NSC Norfolk Southern Corp

Corporate Governance | 2020 Annual Meeting and Proxy Statement

	James A. Squires Executive (Chair)	Director since 2014 Age 58
	Career Highlights   Mr. Squires has been President of Norfolk Southern since 2013 and Chief Executive Officer since June 2015. Mr. Squires was named Chairman of the Board of Norfolk Southern in October 2015. Mr. Squires previously served as Norfolk Southern’s Executive Vice President-Administration, Executive Vice President-Finance and Chief Financial Officer, Senior Vice President Finance, Senior Vice President Law, and Vice President Law.   Areas of Expertise   CEO/Senior Officer; Finance and Accounting; Governance/Board; Governmental and Stakeholder Relations; Human Resources and Compensation; Marketing; Strategic Planning; Transportation

	John R. Thompson Audit, Governance and Nominating	Director since 2013 Independent Age 68
	Career Highlights   Mr. Thompson served as a government relations consultant for Best Buy Co., Inc., a multinational consumer electronics corporation, from October 2012 to April 2016, and as Senior Vice President and General Manager of BestBuy.com LLC, a subsidiary of Best Buy Co., Inc., from 2002 through 2012. Mr. Thompson was formerly a director of Belk, Inc. and Wendy’s International, Inc.   Areas of Expertise   CEO/Senior Officer; Finance and Accounting; Governance/Board; Governmental and Stakeholder Relations; Information Technology; Marketing; Strategic Planning

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Corporate Governance | 2020 Annual Meeting and Proxy Statement

Qualifications of Directors and Nominees

Our directors have diverse backgrounds and provide critical experience and expertise to Norfolk Southern. The Governance and Nominating Committee carefully considers the experience and qualifications of each director standing for re-election and potential nominees for election, including how the director will contribute to the diversity of the Board, to ensure that the Board can effectively carry out its oversight role on behalf of our shareholders.

The Governance and Nominating Committee has identified ten areas of expertise that are of particular importance to Norfolk Southern given the nature of our business and our expectations for the future of our company. The categories identified by the Governance and Nominating Committee are as follows:

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Corporate Governance | 2020 Annual Meeting and Proxy Statement

The table and chart below summarize the areas of expertise that our Governance and Nominating Committee has identified as being represented on our Board, both from an individual and collective standpoint. In addition to these areas of expertise, the Governance and Nominating Committee also considers ethical integrity, board dynamics, reputation of potential nominees, recommendations of director search firms, and diversity of the Board.

Norfolk Southern defines diversity as the collective mixture of similarities and differences that impact our workforce, workplace, and marketplace. Our Governance and Nominating Committee views diversity broadly, seeking to nominate individuals from varied backgrounds, perspectives, and experiences. The Governance and Nominating Committee does not have a specific written policy on the diversity of the Board of Directors at this time. However, more information on Norfolk Southern’s diversity principles and philosophy can be found on our website on the “Work at NS” page under “Learn more about NS.”

More information on director qualifications and nomination is contained in Norfolk Southern’s Corporate Governance Guidelines, posted on the “Invest in NS” page under “Corporate Governance Documents” on our website.

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Corporate Governance | 2020 Annual Meeting and Proxy Statement

Director Independence

The Board of Directors has considered whether the members of our Board of Directors are independent. A director is considered “independent” if the Board determines that the director has no material relationship with Norfolk Southern (directly or as a partner, shareholder, or officer of an organization that has a relationship with Norfolk Southern). The Board makes these determinations after full deliberation, considering all relevant facts and circumstances. To aid in its evaluation of director independence, the Board has adopted categorical independence standards. Under the standards, an individual director is “independent,” unless the Board determines otherwise, if none of the following relationships exist between Norfolk Southern and the director:

For purposes of these categorical standards, “immediate family member” has the definition used in the New York Stock Exchange’s Listing Standards. These categorical independence standards are available on our website at www.norfolksouthern.com on the “Invest in NS” page under “Corporate Governance Documents.”

The Board has determined that all the director nominees other than Mr. Squires satisfy the above categorical standards and qualify as independent directors of Norfolk Southern. Mr. Squires serves as our Chairman, President and Chief Executive Officer and, therefore, is not an independent director. In addition, the Board determined that Messrs. Wesley Bush and Martin Nesbitt, who served as directors during 2019 but were not director nominees at our 2019 Annual Meeting, and Mr. Daniel Carp, who served as a director during 2019 but is not a director nominee at our 2020 Annual Meeting, were “independent” directors. In making these independence determinations, our Board of Directors considered the following transactions:

These transactions did not exceed our categorical independence standards and were not sufficiently material as to require disclosure as a Related Persons Transaction under Item 404(a) of Regulation S-K. In addition, the Board considered these relationships in its nomination of Ms. Scanlon and Messrs. Daniels and Kelleher and determined that their independence as directors of Norfolk Southern is not impaired.

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Corporate Governance | 2020 Annual Meeting and Proxy Statement

The Board of Directors presents Item 2 for vote by shareholders in response to the non-binding shareholder proposal that received support from a majority of the votes cast at the 2019 Annual Meeting of Shareholders. The proposal, submitted by one of our shareholders, requested that the Board take the steps necessary to eliminate the supermajority voting provisions in the Corporation’s Amended and Restated Articles of Incorporation (“Articles”) or Bylaws or implicit due to a default to state law. After considering corporate governance best practices for our shareholders and taking into account last year’s shareholder vote, the Board, at its meeting on July 26, 2019, voted to recommend shareholders approve certain amendments (as described below) to the Articles to revise voting standards for certain items (the “Proposed Amendments”), in accordance with Virginia law, which requires such changes to be presented to shareholders for approval. The Proposed Amendments are set forth in Items 2(a), 2(b), and 2(c) below, which will be voted on separately. Approval of any sub-Item is not conditioned upon approval of the other sub-Items.

Overview of the Proposed Amendments

Article VII of the Corporation’s current Articles establishes a voting standard of the majority of all votes entitled to be cast in order to amend the Articles, but gives the Board of Directors the ability to require a higher standard. In addition, because our Articles and Bylaws are silent on certain other voting standards, the voting standards are determined by certain default provisions in the Virginia Stock Corporation Act (“VSCA”). In many cases this default would require a voting standard greater than a majority of votes cast, unless and until a lower standard is adopted and included in the Articles. After consideration of the vote results at the 2019 Annual Meeting and the Corporation’s engagement with shareholders, the Board recommends an amendment to our Articles adding explicit voting standards, where permitted by the VSCA. More information on the Proposed Amendments to revise these voting standards is set forth in the descriptions of Items 2(a), 2(b), and 2(c) below.

ITEM 2(a): RESOLVED, Article VII of the Articles is amended to provide, the shareholder vote required, of each voting group entitled to vote thereon, to approve an amendment to the Corporation’s Articles of Incorporation is a majority of all votes entitled to be cast by that voting group, unless the VSCA conditions approval of such an amendment upon a greater vote.

Description of Amendment. Currently Article VII of the Articles establishes a voting standard of the majority of all votes entitled to be cast in order to amend the Articles, but gives the Board of Directors discretion to require a higher voting standard. Item 2(a) requests that shareholders approve an amendment to Article VII to delete and replace the language that provides the Board with this discretion and replace it with language indicating that a higher voting standard would only be required if the VCSA conditioned approval of the amendment upon a greater vote.

ITEM 2(b): RESOLVED, the Articles are hereby amended to add a new ARTICLE VIII to provide, in whole or in part, any action on a matter involving: (i) a plan of merger or acquisition for which the VSCA requires shareholder approval; (ii) a share exchange for which the VSCA requires shareholder approval; (iii) the conversion of the Corporation; (iv) a sale of all or substantially all the Corporation’s property for which the VSCA requires shareholder approval; or (v) the dissolution of the Corporation shall require the approval, by the affirmative vote, of a majority of the votes cast thereon.

Description of Amendment. Currently, because the Articles and Bylaws are silent on certain voting standards for certain actions, those voting standards are determined by default to provisions in the VSCA. In many cases, this default would require a voting standard greater than a majority of votes cast, unless and until a lower standard is adopted in the Articles.

