EXECUTIVE SUMMARY

  1. Governance and Pay for Performance Philosophy
  2. Compensation Program Structure
  3. Business Performance and Results
  4. Pay Outcomes Demonstrate Alignment with Company Performance

I. GOVERNANCE AND PAY FOR PERFORMANCE PHILOSOPHY

The Compensation and Human Resources Committee (the Committee) believes the executive compensation program at Caterpillar should be structured to align the interests of executives and shareholders. The program should seek to reward value creation at all stages of our business cycle, and provide an increasing percentage of performance-based compensation at higher levels of executive responsibility.

Beginning in 2015, we significantly expanded our ongoing shareholder outreach program. The feedback received through this engagement led us to make changes to our executive compensation program for our senior leadership team including the following:

Annual Incentive
  • The maximum payout opportunity of awards in the Annual Incentive Plan (AIP) for Named Executive Officers (NEOs) decreased from 200 percent of target to 150 percent of target.
  • In years when the Company’s forecasted operating profit is below prior year’s actual results: (i) NEO annual incentive opportunity is reduced, and (ii) AIP payouts are capped at target.
Long-Term Incentive
  • The proportion of Performance-Based Restricted Stock Units (PRSUs) increased from 1/3 to 1/2 of the total long-term target incentive value.
  • The sizing of long-term incentive grant values is based on relative 1, 3 and 5-year Total Shareholder Return (TSR) as compared to the S&P Industrials, Compensation Peer Group and Competitor Peer Group that the Committee has determined compete directly with the Company.
These changes were well received by our shareholders, and support for our advisory vote on our executive compensation at our 2016 Annual Meeting, commonly referred to as the “say on pay” vote, was approximately 93%, up from 65% support in the prior year. After considering the 2016 “say on pay” results, the Committee determined that the Company’s executive compensation philosophy, compensation objectives and compensation elements continued to be appropriate and did not make any specific changes to the Company’s executive compensation program in response to the 2016 “say on pay” vote.

In 2016, we continued our shareholder outreach effort, reaching out to the holders of approximately half of our outstanding shares, to discuss various matters including governance, executive compensation, sustainability and operational performance. In these meetings, our shareholders generally expressed a continued positive view with respect to our executive compensation program.

The Committee engages in an ongoing review of the Company’s executive compensation program to evaluate whether the program supports the Company’s compensation philosophy and objectives, and is closely aligned with the Company’s business objectives. In connection with this ongoing review, and based on feedback received through our shareholder outreach program, the Committee continues to implement and maintain what it believes are best practices for executive compensation, each of which reinforces the Company’s compensation philosophy. Below is a summary of those practices.

  • Robust stock ownership and retention guidelines (6x base salary for our CEO and 3x base salary for each of the other NEOs)
  • Robust benchmarking process
  • Rigorous Committee oversight of incentive metrics, goals and pay/performance relationship Clawback Policy
  • Limited executive perquisites
  • Strict anti-hedging and anti-pledging policies
  • Independent compensation consultant
  • No individual change-in-control agreements
  • No tax gross-ups on change-in-control benefits
  • No backdating, re-pricing or granting of option awards retroactively

II. COMPENSATION PROGRAM STRUCTURE

We are committed to developing and implementing an executive compensation program that directly aligns the interests of the NEOs with the long-term interests of shareholders. To that end, the objectives of the Company’s executive compensation program are to attract and retain talented executive officers and to incent NEOs to improve Company performance and provide strategic leadership over the long term. The majority of targeted annual compensation for our NEOs is equitybased, vests over multiple years and is tied directly to long-term value creation for shareholders. NEO compensation is comprised of three primary components:

Base Salary

Competitive pay to attract and retain talented executives

Annual Incentive

An opportunity to earn an annual cash award based on the Company’s financial performance and high-priority business initiatives

Long-Term Incentive

A mix of PRSUs and stock options to align management with long-term shareholder interests

Approximately 91 percent of our CEO’s 2016 targeted annual total compensation was variable and/or at-risk compensation, including 50 percent of long-term incentives in the form of PRSUs.

CEO Compensation Elements

III. BUSINESS PERFORMANCE AND RESULTS

Our key financial and business results for 2016 included the following:

Cost Structure
  • In 2016, Machinery, Energy & Transportation (ME&T) period costs and variable manufacturing costs were $2.3 billion less than 2015.
Strong Balance Sheet and Cash Flow
  • In 2016, ME&T operating cash flow was $3.9 billion and we maintained positive cash flow after capital expenditures (CAPEX) and dividends.
  • Enterprise cash on hand at the end of the year was $7.2 billion.
  • ME&T debt-to-capital ratio was 41 percent, within the targeted range of 30 to 45 percent.
Dividend Payments and History

Paid $1.8 billion in dividends in 2016. Caterpillar has paid higher dividends to its shareholders for 23 consecutive years, and since 2007, the Company’s cash dividend has more than doubled. Caterpillar has paid a cash dividend every year since the Company was formed and has paid a quarterly dividend since 1933.

Sales and Revenues

2016 Sales and Revenues By Segment

IV. PAY OUTCOMES DEMONSTRATE ALIGNMENT WITH COMPANY PERFORMANCE

In addition to the financial highlights noted above, the Company’s stock price increased 36.5% in 2016 and TSR for 2016 was 42%. Notwithstanding this increase in shareholder value and the accomplishments noted above, it was a challenging year for our business due to, among other things, continued weak global commodity prices and economic weakness in many countries. The challenges in our business were reflected in the resulting pay decisions made for our CEO and the other NEOs, consistent with the Committee’s pay-for-performance philosophy. Compensation outcomes for 2016 included the following items which adversely affected the compensation of our NEOs:

Base Salary
  • No adjustments were made to NEO base salaries in 2016
Annual Incentive
  • Because 2016 planned operating profit was below 2015 actual operating profit, the Committee determined that 2016 was a “down” year for purposes of 2016 AIP design.
  • Each NEO’s annual incentive opportunity was reduced by 20.9 percent in 2016, to reflect the same proportionate reduction in planned 2016 operating profit versus 2015 actual operating profit results.
  • Payouts for 2016 AIP were capped at the target level with no “upside” opportunity.
  • Actual annual incentive awards for 2016 paid out, on average, at less than 30% of target.
Long-Term Incentive
  • Based on the Committee’s review of the Company’s 1, 3 and 5-year relative TSR in early 2016, the 2016 equity grants to the NEOs were sized at approximately the 25th percentile of the compensation peer group.
  • The long-term cash incentive award for the 2014-2016 cycle paid out at approximately 56% of target.
  • None of the PRSUs granted for the 2015-2017 performance period vested in 2016 and, based on aggregate performance in 2015 and 2016, are trending significantly below target.

In 2016, our CEO’s compensation was substantially below target level in the aggregate as well as for each component of compensation other than base salary. This reduction reflects the very weak market conditions that the Company faced in 2016 and not an operating shortfall in the judgement of the Committee.

CEO Compensation

* Target Value Includes: Salary of $1,600,008, annual incentive of $2,800,000; and LTI grant of $9,273,300. Total Target value: $13,673,308.
** Actual Value Includes: Salary of $1,600,008, annual incentive of $538,000; and LTI grant of $8,268,000. Total Actual value: $10,406,008.