UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. __)

 

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Caterpillar Inc.

 

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

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We are sending you these proxy materials in connection with Caterpillar’s solicitation of proxies, on behalf of its Board of Directors, for the 2019 Annual Meeting of Shareholders (Annual Meeting). Distribution of these materials is scheduled to begin on May 3, 2019. Please submit your vote or proxy by telephone, mobile device, internet, or, if you received your materials by mail, you can complete and return your proxy or voting instruction form by mail.

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DEAR FELLOW SHAREHOLDERS,

 

 

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PROXY SUMMARY

This summary does not contain all of the information you should consider when casting your vote. You should read the complete proxy statement before voting.

ANNUAL MEETING OF SHAREHOLDERS

SHAREHOLDER VOTING MATTERS

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OUR DIRECTOR NOMINEES

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GOVERNANCE HIGHLIGHTS

Our commitment to good corporate governance stems from our belief that a strong governance framework creates long-term value for our shareholders, strengthens Board and management accountability and builds trust in the Company and its brand. Our governance framework includes, but is not limited to, the following highlights:

2018 PERFORMANCE HIGHLIGHTS

 

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510 Lake Cook Road, Suite 100
Deerfield, IL 60015
Phone (224) 551-4160
www.caterpillar.com

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

MEETING INFORMATION

JUNE 12, 2019

8:00 a.m.

Caterpillar Building Construction Products
Clayton Campus
954 NC Highway 42 East
Clayton, NC 27527

MEETING AGENDA

RECORD DATE

April 15, 2019

 

By Order of the Board of Directors

Suzette M. Long

General Counsel and Corporate Secretary
May 3, 2019

 

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DIRECTORS & GOVERNANCE

PROPOSAL 1 – ELECTION OF DIRECTORS

 

OVERVIEW OF OUR BOARD

BOARD ATTENDANCE

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The Board’s policy is to encourage and expect that all directors attend each Annual Meeting of Shareholders. All directors attended the 2018 annual meeting. The independent directors generally meet in executive session as part of each regularly scheduled Board meeting. David Calhoun, who was Chairman of the Board through December 12, 2018, and became Presiding Director on December 12, 2018, presided over the Board's executive sessions in 2018.

BOARD EVOLUTION SINCE 2011

DIVERSITY OF SKILLS AND EXPERTISE

Our Board nominees offer a diverse range of skills and experience in relevant areas.

SUMMARY OF INDIVIDUAL DIRECTOR SKILLS, CORE COMPETENCIES AND ATTRIBUTES

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DIRECTOR CONTINUOUS EDUCATION AND DEVELOPMENT

The Company places a high importance on the continuous development of its Board. Directors have opportunities for ongoing education and development through participation in meetings, subscription to relevant publications and attendance at activities and professional development training offered by associations such as the National Association of Corporate Directors and the Lead Director Network. Directors receive specialized presentations from experts in the Company's various businesses in the course of their service. Since the last annual shareholder meeting, these presentations have included updates on digital strategy, customer support and the operations of certain Energy & Transportation businesses. These opportunities allow directors to be well-informed and to expand their knowledge of trends and issues relevant to their role. Directors are also given development opportunities through direct meetings with company dealers and customers and attending industry trade shows, such as CONEXPO.

BOARD’S ROLE IN RISK OVERSIGHT

The Board has oversight for risk management with a focus on the most significant risks facing the Company, including strategic, operational, financial and legal compliance risks. The Board’s risk oversight process builds upon management’s risk assessment and mitigation processes, which include an enterprise risk management program, regular internal management disclosure and compliance committee meetings, a code of business conduct that applies to all employees, executives and directors, quality standards and processes, an ethics and compliance program and comprehensive internal audit processes. The Board’s risk oversight role also includes the selection and oversight of the independent auditors. The Board implements its risk oversight function both as a full Board and through delegation to Board committees, which meet regularly and report back to the full Board. The Board has delegated the oversight of specific risks to Board committees that align with their functional responsibilities.

