2018 Guide to Effective Proxies

2.17.9 Performance metrics | 447 6 TH EDITION | GUIDE TO EFFECTIVE PROXIES Compensation Discussion & Analysis PersonalGoals. Webelievethatindividualcontributionstowardsotherenterprisegoalsareresponsiblefortheachievement ofourfinancialgoalsovertime.Suchnon-formulaicgoalsrepresent20%ofanypotentialpayouttoencourageindividual effortsinanarrayofmanagementandleadershipareasthatwebelievewillultimatelyleadtoimprovedfinancial performanceforthecompany. FinancialPerformanceTargetsandAchievementLevels. TheCommitteeestablishedtheperformancetargetsforour annualcashincentiveprogramatthebeginningofthefiscalyear.Forouractiveexecutiveofficersthetargetedenterprise financialperformanceandactualperformanceforfiscal2017were: (inmillions) Target Actual AchievementLevel AdjustedOperatingIncome (1) $879million $993million 113.0% TotalBacklog $18,190million $17,476million 96.0% AverageDaysWorkingCapital (2) 26days 32days 75.0% WeightedFinancialPerformanceAchievementLevel: 94.5% (1) AdjustedOperatingIncomeisnotameasureoffinancialperformanceundergenerallyacceptedaccountingprinciples (“GAAP”)intheUnitedStates.WebelievethatAdjustedOperatingIncomeprovidesusefulinformationto managementandstockholdersasitprovidesanothermeasureofthecompany’sprofitabilityafteradjustingforthe impactofdiscreteevents.AreconciliationofAdjustedOperationIncometothemostcomparableGAAPmeasureis setforthbelow: (inmillions) GAAPOperatingIncome $559 AcquisitionandIntegrationCosts $102 AmortizationofIntangibles $281 RestructuringExpenses $37 AmortizationofEquityMethodInvestments $14 AdjustedOperatingIncome $993 (2) AverageDaysWorkingCapitalmeasurestheefficiencyofouruseofcapital.Ascorebelowtargetisapositiveresult. DeterminationofAnnualCashIncentiveAwards. Targetpayoutamountsforouractivenamedexecutiveofficersforfiscal 2017rangedbetween80%and145%ofbasesalaryrates.Actualpayoutamountsforfiscal2017rangedbetween79% and143%ofbasesalaryrates. Inevaluatingthefinancialperformanceforfiscal2017,theCommitteereviewedactualperformanceresultsagainsttargeted performancelevels.Inanalyzingpersonalperformanceresults,theCommitteereviewedeachindividual’slevelof achievementandalsoconsideredinputfromtheChiefExecutiveOfficer—ortheindependentdirectorswithrespecttothe ChiefExecutiveOfficer’scompensation.AnycircumstanceconsideredrelevantbyCommitteemembers—orinthecaseof namedexecutiveofficersotherthantheCEO,bytheCEO—canbeafactorinthedetermination,includingthedegreeof success,thedifficultyofachievingpersonalperformancegoalsandhisorherleadershipbehavior. Followingtheendofthefiscalyear,basedontheCommittee’sreviewofthefinancialresults,personalperformance,and otherrelevantfactors,theCommitteedeterminedtheamountofcompensationpayableunderourannualcashincentive programsforeachofouractivenamedexecutiveofficers. 2018ProxyStatement | 33 Total of 02 pages in section LEIDOS HOLDINGS, INC. MICROSOFT CORPORATION MONSANTO COMPANY Compensation Discussion & Analysis August2016(the“IS&GSTransaction”).TheCommitteesubsequentlyapprovedadjustmentstoourcompensationpeer groupinviewofthismajorchangeinourcompanyandotherindustryconsolidationinvolvingothercompaniesinthegroup. Asaresult,marketmedianbasedsalariesforourreconstitutedcompensationpeergroupwerehigherthanpreviouslyand basesalariesforouractivenamedexecutiveofficerswereadjustedasfollows: 2016Salary 2017Salary %Increase $Increase RogerA.Krone $1,000,000 $1,100,000 10% $100,000 JamesC.Reagan $565,000 $585,000 4% $20,000 TimothyJ.Reardon $470,000 $515,000 10% $45,000 JonathanW.Scholl $535,000 $535,000 — — AngelaL.Heise $375,000 $410,000 9% $35,000 AnnualCashIncentiveAwardsforFiscal2017 Weprovidedannualcashincentiveawardstoexecutivesforperformanceduringfiscal2017basedontheachievementof pre-establishedfinancialandpersonalperformancegoalsandotherrelevantfactors.Inthefirstquarteroffiscal2017,the