DEF 14A of Illinois Tool Works Inc

Filed Mar 24, 2023 · FY20220000049826-23-000017

Open on EDGAR

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ITW’s High-Quality Diversified Business Portfolio While ITW’s seven market-leading business segments operate in different industries, each segment is able to leverage the ITW Business Model to generate high-quality organic growth with best-in-class margins and returns. 2022 Operating Margin by Segment vs. Peer Average1 ITW’s operating margin in 2022 was 24% vs. 14% average for proxy peers 1See Appendix A for segment peer group definition. 2Test & Measurement and Electronics and Polymers & Fluids exclude 190 bps and 220 bps, respectively, of unfavorable operating margin impact of amortization expense related to intangible assets. Dear Fellow Shareholders, On behalf of the Board of Directors and our senior leadership team, we are pleased to invite you to attend ITW’s Annual Meeting of Stockholders, which will be held virtually on Friday, May 5, 2023, at 8:30 a.m. Central Time. You may join at www.virtualshareholdermeeeting.com/ITW2023. You will have a chance to vote at the meeting on the matters set forth in the following Notice of Annual Meeting and the Proxy Statement. There will also be time for questions. Your vote is important. Whether or not you plan to attend the Annual Meeting, please vote as soon as possible on the internet, by telephone or by mail, by reviewing the instructions on the enclosed proxy card or the electronic proxy material delivery notice. Our Enterprise Strategy is focused on leveraging the ITW Business Model to consistently deliver top-tier performance in any environment and once again in 2022, our teams around the world did just that. Despite continuing supply chain disruptions and significant input cost inflation, the ITW team delivered world-class service to our customers and robust financial results for our shareholders. Organic growth was 12 percent for the second year in a row, and margins and returns on capital remained #1 in our peer group. Since we launched our Enterprise Strategy in 2012, we have generated a Total Shareholder Return (TSR) of 356 percent versus 226 percent for the S&P 500. In 2022 we also continued to make strong progress in the execution of ITW’s Sustainability Strategy. ITW’s longstanding commitment to sustainability is rooted in our core values and fundamental to who we are as a company. Supported by strong governance practices and our commitment to “do what we say” execution in every aspect of our business, we are inspired to continue to make a difference for our people, our communities, and the environment. Please see ITW’s 2022 Sustainability Report at www.itw.com/sustainability for details of the company’s sustainability strategy and our progress in executing it. We welcome our newest director, Kelly Grier, who brings to the board her valuable experience and perspectives as the retired US Chair and Managing Partner (CEO) of Ernst & Young LLP. We also remember our director emeritus Harold B. Smith, Jr., who passed away in 2022. Harold served the company for over 70 years as an active member of the leadership team and as a member of our board of directors. We are immensely grateful for his guidance, support, and his unwavering dedication and commitment to ITW and our long-term success. Sincerely,
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| NEO Compensation | | 43 | | | Summary Compensation Table | 43 | | | Grants of Plan-Based Awards | 45 | | | Outstanding Equity Awards at Fiscal Year-End 2022 | 46 | | | Option Exercises and Stock Vested | 47 | | | Pension Benefits | 47 | | | ITW Retirement Plans | 48 | | | Potential Payments upon Termination | 51 | | | Summary of Termination and Change-in-Control Provisions | 52 | | | Termination and Change-in-Control Payments and Benefits | 53 | | | Compensation Committee Report | 55 | | | Equity Compensation Plan Information | 56 | | | Pay Ratio | 56 | | Pay Versus Performance | | 57 | | | Proposal 3 – Advisory Vote on Frequency of Advisory Vote on Executive Compensation | 60 | | | Proposal 4 – Ratification of the Appointment of Independent Registered Public Accounting Firm | 61 | | | Audit Committee Report | 63 | | | Proposal 5 – Non-Binding Stockholder Proposal for an Independent Board Chairman | 64 | | Beneficial Ownership of Common Stock | | 67 | | Other Information | | 69 | | | Voting and Virtual Annual Meeting Information | 69 | | | Submitting Proxy Proposals and Director Nominations for the 2024 Annual Meeting | 72 | | Appendix A | | A-1 |
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Overview The Compensation Committee adopted our executive compensation pay-for-performance philosophy which is designed to deliver competitive total compensation upon the achievement of our strategy objectives, which will attract, motivate and retain leaders who drive the creation of long-term stockholder value. Our decisions surrounding executive compensation are guided by this pay-for-performance philosophy. The programs are weighted toward variable compensation elements (annual cash incentives and long-term incentives), with reward opportunities tied to stock price appreciation and achievement of rigorous financial performance metrics. We have not granted time-vested full value equity awards to our NEOs. Our executive compensation programs are also governed by practices and policies aligned to the interests of our stockholders, as the table below highlights.
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| What We Do | What We Don’t Do | | Pay for Performance: Our NEOs’ average total target compensation is 83% performance based. Robust Stock Ownership Guidelines: We have stock ownership guidelines for our executive officers of 6 x salary for CEO, 3 x salary for Vice Chairman, Executive Vice Presidents and CFO and 2 x salary for Senior Vice Presidents. Executives must retain the net after tax shares of vested or exercised awards if an executive does not meet the guidelines within five years. Annual “Say on Pay” Vote: We hold an annual advisory vote for our stockholders to review and approve our executive compensation programs. Independent Compensation Consultant: The Committee: (1) engages an independent compensation consultant who advises the Committee on regulatory and other current trends and key developments in executive compensation, and (2) reassesses its consultant’s independence annually. Annual CEO and NEO Performance Review: The Committee conducts an annual review of the performance of the CEO, as well as the other executive officers. Annual Review of Compensation Programs: The Committee, with input from its independent compensation consultant, conducts an annual review of our executive compensation programs, considering business strategies, best practices and good governance. Clawback Policy: Our Compensation Recovery Policy provides for the reimbursement of incentives if a material financial restatement is required, whether or not based on misconduct, and equity forfeiture provisions for violations of restrictive covenants and certain misconduct related to restatement. Annual Compensation Risk Assessment: Each year we perform an assessment of risks that could result from our executive compensation practices. | Employment Agreements: We do not provide executive officers with employment agreements. Tax Gross-ups: We do not provide tax gross-ups as part of our change-in-control agreements. Repricing: We do not allow share repricing within our stock option plan. Hedging/Pledging of Company Equity Securities: We prohibit executive officers and directors from engaging in any transaction that is designed to hedge or offset a decrease in the market value of ITW common stock and from pledging ITW equity securities. Dividends on Unvested Equity Awards: Dividends accrued on unvested equity awards, including restricted stock units and performance share units, are not paid unless awards vest. Single-Trigger Change-In-Control Vesting/Benefits: We do not allow immediate vesting of equity awards that are continued or replaced upon a change-in-control; all such awards allow only double-trigger vesting (change-in-control and termination). |
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The Board recommends that the advisory vote on executive compensation (“Say on Pay”) continue to be submitted to the stockholders every year because an annual vote provides feedback for our Compensation Committee that can be taken into account when making compensation decisions and setting our compensation philosophy, policies and practices. The Board recommends that stockholders ratify the appointment of Deloitte & Touche LLP (Deloitte) as the Company’s independent registered public accounting firm for 2023. The Audit Committee and the Board believe that it is in the best interests of the Company and its stockholders to retain Deloitte as the Company’s independent auditor based on its ability to handle the breadth and complexity of ITW’s global operations, its familiarity with our businesses and the appropriateness of Deloitte’s fees.
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| 2023 PROXY STATEMENT | 7 |
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Stockholders are being asked to elect the ten director nominees named in this proxy statement at our Annual Meeting. The individuals listed below have been nominated by the Board of Directors as recommended by the Corporate Governance and Nominating Committee. See “Director Candidate Selection Process” for more information regarding our candidate selection process. If elected, each director nominee will serve until the 2024 Annual Meeting, until a qualified successor director has been elected, or until he or she resigns or is removed. We will vote your shares as you specify on the proxy card, by telephone, by Internet or by mail. If you do not specify how you want your shares voted, we will vote them “FOR” the election of all the nominees listed below. If unforeseen circumstances (such as death or disability) make it necessary for the Board of Directors to substitute another person for any of the nominees, we will vote your shares “FOR” that other person. The Board of Directors does not anticipate that any nominee will be unable to serve. Each nominee for director brings a strong and unique background and set of skills to the Board, giving the Board as a whole competence and experience in a variety of areas. Set forth below is biographical information provided by the nominees, as well as a description of the experiences, qualifications, skills and attributes that led the Corporate Governance and Nominating Committee and the Board to conclude that each nominee should serve as a director of the Company. Director Election Our by-laws provide for the election of directors in uncontested elections by majority vote. Under this majority vote standard, each director must be elected by a majority of the votes cast with respect to that director. For this purpose, a majority of the votes cast means that the number of shares voted “for” a director exceeds the number of shares voted “against” that director. In a contested election, directors will be elected by a plurality of the votes represented in person or by proxy at the meeting. An election is contested if the number of nominees exceeds the number of directors to be elected. Whether an election is contested or not is determined ten days in advance of when we file our definitive proxy statement with the SEC. This year’s election is uncontested, and the majority vote standard will apply. If a nominee who is serving as a director is not elected at an annual meeting, Delaware law provides that the director would continue to serve on the Board as a “holdover director” until his or her successor is elected. Our Corporate Governance Guidelines, however, require any nominee for director who fails to receive a majority of the votes cast for his or her election to tender his or her resignation. The Corporate Governance and Nominating Committee of the Board will consider the resignation and recommend to the Board whether to accept or reject it. In considering the resignation, the Committee will take into account such factors as any stated reasons stockholders voted against the election of the director, the length of service and qualifications of the director, the director’s contributions to the Company, and our Corporate Governance Guidelines. The Board will act on the Committee’s recommendation within 90 days of the Company's annual meeting, and no director who failed to receive a majority of the votes cast will participate in the Committee's recommendation or Board consideration regarding the tendered resignation. Director Qualifications and Succession Planning The Corporate Governance and Nominating Committee periodically reviews with the Board the skills and characteristics required of Board members in the context of the current make-up of the Board and screens and recommends director nominees to the full Board. When evaluating director nominees, the Board considers skills such as an understanding of manufacturing, finance, corporate governance, human capital management, risk management, global operations and experience, as well as age, diversity (including racial, ethnic and gender diversity), and ability to provide insight and direction on the Company’s key strategic initiatives. In addition to skills and experience, Board candidates are considered based upon various criteria, such as their personal integrity and
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judgment, global business and social perspective, and concern for the long-term interests of our stockholders. Although there is no specific policy regarding Board diversity quotas, racial, ethnic and gender diversity are important factors considered in the director selection process. Of the ten director nominees, three are female and one is an African-American male. In addition, directors must have time available to devote to Board activities and to enhance their knowledge of the global manufacturing environment. Accordingly, we seek to attract and retain a diverse board composed of highly qualified directors who have sufficient time to attend to their duties and responsibilities to the Company. Pursuant to ITW’s Corporate Governance Guidelines, a director may not stand for re-election after his or her 75th birthday, except in rare circumstances approved by the Board. The Committee believes it is important to replace skills that may be lost as directors approach retirement age and to identify skills to supplement existing board experience. The Committee discusses with the full Board its analysis of the characteristics and key attributes for future Board candidates. After receiving recommendations for nominations from the Corporate Governance and Nominating Committee, the Board nominates or elects candidates for director.
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| | Director Experience, Attributes and Skills | | | | | | | | | | | | | Other Public Company Board/Corporate Governance Experience | | | | | | | | | | | | | Executive Leadership | | | | | | | | | | | | | Global | | | | | | | | | | | | | Manufacturing & Operations | | | | | | | | | | | | | Finance/Capital Allocation | | | | | | | | | | | | | Risk Management | | | | | | | | | | | | | Human Capital Management | | | | | | | | | | | | | Corporate Responsibility/ Sustainability | | | | | | | | | | | | | Women | | | | | | | | | | | | | Racial/Ethnic Diversity | | | | | | | | | | |
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Board Biographies
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| | | | | Director since: 2012 | Independent: Yes | Committees: Audit, Finance | | Public Directorships •Sysco Corporation: Chairman of the Corporate Social Responsibility Committee and member of the Corporate Governance and Nominating and Executive Committees. Professional Background •Retired as President of UPS International and Senior Vice President of United Parcel Service, Inc. (UPS), a global package delivery, supply chain management and freight forwarding company, having served in these capacities from 2008 to 2013. •Over 38 years of experience at UPS, serving in various areas with increasing levels of responsibility, including global operations, finance, accounting, information systems, mergers and acquisitions, marketing and business development. His service at UPS included President, Global Freight Forwarding and corporate controller. •Served as Executive Chairman of Radial, Inc., a global fulfillment, customer care and omnichannel technology company from 2016 to 2017 and as Vice Chairman of eBay Enterprise/Innotrac, the predecessor business to Radial from 2015 to 2016. •Has served on the board of the US China Business Council, the Guangdong Economic Council and the Turkey Economic Advisory Council and as a delegate to the World Economic Forum, Davos Switzerland, from 2009 to 2013. Skills and Qualifications Mr. Brutto’s significant strategic, operational, and financial leadership experience with a major global company, including the establishment of operations in 35 countries, along with his significant international business experience and board leadership role in the area of Corporate Social Responsibility, bring valuable perspectives to our Board. | | |
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| | | | | Director since: 1994 | Independent: Yes | Committees: Compensation, Corporate Governance and Nominating, Executive Committee (Chair) | | Public Directorships •Northern Trust Corporation: Member of the Business Risk and Compensation and Benefits Committees. Professional Background •Has served as Chairman and CEO of Owl Creek Partners, LLC, a private equity firm, since 2010. •Founder of Susan Crown Exchange Inc., a social investment organization. •Served two terms as a Fellow of the Yale Corporation, and is currently Chairperson of Rush University Medical Center, the Rush System for Health, and a director of The Brookings Institution as well as several other civic and not-for-profit organizations. •Served as Vice President of Henry Crown and Company, a business with diversified investments, from 1984 to 2015. Skills and Qualifications Ms. Crown’s long-standing board service at a global banking and financial institution and her extensive board service and leadership roles with many civic and not-for-profit organizations bring valuable perspectives to our Board. Ms. Crown’s experience includes executive experience in diversified manufacturing, management, corporate governance and strategy. | | |
