STOCK COMPENSATION PLANS AND OTHER COMPENSATION ARRANGEMENTS

Stock Compensation Plans

At December 31, 2012, Northrop Grumman had stock-based compensation awards outstanding under the following plans: the 2001 Long-Term Incentive Stock Plan (2001 Plan) and the 2011 Long-Term Incentive Stock Plan (2011 Plan), both applicable to employees, and the 1993 Stock Plan for Non-Employee Directors (1993 SPND) and 1995 Stock Plan for Non-Employee Directors (1995 SPND) as amended. All of these plans were approved by the company’s shareholders. The company has historically issued new shares to satisfy award grants.

Employee Plans – On May 18, 2011, the shareholders of the company approved the company’s new 2011 Plan, which replaced the expired 2001 Plan. The 2011 Plan permit grants to key employees of three general types of stock incentive awards: stock options, stock appreciation rights (SARs), and stock awards. Each stock option grant is made with an exercise price either at the closing price of the stock on the date of grant (market options) or at a premium over the closing price of the stock on the date of grant (premium options). Outstanding stock options granted prior to 2008 generally vest in 25 percent increments over four years from the grant date, and grants outstanding expire ten years after the grant date. Stock options granted after January 1, 2008 vest in 33 percent increments over three years from the grant date and grants outstanding expire seven years after the grant date. No SARs have been granted under either plan. Stock awards, in the form of restricted performance stock rights and restricted stock rights, are granted to key employees without payment to the company. The 2011 Plan also provides equity-based award grants to non-employee directors.

Under the 2011 Plan, the company is authorized to issue or transfer shares of common stock pursuant to any of the types of awards mentioned above. The 2011 Plan authorized 39.1 million new shares plus 6.9 million shares from the 2001 LTISP that were previously authorized and available to be issued at the date the 2001 Plan expired. Under the terms of the 2011 Plan, in the event that outstanding awards under the 2001 Plan expire or terminate without being exercised or paid, as the case may be, such shares (the “Forfeited Shares”) will become available for award under the 2011 Plan.

Recipients of restricted performance stock rights earn shares of stock, based on financial metrics determined by the board of directors in accordance with the plan. For grants prior to 2010, if the objectives have not been met at the end of the applicable performance period, up to 100 percent of the original grant for members of the Corporate Policy Council (consisting of the CEO and certain other leadership positions) and up to 70 percent of the original grant for all other recipients will be forfeited. For grants in 2010 and after, all recipients could forfeit up to 100 percent of the original grant, and all recipients could earn up to 200 percent of the original grant. Restricted performance stock rights and restricted stock rights issued under either plan generally vest after three or four years. Termination of employment can result in forfeiture of some or all of the benefits extended. Shares issued under the 2011 Plan other than for stock options, stock appreciation rights and the Forfeited Shares will be counted against the 2011 Plan’s aggregate share limit as 4.5 shares for every one share actually issued in connection with the award; any shares issued for stock options, stock appreciation rights and the Forfeited Shares will be counted against the remaining shares on a one for one basis.

As of December 31, 2012, 37 million shares are available for grant under the 2011 Plan.

Non-Employee Director Plans – Under the 2011 Plan, each non-employee director must defer a portion of their compensation into a stock unit account (Automatic Stock Units). The Automatic Stock Units accrued under the 2011 Plan and the 1993 SPND are paid out in the form of common stock at the conclusion of the director's board service, or earlier, as specified by the director, if he or she has five or more years of service. In addition, each director may elect to defer payment of all or a portion of his or her remaining cash retainer or committee retainer fees into a stock unit account (Elective Stock Units). The Elective Stock Units are paid at the conclusion of board service or earlier as specified by the director, regardless of years of service. Directors are credited with dividend equivalents in connection with the accumulated stock units until shares of common stock related to such stock units are issued. Since all directors are eligible to receive awards under the 2011 LTISP, shares from this plan are available for future director awards following the same share counting limits as described for the employee plans. Awards under the 2011 Plan are made pursuant to the Northrop Grumman Corporation Equity Grant Program for Non-Employee Directors under the 2011 Plan which sets forth the terms and conditions for the awards of stock units as described above.

The 1995 SPND provided for an annual grant of nonqualified stock options to each non-employee director. Since June 2005, no new grants have been issued under that 1995 SPND. Each grant of stock options under the 1995 SPND was made at the closing market price on the date of the grant and expires ten years from the date of grant. As of December 31, 2012, only three non-employee directors held unexercised options.

