Northrop Grumman's chief executive has a new equity award that pays nothing only if the shares fall by more than a quarter

The award pays nothing only if the shares fall by more than a quarter.

Northrop Grumman told the Securities and Exchange Commission late on Friday afternoon that on 19 August the independent members of its board approved a one-time grant of performance-based equity to Kathy J. Warden, who is the company's chair, chief executive and president. The target is 35,910 market stock units. Between 0 and 150 percent of that target may be earned. What decides the number is the company's absolute share price appreciation or depreciation over a performance period ending 31 December 2031.

Three thresholds carry the design. A fall of more than 25 percent pays zero. A rise of 10 percent earns the target. A rise of 50 percent or more pays the maximum of 150 percent, which is 53,865 units, and the wide band between those points is where the number will actually land.

What the filing does not give

A starting price.

The 8-K names no baseline, no measurement date for the beginning of the performance period, and no grant date fair value. Absolute appreciation has to be measured from something, and the document does not say from what or from when. It also puts no dollar figure on the award at any of the three thresholds, which is a number the proxy statement will eventually carry and this filing does not. The Market Stock Units Grant Agreement that governs the terms is referred to and was not filed with it.

Five years and four months

The performance period runs to the last day of 2031. Measured from the day the independent directors approved the grant, that is five years and four months. A 10 percent rise across that span, which is the threshold for the target award, works out at under 2 percent a year compounded.

The test is absolute rather than relative. Nothing in it compares Northrop Grumman with other defence contractors or with an index, so the award turns on where the share price goes and not on how that compares with anyone else. The company says the grant is intended to sustain Warden's leadership contributions and to strengthen the alignment of her interests with those of shareholders and customers, and it is generally conditional on her remaining in service through the performance period.