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| | | | | Director since: 2021 | Independent: Yes | Committees: Audit, Compensation | | Public Directorships •None Professional Background •Has been Executive Vice President, Chief Human Resources Officer of UPS International, a global package delivery, supply chain management and freight forwarding company, since January 2021. In his role he is responsible for human resources strategy and operations. •Served as Chief Human Resources Officer and Senior Vice President, Communications, Occupational Health and Aviation, DuPont de Nemours, Inc. from 2018 to 2020, prior to joining UPS International. •Served as Chief Human Resources Officer for Xerox Corporation from 2015 to 2018. •Served in various human capital management leadership roles at Advanced Micro Devices (AMD), Shell Oil and Honeywell International prior to Xerox Corporation. •Throughout his professional career, he has focused on building successful company cultures. •Serves as a director of a number of professional, civic and not-for-profit organizations. Skills and Qualifications Mr. Ford’s deep knowledge of talent management, human capital strategy, risk management and operations gained from executive experience and senior leadership roles with large public global companies spanning industries from distribution and logistics to manufacturing to technology, brings valuable perspectives to our Board. | | |
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| | | | | Director since: 2022 | Independent: Yes | Committees: Audit, Finance | | Public Directorships •None Professional Background •Has been a Senior Advisor of Permira Advisers since January 2023. •Retired as US Chair and Managing Partner (CEO) of Ernst & Young LLP (EY), a global professional services firm having served in that capacity from 2018 to July 2022. •A Certified Public Accountant and has over 30 years of service at EY serving in various roles with increasing levels of responsibility. •During her career at EY, Ms. Grier gained significant broad-based experience working with the boards of many of the largest companies worldwide. Skills and Qualifications Ms. Grier’s experience working with boards and audit committees of global companies, her leadership role at a major professional services firm, as well as her experience with risk and crisis management, financial reporting, leadership development and talent strategy, diversity, equity and inclusion and corporate governance, bring valuable perspectives to our Board. | | |
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| | | | | Director since: 2012 | Independent: Yes | Committees: Compensation, Corporate Governance and Nominating, Executive | | Public Directorships •None Professional Background •Retired as President and Chief Executive Officer of The Timken Company, a manufacturer of bearings, alloy and specialty steels and components, having served in that capacity from 2002 to 2014. •Served as Timken’s President and Chief Operating Officer from 1999 to 2002. •Joined Timken in 1984 and held positions in various functional areas of Timken with increasing levels of responsibility, including purchasing and logistics, manufacturing and international operations. •Led Timken’s automotive business in North America and Timken’s bearing business activities in Asia and Latin America from 1996 to 1999. •Previously served as a director of AB Volvo. •Served as a director of the US China Business Council and a number of other industry and not-for-profit organization boards. Skills and Qualifications Mr. Griffith’s extensive knowledge of manufacturing and operations, finance, human resources, risk management and corporate social responsibility matters gained from experience as Chief Executive Officer of a global industrial manufacturer, along with his international business and engineering experience, bring valuable perspectives to our Board. In addition, his past service on the boards of other companies gives him a broad understanding of governance issues facing public companies. | | |
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| | | | | Director since: 2016 | Independent: Yes | Committees: Audit, Finance | | Public Directorships •The J.M. Smucker Company: Member of the Audit Committee. •Northern Trust Corporation: Lead Director, Audit Committee Chair and a member of the Capital Governance, Human Capital and Compensation, Corporate Governance and Executive Committees. Professional Background •Retired as Vice Chairman, Client Service of PricewaterhouseCoopers LLP (PwC), a global professional services firm, in June 2016, having served in that capacity since 2007. Served as PwC’s Greater Chicago Market Managing Partner from 2003 to 2013 and, prior thereto, Managing Partner of the Cleveland Office. •Gained significant broad-based experience working with boards and audit committees of Fortune 500 global organizations across multiple markets and industry sectors during his career at PwC. •A Certified Public Accountant since 1977. •Has significant expertise as a participating board member of a number of professional, civic and not-for-profit organizations. Skills and Qualifications Mr. Henderson’s extensive experience in managing and overseeing businesses and working with the boards and audit committees of complex global companies, his other board leadership roles and leadership roles at a major professional services firm, as well as his experience with risk oversight, bring valuable perspectives to our Board. | | |
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| | | | | Director since: 2014 | Independent: Yes | Committees: Compensation, Corporate Governance and Nominating (Chair), Executive | | Public Directorships •Conagra Brands, Inc.: Non-executive Chairman of the Board, Chair of the Executive Committee and a member of the Human Resources and Nominating and Corporate Governance Committees. •McDonald’s Corporation: Chairman of the Compensation Committee and a member of the Sustainability and Corporate Responsibility Committee. Professional Background •Served as Chairman of Information Resources, Inc., a privately held producer of market and shopper information, from 2013 to 2018. •Served as senior advisor of Friedman Fleischer & Lowe LLC, a private equity firm, from 2014 to 2016, after serving as an operating partner of that firm. •Served as Chairman, President and Chief Executive Officer of The Hershey Company, a manufacturer, distributor and marketer of candy, snacks and candy-related grocery products from 2001 through 2007. •Served as President, Nabisco Biscuit Company, and President of Pillsbury, North America prior to joining The Hershey Company. •He previously served as a director of Discover Financial Services. Skills and Qualifications Mr. Lenny’s extensive knowledge of strategy, finance, supply chain management and distribution, human resources, sustainability and corporate social responsibility matters gained from experience as Chief Executive Officer of a global Fortune 500 company brings valuable perspectives to our Board. In addition, his current and former board leadership positions in large public companies give him a broad understanding of governance issues facing public companies. | | |
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| | | | | Director since: 2012 | Independent: No | Committees: Executive | | Public Directorships •W.W. Grainger, Inc.: Member of the Audit Committee and Board Affairs and Nominating Committee. Professional Background •Has served as Chairman of ITW since May 2015 and as Chief Executive Officer since November 2012. •Served as President and Chief Executive Officer of ITW from November 2012 to May 2015 and as President and Chief Operating Officer from October to November 2012. •Served as Vice Chairman of ITW from December 2008 to October 2012 and Executive Vice President from October 2004 to December 2008. •Serves on the boards of numerous civic and not-for-profit organizations. Skills and Qualifications Mr. Santi’s deep understanding of the Company’s business operations, operating philosophy and culture, his expertise in the application of ITW’s business model, as well as his demonstrated success and proven quality of leadership, bring indispensable perspectives to our Board and strong leadership as Chairman. | | |
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| | | | | Director since: 2009 | Independent: Yes | Committees: Audit, Finance (Chair) | | Public Directorships •Northern Trust Corporation: Member of the Audit and Executive Committees and the Chairman of the Capital Governance Committee. Professional Background •Has served as Executive Vice President for Policy and Legal Affairs and General Counsel of Mutual Fund Directors Forum, a not-for-profit membership organization for independent investment company directors and an advocate on important policy matters, since 2005. •Held several positions with increasing levels of responsibility at the Securities and Exchange Commission from 1996 to 2005, serving as Associate Director, Division of Investment Management, from 2001 to 2005. Skills and Qualifications Mr. Smith’s extensive leadership experience in the finance industry and executive experience with a mutual fund industry organization, along with his legal and regulatory experience, bring valuable perspectives to our Board. In addition, his service on the board of another public company gives him an understanding of governance issues facing public companies. | | |
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| | | | | Director since: 2008 | Independent: Yes | Committees: Audit (Chair), Corporate Governance and Nominating, Executive | | Public Directorships •None Professional Background •Retired as Executive Vice President and Chief Administrative Officer of Exelon Corporation and President of Exelon Business Services Company, an electric and gas utility company, in October 2005, a position she had held since 2003. •Served as Chairman and Chief Executive Officer of Exelon Energy Delivery from 2000 to 2003. •Served as Executive Vice President of Unicom and its chief subsidiary, ComEd, having joined ComEd as General Counsel in 1993, where her experience included supervision and oversight of legal matters and risk management. •Previously served as a director of State Farm Mutual Automobile Insurance Company and Domtar Corporation. Skills and Qualifications Ms. Strobel’s deep knowledge of human capital management, finance, risk management and sustainability matters gained from executive and legal leadership roles with a leading energy provider brings valuable perspectives to our Board. In addition, her current and past service on the boards of other companies gives her an understanding of compensation and corporate governance issues. | | |
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Board Independence Our Corporate Governance and Nominating Committee conducts an annual review and makes a recommendation to the full Board as to whether each of our directors meets the applicable independence standards of the NYSE. In accordance with the NYSE listing standards, our Board of Directors has adopted categorical standards for director independence, including heightened standards applicable to members of our Audit and Compensation Committees. A copy of the Company’s Categorical Standards for Director Independence are included in our Corporate Governance Guidelines that are posted on our website at: https://investor.itw.com. A director will not be considered independent unless the Board of Directors determines that the director has no material relationship with the Company (directly, or as a partner, stockholder or officer of an organization that has a material relationship with the Company). The Board has determined that, other than E. Scott Santi, each of our current directors has no material relationship with the Company other than as a director and is independent within the meaning of the Company’s Categorical Standards for Director Independence and the listing standards of the NYSE. In making its independence determinations, the Board of Directors has broadly considered all relevant facts and circumstances including that: (1) Ms. Crown and Messrs. Henderson and Smith serve as directors of Northern Trust Corporation and its subsidiary, The Northern Trust Company, with which the Company has a commercial banking relationship; (2) Messrs. Brutto, Henderson and Lenny serve as directors of companies that have an existing customer or supplier relationship with the Company; and (3) Messrs. Ford and Williams are officers of companies with which we conduct business. The Board has concluded that these relationships are not material and, therefore, do not impair the independence of these directors. Director Candidate Selection Process The Corporate Governance and Nominating Committee, or other members of the Board of Directors, may identify a need to add new members to the Board of Directors with specific skills or to fill a vacancy on the Board. At that time, the Corporate Governance and Nominating Committee would initiate a search, seeking input from Board members and senior management and, to the extent it deems appropriate, engaging a search firm. An initial qualified candidate or a slate of qualified candidates would be identified and presented to the Committee for its evaluation. Candidates whose skills, background and qualifications are deemed to be a good fit with the Board then meet with a number of individual directors and senior executives for further evaluation. The Committee would then seek full Board approval of the selected candidate(s). Shareholder Nominations Our by-laws permit any stockholder or group of up to 20 stockholders meeting certain ownership requirements to nominate a director candidate or candidates for inclusion in our proxy statement and form of proxy. For a description of the process for submitting a director candidate through the use of proxy access, see “Other Information—Submitting Proxy Proposals and Director Nominations for the 2024 Annual Meeting—How do I use proxy access to nominate a director candidate to be included in ITW’s 2024 Proxy Statement?” Our by-laws also permit stockholders to nominate directors for consideration at an annual meeting of stockholders without requiring that their nominees be included in our proxy statement and form of proxy. The Corporate Governance and Nominating Committee will consider a candidate who has been properly nominated pursuant to Article II, Section 10 of the Company’s by-laws by following substantially the same process, and applying substantially the same criteria, as for candidates submitted by other sources, but the Committee has no obligation to recommend that candidate for nomination. For a description of the process for submitting a director candidate without proxy access, see “Other Information—Submitting Proxy Proposals and Director Nominations for the 2024 Annual Meeting—How do I nominate a director candidate who would not be included in ITW’s Proxy Statement?”
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Corporate Governance Board of Directors and its Committees Board Leadership Structure E. Scott Santi, Chairman and CEO Pursuant to the Company’s Corporate Governance Guidelines, the Board examines whether the role of Chairman and CEO should be combined each time the Board elects a new CEO, and may determine to separate or combine the offices of Chairman and CEO at such other times as it deems appropriate. E. Scott Santi was elected President and CEO in November 2012, and the Board decided to separate the roles of Chairman and CEO at that time. Given Mr. Santi’s successful transition into the CEO role and his deep knowledge and understanding of the Company’s business model, operations and culture, the Board determined that he is best positioned to lead the Board in its ongoing oversight of the Company’s operations and strategy. In May 2015, the Board elected Mr. Santi Chairman of the Board and CEO. The Board annually reviews its leadership structure as well as the composition and leadership of the Board Committees, and confirms or makes adjustments to Board leadership positions and Committee composition through annual Board action. The Board continues to believe that Mr. Santi is best positioned to lead the Board given his demonstrated success and quality of leadership. Richard H. Lenny, Independent Lead Director Since the roles of Chairman and CEO were combined in 2015, the Board has elected a strong independent director as Lead Director. The Board believes that this structure, which calls for a strong, independent and highly experienced lead director with well-defined responsibilities, along with the Company’s experienced and engaged independent directors, provide effective oversight of the Company’s management. Mr. Richard H. Lenny was appointed Lead Director by the Board effective May 8, 2020. Mr. Lenny is a highly experienced director who has held several board and management leadership roles and currently serves as non-executive Chairman of the Board of Conagra Brands, Inc. and as a member of the Board of McDonald’s Corporation. In conjunction with the Board’s role in overall strategy and succession planning as described below, Mr. Lenny actively engages with our Chairman and CEO on such matters. Additionally, Mr. Lenny works closely with our Chairman and CEO and has direct input into meeting agendas that guide the Board in performing its oversight function, including with respect to the Company’s sustainability strategies, Board and executive succession, and Board evaluations. In addition to the duties and responsibilities noted above, the Corporate Governance Guidelines state that the Lead Director will:
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| •preside at all meetings of the Board at which the chairman is not present, including executive sessions of the independent directors; •act as a key liaison between the chairman and the independent directors; •have the authority to call meetings of the independent directors, when necessary; | •approve meeting agendas, schedules and information sent to the Board; •communicate Board member feedback to the chairman after each Board meeting; •if requested by major stockholders, ensure that he or she is available for consultation and direct communication; and •perform such other duties as requested by the Board. |
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Board Committees Our Board has established and delegated certain authorities and responsibilities to five committees: Audit, Compensation, Corporate Governance and Nominating, Finance and Executive committees. Under the terms of the respective charters, each member of the Audit, Compensation, and Corporate Governance and Nominating Committees must meet applicable New York Stock Exchange (NYSE) and SEC independence requirements. Each committee regularly reports its activities to the full Board of Directors.
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| Key Responsibilities •Responsible for the integrity of the Company’s financial statements, compliance with legal and regulatory requirements, the independence and performance of ITW’s independent registered public accounting firm, and the performance of the Company’s internal audit function. •Responsible for the oversight and engagement of our independent registered public accounting firm and assists the Board with respect to matters involving and overseeing accounting, financial reporting, and internal audit functions. •Annually reviews legal affairs and environmental, safety and health matters that may have a material impact on the Company’s financial statements or the Company’s compliance policies, as required by the Company’s Corporate Governance Guidelines and Audit Committee charter. •Reviews and evaluates certain of our policies and practices with respect to risk assessment and risk management, including major financial risk exposures and steps taken by management to monitor and control such exposures. •Receives quarterly cybersecurity reports from management. Additional information on the Audit Committee and its activities is set forth under “Audit Committee Report.” |
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| Key Responsibilities •Establishes and oversees the Company’s executive compensation philosophy, programs and policies, including ensuring that executive compensation is aligned with Company and individual performance. •Recommends to the other independent directors compensation for the chief executive officer, reviews and approves the chief executive officer’s recommendations regarding the compensation of our other executive officers, and makes recommendations regarding new incentive compensation and equity-based plans or amendments to any existing plans. •Reviews and evaluates risks arising from our compensation policies and practices and providing input to management on whether such policies and practices may have a material adverse effect on the Company. Independent Compensation Consultant Under its charter, the Compensation Committee may retain an independent compensation consultant or other advisors. The Compensation Committee engaged independent consultants Meridian Compensation Partners LLC (Meridian) beginning in June 2021 as its independent advisor to review the Company’s overall executive compensation program, review the peer group of companies used by the Compensation Committee for comparison purposes and assess our compensation governance process. Based on representations from Meridian and executive officers and directors of the Company, the Compensation Committee has determined that Meridian and their respective individual compensation advisors to the committee are independent. See “Compensation Discussion and Analysis—How We Make Compensation Decisions—Role of the Compensation Consultant.” Additional information on the Compensation Committee, its activities, its relationship with its compensation consultant and the role of management in setting compensation is provided under “Compensation Discussion and Analysis.” |
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* Not standing for re-election at the 2023 Annual Meeting.
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| 2023 PROXY STATEMENT | 17 |
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| Key Responsibilities •Identifies, evaluates and recommends director candidates. •Develops, administers and recommends corporate governance guidelines. •Reviews and makes recommendations on matters of corporate governance and associated risks. •Oversees the evaluations of the performance and procedures of the Board and individual directors. •Makes recommendations as to Board committees and Board size. •Makes a recommendation to the Board regarding the determination of director independence for the Board, the Audit Committee and the Compensation Committee. •Reviews the Board qualification criteria for Board members. •Oversees and makes recommendations to the independent directors regarding non-employee director compensation. •Reviews and makes recommendations to the Board with respect to shareholder proposals. |
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| Key Responsibilities •Reviews, evaluates and recommends management’s proposals to the Board relating to the Company’s financings and dividend policy. •Periodically reviews and evaluates the Company’s capital structure and capital allocation strategy as well as risks arising from the Company’s treasury function. •Reviews and evaluates an annual summary of the funding and investment status of significant benefit plans sponsored by the Company globally. |
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| Key Responsibilities •May act on behalf of the Board if a matter requires Board action between meetings of the full Board. The Executive Committee’s authority in certain matters is limited by law and our by-laws. |
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* Not standing for re-election at the 2023 Annual Meeting.
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Meetings and Attendance; Executive Sessions The Company’s Board of Directors met five times during 2022. Non-employee directors, all of whom are independent, met five times in regularly scheduled executive sessions in conjunction with the regular Board meetings. The Company strongly encourages its directors to attend all Board and committee meetings and the Annual Meeting of Stockholders. In 2022, our directors attended 96% of the total number of meetings of our Board and respective Committees on which they served, and each director attended 75% or more of such meetings. In addition, in 2022 all of the directors attended the Annual Meeting of Stockholders. Director Education and Orientation Program The Company provides its new directors with extensive onboarding materials covering our corporate governance practices and policies, the ITW Business Model, ITW's Enterprise Strategy, financial performance, talent development, and sustainability strategy. New directors also have individual meetings with the Chairman, Lead Director, other Board members and senior executives. The Company provides directors with access to professional development training opportunities, including membership in National Association of Corporate Directors, as well as subscriptions to a publication focused on governance issues for public company directors. Each year management and outside experts present to the Board on a variety of topics, including strategic planning, regulatory developments, cybersecurity, sustainability initiatives, and business updates on the operating segments. As part of their Board service, directors periodically visit ITW businesses in various locations, including international locations, to gain a deeper understanding of the ITW Business Model in practice, to meet members of management and other employees, and to learn about the company’s operating segments. Board Evaluations The Board of Directors and the Audit, Compensation, and Corporate Governance and Nominating Committees conduct annual evaluations that assess the effectiveness, processes, skills, functions and other matters relevant to the Board as a whole or to the particular committee. Results of the evaluations are summarized and discussed at Board and committee meetings. In addition, the Board conducts a peer review evaluation led by our independent Lead Director, whereby each Board member evaluates the contributions of the other Board members, and each director receives feedback from this peer review from our independent Lead Director. The evaluation process provides the Board with actionable feedback to enhance its performance and effectiveness.
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| 2023 PROXY STATEMENT | 19 |
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Board’s Role in Risk Oversight ITW’s Board of Directors is responsible for providing oversight and strategic guidance to management to support the long-term interests of our stakeholders.
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| | | | | | Board of Directors •The Board of Directors is responsible for the overall risk oversight of the Company with a focus on the most significant risks facing the Company. •The Board has a formal process to review identified key enterprise risks, including, but not limited to, legal/compliance, controllership/tax, key leader continuity/succession, supply chain integrity/continuity, cybersecurity, environmental stewardship, and significant external event risks, annually or more frequently, if appropriate. •Throughout 2022, the Board continued to oversee the Company’s strategy and response to the COVID-19 pandemic, including with respect to the health, safety and financial challenges presented, receiving regular updates from management. •Regular access to information provided the Board with opportunities to effectively exercise its oversight function and provide leadership and support to management in a challenging environment. | | | | | | | | Audit Committee •The Board has delegated to the Audit Committee the responsibility to review and evaluate the Company’s overall financial and compliance risk policies and practices, including certain legal affairs and environmental, safety and health matters and related policies. | Compensation Committee •The Board has delegated to the Compensation Committee the responsibility to review and evaluate the risks arising from the Company’s compensation policies and practices. •The Compensation Committee also advises management on whether the Company’s compensation policies and practices may have a material adverse effect on the Company. | | | Corporate Governance and Nominating Committee •The Board has delegated to the Corporate Governance and Nominating Committee the responsibility to advise the Board on matters of corporate governance and associated risks. | Finance Committee •The Board has delegated to the Finance Committee the responsibility to review and evaluate the risks relating to financings, capital structure, pension obligations, and other treasury functions. | | | •In instances where a particular committee reviews certain risks, that committee reports on those risks to the full Board on a regular basis. | | | | | | | | | | | | Management •The Board’s oversight process builds upon management’s annual enterprise risk assessment. •Company management presents on the enterprise risks, at least annually, at meetings of the Company’s Board and Board committees, providing them with an opportunity to discuss the risks and the Company’s risk mitigation processes. | |
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Key Areas of Board Oversight
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| Board Oversight of Strategy The Board has an active role in the Company’s overall strategy. Each year, the Board conducts a comprehensive, in-depth review of the Company’s long-term strategy and actively monitors and reviews management’s progress in executing it. The Board also conducts an annual review of the Company’s corporate governance practices. In addition, throughout the year the Board conducts individual segment strategy reviews with segment leadership. Board Oversight of Cybersecurity The Board annually reviews and evaluates the company’s cybersecurity policies and practices with respect to risk management as well as steps taken by management to monitor and control such exposures. In addition, the Audit Committee receives quarterly cybersecurity reports from management. Board Oversight of Sustainability The Board and management are committed to operating our business in a way that demonstrates our dedication to global environmental sustainability. The Board plays an active role in the oversight of ITW’s sustainability strategy, including environmental, social and governance (ESG) matters. The Board receives periodic updates from management regarding the Company’s ESG initiatives and progress, which may include discussions relating to ESG risks, priorities and reporting, and annually reviews and approves the Company’s ESG strategy. As a result of the Board’s annual review of enterprise risks in 2022, the plastics in consumer packaging risk was expanded to environmental stewardship risk to include a wider range of products, risks related to changing laws and stakeholder views, and the impact of climate change. Additionally, Board committees may also review components of the ESG strategy that fall within their purview. Executive Succession Planning The Board recognizes that one of its most important duties is to ensure continuity in the Company’s senior leadership by overseeing the development of executive talent and planning for the effective succession of the Company’s CEO and the executive leadership team. In order to ensure that the succession planning and leadership development process supports and enhances ITW’s strategic objectives, including the Company’s diversity goals, the Board regularly consults with the CEO on the Company’s organizational needs, its leadership pipeline and the succession plans for critical leadership positions. On an annual basis, the Board also conducts a detailed review of executive succession plans, in addition to addressing the Company’s talent management initiatives and discussing individuals who are considered potential future senior executives of the Company. Similarly, leadership development, including succession planning, is a top priority of the CEO and the senior executive team. |
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| 2023 PROXY STATEMENT | 21 |
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Shareholder Engagement Shareholder Outreach Activities We believe regular, proactive communications with our shareholders to be in the long-term best interests of the Company.
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| How We Engage with Our Shareholders Our investor communications and outreach typically include the following: Investor day meetings Quarterly conference calls Investor conferences Analyst meetings and calls throughout the year at the request of investors Annual ESG-focused engagement | Topics We Discuss with Our Shareholders The meetings provide a forum to engage with our shareholders on topics including: Strategy Financial performance Risk management Talent development Compensation Corporate governance Social and environmental matters | Throughout 2022, management representatives led numerous meetings on these topics and sought valuable feedback from our shareholders. We regularly engage with shareholders holding more than a majority of our shares regarding environmental, social and governance topics, shareholder proposals and any other topics of interest to our shareholders, and we share feedback we receive from our shareholders with our Board. |
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| We received valuable inputs from our shareholders related to our progress in executing our sustainability strategy. We also received supportive feedback regarding Board composition, diversity and inclusion strategies, goals and progress, employee resource groups, our greenhouse gas emissions reduction strategies, goals and progress, and our continuous journey to utilize the SASB Materiality Map® and the Task Force on Climate-related Financial Disclosures (TCFD) framework to guide our sustainability-related disclosures. Overall, the discussions were positive, with shareholders expressing support for the Company’s Board, current governance practices and progress in executing our sustainability strategy. |
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How to Communicate with our Directors Shareholders and other interested parties may communicate with any of our directors, including our independent Lead Director, or with the independent directors as a group by sending an e-mail to independentdirectors@itw.com or by writing to the independent directors as a group or to any of our directors c/o Illinois Tool Works Inc., 155 Harlem Avenue, Glenview, IL 60025, Attention: Secretary, with a designation on the outside of the envelope as a “Board Communication.” Relevant communications will be forwarded by the Secretary to the appropriate directors depending on the facts and circumstances outlined in the communication.