This Item 2(b) requests that shareholders approve an amendment to the Articles to add a new Article VIII. As a result of the amendment, the default VSCA voting standards for certain actions would no longer apply as the Articles would now contain an explicit voting standard. If Item 2(b) is approved, the new Article VIII would revise the voting standard to be the affirmative vote of a majority of the votes cast for (i) a plan of merger or acquisition for which the VSCA requires shareholder approval; (ii) a share exchange for which the VSCA requires shareholder approval; (iii) the conversion of the Corporation; (iv) a sale of all or substantially all the Corporation’s property for which the VSCA requires shareholder approval; and (v) the dissolution of the Corporation.

ITEM 2(c): RESOLVED, the Articles are hereby amended to add a new ARTICLE VIII to provide, in whole or in part, any action on a matter involving: (i) the re-domestication of the Corporation; or (ii) an affiliated transaction for which the VSCA requires shareholder approval shall require the approval, by the affirmative vote, of a majority of the votes entitled to be cast thereon.

Description of Amendment. Currently, because the Articles and Bylaws are silent on certain voting standards for certain actions, the voting standards are determined by default to provisions in the VSCA. In many cases this default would require a voting standard greater than a majority of votes cast, unless and until a lower standard is adopted in the Articles.

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Corporate Governance | 2020 Annual Meeting and Proxy Statement

This Item 2(c) requests that shareholders approve an amendment to the Articles to add a new Article VIII. As a result of the amendment, the default VSCA voting standard for certain items would no longer apply as the Articles would now contain an explicit voting standard. If Item 2(c) is approved, the new Article VIII would revise the voting standard to be the affirmative vote of a majority of the votes entitled to be cast for (i) the re-domestication of the Corporation; and (ii) an affiliated transaction for which the VSCA requires shareholder approval.

Additional Information

The full text of the Proposed Amendments, in each case marked to show the proposed deletions and insertions, is set forth in Exhibit A to this Proxy Statement. The general description of provisions of our Articles and the Proposed Amendments set forth herein are qualified in their entirety by reference to the text of Exhibit A.

If shareholders approve any of the Proposed Amendments by the requisite vote, we will file Articles of Amendment that include only those amendments that were approved by the shareholders with the Virginia State Corporation Commission promptly after this Annual Meeting. The Articles of Amendment will become effective upon the issuance of a certificate of amendment by the Virginia State Corporation Commission. For any Proposed Amendment that does not receive the requisite vote, that Proposed Amendment will not be implemented and the Corporation’s current voting standards relating to such Proposed Amendment will remain in place.

Governance Framework and Practices

The Board of Directors has adopted Corporate Governance Guidelines that, among other matters, describe procedures for shareholders and other interested parties to communicate with the non-employee members of the Board (the “outside” directors). Communications will be forwarded to the Lead Independent Director after review by the Corporate Secretary, as appropriate. Communications that are unrelated to the duties and responsibilities of the Board may not be forwarded. These include matters involving individual grievances or that are otherwise not of general concern to all shareholders, and items that are business solicitations or advertisements, resumes or other job-related inquiries, spam, and hostile, threatening, or similarly unsuitable communications, each of which will be handled by management, as appropriate. However, all shareholder and interested parties’ communications are made available to the Board of Directors upon the Board’s request. The Corporate Governance Guidelines are available on our website at www.norfolksouthern.com on the “Invest in NS” page under “Corporate Governance Documents.”

Board Leadership Structure

Mr. Squires has served as Chief Executive Officer since June 1, 2015, and as Chairman since October 1, 2015. While the Board believes that combining the CEO and Chairman positions provides a leadership structure that is in the best interests of Norfolk Southern and our shareholders, the Board of Directors recognizes the importance of strong independent board leadership and has provided for such leadership by designating a Lead Independent Director, as discussed in detail below under “Lead Independent Director.”

Combining the CEO and Chairman positions provides for consistency of leadership of the Board and management and maintains clear lines of authority. Given that Mr. Squires’ knowledge of the Corporation is more extensive than that of any other director, he is particularly well equipped to lead the Board and set the Board’s agenda in collaboration with our Lead Independent Director. Further, Mr. Squires’ experience gives him a depth of knowledge about the broader industry that the Board believes is a highly valuable feature for the Chairman.

Lead Independent Director

In order to provide strong independent Board leadership, the Board’s leadership structure is enhanced by the role of our Lead Independent Director, who:

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Corporate Governance | 2020 Annual Meeting and Proxy Statement

Mr. Leer was selected by the independent directors to be our Lead Independent Director in 2013. Mr. Leer is an experienced director with extensive knowledge of Norfolk Southern’s business, drawing from his perspectives both as a board member and as a former customer. While Mr. Leer has extensive experience as a public company CEO and chairman, because he is not currently a standing executive he is able to devote extensive time and focus to his role as Lead Independent Director. Mr. Leer has served as a director of Norfolk Southern through two leadership transitions and has been instrumental in providing continuity in the leadership of the Board, and in facilitating communication amongst board members.

More information on the position of Lead Independent Director is contained in Norfolk Southern’s Corporate Governance Guidelines, posted on the “Invest in NS” page under “Corporate Governance Documents” on our website.

Board Self-Evaluation Process

Our Lead Independent Director presides over our annual board self-evaluation process. For the 2019 evaluation, the Board retained a third-party firm to facilitate the evaluation, with evaluation results sent directly to the directors without input or interpretation by management. The evaluation included an assessment of the effectiveness of the Board and its committees, director performance, board dynamics, director succession planning, the effectiveness of our Lead Independent Director and committee chairs, and the level of independence between the Lead Independent Director and our Chairman and CEO. The individual assessments were organized and summarized by the third-party firm for discussion by our Lead Independent Director with the Board. In addition, our Lead Independent Director supplemented the evaluation process with one-on-one reviews with individual directors following the evaluation as he deemed appropriate. The Board believes utilizing a third-party firm and reviewing and updating the questionnaire each year as appropriate ensures the evaluation process remains robust and that the process is free from any conflicts of interest and is truly an independent review.

Board Refreshment and Succession Planning Policy

Our Governance and Nominating Committee adopted a policy under our Corporate Governance Guidelines requiring that it discuss succession planning for directors, including the committee chair and lead director positions, at least annually. The Committee considers any upcoming retirements under its retirement policy for directors, desired skills and expertise for the Board, and tenure of current directors. In evaluating tenure, the Committee reviews average tenure and distribution of individual tenures for the Board (that is, the number of directors having less than five years of service, five to ten years of service, and over ten years of service), with the goal of maintaining an appropriate balance of new perspectives and longer-term expertise.

Retirement Policy

Under our Corporate Governance Guidelines, a director must retire effective as of the date of the annual meeting that falls on or next follows the date of that director’s 75th birthday.

Director Education

Directors will receive continuing education from time to time through presentations about the Corporation and new legal and regulatory developments relating to directors. Directors are encouraged to participate in outside director education seminars at the Corporation’s expense. In addition, Directors periodically participate in site visits to our railroad facilities.

Director Elections Majority Voting Policy and Resignation Requirement

Norfolk Southern’s Bylaws require that in an uncontested election of directors, a director will be elected by a majority of votes cast. Any incumbent director who is not re-elected will promptly tender his or her resignation to the Board of Directors for consideration by our Governance and Nominating Committee. The Governance and Nominating Committee will promptly consider the resignation and recommend to the Board of Directors whether to accept or reject the tendered resignation. The Board of Directors will act on the Committee’s recommendation within 90 days following certification of the election results. Any director who tenders his or her resignation pursuant to this provision will not participate in the Governance and Nominating Committee’s recommendation or Board of Directors’ consideration regarding whether or not to accept the tendered resignation. If the resignation is accepted, the Governance and Nominating Committee will recommend to the Board whether to fill the vacancy or reduce the size of the Board. We will publicly disclose the Board of Directors’ decision within four business days, including a full explanation of the process by which the decision was reached and, if applicable, the reasons why the Board rejected the director’s resignation.

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Corporate Governance | 2020 Annual Meeting and Proxy Statement

Proxy Access

The Corporation’s Bylaws permit a group of shareholders holding 3% of our outstanding shares for at least 3 years, and who otherwise comply with the Corporation’s Bylaws, to nominate up to 20% of the Board of Directors (with a minimum of 2 nominees). Up to 20 shareholders may aggregate their holdings to reach the 3% threshold. Our Bylaws are posted on our website on the “Invest in NS” page under “Corporate Governance Documents.”