The Audit Committee (AC) evaluates and monitors risks related to the Company’s financial reporting requirements, including the Company’s internal audit function and the independent auditor. The AC also assesses other risks faced by the Company including cybersecurity and information technology risks and the controls implemented to monitor and mitigate these risks. The Chief Information Officer regularly attends bimonthly AC meetings. The Compensation and Human Resources Committee (CHRC) monitors and assesses risks associated with the Company’s employment and compensation policies and practices. The Public Policy and Governance Committee (PPGC) oversees various governance matters and risks related to public policy matters affecting the Company.

DIRECTOR NOMINATIONS AND EVALUATIONS

PROCESS FOR NOMINATING AND EVALUATING DIRECTORS

The PPGC solicits and receives recommendations for potential director candidates from shareholders, management, directors and other sources. In its assessment of each potential candidate, the PPGC considers each candidate’s professional experience, integrity, honesty, judgment, independence, accountability, willingness to express independent thought, understanding of the Company’s business and other factors that the PPGC determines are pertinent in light of the current needs of the Board. Candidates must have successful leadership experience and stature in their primary fields, with a background that demonstrates an understanding of business affairs as well as the complexities of a large, publicly-held company. In addition, candidates must have demonstrated an ability to think strategically and make decisions with a forward-looking focus and the ability to assimilate relevant information on a broad range of complex topics. In evaluating director candidates, the PPGC also considers key skills and experience related to the Company's strategy for profitable growth, which identifies services, expanded offerings and operational excellence as primary focus areas. Moreover, candidates must have the ability to devote the time necessary to meet a director’s responsibilities and serve on no more than four public company boards in addition to Caterpillar.

The Board values diversity of talents, skills, abilities and experiences and believes that Board diversity of all types provides significant benefits to the Company. Although the Board has no specific diversity policy, the PPGC considers the diversity of the Board in selecting new director candidates.

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DIRECTOR RECRUITMENT PROCESS

The following table summarizes certain key characteristics of the Company’s businesses and the associated qualifications, skills and experience that the PPGC believes should be represented on the Board.

 

 

 

 

NOMINATIONS FROM SHAREHOLDERS

The PPGC considers unsolicited inquiries and director nominees recommended by shareholders in the same manner as nominees from all other sources. Recommendations should be sent to the Corporate Secretary located at 510 Lake Cook Road, Suite 100, Deerfield, IL 60015. Shareholders may nominate a director candidate to serve on the Board by following the procedures described in our bylaws. Deadlines for shareholder nominations for Caterpillar’s 2020 Annual Meeting of Shareholders are included in the “Shareholder Proposals and Director Nominations for the 2020 Annual Meeting” section on page 60.

The number of persons comprising the Caterpillar Board of Directors is currently established as 12. If any of the Board’s nominees should become unavailable to serve as a Director prior to the Annual Meeting, the size of the Board and number of Board nominees will be reduced accordingly.

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DIRECTOR CANDIDATE BIOGRAPHIES AND QUALIFICATIONS

Directors have been in their current positions for the past five years unless otherwise noted. Information is as of April 12, 2019. The Board has nominated the following individuals to stand for election for a one-year term expiring at the Annual Meeting of Shareholders in 2020.

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DIRECTOR COMPENSATION

The following table sets forth information concerning the compensation for our non-employee directors during the year ended December 31, 2018. Mr. Umpleby, who served as CEO during 2018 and, effective December 12, 2018, as Chairman of the Board, did not receive separate compensation for his service on the Board.

Compensation for non-employee directors for 2018 was comprised of the following components:

 

Directors are required to own Caterpillar common stock equal to five times their annual cash retainer. Directors have a five-year period from the date of their election or appointment to meet the target ownership guidelines. In addition, under the Company's Directors' Deferred Compensation Plan, Directors may defer 50 percent or more of their annual cash retainer and stipend into an interest-bearing account or an account representing phantom shares of Caterpillar stock. Directors that joined the Board prior to April 1, 2008 also are able to participate in a Charitable Award Program, under which a donation of up to $500,000 will be made by the Company in the director’s name to charitable organizations selected by the director and a donation of up to $500,000 also will be made by the Company in the director’s name to the Caterpillar Foundation. Directors derive no financial benefit from the Charitable Award Program.