Committeeapprovedthethreshold,targetandmaximumbonusamountsforeachofouractivenamedexecutiveoffic rsa thetime,aswellastheperformancegoals,relativeweightingsandcriteriauponwhichawardswouldbedet rmined. Followingtheendoftheone-yearperformanceperiod,theCommitteeapprovedthepaymentofcashincentiveawards baseduponperformanceachievedagainstthepre-establishedgoalsandotherfactors.TheCommitteedidnotexerciseits discretiontoadjustpayoutsfromtheformulaicallycalculatedamountsbasedonpre-establishedgoals. PerformanceMeasuresandWeightings. Ourannualcashincentiveplanforfiscal2017wasdesignedtoincentivizea d rewardbothcompanyfinancialperformanceandindividualcontributionstoenterprisegoals.Theintendedpurposeand relativeweightingsoftheperformancegoalsareshownbelow: TotalBacklog measures our success at winning contracts – both contracts for which funding has been appropriated (less revenues pr viously ecognized) and contractswherewe can estimate the amount of future revenues. AdjustedOperating Income measures growth and coreoperating performance and is strongly correlatedwith potential stockholder value. AOI is operating income adjusted for non-recurringordiscrete items that do not reflect core operating performance, such as restructuring costs andnon-cash accounting changes for impairmentsof goodwill and intangible assets. Ifwe fail to achieve at least 70% of our adjustedoperating incomegoal, there is no payout to executives for anyof the 80% portionof the bonus pool represented by financial goals. DaysWorkingCapital measures how effici ntlyweuseourworking capital. It isdeterminedby dividing totalworking capital atquarter-end by averagedaily salesduring the quarter.Goals and payouts are basedon the averageof the quarter-end daysworking capital. PersonalGoals encourage ethical behavior, collaboration, a focus onour customers, andmotivate behaviors that contribute to financial performance over tim . F I N A N C I A L G O A L S , 8 0 % 25% TOTAL BACKLOG DAYSWORKING CAPITAL PERSONAL GOALS 15% 20% ADJUSTED OPERATING INCOME 40% FinancialGoals. Becauseourfinancialresultsareconsideredthemostimportantfactorsinsettingpayandareobjectively measurable,weweightthesemetricsmostheavilyandtheyrepresent80%oftargetpayouts.Totheextentthat performanceforafinancialmetricislessthan80%oftarget(thresholdperformance)nobonusamountwouldbepaidwith respecttothatmetric.Potentialpayoutforfinancialgoalsrangesfrom60%atthresholdperformance(paidonlywhenat least80%oftheobjectiveisachieved)to150%atmaximumperformance(paidwhen125%ormoreoftheobjectiveis achieved),interpolatedonastraight-linebasis.Inaddition,failuretoachievethresholdperformanceofatleast70%ofour annualadjustedoperatingincomegoalforthefiscalyearwouldresultinnopayoutforthefinancialgoalsportionofthe annualcashincentive. 32 | 2018ProxyStatement OURCOMPENSATIONPERFORMANCEMETRICS Weusefourkeyfinancialperformancemeasurestomotivateandevaluateresults.Webelievetheserepresentkeymeasuresshareownerscan usetoassessthevalueofourbusinessandourperformance.ThefollowingchartexplainstheweightingofeachmeasurefortheAIPand FinancialGoalRSUs,andtherationaleforusingeachofthesemeasures. FinancialPerformanceMetrics AIP FinancialGoalRSUs NetSales 10% EPS 50% FCF 40% PerformanceMeasure&Rationale EPS EarningsPer Share sets thegrowth expectation forour shareowners;weuseEPS as the key accountingmeasure and evaluationofhowour company isperforming FCF Webelieve cash flow reflects the true valueofour business.Our ability to translate earnings to cash indicates thehealthofourbusiness and allowsour company to invest for the future aswell as return value to shareowners ROC ReturnonCapital is another keymeasureofour ability to return value toour shareownersby ensuring capital investments, acquisitions andotherusesofour capital are focusedonprofitablegrowth NetSales Net Salesmeasures