Special Meetings

A special meeting will be called by the Corporate Secretary of the Corporation upon written request by one or more shareholders who in the aggregate represent at least 20% of the Corporation’s voting shares and who otherwise comply with the Corporation’s Bylaws, which are posted on our website on the “Invest in NS” page under “Corporate Governance Documents.”

Shareholder Engagement

Norfolk Southern regularly engages with its shareholders on our strategic plan, governance, executive compensation, sustainability, and other matters of interest to shareholders. During 2019, we continued our shareholder outreach program and met with many of our largest institutional investors. Our outreach program included one-on-one meetings with members of our governance team, as well as members of our investor relations, human resources, and sustainability teams. Feedback we received from shareholders was presented to our Board of Directors and to our Governance and Nominating Committee or Compensation Committee, as appropriate, for that committee’s consideration. Our Governance and Nominating Committee, headed by our Lead Independent Director, discussed both the process for conducting this outreach program and the results of these shareholder meetings with our Board of Directors. In response to these engagements, our Board recommended amendments to our Articles of Incorporation, as described in Item 2 of this Proxy Statement, in response to shareholder approval of the shareholder proposal on majority vote at the 2019 Annual Meeting.

Corporate Sustainability and Responsibility

Moving freight by rail is more fuel- and carbon-efficient than moving freight by truck: on average four times more efficient. In addition, Norfolk Southern strives to continuously reduce our fuel consumption and lower our carbon emissions. In support of these goals, we continue to implement technology-driven initiatives that benefit both the environment and our bottom line.

Our Governance and Nominating Committee’s charter includes oversight of sustainability initiatives. We have entwined sustainability into daily operations in ways that advance our business goals and honor our environmental and social commitments as a responsible corporate citizen. We strive to satisfy these commitments while driving business forward, to ensure success for all stakeholders: investors, customers, employees, communities, and industry partners.

Our Corporate Social Responsibility Report is published annually and informed by the Global Reporting Initiative’s G4 Core Level guidelines. The report is available on our website on the “Get to Know NS” page under “Environment.” (Please note that information contained on our website is not incorporated by reference in this Proxy Statement or considered to be part of this document.)

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Sustainability and Climate Change Risk Management

Norfolk Southern, through its Enterprise Risk Management (“ERM”) program and disclosure procedures, reviews and monitors sustainability and climate change risks relating to volatility in energy prices, business interruptions from severe weather, and legislative and regulatory efforts to limit greenhouse gas emissions. Our Board receives updates on these risks, and our management works with employees to identify, assess, and mitigate these risks and any potential emerging risks associated with sustainability and climate change. For more information on these risks, please see our annual and quarterly reports filed with the SEC.

Risk Oversight

Norfolk Southern considers and manages opportunities, threats, and uncertainties that may impact the Corporation’s business objectives by employing a robust ERM program. The ERM program supports the Corporation’s achievement of business objectives by enabling a collaborative risk management environment to proactively identify, assess, monitor, and mitigate business risk.

While the Board of Directors is ultimately responsible for oversight of the ERM program, the Finance and Risk Management Committee has been delegated oversight of the ERM program. The Finance and Risk Management Committee:

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Corporate Governance | 2020 Annual Meeting and Proxy Statement

Other Board committees also play a role in risk oversight:

Management implements the ERM program through its Enterprise Risk Council. The Council comprises executive leadership and the chief risk officer, who coordinate with business leaders across Norfolk Southern to assess and mitigate enterprise risks. Management provides regular presentations and updates on risk management efforts to the Finance and Risk Management Committee. In addition, the Board or the Finance and Risk Management Committee may conduct additional risk assessments at any time, and the Board - and each of its committees - is empowered to engage outside advisors to assist in performing its risk oversight duties.

Related Persons Transactions

During 2019, Norfolk Southern did not have any related persons transactions.

We may occasionally participate in transactions with certain “related persons.” Related persons include our Executive Officers, directors, beneficial owners of 5% or more of our common stock, immediate family members of these persons, and entities in which one of these persons has a direct or indirect material interest. We refer to transactions with these related persons as “related persons transactions.” We have adopted a written policy to prohibit related persons transactions unless they are determined to be in Norfolk Southern’s best interests. Under this policy, the Audit Committee of our Board is responsible for the review and approval of each related persons transaction exceeding $120,000. In instances where it is not practicable or desirable to wait until the next meeting of the Audit Committee for review of a related persons transaction, the Chair of the Audit Committee has been delegated authority to act between Audit Committee meetings. The Audit Committee, or its Chair, considers all relevant factors when determining whether to approve a related persons transaction, including whether the proposed transaction is on terms and made under circumstances that are at least as favorable to Norfolk Southern as would be available in comparable transactions with or involving unaffiliated third parties. Among other relevant factors, they consider:

The Chair must report any action taken pursuant to this delegated authority to the Audit Committee at its next meeting. In addition, at the Audit Committee’s first meeting of each fiscal year, it reviews all previously approved related persons transactions that remain ongoing and have a remaining term or remaining amounts payable to or receivable from us of more than $120,000. Based on all relevant facts and circumstances, taking into consideration our contractual obligations, the Audit Committee determines whether it is in our and our shareholders’ best interest to continue, modify, or terminate the related persons transaction.

Anti-Hedging and Anti-Pledging Policies

In September 2019, the Board of Directors amended the Corporation’s anti-hedging policy to extend the policy to all officers and members of the Board, effective for transactions entered into after adoption of the amendment. The policy provides that the Corporation’s executive and non-executive officers and members of its Board of Directors are prohibited from purchasing any financial instruments (including prepaid variable forward contracts, equity swaps, collars, exchange funds) that hedge or offset, or are designed to hedge or offset, any decrease in the market value of the Corporation’s securities, whether granted by the Corporation as part of the officer’s or director’s compensation or held, directly or indirectly, by the officer or director. Corporation policy also prohibits executive officers from entering into pledging transactions or positions regarding the Corporation’s securities. The Corporation is not aware of any violation of these policies.

The Thoroughbred Code of Ethics

The Board has approved and adopted The Thoroughbred Code of Ethics, which applies to all directors, officers, and employees of Norfolk Southern, and a Code of Ethical Conduct for Senior Financial Officers that applies to specified financial officers. These documents and our Corporate Governance Guidelines are available on our website at www. norfolksouthern.com on the “Invest in NS” page under “Corporate Governance Documents.” Any shareholder may request printed copies of our Corporate Governance Guidelines, The Thoroughbred Code of Ethics, or Code of Ethical Conduct for Senior Financial Officers by contacting: Denise W. Hutson, Corporate Secretary, Norfolk Southern Corporation, Three Commercial Place, Norfolk, Virginia 23510 (telephone 757-823-5567).

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Corporate Governance | 2020 Annual Meeting and Proxy Statement

Board Composition and Attendance

On September 23, 2019, the Board of Directors elected Mr. Mongeau. On February 21, 2020, the Board of Directors elected Mr. Huffard and Mr. Jones. The Board met six times in 2019. Each director attended not less than 75% of the aggregate number of meetings of the Board and meetings of all committees on which such director served.

The Corporate Governance Guidelines also describe the Board’s policy with respect to director attendance at the Annual Meeting of Shareholders, which provides that, to the extent possible, each director is expected to attend the Annual Meeting. We work hard to coordinate schedules so that all our directors can attend, but occasionally events arise that we are unable to schedule around. All directors attended our 2019 Annual Meeting of Shareholders.

Committees of the Board

Our Board committees and their responsibilities are described below. Each committee operates under a charter approved by the Board of Directors that requires the committee to evaluate its performance at least annually. The committee’s evaluation includes effectiveness, size and composition, the quality of information and presentations given to the committee by management, the suitability of the committee’s duties and other issues that the committee deems appropriate. Copies of the committee charters are available on our website on the “Invest in NS” page under “Corporate Governance Documents.” Any shareholder may request a printed copy of one or more of the committee charters by contacting: Denise W. Hutson, Corporate Secretary, Norfolk Southern Corporation, Three Commercial Place, Norfolk, Virginia 23510 (telephone 757-823-5567).