 

 

DIRECTOR COMPENSATION FOR 2018

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BOARD ELECTION AND LEADERSHIP STRUCTURE

Directors are elected at each annual meeting to serve for a one-year term. In uncontested elections, directors are elected by a majority of the votes cast for such directorship. If an incumbent director does not receive a greater number of “for” votes than “against” votes, such director must tender his or her resignation to the Board. In contested elections, directors are elected by a plurality vote. Directors must retire at the end of the calendar year in which they reach the age of 72.

Under Caterpillar's bylaws, the directors annually elect a Chairman. The Board has no fixed policy on whether or not to have an executive or non-executive chairman and believes this determination should be made based on the best interests of the Company and its shareholders in light of the circumstances at the time. On the recommendation of the PPGC, the Board elected D. James Umpleby III as its Chairman on December 12, 2018. Mr. Umpleby has served as CEO and a director since January 1, 2017. David L. Calhoun was elected Presiding Director on December 12, 2018. Mr. Calhoun had served as non-executive Chairman since April 1, 2017.

In the role of Presiding Director, Mr. Calhoun provides strong independent oversight of management and serves as a liaison between the independent directors and the Chairman and CEO, as further described below. Mr. Calhoun also leads the Board's annual evaluation of Mr. Umpleby, and the independent members of the Board set Mr. Umpleby's compensation annually based on the recommendation of the Compensation and Human Resources Committee.

DUTIES AND RESPONSIBILITIES OF PRESIDING DIRECTOR

 

 

 

The Board believes it is important to maintain flexibility as to the Board’s leadership structure. The Board will continue to regularly review its leadership structure and exercise its discretion in recommending an appropriate and effective framework to assure effective governance and accountability, taking into consideration the needs of the Board and the Company.

CORPORATE GOVERNANCE GUIDELINES AND CODE OF CONDUCT

Our Board has adopted Guidelines on Corporate Governance Issues (Corporate Governance Guidelines), which are available on our website at www.caterpillar.com/governance. The guidelines reflect the Board’s commitment to oversee the effectiveness of policy and decision-making both at the Board and management level, with a view to enhance shareholder value over the long term.

Caterpillar’s code of conduct is called Our Values in Action. Integrity, Excellence, Teamwork, Commitment and Sustainability are the core values identified in the code. Our Values in Action apply to all members of the Board and to management and employees worldwide. These values embody the high ethical standards that Caterpillar has upheld since its formation in 1925. Our Values in Action is available on our website at www.caterpillar.com/code.

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BOARD EVALUATION PROCESS

The Board conducts an annual self-evaluation to determine whether the Board and its committees are functioning effectively. In 2018, the Chairman of the Public Policy and Governance Committee contacted each Board member to solicit their feedback. The Public Policy and Governance Committee also developed a discussion outline to facilitate the self-evaluation performed at the Board’s year-end meeting. The Public Policy and Governance Chairman then led a discussion during the Board’s executive session. Each of the committees of the Board followed a similar process.

BOARD COMMITTEES

The Board has three standing committees: Audit, Compensation and Human Resources, and Public Policy and Governance. Each committee meets regularly throughout the year, reports its actions and recommendations to the Board, receives reports from management, annually evaluates its performance and has the authority to retain outside advisors at its discretion. The current primary responsibilities of each committee are summarized below and set forth in more detail in each committee’s written charter, which can be found on Caterpillar’s website at www.caterpillar.com/governance. All committee members are independent under Company, NYSE and SEC standards applicable to Board and committee service, and the Board has determined that each member of the Audit Committee is an “audit committee financial expert” as defined under SEC rules.