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Other Governance Matters Corporate Governance Policies and Code of Conduct One of our core values is integrity, and we have long believed that strong corporate governance is important to assure that the Company is managed for the long-term benefit of its stockholders. Accordingly, we continuously review our corporate governance policies and practices not only for compliance with applicable laws, the rules and regulations of the SEC, and the listing standards of the NYSE, but also for strong corporate governance and social and environmental responsibility principles and standards of behavior. •Our Corporate Governance Guidelines provide a framework for the effective governance of the Company and address such matters as Board structure, Board governance and the responsibilities of the independent Lead Director. •Our Code of Conduct sets forth standards of conduct applicable to all employees and directors, and all relevant aspects of our Code of Conduct are also applied to our suppliers through our Supplier Code of Conduct. •Our Global Anti-Corruption Policy emphasizes the importance of complying with anti-corruption laws of all countries in which ITW and our divisions, subsidiaries, agents, consultants and affiliates operate. •Our Code of Ethics sets forth standards of ethical dealing, full and fair disclosure and compliance applicable to our CEO, Vice Chairman, CFO, and all key financial personnel. •Our Sustainability Report describes our sustainability strategy and our commitment to robust governance and ethics, our people, our communities and our environment and provides information about our goals and progress in these areas. The Audit, Compensation and Corporate Governance and Nominating Committees each review their Committee charters annually and recommend that the Board of Directors approve any changes. Our website (https://investor.itw.com) includes the charters of these committees, the Company’s Corporate Governance Guidelines, the Code of Conduct, the Global Anti-Corruption Policy, the Code of Ethics for the Chief Executive Officer and key financial and accounting personnel, and the Sustainability Report, none of which is incorporated herein by reference. Any amendments to or waivers of the Code of Ethics will be promptly posted on our website. Copies of these documents will be provided, without charge, upon request. Certain Relationships and Related-Party Transactions We review related-party transactions in accordance with our Code of Conduct, by-laws and Corporate Governance Guidelines, rather than a separate written policy. A related-party transaction is a transaction involving the Company and any of the following persons: a director, director nominee or executive officer of the Company; a holder of more than 5% of ITW common stock; or an immediate family member or person sharing the household of any of these persons. The ITW Code of Conduct states that our directors, officers and employees must avoid engaging in any activity that might create a conflict of interest or a perception of a conflict of interest. These individuals are required to raise for consideration any proposed or actual transaction that they believe may create a conflict of interest. Our by-laws provide that no related-party transaction is void or voidable solely because a director has an interest if (1) the material facts are disclosed to or known by the Board of Directors and the transaction is approved by the disinterested directors or an appropriate Board committee comprised of disinterested directors, (2) the material facts are disclosed to or known by the stockholders and the transaction is approved by the stockholders, or (3) the transaction is fair to the Company as of the time it is approved. Our Corporate Governance Guidelines provide that the Board will apply established Categorical Standards for Director Independence in making its independence determinations. Under the standards, certain relationships between the Company and a director would preclude a director from being considered independent. On an annual basis, each director, director nominee and executive officer completes a Directors’ and Officers’ Questionnaire, which requires disclosure of any transactions with the Company in which he or she, or any member of his or her immediate family, has a direct or indirect material interest. The Corporate Governance and Nominating Committee reviews the results of these questionnaires and discusses any related-party transaction disclosed therein. In addition, under its charter, the Audit Committee is responsible to conduct a reasonable prior review, and provide oversight, of all material related-party transactions for potential conflicts of interest and to approve such transactions only if it determines the transaction is consistent with the interests of the Company and its shareholders. In reviewing related-party transactions, the Audit Committee considers the factors set forth in our Code of Conduct, by-laws and Corporate Governance Guidelines, as well as other factors, including the Company’s rationale for entering into the transaction, alternatives to the transaction, whether the transaction is on terms at least as fair to the Company as would be the case were the transaction entered into with a third party, and the potential for an actual or apparent conflict of interest. No member of the Audit Committee having an interest in a related-party transaction may participate in any decision regarding that transaction.
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| 2023 PROXY STATEMENT | 23 |
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Director Compensation Our non-employee directors receive retainer-only compensation with no fees for attending meetings, which is an expected part of Board service. Our committee chairs and Lead Director receive additional retainers for their service in these capacities, and all Board members receive an annual equity grant based on a fixed-value amount with immediate vesting that avoids entrenchment. Our directors’ compensation is compared to that of the same peer group of companies used for executive compensation comparisons. The Corporate Governance and Nominating Committee oversees and makes recommendations to the Board regarding non-employee director compensation based on comparisons of financial performance and median compensation levels of our peer group. Our 2022 peer group directors’ compensation data was prepared by Meridian. Annual Fees The following table shows the non-employee director compensation for 2022. Non-employee directors are given the opportunity to elect to receive all or a portion of their annual cash retainer, including chair and Lead Director fees, in an equivalent value of ITW common stock pursuant to our 2015 Long-Term Incentive Plan. The number of ITW shares to be issued to a director is determined by dividing the dollar amount of the fee subject to the election by the fair market value of ITW common stock on the date the fee otherwise would have been paid in cash.
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| Director Compensation Mix | | Annual Committee Chair/Lead Director Cash Retainers: | | | Annual Cash Retainer: | $135,000 | Lead Director: | $35,000 | | Annual Stock Grant: | $170,000 | Committees: | | | | | | | | | | •Audit Committee •Compensation Committee •Corporate Governance and Nominating Committee •Finance Committee •Executive Committee | $25,000 $25,000 $20,000 $15,000 $5,000 |
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Directors’ Deferred Fee Plan Non-employee directors can defer receipt of all or a portion of their annual cash retainer, including chair and Lead Director fees, and/or stock grant until retirement or resignation. Deferred cash amounts are credited with interest quarterly at 120% of the applicable federal long-term rate for the quarter. Cash fees may be deferred as cash or ITW common stock. If a director elects to defer receipt of any ITW common stock to be received in lieu of a cash payment and/or any portion of his or her stock grant, the deferred shares are credited as stock units to an account in the director’s name. The account receives share-equivalent credit for cash dividends and is adjusted for stock dividends, splits, combinations or other changes in ITW common stock upon retirement, resignation or a corporate change (as defined in our 2015 Long-Term Incentive Plan), with any fractional shares paid in cash. ITW Common Stock Grant The Company grants stock to its non-employee directors under our 2015 Long-Term Incentive Plan, which links this element of compensation to long-term performance. Under our director compensation program, non-employee directors serving in 2022 received an annual stock grant equivalent in value to approximately $170,000.
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| Director Compensation |
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| Name | Cash Fees Paid or Deferred ($)(1) | Stock Awards Issued or Deferred ($)(3) | All Other Compensation ($)(6) | Total ($) | | Daniel J. Brutto | 135,000 | 169,927 | — | 304,927 | | Susan Crown | 140,000 | 169,927(4) | 15,000 | 324,927 | | Darrell L. Ford | 135,000(2) | 169,927(4) | — | 304,927 | | Kelly J. Grier | 41,821(2) | —(5) | 15,000 | 56,821 | | James W. Griffith | 135,000 | 169,927(4) | — | 304,927 | | Jay L. Henderson | 135,000 | 169,927 | — | 304,927 | | Richard H. Lenny | 190,000 | 169,927(4) | 16,000 | 375,927 | | David B. Smith, Jr. | 150,000 | 169,927 | 15,000 | 334,927 | | Pamela B. Strobel | 160,000 | 169,927(4) | 15,500 | 345,427 | | Anré D. Williams | 160,000 | 169,927 | — | 329,927 |
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| NEO Compensation | 43 | | Summary Compensation Table | 43 | | Grants of Plan-Based Awards | 45 | | Outstanding Equity Awards at Fiscal Year-End 2022 | 46 | | Option Exercises and Stock Vested | 47 | | Pension Benefits | 47 | | ITW Retirement Plans | 48 | | Potential Payments upon Termination | 51 | | Summary of Termination and Change-in-Control Provisions | 52 | | Termination and Change-in-Control Payments and Benefits | 53 | | Compensation Committee Report | 55 |
Market Capitalization****
2022: Record Financial Performance in a Challenging Environment Throughout 2022, our teams did an exceptional job of delivering for our customers, while responding quickly and decisively to rapidly rising input costs, navigating supply chain disruptions, and aggressively executing our "Win the Recovery" strategy. As a result, ITW delivered the following 2022 financial performance highlights: •Revenue of $15.9B, an increase of 10% •Organic revenue growth of 12%, for the second year in a row •Record GAAP EPS of $9.77, up 15% •Peer group best-in-class After-tax ROIC1 of 29.1%2 •Peer group best-in-class operating margin of 23.8 % •Annual dividend increase of 7% (raised for the 59th consecutive year)
Market Capitalization****
We delivered these results while continuing to drive meaningful progress on our path to ITW's full potential through the execution of our long-term Enterprise Strategy. Our decision to stay invested in our strategy and in our people throughout the pandemic and the quality of our teams’ execution of our “Win the Recovery” focus coming out of it are powering the strong organic revenue growth and financial results the Company is currently delivering. ITW is well-positioned to continue to deliver best-in-class performance, maintain solid organic growth in further slowing end markets, and sustain our best-in-class margins and returns in 2023 and beyond. The high quality of ITW’s operational and financial performance over the past decade and in particular during the global pandemic demonstrates that ITW is a company that has the enduring competitive advantages, agility, and resilience necessary to consistently deliver top-tier performance in any environment. How We Align Executive Compensation with Our Long-Term Enterprise Strategy The independent members of our Board of Directors and Compensation Committee are responsible for aligning executive incentives with the Company’s strategy and the best interests of our stockholders. The Board believes that the Company has a strong track record of thoughtful and diligent governance and execution with respect to aligning executive incentives, as evidenced by our stockholders’ overwhelming and continuing support for our annual advisory vote on executive compensation. The Compensation Committee uses our long-term Enterprise Strategy as a framework to guide our executive compensation decisions. Our programs are designed to be highly performance-oriented, with rigorous financial goals to reward our executives for best-in-class performance. We regularly review our annual and long-term incentive plan metrics to ensure ongoing alignment with the strategy’s initiatives and performance objectives. We generally link 50 percent of our executives’ target long-term incentive opportunity to performance awards consisting of share-based units and cash, with three performance goals: three-year average (i) Operating Margin, (ii) After-tax ROIC, and (iii) EPS growth. The remaining 50 percent of our target long-term incentive opportunity consists of stock option awards that only provide compensation value as our stock price increases. Notably, we do not provide any time-vested full value equity awards (i.e. restricted stock units) to our NEOs. ITW’s Focus on Performance-Based Compensation in 2022 Variable pay makes up a substantial portion of CEO and NEO compensation, as illustrated in the graphs below. We believe that the mix of incentives in our executive compensation plans continues to support the achievement of the current phase of our strategy. For 2022, the mix of compensation for our CEO and NEOs was:
Market Capitalization****
The metrics in our annual and long-term incentive plans are designed to reward superior Company and business segment performance. The following table shows the financial performance metrics for the NEOs used in the Company’s 2022 Executive Incentive Plan (EIP) and 2022-2024 Performance Share Units (PSUs) and Performance Cash awards granted under the long-term incentive plan.
Market Capitalization****
| Plan | Performance Measure | Weight | | 2022 Executive Incentive Plan (EIP) | Organic Revenue Growth | 40% | | | Operating Income Growth | 60% | | 2022-2024 Performance Share Units & Long-term Performance Cash | Operating Margin | 33.33% | | | After-tax ROIC | 33.33% | | | EPS Growth | 33.33% |
ITW 3-Year CEO Pay Versus Indexed TSR (2020-2022)
ITW 3-Year CEO Pay Versus Indexed TSR (2020-2022) Notes: •CEO Pay represents Mr. Santi’s compensation levels based upon salary and annual incentive compensation as reported in the Summary Compensation Table (SCT), annual Performance Share Units (PSUs) and Long-term Performance Cash valued at year end at target performance, and stock option values based on a lattice-based valuation model valued at year end. •Indexed TSR line assumes $100 invested on 12/31/2019 in ITW stock, including the reinvestment of dividends.
ITW 3-Year CEO Pay Versus Indexed TSR (2020-2022)
| | | Compensation Component | | | | | | | CEO | Other NEOs | Form | Objective | | | Base Salary | | | Cash | •Offer competitive pay levels to attract and retain highly qualified leaders •Reflective of individual performance, experience and scope of responsibility | | | Annual Executive Incentive Plan (EIP) | | | Cash | •Motivate executives to achieve annual Company and business segment performance goals | | | Performance Cash | | | Cash | | | | Performance Share Units (PSUs) | | | Equity | •Reward executives for delivering on the long-term performance goals aligned with the Company’s strategy and creating long-term stockholder value | | | Stock Options | | | Equity | |
ITW 3-Year CEO Pay Versus Indexed TSR (2020-2022)
| What We Do | What We Don’t Do | | Pay for Performance: Our NEOs’ average total target compensation is 83% performance based. Robust Stock Ownership Guidelines: We have stock ownership guidelines for our executive officers of 6 x salary for CEO, 3 x salary for Vice Chairman, Executive Vice Presidents and CFO and 2 x salary for Senior Vice Presidents. Executives must retain the net after-tax shares of vested or exercised awards if an executive does not meet the guidelines within five years. Annual “Say on Pay” Vote: We hold an annual advisory vote for our stockholders to review and approve our executive compensation programs. Independent Compensation Consultant: The Committee: (1) engages an independent compensation consultant who advises the Committee on regulatory and other current trends and key developments in executive compensation and (2) reassesses its consultant’s independence annually. Annual CEO and NEO Performance Review: The Committee conducts an annual review of the performance of the CEO, as well as the other executive officers. Annual Review of Compensation Programs: The Committee, with input from its independent compensation consultant, conducts an annual review of our executive compensation programs, considering business strategies, best practices and good governance. Clawback Policy: Our Compensation Recovery Policy provides for the reimbursement of incentives if a material financial restatement is required, whether or not based on misconduct, and equity forfeiture provisions for violations of restrictive covenants and certain misconduct related to restatement. Annual Compensation Risk Assessment: Each year we perform an assessment of risks that could result from our executive compensation practices. | Employment Agreements: We do not provide executive officers with employment agreements. Tax Gross-ups: We do not provide tax gross-ups as part of our change-in-control agreements. Repricing: We do not allow share repricing within our stock option plan. Hedging/Pledging of Company Equity Securities: We prohibit executive officers and directors from engaging in any transaction that is designed to hedge or offset a decrease in the market value of ITW common stock and from pledging ITW equity securities. Dividends on Unvested Equity Awards: Dividends accrued on unvested equity awards, including restricted stock units and performance share units, are not paid unless awards vest. Single-Trigger Change-In-Control Vesting/Benefits: We do not allow immediate vesting of equity awards that are continued or replaced upon a change-in-control; all such awards allow only double-trigger vesting (change-in-control and termination). |