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Corporate Governance | 2020 Annual Meeting and Proxy Statement

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Corporate Governance | 2020 Annual Meeting and Proxy Statement

Compensation Committee Report

 

The Compensation Committee of our Board of Directors oversees the executive compensation program on behalf of the Board. In fulfilling its oversight responsibilities, we reviewed and discussed with management the “Compensation Discussion and Analysis” set forth in this Proxy Statement.*

 

The Compensation Discussion and Analysis discloses the material elements of Norfolk Southern’s executive compensation program. We are committed to a compensation program that is designed to align executives’ compensation with Norfolk Southern’s overall business strategies, attract and retain highly qualified executives, and provide incentives that drive shareholder value. The Compensation Discussion and Analysis describes how our

decisions regarding Norfolk Southern’s executive compensation program for 2019 implemented these design elements.

 

In reliance on the review and discussions with management referred to above, we recommended to the Board that the Compensation Discussion and Analysis be included in Norfolk Southern’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, and this Proxy Statement.

 

MEMBERS OF THE COMPENSATION COMMITTEE

 

Daniel A. Carp, Chair
Thomas D. Bell, Jr.
Mitchell E. Daniels, Jr.
Steven F. Leer

Claude Mongeau
Jennifer F. Scanlon

 

*	John C. Huffard, Jr. was appointed to the Compensation Committee on February 21, 2020, upon his election to the Board, and he did not participate in the Committee’s deliberations regarding the Compensation Discussion and Analysis.

 

		Norfolk Southern Corporation		Page 32		www.norfolksouthern.com

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Executive Compensation | 2020 Annual Meeting and Proxy Statement

 

 

Compensation Discussion and Analysis

 

This Compensation Discussion and Analysis describes the objectives, governance, and policies that guide our executive compensation program, the compensation components that made up that program during 2019, and the performance goals and results.

 

Executive Summary

 

Our 2019 Executive Compensation Program

The following chart summarizes the key characteristics and performance metrics that apply to the compensation program for our Named Executive Officers for 2019:

 

Element	Form	Key Characteristics & Performance Metrics
Base Salary	Fixed Cash	·   Reviewed annually and periodically adjusted based on market data, individual performance and experience, changes in position or duties, or other circumstances
Annual Incentive	Performance- Based Cash	·   Designed to compensate executives based on achievement of annual corporate performance goals ·   Performance metrics chosen to encourage employees to do all they can individually and as a team to increase revenue, reduce expenses, and improve operating performance Performance metrics for 2019:
Long-Term Incentive Awards	Performance Share Units (60%)	·   Performance metric chosen to promote efficient utilization of corporate assets and enhancement of shareholder value ·   The performance metric is return on average invested capital, with total shareholder return versus publicly-traded North American Class I railroads as a modifier that may reduce or increase payout (if any) by up to 25% ·   Vest at the end of a 3-year period if performance goal is achieved
	Restricted Stock Units (25% CEO, 30% Other NEOs)	·   Serve as a retention tool for valued members of management ·   Vest ratably in 4 installments beginning on the 1st anniversary of the date of grant
	Stock Options (15% CEO, 10% Other NEOs)	·   Provide the ability to retain key employees and at the same time increase shareholder value ·   Vest on the 4th anniversary of the date of grant

 

2019 Compensation Alignment

At Norfolk Southern, our Compensation Committee aligns compensation to performance by emphasizing performance- based compensation components. These components include an annual cash incentive, long-term performance share units with a three-year cycle, and stock options.

 

In February 2019, Norfolk Southern announced its three-year strategic plan focused on increased productivity, efficiency, and revenue growth. Under the strategic plan, Norfolk Southern’s goal is to achieve an operating ratio of 60 percent by 2021 (including a full year operating ratio improvement in 2019 of at least 100 basis points on our 2018 operating ratio of 65.4 percent), revenue growth at a compound annual rate of 5 percent through 2021, focused capital expenditures between 16 percent and 18 percent of revenues through 2021, and significant return of capital to shareholders through a dividend payout ratio of 33 percent and continuance of share repurchases using free cash flow and borrowing capacity. Norfolk Southern is intensely focused on executing these initiatives to drive long-term shareholder value.

 

		Norfolk Southern Corporation		Page 33		www.norfolksouthern.com

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As described in the “Business Highlights” beginning on page 7, implementation of Norfolk Southern’s three-year strategic plan quickly produced results in 2019, including a record operating ratio of 64.7 percent for the year and diluted earnings per share of $10.25 as compared with $9.51 for 2018. The 2019 operating ratio was a 70 basis point improvement over the prior year’s record, and 2019 diluted earnings per share was an 8 percent improvement over 2018.

 

In 2019, we reinvested $2 billion in the Corporation through our capital spending and replacement program, while paying $949 million in dividends and repurchasing just over $2 billion of the Corporation’s stock. Annual revenues decreased by 1% in 2019 due to a 5% decrease in total volume, which was partially mitigated by an increase in revenue per unit.

 

The Committee is committed to tying executives’ annual and long-term incentive compensation to Norfolk Southern’s performance and strategic plan goals.

 

Annual Incentive. Norfolk Southern did not meet the challenging 2019 target goals for operating income and operating ratio, resulting in a payout of 48.5% of the annual incentive opportunity for the Named Executive Officers.

 

Performance Share Units. Our Named Executive Officers earned 87.5% of performance share units for the three- year cycle ending in 2019, based on equally weighted goals for total shareholder return (TSR) and after-tax return on average invested capital (ROAIC). We achieved an above-target earnout based on a 75% payout for TSR for the three-year cycle, and a payout of 100% for the ROAIC portion of the award.

 

Leading Compensation Governance Practices

 

Embedded in our overall executive compensation program are features that reflect leading governance principles and demonstrate our commitment to best practices in executive compensation:

 

At Norfolk Southern, We Do		At Norfolk Southern, We Do Not Do

 

		Norfolk Southern Corporation		Page 34		www.norfolksouthern.com

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Executive Compensation | 2020 Annual Meeting and Proxy Statement

 

 

Key 2019 Compensation Decisions

 

As the Compensation Committee continues its focus on aligning executives’ compensation with Norfolk Southern’s strategic plan goals and overall business strategies, attracting and retaining highly qualified executives, and providing incentives that drive shareholder value, the Committee made the following key decisions with respect to executive compensation for 2019:

 

·

Established Challenging 2019 Annual Incentive Performance Targets Aligned to Our Strategic Plan Goals. The Committee selected operating income and operating ratio as performance measures for the 2019 annual incentive, as these measures reflect the Corporation’s financial profitability and operational efficiency. The Committee chose not to include the composite service measure, a railroad network performance measure, as a component in the annual incentive for 2019; rather, the Committee decided that the primary focus of the executives should be on operating income growth and operating ratio improvement, and that the railroad’s operating performance would be incorporated in these two performance measures.

In January 2019, the Committee set challenging financial and operating targets consistent with the 2019 goals established under the Corporation’s three-year strategic plan which, if met, would have produced a 67% annual incentive payout. In establishing performance targets for operating income and operating ratio for 2019, the Committee considered:

·

Norfolk Southern’s forecasted business environment;

·

Norfolk Southern’s continued focus on service; and

·

goals of the three-year strategic plan.

Given Norfolk Southern’s strong financial results for operating income and operating ratio in 2018, the Committee’s expectations of improving profitability, growth, productivity, service, and efficiency, and in consideration of the goals of the strategic plan, the Committee in 2019:

·

increased the performance necessary to achieve the threshold, target, and maximum payout levels for operating income and operating ratio;

·

established Norfolk Southern’s 2018 results as the threshold to earn a minimum payout on either the operating income or operating ratio measure; and

·

increased the payout that would be made upon achievement of the threshold level for operating income. Against these challenging performance measures, Norfolk Southern achieved a 48.5% payout of its 2019 annual incentive, which was below the 67% target payout.

·	Established Compensation for CEO that is 71% Performance-Based. The Committee established Mr. Squires’ 2019 compensation, which provided 74% of his targeted compensation in the form of equity-based awards that are aligned with shareholder interests, and 71% as performance-based compensation.