Compensation Expense

Stock-based compensation expense and the related tax benefits for the years ended December 31, 2012, 2011, and 2010, were as follows:



	Year Ended December 31
$ in millions	2012		2011		2010
Stock-based compensation expense:
Stock options		$ 10		$ 14		$ 27
Stock awards	173		125		107
Total stock-based compensation expense	183		139		134
Tax benefits from the exercise of stock options	26		18		17
Tax benefits from the issuance of stock awards	19		37		36
Tax benefits recognized for stock-based compensation		$ 45		$ 55		$ 53

At December 31, 2012, there was $114 million of unrecognized compensation expense related to unvested awards granted under the company’s stock-based compensation plans, of which $5 million relates to stock options and $109 million relates to stock awards. These amounts are expected to be charged to expense over a weighted-average period of 1.3 years.

Stock Options

There were no stock options issued in 2012. Stock option activity for the year ended December 31, 2012, was as follows:



	Shares under Option (in thousands)		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value ($ in millions)
Outstanding at January 1, 2012	11,744			$53	3.4 years		$93
Granted	—		—
Exercised	(5,404	)	47
Cancelled and forfeited	(69	)	61
Outstanding at December 31, 2012	6,271		58		2.9 years	66
Vested and expected to vest in the future at December 31, 2012	6,257		58		2.9 years	66
Exercisable at December 31, 2012	4,874			$58	2.5 years		$53

The total intrinsic value of options exercised during the years ended December 31, 2012, 2011, and 2010, was $97 million, $46 million, and $42 million, respectively. Intrinsic value is measured using the fair market value at the date of exercise (for options exercised) or at December 31, 2012 (for outstanding options), less the applicable exercise price.

Stock Awards

Compensation expense for stock awards is measured at the grant date based on the fair value of the award and is recognized over the vesting period, generally three years. The fair value of stock awards and performance stock awards is determined based on the closing market price of the company’s common stock on the grant date. The fair value of market-based stock awards is determined at the grant date using a Monte Carlo simulation model. For purposes of measuring compensation expense for performance awards, the number of shares ultimately expected to vest is estimated at each reporting date based on management’s expectations regarding the relevant performance criteria.

Stock award activity for the years ended December 31, 2012, 2011, and 2010, is presented in the table below. Vested awards include stock awards fully vested during the year and net adjustments to reflect the final performance measure for issued shares.



	Stock Awards (in thousands)		Weighted- Average Grant Date Fair Value		Weighted- Average Remaining Contractual Term (in years)
Outstanding at January 1, 2010	3,658			$58	1.6
Granted	2,317		60
Vested	(1,319	)	79
Forfeited	(356	)	56
Outstanding at December 31, 2010	4,300			$53	1.5
Granted	1,748		63
Vested	(1,824	)	42
Forfeited	(350	)	50
Shipbuilding spin-off adjustments	(252	)		$47
Outstanding at December 31, 2011	3,622			$58	1.6
Granted	1,860		60
Vested	(1,800	)	55
Forfeited	(204	)	59
Outstanding at December 31, 2012	3,478			$61	1.6

The company issued 2.8 million, 1.4 million, and 1.3 million shares to employees in settlement of prior year stock awards that were fully vested, which had total fair values at issuance of $172 million, $87 million, and $76 million and grant date fair values of $75 million, $101 million, and $91 million during the years ended December 31, 2012, 2011, and 2010, respectively. The differences between the fair values at issuance and the grant date fair values reflect the effects of the performance adjustments and changes in the fair market value of the company’s common stock.

On February 15, 2012, the company granted certain employees 0.5 million restricted stock rights (RSRs) and 1.2 million restricted performance stocks rights (RPSRs) under the company's long-term incentive stock plan, with a grant date aggregate fair value of $102 million. The RSRs will vest on the third anniversary of the grant date, while the RPSRs will vest and pay out based on the achievement of financial metrics for the three-year period ending December 31, 2014.

In 2013, the company expects to issue to employees 3.4 million shares of common stock from the 2010 stock award grant that vested as of December 31, 2012, with a grant date fair value of $96 million. The ultimate amount of shares to be paid out is subject to approval by the Compensation Committee of the Board of Directors and may vary from this estimate.

Cash Awards

On February 15, 2012, the company granted certain employees 0.6 million cash units (CUs) and 1.3 million cash performance units (CPUs) with a minimum aggregate payout amount of $34 million and a maximum aggregate payout amount of $190 million. The CUs will vest and settle in cash on the third anniversary of the grant date, while the CPUs will vest and pay out based on the achievement of financial metrics for the three-year period ending December 31, 2014. At December 31, 2012, there was $125 million of unrecognized compensation expense related to cash awards.