Role of the Compensation Consultant
Role of the Compensation Consultant The Committee engaged with an independent advisor, Meridian Compensation Partners LLC ("Meridian"). The Committee's consultant works directly on its behalf and in cooperation with management to review ITW’s executive compensation programs, confirm appropriateness of our peer companies, and assess our compensation governance processes. In 2022, Meridian conducted a marketplace review of the compensation we pay to our executive officers. Meridian provided the Committee with relevant market data, including a review of our pay and performance and that of our peers, reviewed the peer companies we use for comparison purposes, and benchmarked our compensation against our peer companies. Meridian also assisted the Committee with its assessment of compensation-related risk. With respect to CEO compensation, on an annual basis, the Company's consultant provides an independent recommendation to the Committee for its consideration. In developing its recommendation, the consultant relies on its understanding of ITW’s business, strategy and compensation programs, as well as their own independent research and analysis including ITW’s peer group. The consultant does not meet with the CEO with respect to his compensation.
Role of the Compensation Consultant
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Role of the Compensation Consultant
Peer Companies The Committee has identified a group of comparable companies, which we refer to as the peer group, to benchmark executive compensation and provide competitive market data to be used in establishing and recommending each component of compensation. The peer group is reviewed annually by the Committee with assistance from its independent compensation consultant. In 2022, the Committee utilized market data from the peer group's public disclosures, as well as a custom survey consisting of the peers below, as provided by Aon plc, a global provider of compensation data. In connection with its annual review in 2022, the Committee determined that no changes to the peer group were warranted.
Role of the Compensation Consultant
| Peer Group Selection Criteria: | 2022 Peer Group | | | •U.S. publicly traded companies from ITW’s same and related industries, identified based on Standard & Poor’s Global Industry Classification Standard (GICS) codes; •Companies with one-fourth to four times our revenue and market capitalization with broadly similar businesses and pay models; •Companies that compete for the same customers with similar products and/or services; and •Companies with whom we may compete for executive talent. | 3M Company Caterpillar Inc. Cummins Inc. Deere & Company Dover Corporation Eaton Corporation plc Ecolab Inc. Emerson Electric Co. Fortive Corporation | General Dynamics Corporation Honeywell International Inc. Johnson Controls International plc Parker-Hannifin Corporation PPG Industries, Inc. Rockwell Automation, Inc. Stanley Black & Decker, Inc. Trane Technologies plc |
Role of the Compensation Consultant
The revenue median of the peer group was $18.9 billion based on the twelve-month average of reported financial results through July 1, 2022, and the median market capitalization was $33.7 billion as of July 1, 2022, versus $14.9 billion and $57.0 billion, respectively, for ITW. The nature of our decentralized and diverse lines of business presents challenges in identifying similar organizations for comparison purposes; however, we believe that the selected peer group provides relevant comparisons. Compensation Decisions and Individual Compensation Levels On an annual basis, the CEO reviews the total compensation of the NEOs and makes recommendations to the Committee based on his assessment of each executive’s individual performance and peer group compensation information. The Committee makes recommendations to the independent directors regarding the CEO’s compensation based on an assessment of the CEO’s performance and peer group compensation information. There are no material differences in the policies and decision processes used in setting compensation for the CEO and the other NEOs. However, the different levels of compensation for the NEOs, as shown in the Summary Compensation Table of this proxy statement, reflect internal factors such as each executive’s scope of responsibility, performance, impact on profitable growth and breadth of experience, as well as compensation data from the peer group. Components of the 2022 Executive Compensation Program Base Salary In determining base salary, the CEO and the Committee consider the size and scope of the executive officers’ responsibilities, experience, performance, market data and the median base salary of similar positions at our peer group companies. The Committee believes that median base salary is an appropriate general reference point to use for encouraging solid performance. Base salaries are reviewed annually, and adjustments are intended to recognize performance and contributions over the prior year, as well as any significant changes in duties or scope of responsibility. For 2022, the Committee recommended a 3.7 percent base salary increase for Mr. Santi, which was approved by the Board’s independent directors. For the other NEOs, the Committee approved recommended base pay merit increases ranging from 3.5 to 13.1 percent. These base salary increases were effective February 21, 2022.
Role of the Compensation Consultant
| 2023 PROXY STATEMENT | 35 |
Role of the Compensation Consultant
Annual Executive Incentive Plan We believe that executives generally should be rewarded for their contributions to the overall financial success measured by income and organic growth of the Company as a whole, and, if applicable, the business segment he or she leads. Achieving our annual financial objectives is important to executing on our current strategic objectives and delivering long-term value to stockholders. The Committee determines and approves the performance results and awards for the NEOs and recommends the CEO’s annual incentive award amount for approval by the independent directors of the full Board. The Company provides annual incentive award opportunities to the NEOs through the annual Executive Incentive Plan (EIP). The Committee determined each NEO’s 2022 award target based on responsibilities, experience, performance, market data and the median target incentive opportunity of similar positions at our peer group companies. Based on achieved results against performance goals, an NEO may earn between zero percent and 200% of his or her award target. For 2022, the Committee approved the following performance metrics and weightings:
2022 EIP Company Financial Targets
| | Operating Income Growth vs. Prior Year | Operating Income Growth Payout (as a % of Target) | Organic Revenue Growth | Organic Revenue Payout (as a % of Target) | | Maximum | 116% | 200% | 9.0% | 200% | | Target | 106% | 100% | 5.6% | 100% | | Threshold | 85% | 50% | 3.8% | 0% |
2022 EIP Company Performance Results
| Operating Income Growth vs. Prior Year(1)(2) | | | | Organic Revenue Growth(1)(3) | | | | Total Payout Percent 164.2% | | 2021 | 2022 | Achievement Percent | Payout Percent | 2021 | 2022 | Achievement Percent | Payout Percent | | | $3.5B | $3.9B | 113.6% | 175.5% | $14.5B | $16.2B | 7.4% | 147.3% | |
2022 EIP Total Payouts
2022 EIP Total Payouts The total 2022 payouts to the NEOs for Company performance results were 164.2% percent of the target award level.
2022 EIP Total Payouts
| Named Executive Officer | Award Target (as a % of Base Salary) | Year-End 2022 Salary | | Total Payout Percent | Total Payout Amount(2) | | | E. Scott Santi | 160% | | $1,400,000 | 164.2% | | $3,678,528 | | Michael M. Larsen | 100% | | $879,323 | 164.2% | | $1,444,024 | | Christopher A. O’Herlihy | 100% | | $888,997 | 164.2% | | $1,459,910 | | Mary K. Lawler | 70% | | $604,000 | 164.2% | | $694,322 | | Michael R. Zimmerman(1) | 80% | | $518,839 | 126.3% | | $524,152 | | Lei Z. Schlitz(1) | 67%(3) | | $576,239 | 149.3% | | $580,934 |
2022 EIP Total Payouts
(1)50% of the total payout percent for Mr. Zimmerman and Ms. Schlitz is based on their respective business segment’s results and the other 50% is based on total company results. (2)These amounts are included in the Summary Compensation Table under “Non-Equity Incentive Plan Compensation.” The award payout is calculated as a percent of base salary. (3)Ms. Schlitz's award target was pro-rated based on her separation date. In 2022, as part of its regular review of the Company’s annual incentive plans and performance metrics, the Committee carefully considered the incorporation of environmental, social & governance (ESG) metrics, and determined that changing the current performance metrics or otherwise altering the annual incentive plan was not aligned with our compensation objectives at this time. The current annual incentive plan for ITW’s executives is solely based on the Company’s performance of two financial performance metrics – operating income and organic revenue growth – and directly supports the Company’s stated goal to deliver consistent above-market organic revenue growth at best-in-class operating margins and returns. ITW's annual incentive plan and key performance metrics are simple, rigorous and transparent, and are closely aligned with our pay-for-performance philosophy. The Company’s ESG strategy and supporting objectives and performance measures are identified in the Company’s annual Sustainability Report and the achievement of these strategic objectives is an important long-term driver of the Company’s success.
2022 EIP Total Payouts
| Long-Term Incentives The value of the overall long-term incentive award for the CEO is determined by the Committee, subject to approval by the independent directors of the full Board of Directors. Awards to the other NEOs are recommended by the CEO to the Committee for approval. The key factors in determining the awards are the executive’s position, performance, potential to contribute to the long-term success of the Company, breadth of experience, and prior awards. In addition, although we generally do not establish any specific target or prescribed value in relation to the peer group, comparisons are made to long-term incentive levels in the peer group and market compensation data. | | | | Long-Term Incentive Philosophy We believe that ensuring the long-term growth and profitability of the business is a primary management responsibility. Therefore, a significant portion of an executive officer’s compensation should be directly linked to key financial performance measures that consider the long-term perspective, such as operating margin, After-tax ROIC, EPS and ITW’s share price over time. |
2022 EIP Total Payouts
| 2023 PROXY STATEMENT | 37 |
2022 EIP Total Payouts
| | Stock Options | PSU | Performance Cash | | LTI Mix | | | |
2022 EIP Total Payouts
In 2022, the value of the NEOs’ long-term incentive awards consisted of 50% in the form of stock options and 25% percent in the form of PSUs and 25% in the form of Performance Cash awards. We believe that stock options are an effective incentive because they directly align the interest of the executives with those of our stockholders. Similarly, we believe PSUs and Performance Cash awards are effective because they incent executive leaders to achieve key long-term financial goals. Stock options are combined with performance-based awards to closely align the realized value of long-term incentives with the financial performance objectives of the Company’s strategy and total shareholder return. The Committee has established specific vesting and expiration provisions associated with termination of employment due to death, disability and retirement, as defined in the applicable awards, and forfeiture provisions upon other termination of employment. The Committee, in its sole discretion, may deem a long-term incentive award, whether vested or unvested, to be immediately forfeited if the recipient competes with the Company, engages in gross misconduct or conduct that is against the business interests of the Company, or divulges confidential information about the Company to others. 2022 Stock Option Awards The 2022 stock options vest in equal installments over a four-year period ending in 2026. Stock options are awarded with an exercise price equal to the fair market value of the common stock on the date of grant and normally expire ten years after the award date. The Committee awards non-qualified stock options because it believes that the tax benefits to the Company from non-qualified stock options outweigh the potential tax benefits to the NEOs from incentive stock options. 2022-2024 Performance Share Units and Performance Cash Awards The PSUs and Performance Cash awards vest three years from the date of grant, subject to the achievement of the performance goals set at the beginning of the performance period. PSUs are awarded based on the fair market value of one share of ITW common stock on the date of the award. Dividend equivalents are accrued and added in the form of units to the original PSU awards as reinvested dividends. These reinvested dividends are paid only on PSUs earned at the end of the performance period. The goals for the 2022 PSUs and Performance Cash awards are equally weighted and based on three-year average operating margin, After-tax ROIC and EPS growth. The payout range is 50 percent to 200 percent of the target award for threshold to maximum performance. Performance below threshold results in no payout for the weighted portion for that metric. The payout at the end of the performance period will be based on the following payout scale:
2022 EIP Total Payouts
| | Operating Margin | After-tax ROIC | EPS Growth | Payout (as a % of Target) | | Maximum | 26% | 27% | 12% | 200% | | Target | 24% | 25% | 9% | 100% | | Threshold | 20% | 20% | 4% | 50% |
2022 EIP Total Payouts
Note: Interpolation is used for measuring achievement between threshold and target and between target and maximum.
2022 EIP Total Payouts
| 38 | |
2022 EIP Total Payouts
2020-2022 Performance Share Units and Performance Cash Awards Payout In 2020, executives were awarded PSUs and Performance Cash awards with a three-year performance period from January 1, 2020 to December 31, 2022. The awards had the same financial metrics (operating margin, After-tax ROIC, and EPS growth) and weightings as the 2022-2024 performance awards noted above. Consistent with last year’s practice and ITW’s pay-for-performance philosophy, the Committee determined not to exercise its discretion to increase the payouts of those 2020-2022 awards beyond achievement of the pre-established payout targets despite the unforeseeable impact of the COVID pandemic and its impact on 2020 financial performance. The table below details the performance and associated payouts of the 2020-2022 PSU and Performance Cash awards:
2022 EIP Total Payouts
| Long-Term Performance Results | | | | | Performance Scale and Payout | | | | | Metrics (Weighting) | FY 2020 | FY 2021 | FY 2022 | 3 Year Average | Threshold 50% of Target | Target 100% of Target | Maximum 200% of Target | Payout % of Target | | Operating Margin (1/3rd) | 22.9% | 24.1% | 23.8% | 23.6% | 23.0% | 25.0% | 27.0% | 65.0% | | After-tax ROIC (1/3rd) | 26.2% | 29.5% | 29.1% | 28.3% | 20.0% | 25.0% | 27.0% | 200.0% | | EPS Growth (1/3rd) | (14.3)% | 28.4% | 7.8%(1) | 7.3% | 4.0% | 7.0% | 10.0% | 110.0% | | Total Payout % of Target: | | | | | | | | 125.0% |
2022 EIP Total Payouts
(1)2022 EPS excludes the net impact of gains of $0.60 from two divestitures in the fourth quarter of 2022. Timing of Long-Term Incentive Awards The Committee meets in February of each year following the Company’s public release of its earnings results for the most recently completed fiscal year to review and approve long-term incentive awards for the executive officers. Long-term awards are made in compliance with the Long-Term Incentive Plan, including the requirement that stock options may not be awarded at less than 100 percent of the fair market value of ITW’s common stock on the date of grant. The exercise price of the awards is based on the closing price of ITW’s stock on the date of award. We do not time award grant dates for the purpose of enhancing the value of executive compensation. Benefits and Perquisites Our NEOs participate in the same health, disability, life insurance, and retirement benefit plans and programs provided to the company’s U.S.-based non-union employees. Beginning in 2022, our executive officers were offered the opportunity to participate in a comprehensive annual physical paid by the Company, which is an extension of our company wellness program that encourages healthy lifestyles and preventative medical care. The Company also offers a three-year program of financial counseling and optional tax preparation services for select executives, and occasionally offers the use of tickets to sporting events (there is no incremental expense to the Company for these tickets). ITW’s perquisites are consistent with market practices and do not comprise a substantive element of our compensation programs. Compensation Governance Practices and Policies Stock Ownership Guidelines We believe that stock ownership is important because it aligns the interests of our management and directors with those of our stockholders and mitigates compensation-related risk. Because of the importance of stock ownership, the Board of Directors and the Committee have adopted stock ownership guidelines for executive officers and directors. The guidelines for stock ownership as a multiple of executive officers’ base salaries and of directors’ annual cash retainers are as follows:
2022 EIP Total Payouts
| Title | Guideline | | Chief Executive Officer | 6 times salary | | Vice Chairman, Executive Vice Presidents, and Chief Financial Officer | 3 times salary | | Senior Vice Presidents | 2 times salary | | Non-employee Directors | 5 times annual cash retainer |
2022 EIP Total Payouts
| 2023 PROXY STATEMENT | 39 |
2022 EIP Total Payouts
If the applicable ownership guideline is not met within the five-year time period, the covered executive officer or non-employee director must retain 100% of the net after-tax shares received from the vesting or any subsequent exercise of awards until the ownership
2022 EIP Total Payouts
| 40 | |
2022 EIP Total Payouts
guidelines are met. The achievement of these guidelines is reviewed annually. The Board of Directors believes that its stock ownership guidelines are appropriate, reasonable and attainable given the responsibilities and compensation levels of our executive officers and directors. All executive officers and directors who have been in their positions for five or more years have met or exceeded the applicable stock ownership guidelines. Hedging and Anti-Pledging Policy Pursuant to the Company’s Hedging and Anti-Pledging Policy, all employees (including executive officers) and directors who receive equity-based awards from the Company are prohibited from trading ITW options or engaging in short sales of ITW stock. In addition, all executive officers and directors and their designees are prohibited from purchasing or selling any financial instrument or otherwise engaging in any transaction that hedges or offsets, or is designed to hedge or offset, any decrease in the market value of ITW equity securities. In addition, since April 2013, our executive officers and directors have been prohibited from pledging ITW stock, and all pledged shares are excluded from ownership for purposes of our stock ownership guidelines. Compensation Recovery Policy We maintain a Compensation Recovery Policy (clawback policy) applicable to all executive officers of the Company subject to Section 16 of the Securities Exchange Act of 1934. Under the policy, the Committee will seek reimbursement of incentives paid to executive officers in the prior three years where the payment was predicated upon the achievement of certain financial results with respect to the applicable performance period that was subsequently the subject of a material restatement due to non-compliance of the Company with any financial reporting requirement under the U.S. securities laws. The reimbursement requirement would be imposed whether or not the restatement is based on misconduct. The amount recovered would be measured by the excess of the gross incentive payment made over the gross payment that would have otherwise been made if the original payment had been determined based on the restated financial results. Further, following a material restatement of our financial statements, we will seek reimbursement of compensation and profits from trading in Company stock received by our CEO and CFO to the extent required under Section 304 of the Sarbanes-Oxley Act of 2002. In addition, forfeiture provisions in the terms of awards under our equity incentive plan provide flexibility to cancel outstanding grants for violation of non-compete and confidentiality restrictive covenants, and for engaging in gross misconduct or conduct that is against the business interests of the Company regardless of whether a financial restatement is required. 2022 Risk Assessment The Committee, together with management and Meridian, annually considers potential risks when reviewing our compensation programs for all employees, including our executive officers. Based on this assessment, the Committee concluded that our 2022 compensation programs do not create risks that are reasonably likely to have a material adverse effect on ITW. In making this determination, the Committee reviewed the key design elements of our compensation programs, as well as the means by which any potential risks may be mitigated, including: •A Balanced Mix of Compensation Components - The target compensation mix for our executive officers is composed of base salary, annual cash incentives and long-term cash and equity incentives, representing a mix that is not overly weighted toward short-term cash incentives. •Multiple Performance Factors - Our incentive compensation plans use Company-wide measures, which encourage focus on the achievement of objectives for the overall benefit of the Company. Multiple financial goals also prevent an overemphasis on any one metric. •Long-Term Incentives - Our long-term incentives are primarily equity-based, and our PSUs and Performance Cash awards are subject to performance goals. These long-term incentives have three-year vesting schedules (PSUs and Performance Cash) or four-year vesting schedules (stock options), in each case to complement our annual cash-based incentives. •Capped Incentive Awards - Annual and long-term incentive awards, PSUs and Performance Cash are all capped at 200% of target. •Stock Ownership Guidelines - Our guidelines call for significant share ownership by executive officers and directors, which further aligns interests with the long-term interests of our stockholders, and we maintain a holding-period requirement for individuals who have not achieved their guidelines in the targeted period. •Clawback Policy - Our Compensation Recovery Policy authorizes the Committee to recoup past incentive compensation in the event of a material restatement of the Company’s financial results, whether or not based on misconduct.
2022 EIP Total Payouts
| 2023 PROXY STATEMENT | 41 |
2022 EIP Total Payouts
•Prohibition on Hedging and Pledging - Executive officers and directors are subject to Company policy that prohibits hedging and pledging activities with respect to ITW stock. •Committee Oversight - The Committee has ultimate authority to determine, and reduce if appropriate, compensation provided to our executive officers. •Independent Compensation Consultant - The Committee retains an outside independent compensation consultant. Committee’s Independent Consultant Meridian, the independent compensation consultant, has been retained by and reports directly to the Committee. It also provides peer group directors’ compensation data to the Corporate Governance and Nominating Committee; it does not have any other consulting engagements with management or ITW. Based on its consideration of factors under NYSE listing standards, the Committee concluded that the work performed by Meridian and its senior advisor involved in the engagement did not raise any conflict of interest or independence concerns.
2022 EIP Total Payouts
| 42 | |
2022 EIP Total Payouts
NEO Compensation Summary Compensation Table The following tables provide information regarding the compensation of our NEOs.
2022 EIP Total Payouts
| Name and Principal Position | Year | Salary(1) | Bonus | Stock Awards(2) | Option Awards(2) | Non-Equity Incentive Plan Compensation(1)(3) | Change in Pension Value and Nonqualified Deferred Compensation Earnings(4) | All Other Compensation(5) | Total | | E. Scott Santi Chairman & Chief Executive Officer | 2022 | $1,393,269 | — | $3,337,430 | $6,674,976 | $7,350,403 | $3,296,378 | $181,774 | $22,234,230 | | | 2021 | $1,350,000 | — | $4,887,030 | $6,174,959 | $7,410,625 | $766,558 | $198,450 | $20,787,622 | | | 2020 | $1,344,924 | — | $2,937,379 | $5,874,987 | $3,117,342 | $662,892 | $69,832 | $14,007,356 | | Michael M. Larsen Senior Vice President & CFO | 2022 | $875,320 | — | $874,799 | $1,749,969 | $2,381,524 | — | $332,736 | $6,214,348 | | | 2021 | $845,080 | — | $1,266,174 | $1,599,967 | $2,465,112 | — | $346,108 | $6,522,441 | | | 2020 | $812,904 | — | $749,937 | $1,499,996 | $885,167 | — | $126,797 | $4,074,801 | | Christopher A. O'Herlihy Vice Chairman | 2022 | $884,950 | — | $962,322 | $1,924,970 | $2,475,535 | — | $375,201 | $6,622,978 | | | 2021 | $854,377 | — | $1,365,659 | $1,749,988 | $2,524,118 | $23,868 | $408,529 | $6,926,539 | | | 2020 | $820,740 | — | $812,495 | $1,624,993 | $921,511 | $408,519 | $165,381 | $4,753,639 | | Mary K. Lawler Senior Vice President, Human Resources | 2022 | $594,556 | — | $374,914 | $749,987 | $1,124,010 | — | $192,185 | $3,035,651 | | | 2021 | $530,336 | — | $579,023 | $724,993 | $1,103,474 | — | $158,148 | $3,095,974 | | Michael R. Zimmerman Executive Vice President | 2022 | $513,226 | — | $349,876 | $699,960 | $899,152 | $476,783 | $50,365 | $2,989,362 | | Lei Z. Schlitz Former Executive Vice President | 2022 | $508,453 | — | $387,324 | $775,000 | $966,057 | — | $145,116 | $2,781,949 |
2022 EIP Total Payouts
Note: Years prior to becoming an NEO are not presented in this table. (1)The Salary and Non-Equity Incentive Plan Compensation columns for 2022 include amounts deferred by the executive under the Executive Contributory Retirement Income Plan (ECRIP) and the Savings and Investment Plan. The deferral amounts for each year shown for each NEO can be found in the Footnote 1 Table to the table under the “ITW Retirement Plans—Nonqualified Deferred Compensation” section. (2)The Stock Awards column represents PSUs awarded in 2022, 2021, and 2020. The amounts shown represent the target amount that may be earned based on the grant date fair value. The Option Awards column represents stock options awarded in the relevant year, and the assumptions applicable to these valuations can be found in Note 15 of the Notes to Financial Statements—Stock-Based Compensation contained in the Company's Form 10-K for the year ended December 31, 2022. (3)These amounts include payouts made under the EIP and 2020-2022 Long-term Performance Cash award payouts made under our Long-Term Incentive Plan. The following table shows the award payouts under each plan for 2022.
2022 EIP Total Payouts
| Name | EIP Award | Performance Cash | Non-Equity Incentive Plan Compensation | | E. Scott Santi | $3,678,528 | $3,671,875 | $7,350,403 | | Michael M. Larsen | $1,444,024 | $937,500 | $2,381,524 | | Christopher A. O'Herlihy | $1,459,910 | $1,015,625 | $2,475,535 | | Mary K. Lawler | $694,322 | $429,688 | $1,124,010 | | Michael R. Zimmerman | $524,152 | $375,000 | $899,152 | | Lei Z. Schlitz | $580,934 | $385,123 | $966,057 |
2022 EIP Total Payouts
| 2023 PROXY STATEMENT | 43 |
2022 EIP Total Payouts
(4)These amounts include an amount of interest in the applicable calendar year considered to be in excess of market rates credited to the deferred compensation accounts of the NEOs under the ECRIP, discussed in more detail under “Nonqualified Deferred Compensation” below. When a participant attains retirement eligibility at age 55 with 10 years of service, any amounts in his or her ECRIP account deferred prior to January 1, 2010 are entitled to a return of 130 percent of the monthly Moody’s Corporate Bond Yield Average rate, and the excess interest portion is deemed to be amounts exceeding 100 percent of such rate. This additional interest credit applies to all eligible plan participants, including the eligible NEOs. All amounts deferred after December 31, 2009 accrue interest at 100 percent of the Moody’s Rate. The individual amounts of pension benefits and excess interest credits earned in each year are shown in the table below.
2022 EIP Total Payouts
| Name | Year | Accrual in ITW Retirement Accumulation Plan | Accrual in ITW Nonqualified Pension Plan | Excess Interest on Deferred Compensation | Change in Pension Value and NQDC Earnings | | E. Scott Santi | 2022 | $85,100 | $3,193,773 | $17,505 | $3,296,378 | | | 2021 | $73,876 | $680,057 | $12,625 | $766,558 | | | 2020 | $59,874 | $590,293 | $12,725 | $662,892 | | Michael M. Larsen* | 2022 | — | — | — | — | | | 2021 | — | — | — | — | | | 2020 | — | — | — | — | | Christopher A. O’Herlihy** | 2022 | — | — | — | — | | | 2021 | $23,868 | — | — | $23,868 | | | 2020 | $408,519 | — | — | $408,519 | | Mary K. Lawler* | 2022 | — | — | — | — | | | 2021 | — | — | — | — | | Michael R. Zimmerman | 2022 | $75,080 | $401,112 | $591 | $476,783 | | Lei Z. Schlitz* | 2022 | — | — | — | — |
2022 EIP Total Payouts
* Mr. Larsen, Ms. Lawler, and Ms. Schlitz joined the Company in September 2013, October 2014 and October 2008, respectively. Consequently, their ECRIP deferrals are not eligible for the 130 percent rate. They are not eligible to participate in the Company’s pension plans, which were closed to new entrants effective January 1, 2007. ** Mr. O’Herlihy participated in the ITW Retirement Accumulation Plan from 1989 through 1999. From 1999 through August 2011, he was employed in Ireland, participated in the ITW Irish Pension Plan and ceased active participation in the U.S. plan. Upon his return to the U.S. in 2011, he was ineligible to actively participate in the U.S. plan due to the plan participation closure effective January 1, 2007. The ITW Irish Pension Plan accrual is included in the “Accrual in ITW Retirement Accumulation Plan” column above because this amount also represents a qualified pension plan present value. Mr. O’Herlihy’s actuarial present value of pension benefits declined by $611,338 in fiscal year 2022. (5)These amounts include the Company contributions to the Savings and Investment Plan and ECRIP, as well as perquisites to our NEOs, as outlined in the table below:
2022 EIP Total Payouts
| Name | Company Contributions to Retirement Plans | Perquisites* | Total All Other Compensation | | E. Scott Santi | $177,479 | $4,295 | $181,774 | | Michael M. Larsen | $328,441 | $4,295 | $332,736 | | Christopher A. O'Herlihy | $370,906 | $4,295 | $375,201 | | Mary K. Lawler | $179,221 | $12,964 | $192,185 | | Michael R. Zimmerman | $36,280 | $14,085 | $50,365 | | Lei Z. Schlitz | $137,765 | $7,351 | $145,116 |
2022 EIP Total Payouts
* Perquisites to NEOs in 2022 were as follows: (1) financial planning and tax preparation services (Mdmes. Lawler and Schlitz, and Mr. Zimmerman), (2) executive physicals (NEOs except Ms. Schlitz). Additionally, NEOs may use tickets to sporting events that have no incremental cost to ITW.
2022 EIP Total Payouts
| 44 | |
2022 EIP Total Payouts
Grants of Plan-Based Awards The table below provides information regarding plan-based awards granted to our NEOs during fiscal year 2022 under the Executive Incentive Plan (EIP) and the Long-Term Incentive Plan.
2022 EIP Total Payouts
| | | | Estimated Future Payouts Under Non-Equity Incentive Plan Awards(1)(2) | | | | Estimated Future Payouts Under Equity Incentive Plan Awards(3) | | | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise or Base Price of Option Awards ($)(4) | Grant Date Fair Value of Stock and Option Awards ($)(5) | | Name | Approval Date | Grant Date | Plan Type | Threshold ($) | Target ($) | Maximum ($) | Threshold (#) | Target (#) | Maximum (#) | | | | | E. Scott Santi | | | EIP | | 2,240,000 | 4,480,000 | | | | | | | | | 2/11/2022 | 2/11/2022 | Perf. Cash | 1,668,750 | 3,337,500 | 6,675,000 | | | | | | | | | 2/11/2022 | 2/11/2022 | PSUs | | | | 7,665 | 15,329 | 30,658 | | | $3,337,430 | | | 2/11/2022 | 2/11/2022 | Stock Options | | | | | | | 147,840 | 217.72 | $6,674,976 | | Michael M. Larsen | | | EIP | | 879,323 | 1,758,646 | | | | | | | | | 2/10/2022 | 2/11/2022 | Perf. Cash | 437,500 | 875,000 | 1,750,000 | | | | | | | | | 2/10/2022 | 2/11/2022 | PSUs | | | | 2,009 | 4,018 | 8,036 | | | $874,799 | | | 2/10/2022 | 2/11/2022 | Stock Options | | | | | | | 38,759 | 217.72 | $1,749,969 | | Christopher A. O’Herlihy | | | EIP | | 888,997 | 1,777,994 | | | | | | | | | 2/10/2022 | 2/11/2022 | Perf. Cash | 481,250 | 962,500 | 1,925,000 | | | | | | | | | 2/10/2022 | 2/11/2022 | PSUs | | | | 2,210 | 4,420 | 8,840 | | | $962,322 | | | 2/10/2022 | 2/11/2022 | Stock Options | | | | | | | 42,635 | 217.72 | $1,924,970 | | Mary K. Lawler | | | EIP | | 422,800 | 845,600 | | | | | | | | | 2/10/2022 | 2/11/2022 | Perf. Cash | 187,500 | 375,000 | 750,000 | | | | | | | | | 2/10/2022 | 2/11/2022 | PSUs | | | | 861 | 1,722 | 3,444 | | | $374,914 | | | 2/10/2022 | 2/11/2022 | Stock Options | | | | | | | 16,611 | 217.72 | $749,987 | | Michael R. Zimmerman | | | EIP | | 415,071 | 830,142 | | | | | | | | | 2/10/2022 | 2/10/2022 | Perf. Cash | 175,000 | 350,000 | 700,000 | | | | | | | | | 2/10/2022 | 2/10/2022 | PSUs | | | | 804 | 1,607 | 3,214 | | | $349,876 | | | 2/10/2022 | 2/10/2022 | Stock Options | | | | | | | 15,503 | 217.72 | $699,960 | | Lei Z. Schlitz | | | EIP | | 460,991 | 921,982 | | | | | | | | | 2/10/2022 | 2/11/2022 | Perf. Cash | 193,750 | 387,500 | 775,000 | | | | | | | | | 2/10/2022 | 2/11/2022 | PSUs | | | | 890 | 1,779 | 3,558 | | | $387,324 | | | 2/10/2022 | 2/11/2022 | Stock Options | | | | | | | 17,165 | 217.72 | $775,000 |
2022 EIP Total Payouts
(1)The range of potential payouts under the EIP awards for the NEOs as determined by the Committee in February 2022 for 2022 performance is set forth in these columns. The financial performance components and corresponding payouts as a percent of target are shown under “Components of the 2022 Executive Compensation Program—Annual Executive Incentive Plan.” (2)The range of potential payouts under the Performance Cash awards for the three-year period 2022 through 2024 is set forth in these columns. (3)The range of potential share distributions under the 2022 PSU awards for the NEOs as set by the Committee in February 2022 for performance for the three-year period 2022 through 2024 is set forth in these columns. (4)Exercise price is equal to the closing price on the grant date. (5)Grant date fair values of options awarded to the NEOs on February 11, 2022 were based on an implied value of $45.15 per share as determined using a binomial valuation technique under Accounting Standards Codification Topic 718. Grant date fair value of PSUs was based on the assumption that the performance conditions will be met at target.
2022 EIP Total Payouts
| 2023 PROXY STATEMENT | 45 |
2022 EIP Total Payouts