·

Granted Long-Term Incentive Awards that are Performance-Based. The Committee continued to grant annual long- term incentive awards, the majority of which consist of performance share units and of stock options whose ultimate value is based on shareholder return and which may not have any value at the end of the vesting period. The value of these long-term incentives is closely tied to delivery of results under the Corporation’s three-year strategic plan, and the Committee increased the percentage of total compensation granted as long-term incentive awards for each of the Named Executive Officers in 2019 as compared with 2018.

·

Granted Inducement Awards to CFO. The Committee determined it was in the best interest of the Corporation to provide a new-hire equity grant to Mr. George to serve as an inducement for him to join Norfolk Southern as the Corporation’s Chief Financial Officer in 2019. This equity award created immediate alignment with shareholder interests, and incentivized Mr. George as part of our leadership team to drive long-term value creation. In addition, the Committee provided Mr. George with a cash signing bonus, in part to replace compensation opportunities he forfeited by leaving his former employer. The amounts and terms of these compensation arrangements were deemed necessary by the Committee to recruit the best executive in a competitive market for talent.

Our 2019 Named Executive Officers

Name	Position
James A. Squires	Chairman, President and Chief Executive Officer
Mark R. George	Executive Vice President Finance and Chief Financial Officer
John M. Scheib	Executive Vice President and Chief Strategy Officer
Alan H. Shaw	Executive Vice President and Chief Marketing Officer
Michael J. Wheeler	Executive Vice President and Chief Operating Officer
Cynthia C. Earhart	Former Executive Vice President Finance and Chief Financial Officer

 

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Objectives of Compensation Program

 

Norfolk Southern’s executive compensation program is primarily designed to:

 

·	Align executives’ compensation with overall business strategies.

·	Provide incentives that drive shareholder value.

·	Attract and retain highly qualified executives.

 

Compensation Governance

 

The Compensation Committee works closely with its independent compensation consultant throughout the year to develop the executive compensation program and to align pay with performance and with pay at comparable companies. While the Compensation Committee discusses current and proposed compensation structures with management, the Committee acts independently of management and has the full authority to retain any advisors it deems appropriate to assist it in making these decisions.

 

Role of Independent Compensation Consultant

The Committee engaged an independent compensation consultant, Pay Governance LLC, to provide executive compensation consulting services during 2019. Pay Governance does not provide services to Norfolk Southern other than those provided at the request of the Committee.

 

At the Committee’s request, Pay Governance compiled compensation data for the peer group selected by the Committee. Pay Governance also provided requested reports and information to the Committee, including at the Committee’s request, recommendations regarding individual pay and compensation program design. Pay Governance attended Committee meetings as requested by the Committee. The Committee used the information provided by Pay Governance, and considers Pay Governance’s analysis and recommendations, as a starting point for its compensation decisions.

 

More specifically, in 2019, Pay Governance:

 

·	conducted a market pay assessment of Norfolk Southern’s compensation levels relative to both the competitive market and Norfolk Southern’s compensation philosophy, including identifying and reviewing available market benchmark positions and pay data;

·	assisted Norfolk Southern with the development of long-term incentive grant guidelines for the officer and management groups, based on Pay Governance’s competitive pay assessment;

·	reviewed emerging trends and issues in executive compensation with the Committee and discussed the implications for Norfolk Southern; and

·	provided an analysis of the difficulty of achieving the threshold, target, and maximum performance goals for the annual incentive and the performance share units, and of the current plans’ effectiveness in driving achievement of threshold, target, and maximum payouts.

 

For 2019 and 2020, following a review of its records and policies, Pay Governance provided the Compensation Committee with a report regarding its conformance with independence factors under applicable SEC rules and the listing standards of the NYSE. The Committee considered the independence factors and determined that Pay Governance is independent and free from potential conflicts of interest.

 

Performance Reviews

The Committee annually reviews the performance of the Chief Executive Officer and considers this performance when establishing his compensation package. The Committee also reviews the performance of the other Named Executive Officers with the assistance of the Chief Executive Officer, and considers both its own assessment of the executives’ performance and the assessment of the CEO in establishing a compensation package for the other Named Executive Officers.

 

Committee Consideration of Management Recommendations

Management does not make recommendations on the compensation of the Chief Executive Officer. Pay Governance makes recommendations to the Committee on any adjustments to compensation for the Chief Executive Officer, and the Chief Executive Officer is not present when the Committee makes decisions on his compensation package.

 

The Chief Executive Officer provided recommendations to the Compensation Committee on any adjustments to compensation for the Named Executive Officers, other than the Chief Executive Officer. Such adjustments were based on each individual’s performance, level of responsibility, time in position, and internal pay equity.

 

In addition to individual adjustments, the Chief Executive Officer provided recommendations to the Committee on adjustments to compensation to address retention needs, performance goals, market pay equity, overall corporate performance, and general economic conditions. While the Committee considers the recommendations of management in these areas, it makes compensation decisions independently after considering Pay Governance’s recommendations.

 

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Consideration of Shareholder Advisory Vote on Compensation and Shareholder Engagement

At Norfolk Southern’s 2019 Annual Meeting of Shareholders, approximately 94% of the votes cast supported the advisory resolution on the compensation of our Named Executive Officers. The Committee compared the results of the advisory vote to its peer group average results and the average results amongst the S&P 500 companies. The Committee viewed the results of the advisory vote as demonstrating broad shareholder support for our current executive compensation program. Given the results of the shareholder advisory vote and the Committee’s ongoing review of Norfolk Southern’s compensation programs, the Committee believes that our existing compensation program effectively aligns the interests of the Named Executive Officers with Norfolk Southern’s long-term goals. While the shareholder vote on compensation is advisory in nature, the Board and Compensation Committee carefully consider the results of any such vote in future compensation decisions.

 

Norfolk Southern engages in a shareholder outreach program with our institutional investors to solicit feedback concerning our executive compensation program, and this shareholder feedback is reported to the Committee and the Board for consideration. This process allows shareholders to provide input to the Compensation Committee on our executive compensation program and disclosure beyond the annual advisory vote on compensation. In response to specific concerns expressed by shareholders during these discussions, the Committee has taken several actions over the past years to enhance the design of our executive compensation program.

 

Compensation Policies

 

In setting compensation for the Named Executive Officers, our Compensation Committee considers:

 

·	each officer’s performance, experience, qualifications, responsibilities, and tenure;

·	current and historical salary levels, targeted annual incentive opportunities, and long-term incentive awards;

·	expected corporate performance and general economic conditions;

·	general industry compensation survey data; and

·

comparative market data, provided by the independent compensation consultant, for other North American Class I railroads, as a guideline. The Committee considers total direct compensation (salary plus target annual incentive plus the expected value of long-term incentive awards) relative to the 50th percentile for the Chief Executive Officer and the other Named Executive Officers as compared to the peer group.

 

The Committee does not consider amounts realized from prior performance-based or stock-based compensation awards when setting the current year’s target total direct compensation, regardless of whether such realized amounts may have resulted in a higher or lower payout than targeted in prior years. Since the nature and purpose of performance-based and stock-based compensation is to tie executives’ compensation to future performance, the Committee believes that considering amounts realized from prior compensation awards in making current compensation decisions is inconsistent with this purpose.

 

Peer Group

Our Compensation Committee monitors the continuing appropriateness of its selection of the peer group companies. The Committee believes its focus should be on ensuring the peer group includes the other North American Class I railroads or their holding companies (“Class I railroads”) because Norfolk Southern is primarily in competition with those companies for key executive talent. As a result, the Committee determined that reference to the pay levels at the other Class I railroads was the most relevant comparator for the Named Executive Officers. The Class I railroads that make up the peer group companies for 2019 (“Peer Group Companies”) are: BNSF Railway Company, Canadian National Railway Company, Canadian Pacific Railway Limited, CSX Corporation, Kansas City Southern, and Union Pacific Corporation.

 

Our Committee applies its executive compensation policies consistently to all Named Executive Officers, and the application of these policies produces differing amounts of compensation for each officer based on his or her responsibilities and tenure as compared to the compensation set for comparable positions by the Peer Group Companies. In setting the Chief Executive Officer’s compensation, the Committee strives to balance comparative market data for chief executive officers of Peer Group Companies with its goal to provide incentive opportunities that are significantly performance-based and thus designed to drive shareholder value. Because the Chief Executive Officer’s job carries the highest level of responsibility and has the greatest ability to drive shareholder value, his total compensation contains a higher performance-based component than that of the other Named Executive Officers.