thegrowthof thebusiness, bothorganically and through acquisition, andprovides an indicationof future success EPS ¹/³ FCF ¹/³ ROC ¹/³ MANAGEMENTSTOCKOWNERSHIP Webelievethatstockownershipbyourleadershipisonewaytofosterastrongalignmentwithourshareowners,andwerequireour executivesandkeymembersofmanagementtoholdsignificantvalueinourstock. ProxyOfficerStockOwnershipandRequirements (asdetermined8/31/17) CEO ActualOwnership 168,174 shares 11.5xbasepay RequiredOwnership 94,593 shares 6.5xbasepay OtherProxyOfficers(Average) RequiredOwnership 20,804 shares 3.2xbasepay ActualOwnership 58,516shares 9.1xbasepay 8 MONSANTOCOMPANY2017PROXYSTATEMENT AIPEPS50%FCF40%netsales10%financialgoalRSUsEPS1/3FCF1/3roc1/3PerformanceMeasure&RationaleEPSEarningsPerSharesetsthegrowthexpectationforourshareowners.weuseEPSasthekeyaccountingmeasureandevaluationofhowourcompanyisperformingFreeCashFlowWebelievefreeCashFlowmeasuresthetruevalueofourbusiness.OurabilitytotranslateearningstocashindicatesthehealthofourbusinessandallowsourcompanytoinvestforthefutureaswellasreturnvaluetoshareownersROCReturnonCapitalIsanotherkeymeasureofourabilitytoreturnvaluetoourshareownersbyensuringcapitalinvestments,acquisitionsandotherusesofourcapitalarefocusedonprofitablegrowthNatSalesNetSalesmeasuresthegrowthofthebusiness,bothorganicallyandthroughacquisition,andprovidesanindicationoffuturesuccessProxyOfficerStockOwnershipandRequirements(asdetermined8/31/17)CEOactualownership291,070shares18.6xbasepayrequiredownership87,591shares5.6xbasepayactualownership51,355shares8.0xbasepayrequiredownership 15,882shares2.5xbasepay 2 BOARDOF DIRECTORS 4 AUDIT COMMITTEE MATTERS 5 OTHER MANAGEMENT PROPOSALS 6 INFORMATION ABOUTTHE MEETING 1 CORPORATE GOVERNANCE ATMICROSOFT 3 NAMED EXECUTIVEOFFICER COMPENSATION Performancemetrics Fiscalyear2017PSAmetrics Metricdescription Commercialcloud revenue Net revenue for commercial cloud-based solutions, includingOffice365 commercial,Azure, Dynamics365,andother cloudproperties Commercialcloud subscribers Paid seats for currentornewper-userSaaS cloud servicesprimarily in commercial customer segment Windows 10monthly activedevices (”MAD”) ComprisesallWindows 10MAD, includingPCs, tablets,mobiledevices,gaming consoles, and connected InternetofThings (”IoT”)devicesat fiscalyearend Surfacegrossmargin Grossmargin fromSurfaceand firstpartyaccessories,excludingSurfaceHub Consumerpost-sales monetizationgrossmargin Search,Store,Display/Homepage,Gaming,andOfficeConsumer Toavoidduplicatingmetricsacrosstheincentivepayelements,beginninginfiscalyear2017revenueandoperatingincome werenolongerusedasPSAmetricsbecausetheywereincludedaskeycomponentsinourannualcashincentive. Atthesametime,thetotalequityopportunitywasdividedequallybetweentargetPSAsandSAsand themaximumPSA opportunitybeforeapplyingtherelativeTSRmultiplierwasreducedfrom300%to200% .IfthefullrelativeTSR multiplierisearned,themaximumPSApayoutwouldbe300%oftarget. ThefinalnumberofearnedshareswillbecalculatedbasedontheaggregateresultsoverthethreeseparateyearsinthePSA performanceperiod.RelativeTSRismeasuredoverthethree-yearperiodand,ifearned,isappliedtotheaggregatePSA performanceresults. 36 Fiscalyear2017PSAmetricsPerformancemetricsMetricdescriptionFY17commercialcloudrevenueNetrevenueforcommercialcloud-basedsolutions,includingOffice365commercial,Azure,Dynamics365,andothercloudpropertiesFY17commercialcloudsubscribersPaidseatsforcurrentornewper-userSaaScloudservicesprimarilyincommercialcustomersegmentFY17Windows10monthlyactivedevices(“MAD”)ComprisesallWindows10MAD,includingPCs,tablets,mobiledevices,gamingconsoles,andconnectedInternetofThings(“IoT”)devicesatfiscalyearendFY17SurfacegrossmarginGrossmarginfromSurfaceandfirstpartyaccessories,excludingSurfaceHubFY17consumerpost-salesmonetizationgrossmarginSearch,Store,Display/Homepage,Gaming,andOfficeConsumer