Outstanding Equity Awards at Fiscal Year-End 2022 The following table sets forth details, on an award-by-award basis, of the outstanding equity awards held by each NEO as of December 31, 2022.
2022 EIP Total Payouts
| | | Option Awards | | | | Stock Awards | | | Name | Grant Date(1) | Number of Securities Underlying Unexercised Options Exercisable (#) | Number of Securities Underlying Unexercised Options Unexercisable (#) | Option Exercise Price ($) | Option Expiration Date | Equity Incentive Plan Awards: Number of Unearned Units that Have Not Vested (#)(2) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Units That Have Not Vested ($) | | E. Scott Santi | 02/11/2022 | — | 147,840 | 217.72 | 02/11/2032 | 15,640.545 | 3,445,612 | | | 02/12/2021 | 37,744 | 113,233 | 200.98 | 02/12/2031 | 25,325.867 | 5,579,289 | | | 02/14/2020 | 82,863 | 82,863 | 187.86 | 02/14/2030 | 16,680.450 | 3,674,703 | | | 02/15/2019 | 125,508 | 41,837 | 144.21 | 02/15/2029 | — | — | | | 02/15/2018 | 143,453 | — | 163.36 | 02/15/2028 | — | — | | | 02/10/2017 | 195,676 | — | 128.00 | 02/10/2027 | — | — | | | 02/12/2016 | 199,800 | — | 91.88 | 02/12/2026 | — | — | | | 02/13/2015 | 35,856 | — | 98.26 | 02/13/2025 | — | — | | Michael M. Larsen | 02/11/2022 | — | 38,759 | 217.72 | 02/11/2032 | 4,099.667 | 903,157 | | | 02/12/2021 | 9,779 | 29,340 | 200.98 | 02/12/2031 | 6,561.641 | 1,445,530 | | | 02/14/2020 | 21,156 | 21,157 | 187.86 | 02/14/2030 | 4,258.653 | 938,181 | | | 02/15/2019 | 31,104 | 10,368 | 144.21 | 02/15/2029 | — | — | | | 02/15/2018 | 37,167 | — | 163.36 | 02/15/2028 | — | — | | Christopher A. O’Herlihy | 02/11/2022 | — | 42,635 | 217.72 | 02/11/2032 | 4,509.828 | 993,515 | | | 02/12/2021 | 10,696 | 32,091 | 200.98 | 02/12/2031 | 7,077.208 | 1,559,109 | | | 02/14/2020 | 22,919 | 22,920 | 187.86 | 02/14/2030 | 4,613.902 | 1,016,443 | | | 02/15/2019 | 32,741 | 10,914 | 144.21 | 02/15/2029 | — | — | | | 02/15/2018 | 39,123 | — | 163.36 | 02/15/2028 | — | — | | | 02/10/2017 | 48,453 | — | 128.00 | 02/10/2027 | — | — | | | 02/12/2016 | 37,462 | — | 91.88 | 02/12/2026 | — | — | | | 02/13/2015 | 22,675 | — | 98.26 | 02/13/2025 | — | — | | Mary K. Lawler | 02/11/2022 | — | 16,611 | 217.72 | 02/11/2032 | 1,756.994 | 387,066 | | | 02/12/2021 | 4,431 | 13,295 | 200.98 | 02/12/2031 | 3,000.651 | 661,043 | | | 02/14/2020 | 9,696 | 9,697 | 187.86 | 02/14/2030 | 1,951.176 | 429,844 | | | 02/15/2019 | 14,460 | 4,821 | 144.21 | 02/15/2029 | — | — | | | 02/15/2018 | 17,279 | — | 163.36 | 02/15/2028 | — | — | | | 02/10/2017 | 23,294 | — | 128.00 | 02/10/2027 | — | — | | Michael R. Zimmerman | 02/11/2022 | — | 15,503 | 217.72 | 02/11/2032 | 1,639.662 | 361,218 | | | 02/12/2021 | 3,973 | 11,919 | 200.98 | 02/12/2031 | 2,573.624 | 566,969 | | | 02/14/2020 | 8,462 | 8,463 | 187.86 | 02/14/2030 | 1,702.605 | 375,084 | | | 02/15/2019 | 12,004 | 4,002 | 144.21 | 02/15/2029 | — | — | | | 02/15/2018 | 13,693 | — | 163.36 | 02/15/2028 | — | — | | | 02/10/2017 | 19,567 | — | 128.00 | 02/10/2027 | — | — | | Lei Z. Schlitz | 02/11/2022 | — | 4,291 | 217.72 | 02/11/2032 | 460.000 | 101,338 | | | 02/12/2021 | 4,431 | 13,295 | 200.98 | 02/12/2031 | 1,701.000 | 374,730 | | | 02/14/2020 | 9,167 | 9,168 | 187.86 | 02/14/2030 | 1,750.000 | 385,525 | | | 02/15/2019 | 12,004 | 4,002 | 144.21 | 02/15/2029 | — | — | | | 02/15/2018 | 13,693 | — | 163.36 | 02/15/2028 | — | — | | | 02/10/2017 | 18,635 | — | 128.00 | 02/10/2027 | — | — | | | 02/12/2016 | 13,736 | — | 91.88 | 02/12/2026 | — | — | | | 02/13/2015 | 6,478 | — | 98.26 | 02/13/2025 | — | — |
2022 EIP Total Payouts
(1)Stock options vest in equal installments over a four-year period starting on the anniversary of the grant date, with exceptions for termination upon death, disability, retirement and change-in-control. (2)PSUs were granted in 2020, 2021, and 2022 and are subject to three-year vesting, as well as achievement of operating margin, After-tax ROIC and EPS performance goals. The number of PSUs included in this table assumes target performance is met.
2022 EIP Total Payouts
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2022 EIP Total Payouts
Option Exercises and Stock Vested The following table provides information regarding option exercises and stock vesting for each NEO during 2022. The value realized upon the exercise of options is calculated using the difference between the option exercise price and the market price of ITW’s common stock at the time of exercise multiplied by the number of shares underlying the option. The value realized upon the vesting of stock awards is based on the closing price of ITW’s common stock on the vesting date.
2022 EIP Total Payouts
| | Option Awards | | Stock Awards | | | Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($) | | E. Scott Santi | 148,789 | 19,815,525 | 23,010 | 5,056,217 | | Michael M. Larsen | 51,248 | 5,125,476 | 5,701 | 1,252,738 | | Christopher A. O’Herlihy | — | — | 6,001 | 1,318,660 | | Mary K. Lawler | — | — | 2,650 | 582,311 | | Michael R. Zimmerman | — | — | 2,199 | 483,208 | | Lei Z. Schlitz | — | — | 2,199 | 483,208 |
2022 EIP Total Payouts
Pension Benefits The following table provides pension benefit information through our financial statement measurement date of December 31, 2022 for each NEO serving as of that date.
2022 EIP Total Payouts
| Name | Plan Name | Number of Years of Credited Service | Present Value of Accumulated Benefit (1)(2) | | E. Scott Santi | ITW Retirement Accumulation Plan | 40.62 | $1,147,949 | | | ITW Nonqualified Pension Plan | 40.62 | $16,565,908 | | Michael M. Larsen | ITW Retirement Accumulation Plan(3) | — | — | | | ITW Nonqualified Pension Plan(3) | — | — | | Christopher A. O’Herlihy | ITW Retirement Accumulation Plan(4) | 10.46 | $84,468 | | | ITW Nonqualified Pension Plan(4) | — | — | | | ITW Irish Pension Plan(4) | 11.17 | $1,619,419 | | Mary K. Lawler | ITW Retirement Accumulation Plan(3) | — | — | | | ITW Nonqualified Pension Plan(3) | — | — | | Michael R. Zimmerman | ITW Retirement Accumulation Plan | 17.00 | $733,149 | | | ITW Nonqualified Pension Plan | 17.00 | $1,646,684 | | Lei Z. Schlitz | ITW Retirement Accumulation Plan(3) | — | — | | | ITW Nonqualified Pension Plan(3) | — | — |
2022 EIP Total Payouts
(1)Assuming the individual receives a lump-sum distribution at normal retirement, present values are based on the 5.13 percent discount rate used for financial reporting purposes. (2)In the event of a change-in-control or departure due to death, disability or retirement, the total pension payable is reflected in the total of the above amounts. The allocation between the ITW Retirement Accumulation Plan and the ITW Nonqualified Pension Plan depends on the actual lump sum and annuity values calculated using the actual applicable interest rates and Internal Revenue Service (IRS) limits. (3)The NEO is not eligible for the Company’s pension plans, as the NEO joined the Company after the plans were closed to new hires beginning January 1, 2007. (4)Mr. O’Herlihy participated in the ITW Retirement Accumulation Plan from 1989 through 1999. From 1999 through August 2011, he was employed in Ireland, participated in the ITW Irish Pension Plan and ceased active participation in the U.S. plan. Upon his return to the U.S. in 2011, he ceased active participation in the Irish plan and was ineligible to actively participate in the U.S. plan due to the plan participation closure effective January 1, 2007.
2022 EIP Total Payouts
| 2023 PROXY STATEMENT | 47 |
2022 EIP Total Payouts
ITW Retirement Plans ITW Retirement Accumulation Plan We maintain the ITW Retirement Accumulation Plan (the Pension Plan) for the benefit of eligible employees to provide a portion of the income necessary for retirement. The Pension Plan was closed to new entrants effective January 1, 2007. The Pension Plan is structured as a “pension equity plan” under which a participant accumulates an age-based percentage for each year of plan participation. The sum of the Accumulation Percentages multiplied by final average annual pay (salary and annual incentive paid in the highest five years out of the last ten complete calendar years of service), plus the sum of the Excess Percentages multiplied by the final average annual pay above the Covered Compensation, produce an amount that can be received as a lump-sum payment or an actuarially equivalent lifetime annuity. For each year of credited service after December 31, 2000, the age-based percentages are as follows:
2022 EIP Total Payouts
| Age During the Year | Pay Accumulation Percentage | Excess Percentage(1) | | Less than 30 | 2% | 2% | | 30-34 | 3% | 2% | | 35-39 | 4% | 2% | | 40-44 | 5% | 2% | | 45 | 7% | 2% | | 46-49 | 7% | 6% | | 50-54 | 10% | 6% | | 55-59 | 13% | 6% | | 60 or older | 16% | 6% |
2022 EIP Total Payouts
(1)Covered Compensation is a 35-year average of the maximum earnings recognized in calculating Social Security benefits. For 2022, the Covered Compensation amount for an individual attaining age 65 was $97,620, while for an employee age 35 or younger it was $146,604. Prior to 2001, the Pension Plan operated under a traditional annuity formula (a normal retirement benefit equal to 1 percent of final average annual pay and 0.65 percent of such pay in excess of covered compensation for each of the first 30 years of credited service plus 0.75 percent of final average annual pay for any additional years). As part of the transition to the pension equity formula, as of December 31, 2000: •Accrued benefits under the traditional annuity formula were converted to an initial pension equity percentage by calculating the lump-sum value of the normal retirement annuity and dividing by the average annual pay at that time. •Participants who had 5 years of participation and whose age plus vesting service equaled at least 50 years were entitled to additional pension equity credits of 4 percent of final average annual pay per year for each year of employment from 2001 through 2015. ITW Irish Pension Plan The Irish Pension Plan operates under a traditional annuity formula (a normal retirement benefit equal to 1.5 percent of final average annual pay for each year of credited service). The final average annual pay is the highest consecutive pensionable base salary over any three-year period over the last ten complete years of service. Nonqualified Pension Plan The Nonqualified Pension Plan is maintained to make up for benefits that cannot be paid under the tax-qualified Pension Plan due to Internal Revenue Code limitations on the amount of compensation that may be considered and the amount of benefit that may be paid. The Company has not considered awarding additional years of service to executive officers under the plan and, therefore, does not currently have a policy on such awards. For the most part, the Nonqualified Pension Plan uses the same formulas and other computation elements as the Pension Plan with certain exceptions, including the following: •The Pension Plan uses net compensation after deferrals under the Executive Contributory Retirement Income Plan (ECRIP), and the Nonqualified Pension Plan uses total eligible compensation (generally, salary and EIP award).
2022 EIP Total Payouts
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2022 EIP Total Payouts
•The Nonqualified Pension Plan provides that a participant who leaves the Company, other than upon retirement, may forfeit any plan benefits based on eligible compensation above the IRS maximum amount ($305,000 in 2022) that may be recognized under a tax-qualified plan. •In addition to the annuity and lump-sum options available under the Pension Plan, a participant in the Nonqualified Pension Plan may elect to receive fixed monthly installments over 2 to 20 years. If the executive left employment prior to death, disability or retirement, or if the plan is terminated in conjunction with a change-in-control, the benefit from the Nonqualified Pension Plan would be paid as a lump sum. Nonqualified Deferred Compensation The Company’s ECRIP offers designated executives an opportunity to defer a portion of their salary and earned non-equity incentive to a deferred compensation account to receive the Company contributions they would otherwise receive if such deferrals had been made under our tax-qualified Savings and Investment Plan and IRS limits did not apply. Deferred amounts receive a rate of interest based on the monthly Moody’s Long-Term Corporate Bond Yield Average (Moody’s Rate). All the NEOs are eligible for the ECRIP. An ECRIP participant may defer from 6 percent to 50 percent of his or her salary and from 6 percent to 85 percent of his or her variable cash components (EIP and Performance Cash), with the applicable Company matching contribution on the salary and EIP amounts under the Savings and Investment Plan formula (in lieu of any matching contributions under that plan). Salary and EIP deferrals under the ECRIP reduce the compensation that may be recognized under the Savings and Investment Plan and the tax-qualified Pension Plan. For employees who are not eligible to participate in the pension plan due to the participation freeze on January 1, 2007, the Company contributes a non-elective contribution to the Savings and Investment Plan, up to the IRS Compensation Limits and continues to contribute above the IRS Compensation Limits to this plan. This Savings and Investment Plan contribution is based on the combined age and years of service as of January 1 of each year (“points”). For each year, the points are as follows:
2022 EIP Total Payouts
| Points | Pay Below the Social Security Wage Base(1) | Pay in Excess of the Social Security Wage Base(1) | | Less than 50 | 3.0% | 6.0% | | 50-59 | 4.0% | 8.0% | | 60-69 | 5.0% | 10.0% | | At least 70 | 6.0% | 11.7% |
2022 EIP Total Payouts
(1)For 2022, the Social Security Wage Base was $147,000. The ECRIP features include a maximum limit on the amount of interest under the Moody’s Rate that would be recognized (12 percent annualized, or 15.6 percent for amounts eligible to receive 130 percent of the Moody’s Rate), a return of deferral feature whereby an individual could elect to receive a return of the principal amount deferred after a period of at least five years, and options for payment following death, disability or retirement as a lump sum or in monthly installments over 2 to 20 years. Retirement under the ECRIP is defined as having attained age 55 with at least 10 years of service, or age 65 with at least 5 years of service. If an ECRIP participant’s employment ends due to retirement, death, or disability, amounts deferred to the ECRIP prior to January 1, 2010 will receive interest crediting of 130 percent of the Moody’s Rate. Amounts deferred to the ECRIP after December 31, 2009 are only eligible to receive 100 percent of the Moody’s Rate. During 2022, the Moody’s Rate applied to ECRIP accounts ranged from 2.99 percent to 4.83 percent for amounts eligible for 100 percent of the Moody’s Rate, and 3.88 percent to 6.28 percent for amounts eligible for 130 percent of Moody’s. If terminated in conjunction with a change-in-control, participants would receive their ECRIP as a lump-sum payment.
2022 EIP Total Payouts
| 2023 PROXY STATEMENT | 49 |
2022 EIP Total Payouts
The following table sets forth ECRIP account information for each NEO during fiscal year 2022.
2022 EIP Total Payouts
| Name | Executive Contributions in 2022(1) | Registrant Contributions in 2022(2) | Aggregate Earnings in 2022 | Aggregate Distributions in 2022 | | Aggregate Balance at December 31, 2022(3)(4) | | E. Scott Santi | $507,084 | $177,479 | $294,691 | | — | $7,282,738 | | Michael M. Larsen | $139,126 | $303,260 | $170,355 | | — | $4,494,373 | | Christopher A. O’Herlihy | $1,591,516 | $338,475 | $474,080 | | — | $12,595,064 | | Mary K. Lawler | $322,527 | $154,501 | $76,169 | | — | $2,029,071 | | Michael R. Zimmerman | $232,350 | $36,280 | $68,426 | | — | $1,833,615 | | Lei Z. Schlitz | $290,467 | $112,299 | $63,252 | | — | $1,707,644 |
2022 EIP Total Payouts
(1)As shown below, includes deferrals of (i) 2022 salary reflected in the Salary column of the Summary Compensation Table; (ii) 2022 executive annual incentive amounts deferred in 2023 reflected in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table for 2022; and (iii) 2020-2022 Performance Cash deferred in 2023 reflected in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table for 2022.
2022 EIP Total Payouts
| Name | Salary Deferral in 2022 | Executive Annual Incentive Deferral in 2023 for 2022 Performance | LTI Cash Deferral in 2023 for Performance Period of 2020 - 2022 | Total Executive Deferrals in 2022 | | E. Scott Santi | $139,231 | $367,853 | $0 | $507,084 | | Michael M. Larsen | $52,485 | $86,641 | $0 | $139,126 | | Christopher A. O’Herlihy | $353,749 | $729,955 | $507,813 | $1,591,516 | | Mary K. Lawler | $41,524 | $173,581 | $107,422 | $322,527 | | Michael R. Zimmerman | $153,727 | $78,623 | $0 | $232,350 | | Lei Z. Schlitz | $0 | $290,467 | $0 | $290,467 |
2022 EIP Total Payouts
(2)These amounts are also included in the All Other Compensation column of the Summary Compensation Table for 2022. (3)Footnote 4 to the Summary Compensation Table sets forth above-market interest for 2022 included in aggregate earnings in this table. Above-market interest was discontinued for amounts deferred after December 31, 2009. (4)In addition to the Company’s contributions shown in the table above and excess interest as disclosed for 2022 in the Footnote 4 Table to the Summary Compensation Table, the following amounts of NEO and Company contributions to the ECRIP and excess interest are reported as compensation in the Summary Compensation Table for 2021 and 2020:
2022 EIP Total Payouts
| Name | Year Ended December 31, 2021 | Year Ended December 31, 2020 | | E. Scott Santi | $778,075 | $282,078 | | Michael M. Larsen | $476,608 | $172,690 | | Christopher A. O’Herlihy | $2,213,410 | $931,213 | | Mary K. Lawler* | $215,796 | — | | Michael R. Zimmerman* | — | — | | Lei Z. Schlitz* | — | — |
2022 EIP Total Payouts
* Ms. Lawler was not an NEO in 2020 and Mr. Zimmerman and Ms. Schlitz were not NEOs in 2021 and 2020.
2022 EIP Total Payouts