 

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Compensation Components

 

Overview

Our Compensation Committee has designed a balanced compensation program that provides our Named Executive Officers with an appropriate base salary along with competitive annual and long-term incentive compensation. The program directly links executives’ compensation to Norfolk Southern’s strategic goals and financial performance, and thus aligns their interests with those of our shareholders. Norfolk Southern’s total compensation for its Named Executive Officers is weighted heavily toward performance-based incentive compensation, rather than base salary, so that a substantial portion of targeted executive compensation aligns with shareholder interests.

 

2019 CEO Target Total Compensation Mix

 

2019 Average Target Total Compensation Mix for Other NEOs*

 

*

Average for Mr. Scheib, Mr. Shaw and Mr. Wheeler. Ms. Earhart is omitted from this table because she retired effective November 1, 2019. Also omitted from this table is Mr. George, who joined the Corporation on November 1, 2019. As described further in the Summary Compensation Table and in the Form 8-K filed on August 28, 2019, Mr. George was granted a signing bonus and inducement equity award effective upon his hire, which awards are distinct from the annual compensation components the Compensation Committee granted to our Named Executive Officers.

 

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In setting executives’ total direct compensation and the compensation component mix, the Committee considers the advice of its independent compensation consultant and then makes its own judgments to determine appropriate compensation levels and mix. The Committee considers each executive’s performance, responsibilities, time in position, and internal pay equity. In addition, the Committee uses market data of the Peer Group Companies when available as a reference point for determining the appropriate compensation, considering where the expected total direct compensation for the upcoming year falls relative to the 50th percentile for the Chief Executive Officer and the other Named Executive Officers. In making its final determinations, the Committee generally considers comparable market data, tenure, and internal pay equity.

 

After considering the available market data and other considerations, at the beginning of 2019, the Committee increased the total direct compensation targets for each of the Named Executive Officers employed at that time, to position each officer’s compensation at a competitive range around the median compensation as compared with comparable positions at the Peer Group Companies. In August 2019, the Committee established the total direct compensation target for Mr. George, which became effective upon his joining the Corporation on November 1, 2019.

 

For 2019, the portion of total direct compensation awarded as total cash compensation versus long-term incentive compensation for the continuing NEOs was approximately:*

 

 

 

*	Omitted from this table is Ms. Earhart, who retired effective November 1, 2019, and Mr. George, who joined the Corporation on that date.

 

Our Committee further considers the portion of total direct compensation to be awarded as long-term compensation and how the long-term portion should be allocated among performance share units, restricted stock units, and stock options. This allocation is based on general market practices, compensation trends, governance practices, and business issues facing Norfolk Southern. In making this determination, the Committee takes into account the potential dilutive effect of stock-based awards, including guidance on these measures from proxy advisory services, and further considers the purpose behind each element of long-term compensation and how the allocation among these elements will support its overall compensation objectives. For 2019, the Committee maintained the same percentage allocation of long-term incentive awards as granted in 2018.

 

 

 

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Salaries

The Board establishes competitive base salaries for our executive officers to attract and retain key executive talent. Our Compensation Committee reviews the Named Executive Officers’ base salaries annually and periodically makes recommendations to Norfolk Southern’s Board of Directors to adjust salaries based on market data, individual performance and experience, changes in position or responsibilities, or for other circumstances.

 

After the Committee’s annual salary review in January 2019, the Committee recommended an increase in Mr. Scheib’s salary, and the Board approved this increase. The Committee did not recommend any adjustments to Mr. Squires’, Ms. Earhart’s, Mr. Shaw’s or Mr. Wheeler’s salaries for 2019, as the Committee determined that those salaries were appropriate based on comparisons for total direct compensation among peers at the Peer Group Companies.

 

In August 2019, the Committee recommended a salary to become effective upon the November 2019 hire of Mr. George as Executive Vice President - Finance and Chief Financial Officer, and the Board approved this salary.

 

Annual Incentive

Each of our Named Executive Officers participates in Norfolk Southern’s Executive Management Incentive Plan (“EMIP”), which is designed to compensate executives based on achievement of annual corporate performance goals. Each year, the Compensation Committee establishes a maximum opportunity for each Named Executive Officer at the level of Executive Vice President or above. The opportunity is determined using relevant market data and internal pay equity, and is expressed as a percentage of base salary:

 

Corporate Performance Payout Percentage Earned

=

Individual Payout ($)

Annual Base Salary ($)

X

Maximum Opportunity

–

Committee’s Discretionary Adjustment

X

  

For 2019, the Committee established annual incentive opportunities of 225% of base salary for the Chief Executive Officer and 135% for the Executive Vice President level. The Committee then established performance levels, including at the threshold, target and maximum performance levels as shown below. The Committee established goals to produce an overall 67% targeted corporate performance payout which, if met, would result in annual incentive payouts equal to the following percentages of each officer’s salary:

 

Position	Annual Incentive Opportunity		Target Performance Level		Percent of Salary Paid as Annual Incentive at Target Performance
Chief Executive Officer	225%	x	67%	=	151%
Executive Vice President	135%	x	67%	=	90%

 

The Committee may reduce the annual incentive paid to any executive based on performance. For 2019, the Committee did not make any adjustments to the annual incentive payout based on individual performance, and approved payouts to Mr. Squires based on a 225% opportunity and to the Executive Vice Presidents based on a 135% opportunity. The annual incentive amounts paid for 2019 and reported as “Non-Equity Incentive Plan Compensation” in the Summary Compensation Table apply these opportunities in the formula described above.

 

Under EMIP, each participant has an opportunity to earn an annual incentive that is determined by Norfolk Southern’s performance relative to goals established by the Committee. In 2019, the Committee established goals for operating income and operating ratio, weighted 60% and 40%, respectively. Approximately 20% of the Corporation’s non- union workforce had an opportunity to earn an annual incentive in 2019 based on the achievement of the same annual corporate performance goals that the Committee established under EMIP.

 

The Committee selected operating income, consisting of operating revenue less the sum of operating expenses, as the metric for the Corporation’s financial profitability. Operating ratio, or operating expenses as a percentage of revenue, is the metric for operational efficiency. The Committee revised its practice from prior years and did not include the composite service measure, a railroad network performance measure, as a component in the annual incentive for 2019. The new strategic plan incorporated the principles of Precision Scheduled Railroading, or PSR, and the composite service measure was based on the pre-PSR railroad operations. In particular, the composite service measure did not necessarily reflect whether the Corporation was efficiently using its assets. As such, the Committee believes that the results of railroad’s operating performance, including the railroad’s service, is best reflected in the two performance measures of operating income and operating ratio, and that the primary focus of the executives should be on operating income growth and operating ratio improvement. The portions of the annual incentive based on operating income and operating ratio each vest independently, so it is possible to earn an annual incentive by achieving the threshold on only one of these metrics. The Committee selected these metrics for 2019 because it believed that use of such metrics encourages employees to do all they can individually and as a team to increase revenue, improve efficiency and reduce expenses.

 

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The Committee sets performance levels required to achieve a target payout at the 67% corporate performance level at levels considered challenging with a reasonable likelihood of being achieved and that represent strong levels of performance based on Norfolk Southern’s overall business outlook, general economic conditions expected during the performance year, and long-term strategic plan. The Committee established the maximum annual incentive opportunity at a level so that the full amount would be earned only if actual performance far exceeded forecasted performance. Performance levels for the operating ratio and operating income metrics are established based on the annual financial plan established at the beginning of the year, and were tied to the Corporation’s 2019 goals under the three-year strategic plan announced in February 2019.