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2022 EIP Total Payouts
Potential Payments upon Termination Our severance and change-in-control protections are designed to be fair and competitive. These protections are intended to retain executives in the event they need to consider actions that may impact job security, and ease an executive’s transition at retirement. Providing these benefits help us compete for talent, and we believe they are fully within the range of competitive practice at similar companies. Further, our NEOs are not covered by employment agreements and are employed “at will.” No payments or benefits are automatically payable to NEOs upon a change-in-control, and if there is a qualifying termination following a change-in-control, there are no tax gross-up payments. Payments and benefits received by NEOs upon termination are governed by the arrangements described below and quantified at the end of this section. For NEOs except for Ms. Schlitz, we have estimated the amounts involved assuming that the termination became effective as of December 31, 2022. The actual amounts to be paid out can only be determined at the time of the NEOs’ departure from the Company. For Ms. Schlitz, we have provided the amounts related to her separation. Annual Executive Incentive Plan The EIP provides that if a participant is employed as of the last day of the fiscal year, he or she would receive any amounts earned under the EIP for that fiscal year. In the event an NEO becomes permanently disabled or dies, the NEO would be eligible for a pro-rated payout under the EIP. If termination of employment other than for death, disability, retirement or change-in-control occurs prior to the last day of the fiscal year, a participant forfeits his or her award; however, the Compensation Committee has the discretion to award an amount prorated for the portion of the fiscal year that the participant was employed. Actual amounts earned by the NEOs based on performance in 2022 are discussed in more detail above in “Compensation Discussion and Analysis—Components of the 2022 Executive Compensation Program - Annual Executive Incentive Plan.” ITW Retirement Accumulation Plan and Nonqualified Pension Plan NEOs who are terminated for any reason receive their benefits under the ITW Retirement Accumulation Plan and Nonqualified Pension Plan as described in the Pension Benefits tables above. Executive Contributory Retirement Income Plan NEOs who are terminated for any reason receive contributions and accumulated earnings as outlined in the Nonqualified Deferred Compensation section above. Long-Term Incentive Plan Awards Stock Options: In the event of a termination upon death or disability, all unvested options held by the NEOs would immediately vest. In the event of a termination upon retirement (defined as a combined age and service of 70, subject to a minimum age of 55 and a minimum service of 5 years), 75 percent of stock options granted within one year from the retirement date would be forfeited and the remaining would continue to vest. Additionally, stock options granted more than one year from the retirement date would continue to fully vest. Messrs. Santi and O’Herlihy meet the retirement criteria for the 2020, 2021 and 2022 awards as of December 31, 2022. In the event of a change-in-control, stock options that are not continued or replaced would fully vest and those that are continued or replaced would only vest upon involuntary termination of employment after the change-in-control. PSUs and Performance Cash: In the event of a termination upon death or disability, the awards would vest based on the actual performance level achieved and be paid after the end of the performance period. In the event of a termination upon retirement (defined as a combined age and service of 70, subject to a minimum age of 55 and a minimum service of 5 years), the awards would vest pro-rata based on date of termination and be paid after the end of the performance period. In the event of a change-in-control, an award that is not continued or replaced will fully vest on the date of the change-in-control at the greater of target or actual achievement level and payment will be pro rata based on the number of days during the applicable performance period before the occurrence of the change-in-control. In the event of involuntary termination of employment within two years following a change-in-control, an award that has been replaced would fully vest without conditions. For all NEOs, in the event of a termination other than upon retirement, death, disability or a change-in-control, any unvested options, PSUs, and Performance Cash held on such date by the NEOs would be forfeited.
2022 EIP Total Payouts
| 2023 PROXY STATEMENT | 51 |
2022 EIP Total Payouts
Change-in-Control Severance Policy The Company’s 2011 Change-in-Control Severance Compensation Policy provides that, upon an actual or constructive termination following a change-in-control of the Company, the NEOs and other elected officers would be entitled to receive: (i) two times annual cash compensation (base salary plus average annual incentive pay over the prior three years); (ii) a prorated amount of that year’s annual incentive bonus at the target level (or actual achievement level if greater); and (iii) a prorated amount of the value of Performance Cash awards at the target level (or actual achievement level if greater). Notwithstanding the foregoing, if the payments under the preceding clauses (ii) and (iii) were not replaced at the time of the change-in-control, then such awards will be deemed to be earned and immediately payable at the greater of target or actual achievement level pro rata based on the number of days during the applicable performance period before the occurrence of the change-in-control. We do not gross up any of the compensation paid in the event of termination due to a change-in-control. Summary of Termination and Change-in-Control Provisions The benefits for the NEOs under each termination scenario are outlined below.
2022 EIP Total Payouts
| Benefit or Payment | Retirement | Involuntary (w/o Cause) | Death/ Disability | Termination in Connection with a Change-in-Control | | Base Salary | N/A | 1 week per year of service | N/A | 2 times annual salary | | Benefits | N/A | Based on years of service | N/A | N/A | | Executive Incentive Plan(1)(2) | Pro-rata vesting | Pro-rata payout | Pro-rata vesting | 2 times the average bonus paid in the prior 3 years plus pro-rata payout for current year | | Executive Contributory Retirement Income Plan(1) | Yes | Yes | Yes | Yes | | Retirement Accumulation Plan and Nonqualified Pension Plan(1) | Yes | Yes | Yes | Yes | | Vesting of Unvested Stock Options | If retirement is 1 year or more after award, continue vesting; if less than 1 year, 25 percent continues to vest and 75 percent is forfeited(3) | N/A | 100 percent continued vesting | Subject to replacement and double trigger(5); otherwise, 100 percent vesting | | Payment of Performance Cash and PSUs(2)(3) | Pro-rata vesting(4) | N/A | 100 percent vesting(4) | Subject to replacement and double trigger(5); otherwise, pro-rata amount based on termination date(6) |
2022 EIP Total Payouts
(1)Retirement for these awards or benefits is defined as termination after age 55 and 10 years of service or 65 and 5 years of service. (2)All vesting for these awards is subject to achievement of performance goals. (3)Retirement is defined as a combination of age and service of 70 with a minimum age of 55 and minimum service of 5 years. (4)Vesting is limited to the extent that the performance level for the award is achieved. If the minimum performance level is not achieved, the award is forfeited. (5)Awards that are replaced after a change-in-control do not receive accelerated vesting. Double-trigger vesting occurs for awards that are continued or replaced if actual or constructive termination occurs within two years of a change-in-control of the Company. (6)Pro-rata amount is at the greater of target or actual achievement level.
2022 EIP Total Payouts
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2022 EIP Total Payouts
Termination and Change-in-Control Payments and Benefits The following table shows the value of payments and benefits that the NEOs would receive pursuant to the 2011 Long-Term Incentive Plan, the 2015 Long-Term Incentive Plan and the 2011 Change-in-Control Severance Compensation Policy upon retirement, involuntary termination without cause, death, disability or a change-in-control, assuming that termination occurred as of the last business day of fiscal 2022. The table also shows the Company’s severance benefits that would be payable to the NEOs and that are available to employees generally. For purposes of this table, Performance Cash and PSU payments are assumed at target level. The value of unvested stock options, if accelerated upon a change-in-control or termination, is determined using the excess, if any, of $220.30 (the closing price of ITW common stock on December 31, 2022) over the option exercise price. Messrs. Santi, O’Herlihy and Zimmerman met the retirement criteria for various grants under the Long-Term Incentive Plan during 2022. In case of retirement, the 2020, 2021, and 2022 PSUs and Performance Cash awards would vest and be payable after the performance goals have been met. The unvested stock options continue to vest. In addition, 75 percent of the 2022 stock option awards would be forfeited since the assumed retirement would have occurred within one year from the grant date. The PSUs and Performance Cash awards would be pro-rated based on the retirement date. Voluntary termination without good reason is not shown in the table because such a termination would not trigger the payment of severance benefits or accelerated vesting of long-term awards. Stock options, PSUs and Performance Cash awards, whether vested or unvested, are subject to forfeiture if the holder competes with, or divulges confidential information about, the Company, or if the Compensation Committee determines that the holder engaged in gross misconduct or conduct that is against the business interests of the Company. Awards are also subject to forfeiture, in whole or in part, to comply with applicable law, regulation, stock exchange rules, accounting rules, or our clawback policy.
2022 EIP Total Payouts
| 2023 PROXY STATEMENT | 53 |
2022 EIP Total Payouts
| Named Executive Officer | Benefit | Retirement | Involuntary Termination (w/o Cause) | Death or Disability | Termination Upon a CIC | | E. Scott Santi | Severance | $— | $1,103,846 | $— | $6,737,827 | | | Benefits | $— | $13,867 | $— | $— | | | Current year EIP | $3,678,528 | $3,678,528 | $3,678,528 | $3,678,528 | | | Stock Options (Value of accelerated options) | $— | $— | $8,440,542 | $8,440,542 | | | Restricted Stock Units (Value of unvested PSUs) | $8,542,766 | $— | $12,699,604 | $8,542,766 | | | Performance Cash (Value of prorated cash) | $6,108,333 | $— | $9,362,500 | $6,108,333 | | | Total | $18,329,627 | $4,796,241 | $34,181,174 | $33,507,996 | | Michael M. Larsen | Severance | $— | $169,101 | $— | $3,280,222 | | | Benefits | $— | $3,155 | $— | $— | | | Current year EIP | $— | $1,444,024 | $1,444,024 | $1,444,024 | | | Stock Options (Value of accelerated options) | $— | $— | $2,142,081 | $2,142,081 | | | Restricted Stock Units (Value of unvested PSUs) | $— | $— | $3,286,867 | $2,202,920 | | | Performance Cash (Value of prorated cash) | $— | $— | $2,425,000 | $1,575,000 | | | Total | $— | $1,616,280 | $9,297,972 | $10,644,247 | | Christopher A. O’Herlihy | Severance | $— | $581,267 | $— | $3,314,135 | | | Benefits | $— | $11,940 | $— | $— | | | Current year EIP | $1,459,910 | $1,459,910 | $1,459,910 | $1,459,910 | | | Stock Options (Value of accelerated options) | $— | $— | $2,303,967 | $2,303,967 | | | Restricted Stock Units (Value of unvested PSUs) | $2,387,020 | $— | $3,569,067 | $2,387,020 | | | Performance Cash (Value of prorated cash) | $1,716,667 | $— | $2,650,000 | $1,716,667 | | | Total | $5,563,597 | $2,053,117 | $9,982,944 | $11,181,699 | | Mary K. Lawler | Severance | $— | $104,538 | $— | $1,885,991 | | | Benefits | $— | $3,155 | $— | $— | | | Current year EIP | $— | $694,322 | $694,322 | $694,322 | | | Stock Options (Value of accelerated options) | $— | $— | $981,116 | $981,116 | | | Restricted Stock Units (Value of unvested PSUs) | $— | $— | $1,477,953 | $999,562 | | | Performance Cash (Value of prorated cash) | $— | $— | $1,081,250 | $710,417 | | | Total | $— | $802,015 | $4,234,641 | $5,271,408 | | Michael R. Zimmerman | Severance | $— | $189,576 | $— | $1,710,156 | | | Benefits | $— | $6,633 | $— | $— | | | Current year EIP | $524,152 | $524,152 | $524,152 | $524,152 | | | Stock Options (Value of accelerated options) | $— | $— | $849,325 | $849,325 | | | Restricted Stock Units (Value of unvested PSUs) | $873,469 | $— | $1,303,271 | $873,469 | | | Performance Cash (Value of prorated cash) | $633,333 | $— | $975,000 | $633,333 | | | Total | $2,030,954 | $720,361 | $3,651,748 | $4,590,435 |
2022 EIP Total Payouts
Lei Z. Schlitz Ms. Schlitz met the retirement criteria for the 2020, 2021 and 2022 LTI awards, as well as the 2022 EIP, upon her separation in 2022. Under plan rules, she received a prorated portion of her EIP in the amount of $580,934 in February 2023 following her departure. Her outstanding PSUs and Performance Cash target values were prorated to $841,452 and $629,057, respectively, and under the provisions of the plan will pay out in 2023, 2024, and 2025 subject to the achievement of the performance goals.
2022 EIP Total Payouts
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2022 EIP Total Payouts
Compensation Committee Report The Compensation Committee of the Board of Directors hereby furnishes the following report to the stockholders of the Company in accordance with rules adopted by the Securities and Exchange Commission. We have reviewed and discussed with management the Compensation Discussion and Analysis contained in this proxy statement. Based on our review and discussions, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and the Company’s Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2022. This report is submitted on behalf of the members of the Compensation Committee:
Anré D. Williams, Chairman Susan Crown Darrell L. Ford James W. Griffith Richard H. Lenny
| Year | Summary Compensation Table Total for PEO($) | Compensation Actually Paid to PEO($)(1,2) | Average Summary Compensation Table Total for Non-PEOs ($) | Average Compensation Actually Paid to Non-PEOs ($)(1,2) | Value of Initial Fixed $100 Investment Based On: | | Net Income ($) (in millions) | After-Tax ROIC(4) | | | | | | | Total Shareholder Return(3) | Peer Group Total Shareholder Return(3,5) | | | | (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | | 2022 | $22,234,230 | $18,730,022 | $4,328,857 | $3,805,988 | $131.72 | $135.49 | $3,034 | 29.1% | | 2021 | $20,787,622 | $41,769,292 | $5,010,034 | $9,056,648 | $143.87 | $142.88 | $2,694 | 29.5% | | 2020 | $14,007,356 | $19,593,737 | $3,374,951 | $4,317,669 | $116.40 | $119.39 | $2,109 | 26.2% |
Compensation Actually Paid vs TSR
Compensation Actually Paid vs TSR
Compensation Actually Paid vs Net Income
Compensation Actually Paid vs Net Income
Compensation Actually Paid vs After-tax ROIC*
Compensation Actually Paid vs After-tax ROIC* * After-tax ROIC is a non-GAAP measure. See Appendix A for information regarding this non-GAAP measure.
Compensation Actually Paid vs After-tax ROIC*
| 2023 PROXY STATEMENT | 59 |
Compensation Actually Paid vs After-tax ROIC*
We are providing shareholders with the opportunity to cast an advisory vote regarding the frequency of the advisory vote on executive compensation, commonly known as “Say on Pay” votes. Shareholders may vote on whether the advisory vote on executive compensation should occur every one, two or three years. We are required to hold an advisory vote regarding the frequency of “Say on Pay” votes every six years. In 2017, the Company’s stockholders voted in favor of holding “Say on Pay” votes annually and the Board adopted this standard. After consideration of each alternative, the Board recommends that the advisory vote on executive compensation continue to be submitted to the stockholders every year. While the Company utilizes three-year performance cycles in its long-term compensation grants, compensation decisions regarding salary, incentive bonus, stock options and awards of long-term grants are made annually, and an annual vote provides feedback for our Compensation Committee that can be taken into account each year when making compensation decisions and setting our compensation philosophy, policies and practices. An annual advisory vote is also consistent with our practice of open dialogue with our stockholders. Your vote on frequency is advisory and will not be binding on the Board or the Company. Although non-binding, the Board and the Compensation Committee value the views of the Company’s stockholders and will carefully consider the outcome of the frequency vote. Notwithstanding the Board’s recommendation and the outcome of the stockholder vote, the Board may in the future decide to conduct advisory votes on a more or less frequent basis and may vary its practice based on factors such as discussions with stockholders and the adoption of material changes to compensation programs.

DEF 14A of Illinois Tool Works Inc

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Market Capitalization****

Market Capitalization****

Market Capitalization****

Market Capitalization****

ITW 3-Year CEO Pay Versus Indexed TSR (2020-2022)

ITW 3-Year CEO Pay Versus Indexed TSR (2020-2022)

ITW 3-Year CEO Pay Versus Indexed TSR (2020-2022)

Role of the Compensation Consultant

Role of the Compensation Consultant

Role of the Compensation Consultant

Role of the Compensation Consultant

Role of the Compensation Consultant

Role of the Compensation Consultant

Role of the Compensation Consultant

2022 EIP Company Financial Targets