 

For 2019, the Committee set the following threshold, target, and maximum payouts for each of the corporate performance payout metrics for the annual incentive:

 

If Norfolk Southern achieved only one of each threshold performance measure listed below, then a threshold payout of:

If Norfolk Southern achieved the target or maximum performance measures listed below, then a payout of:

Operating Income

Threshold

Target

Maximum

Outcome

$3.959

$4.371

≥ $4.846

Corporate Performance Payout Percentage

12%

67%

150%

or

and

and

Operating Ratio

Threshold

Target

Maximum

Outcome

65.4%

63.4%

≤ 61.8%

Corporate Performance Payout Percentage

8%

67%

150%

 

Overall, the Committee established the following threshold, target, and maximum payouts for the annual incentive which would be multiplied by the executive’s annual incentive opportunity shown on the previous page:

 

If Norfolk Southern achieved threshold performance for only the operating ratio measure, then a threshold payout of:

If Norfolk Southern achieved the target for each of the performance measures listed above, then a payout of:

If Norfolk Southern achieved the maximum for each of the performance measures listed above, then a payout of:

Overall Result

Threshold

Target

Maximum

Corporate Performance Payout Percentage

8%

67%

150%

 

The dollar amounts corresponding to the above-listed threshold, target, and maximum opportunities for each of the Named Executive Officers can be found under Grants of Plan-Based Awards on page 49.

 

For each of the performance metrics, the Committee sets performance levels and resulting payouts at intervals between the threshold, target, and maximum. When the Committee met in January 2019 and established the performance metrics for the annual incentive, the Committee considered Norfolk Southern’s forecasted business environment, Norfolk Southern’s continued focus on service, and the goals of the three-year strategic plan. As a result, the Committee increased the performance necessary to achieve the threshold, target, and maximum payout levels for operating income and operating ratio as compared with 2018, and established a threshold level for these metrics equal to 2018 performance. The Committee increased the payout that would be made upon achievement of the threshold for operating income as compared with 2018 in light of the significant performance required to achieve a payout at the threshold level for operating income. The Committee maintained a maximum payout for operating income and operating ratio at the 150% earnout level so as to incent achievement of the strategic plan goals.

 

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The final percentage for the annual incentive is calculated using a weighted average of the payouts for each performance metric as illustrated below:

 

	Operating Income (billions) 60%				Operating Ratio 40%
	OI		Payout		OR		Payout
	$ 4.846		150%		61.8%		150%
	$ 4.760		120%		62.2%		125%
	$ 4.651		100%		62.6%		100%
	$ 4.511		82%		62.9%		80%
	$ 4.371		67%		63.4%		67%
	$ 4.019		52%		65.0%		52%
	$ 3.959		20%		65.4%		20%
	<$ 3.959		0%		>65.4%		0%

 

Actual results for the year were applied to each schedule to determine the earned 2019 award, as detailed below:

 

Performance Metric	Performance	% of Award Earned	Component Weighting	Subtotal
Operating Income (billions)	$3.989	40.5%	60%	24.3%
Operating Ratio	64.7%	60.5%	40%	24.2%
Total (rounded)				48.5%

 

Annual incentive award targets and payout ranges for 2019, as well as the actual annual incentive award payouts for each of the Named Executive Officers for 2019, are:

 

Named Executive Officer	67% Target Incentive		Range of Potential Payouts		Award Actually Earned
James A. Squires	$	1,658,250	$	0 - $3,712,500	$	1,200,375
Mark R. George	$	90,450	$	0 - $   202,500	$	65,475
Each of Messrs. Scheib, Shaw, and Wheeler	$	542,700	$	0 - $1,215,000	$	392,850
Cynthia C. Earhart	$	452,250	$	0 - $1,012,500	$	327,375

 

Under the terms of the Executive Management Incentive Plan, the annual incentive paid to any individual executive under the plan will not exceed the lesser of three-tenths of one percent of Norfolk Southern’s income from railway operations for the incentive year or ten million dollars.

 

Long-Term Incentive Awards

Norfolk Southern believes the most effective means to achieve long-term corporate performance is to align the interests of our Named Executive Officers with shareholders. The Committee achieves this alignment by granting equity-based awards that are earned based on continued employment, and at least half of which vest on achievement of predetermined performance goals. The Compensation Committee believes that the use of long-term incentive compensation for executives reinforces their focus on the importance of returns to shareholders, promotes achievement of long-term performance goals, and encourages executive retention.

 

For 2019, the Committee allocated the annual long-term incentive award to the Chief Executive Officer 60% as performance share units, 15% as stock options, and 25% as restricted stock units, and to the other Named Executive Officers 60% as performance share units, 10% as stock options, and 30% as restricted stock units. Executives were required to enter into an agreement not to engage in competing employment as a condition of receiving the 2019 award.

 

Performance Share Units. Norfolk Southern uses performance share units to reward the achievement of performance goals over a three-year period. Performance share units settle in shares of Norfolk Southern common stock after the Committee certifies the extent to which the performance goals were attained. At the time of grant, Norfolk Southern uses the estimated grant date fair values of the performance share unit awards for market comparison purposes.

 

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For 2019, the Committee established performance goals based directly on ROAIC, with TSR serving as a modifier rather than a stand-alone metric. The Committee believes ROAIC is an important indicator to shareholders of a capital- intensive company such as Norfolk Southern. No payout will be made unless the threshold is achieved for the three- year ROAIC metric. The Committee believes that management has more influence and control over the ROAIC metric than TSR, and therefore increased emphasis on this financial metric. For the 2019 awards, the Committee determined that if a threshold payout is met for the ROAIC measure, then the payout will be modified based on Norfolk Southern’s TSR as compared with the shareholder return of the other publicly-traded North American Class I railroads reflecting the return over the entire three-year period, as follows:

 

Modifier for 2019–2021 Performance Share Units
Ranking NS 3-Year Total Stockholder Return vs. Class I Railroads	Performance Share Unit Multiplier
1st	1.250
2nd	1.125
3rd or 4th	1.000
5th	0.875
6th	0.750

 

Using TSR as a modifier, rather than a performance measure, reduces the impact of the performance rankings within Norfolk Southern’s small group of Class I railroad peers on the determination of the units earned, while still ensuring that the final payout is reflective of the Corporation’s performance relative to its peers. Overall, the Committee believes that the use of the ROAIC measure, with the TSR modifier, promotes the enhancement of shareholder value and efficient utilization of corporate assets.

 

The performance share units will be forfeited if the recipient terminates from employment with the Corporation before October 1 of the year of grant, except in the case of death or disability.

 

To allow shareholders to assess the link between corporate performance and compensation, the Committee is committed to disclosing in this Compensation Discussion and Analysis the achievements for our performance share units at the end of each performance period. The Committee believes, however, that disclosing our long-term targets for ROAIC would give substantial insight into the Corporation’s confidential, forward-looking strategies, and could therefore place the Corporation and its shareholders at a competitive disadvantage.

 

Completed 2017-2019 Performance Share Unit Cycle: For the 2017-2019 performance cycle, the performance criteria were based on two equally weighted criteria: ROAIC and TSR. Under the 2017-2019 grant, each half of the performance share units vested independently of the other half and its respective performance measures. For the 2017-2019 performance cycle, the performance criteria were as follows:

 

Performance Metric		% of PSUs Earned
NS Three-Year Total Shareholder Return (“TSR”) vs. North American	1st	100%
Class I Railroads	2nd	75%
	3rd	50%
	4th	25%*
	5th	0%*
*Minimum 40% earnout if NS TSR > median S&P 500 TSR for three-year period	6th	0%*
Three-Year Average After-Tax Return on Average Invested Capital	≥ 11.0%	100%
	10.4%	75%
	9.05%	25%
	<9.0%	0%

 

The earned award for the 2017-2019 performance cycle was determined as follows:

 

Performance Metric	Performance	% of Award Earned
Three-Year Total Shareholder Return vs. North American Class I Railroads	2nd	75%
Three-Year Average After-Tax Return on Average Invested Capital	11.2%	100%
Total (sum of % of Award Earned divided by 2 for one-half weighting of each of the components)		87.5%

 

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Based on the final earnout of 87.5% for the 2017-2019 performance share units, the Named Executive Officers who were employed in 2017 received the following number of shares of stock of Norfolk Southern Corporation in early 2020, with the earned award reduced upon distribution as required for tax withholding:

 

Named Executive Officer	Award Granted (#)	Target Award (#)	Earned Award (#)
James A. Squires	56,370	28,185	49,324
John M. Scheib	2,150	1,075	1,881
Alan H. Shaw	12,360	6,180	10,815
Michael J. Wheeler	14,090	7,045	12,329
Cynthia C. Earhart	9,970	4,985	8,724

 

Stock Options. Norfolk Southern believes that use of stock options provides us with the ability to retain key employees and at the same time increase shareholder value since the value of the options is only realized if our stock price increases from the date on which the options are granted. For 2019, the Committee maintained a four-year cliff-vesting period to encourage retention of key employees and awarded dividend equivalent payments on options during the vesting period. The value of the option awarded is adjusted to recognize the effect of the dividend equivalents.

 

The Committee has never issued backdated option grants. Options are priced on the effective date of the grant at the higher of (i) the closing price or (ii) the average of the high and low price on the effective date of the grant. In addition, the Long-Term Incentive Plan prohibits repricing of outstanding stock options without the approval of shareholders.

 

The Committee grants nonqualified stock options annually at the regularly scheduled January meeting of the Compensation Committee. Under the terms of the Long-Term Incentive Plan, the effective date of a grant is the date on which the Compensation Committee makes the grant or, if granted during a blackout period that precedes the release of the Corporation’s financial information for the prior calendar quarter, the first day on which the Corporation’s common stock is traded after a full trading day has elapsed following the release of the prior quarter’s financial information. This establishes a prospective effective date to price the options.

 

Restricted Stock Units. Norfolk Southern believes that the use of time-based restricted stock units serves as a retention tool for valued members of management. For 2019, the Committee granted restricted stock units that vest ratably over four years beginning on the first anniversary of the date of grant and which settle in shares of Norfolk Southern common stock. The restricted stock units will be forfeited if the recipient terminates from employment with the Corporation before October 1 of the year of grant, except in the case of death or disability.

 

Special Inducement Grants

The Committee made certain new hire inducement grants to Mr. George, our new Executive Vice President - Finance and Chief Financial Officer. These cash and equity awards were special one-time inducements, the amounts of which are distinct from the salary, annual incentive, and regular annual long-term incentive awards described above. As we disclosed in the Form 8-K filed on August 28, 2019, the Committee approved, and the Board granted Mr. George a $400,000 signing bonus, and the Committee granted a $1,000,000 inducement equity award effective upon his hire. The equity award compensation mix made to Mr. George in November 2019 was made in the same proportions of PSUs, RSUs and non-qualified stock options as the equity awards made to the other Named Executive Awards in January 2019, as shown on page 39, and Mr. George was required to execute a non-compete agreement to receive those awards. Additional information concerning these awards can be found in the Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table under the heading “Employment and Other Agreements.”

 

Retirement Plans and Programs

Norfolk Southern believes that its Retirement Plan and Supplemental Benefit Plan provide it with the ability to retain key employees over a longer period. Our officers, including our Named Executive Officers, participate in the Retirement Plan, a tax-qualified defined benefit pension plan that is generally provided to all our employees who are not subject to a collective bargaining agreement. The Retirement Plan provides a benefit based on age, service, and a percentage of final average compensation. Norfolk Southern also sponsors the Supplemental Benefit Plan, a non-qualified plan that restores the retirement benefit for amounts in excess of the Internal Revenue Code limitations for tax-qualified retirement plans, and provides a retirement benefit for salary or annual incentive that is deferred under Norfolk Southern’s deferred compensation plans. In addition to supporting the goal to retain key employees, the Committee believes the Supplemental Benefit Plan maintains internal equity by ensuring that pension benefit levels are based on relative compensation levels of each participant. Further information on the Retirement Plan and Supplemental Benefit Plan may be found in the Narrative to Pension Benefits Table.

 

Norfolk Southern maintains the Executives’ Deferred Compensation Plan (the “EDCP”) for the benefit of the Named Executive Officers and certain other employees. The purpose of the EDCP is to provide executives with the opportunity to defer compensation, as adjusted for earnings or losses, until retirement or another specified date or event. We do not make any company or matching contributions to the EDCP. Further information on the EDCP may be found in the Narrative to Nonqualified Deferred Compensation Table.

 

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Other Benefits and Perquisites

Norfolk Southern provides the Named Executive Officers with certain health and welfare benefits, relocation program benefits, and a tax-qualified 401(k) plan in the same manner that such benefits have been made available to other salaried employees of the Corporation. However, an Executive Officer is not eligible for an equity advance against the value of his or her residence, which is a benefit that is available to all other salaried employees of the Corporation under the Corporation’s relocation program.

 

The Named Executive Officers receive limited perquisites that the Compensation Committee believes are necessary to retain Executive Officers and to enhance their productivity. Our Board of Directors has directed and requires the Chief Executive Officer, and his family and guests when appropriate, to use Norfolk Southern’s aircraft whenever reasonably possible for air travel. The Board believes that such use of the corporate aircraft promotes the best interests of Norfolk Southern by generally ensuring the immediate availability of the Chief Executive Officer and by providing a prompt, efficient means of travel in view of the need for security in such travel. For the same reasons, our Board of Directors has determined that the Chief Executive Officer may authorize employees and their guests to use the corporate aircraft for purposes that further the Corporation’s business interests. Such non-business use by other employees and their guests is infrequent.

 

Other perquisites may include executive physicals and certain approved spousal travel. Norfolk Southern does not make tax gross-up payments on perquisites for the Named Executive Officers employed at the Executive Vice President level or above, except for tax gross-ups on certain relocation expenses and benefits consistent with our relocation programs for all management employees.

 

The Committee reviews perquisites periodically for both appropriateness and effectiveness. However, the value of any perquisites provided to any of the Named Executive Officers is a limited portion of any officer’s compensation; as such, the Committee does not consider perquisites in its analysis of the total compensation package granted to the Named Executive Officers.

 

Norfolk Southern believes that the benefits and perquisites described above are appropriate to remain competitive compared to other companies and to promote retention of these officers.

 

Impact of the Tax Treatment of Awards on Norfolk Southern’s Compensation Policies

 

Our executive compensation program has been carefully considered in light of the applicable tax rules. Section 162(m) of the Internal Revenue Code generally provides that a publicly held company may not deduct compensation paid to certain of its executive officers to the extent such compensation exceeds $1 million per executive officer in any year. The Committee believes that tax-deductibility is but one factor to be considered in fashioning an appropriate compensation package for executives, and that shareholder interests are best served if the Committee’s discretion and flexibility in awarding compensation is not restricted to deductible compensation. Therefore, the Committee has approved compensation for executive officers that was not fully deductible because of Section 162(m), and expects in the future to approve compensation that is not deductible for income tax purposes. Norfolk Southern reserves and will continue to exercise its discretion in this area so as to serve the best interests of Norfolk Southern and its shareholders.

 

Change-in-Control Agreements

 

Norfolk Southern has entered into change-in-control agreements with the Named Executive Officers to provide certain economic protections to executives in the event of a termination of employment following a change in control of Norfolk Southern. The change-in-control agreements are intended to keep management intact and focused on the best interests of Norfolk Southern and its shareholders in pursuing a potential change-in-control transaction, while serving to eliminate potential management distraction related to the uncertainty of possible job and income loss. The Compensation Committee believes that the agreements are reasonable and appropriate. Benefits will not be paid under the agreements unless both a change in control occurs and the executive’s employment is terminated or constructively terminated following the change in control. The Committee believes this “double trigger” maximizes shareholder value because this structure would prevent an unintended windfall to management in the event of a change in control that does not result in the termination (or constructive termination) of employment of management.

 

A detailed description of the benefits provided under the change-in-control agreements may be found in the Change-in-Control Agreements section on page 61.

 

		Norfolk Southern Corporation		Page 45		www.norfolksouthern.com

Table of Contents
 

Executive Compensation | 2020 Annual Meeting and Proxy Statement

 

 

Individual Agreement for Payment in Connection with Termination

 

Norfolk Southern entered into an offer letter with Mr. George that provides certain benefits if Mr. George is terminated without “Cause” within sixty months following his November 1, 2019 hire date, as we disclosed in the Form 8-K filed on August 28, 2019. The Committee determined that it was appropriate to include this term in the offer letter to attract Mr. George to join the Corporation as its Executive Vice President - Finance and Chief Financial Officer and leave his prior employment. For a summary of the material terms of this offer letter, see the discussion in the Narrative to the Summary Compensation Table and the Grants of Plan-Based Awards Table section of this Proxy Statement, under the heading “Employment and Other Agreements.”