AUDIT COMMITTEE

COMPENSATION AND HUMAN RESOURCES COMMITTEE

 

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PUBLIC POLICY AND GOVERNANCE COMMITTEE

DIRECTOR INDEPENDENCE DETERMINATIONS

The Company’s Guidelines on Corporate Governance Issues establish that no more than two non-independent directors may serve on the Board at any point in time. A director is “independent” if he or she has no direct or indirect material relationship with the Company or with senior management of the Company and their respective affiliates. Annually, the Board makes an affirmative determination regarding the independence of each director based upon the recommendation of the PPGC and in accordance with the standards in the Company’s Guidelines on Corporate Governance Issues, which are available on our website at www.caterpillar.com/governance.

Applying these standards, the Board determined that each of the director nominees met the independence standards except Mr. Umpleby, who is a current employee of the Company. In reaching this determination, the Board considered, with respect to Ms. Reed-Klages, ordinary course business between Sempra Energy and Caterpillar involving the purchase or sale of equipment engines and energy, subject to usual trade terms.

COMMUNICATION WITH THE BOARD

Shareholders, employees and all other interested parties may communicate with any of our directors individually, our Board as a group, our independent directors as a group or any Board committee as a group by email or regular mail:

 

CONTACTING CATERPILLAR

While the Board oversees management, it does not participate in day-to-day management functions or business operations. If you wish to submit questions or comments relating to these matters, please use the Contact Us form on our website at www.caterpillar.com/contact, which will help direct your message to the appropriate area of our Company.

All communications regarding personal grievances, administrative matters, the conduct of the Company’s ordinary business operations, billing issues, product or service related inquiries, order requests and similar issues will be directed to the appropriate individual within the Company. The Chairman of the Board has instructed the General Counsel and Corporate Secretary to consult with him if she is unsure who should receive the communication. If a permissible communication is sent, you will receive a written acknowledgement from the Corporate Secretary’s office confirming receipt of your communication.

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INVESTOR OUTREACH

We conduct an annual governance review and shareholder outreach throughout the year to ensure management and the Board understand and consider the issues that matter most to our shareholders and reflect the insights and perspectives of our many stakeholders.

 

SUSTAINABILITY

Caterpillar has set aspirational goals for its operations and product stewardship. We believe these standards affirm our determination to lead our industry to a more sustainable future. You can track our progress toward achieving these goals by visiting our website www.caterpillar.com/sustainability.

 

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POLITICAL CONTRIBUTIONS AND LOBBYING

The actions that governments take can impact the Company, our employees, customers and shareholders. It is important for government leaders to understand the impact of such actions. For this reason, the Company participates in the political process and advocates in a responsible and constructive manner on issues that advance the Company’s goals and protect shareholder value.

To promote transparency and good corporate citizenship, the Company provides voluntary disclosure relating to its political contribution activities and its political action committee, its engagement in public policy issues and global issues of importance to the Company, including detailed information on the Company’s position with respect to such issues. This information is disclosed on our website at www.caterpillar.com/contributions and includes an itemized list of organizations and individuals that received political contributions from Caterpillar or the Caterpillar Political Action Committee. It also includes a summary of some of the public policy issues important to the Company that may cause us to engage in public advocacy.

Caterpillar’s political and advocacy activities at the state, federal and international levels are managed by the Vice President, Global Government & Corporate Affairs who coordinates and reviews with senior management the legislative and regulatory priorities that are significant to the Company’s business and shareholders, as well as related advocacy activities. To ensure appropriate Board oversight of political activities, the Board’s Public Policy and Governance Committee reviews the Company’s legislative and regulatory priorities, the Company’s policy on political activities and contributions, and the Company’s political spending and trade association expenditures as well as the activities of Caterpillar’s Political Action Committee.

RELATED PARTY TRANSACTIONS

Caterpillar has a written policy governing the approval of transactions with the Company that are expected to exceed $120,000 in any calendar year in which any director, executive officer or their immediate family members will have a direct or indirect material interest. Under the policy, all such transactions must be approved in advance or ratified by the PPGC.

The director or officer must submit the details of the transaction to the Company’s General Counsel and Corporate Secretary, including whether the related person or his or her immediate family member has or will have a direct or indirect interest (other than solely as a result of being a director or a less than 10 percent beneficial owner of an entity involved in the transaction). The General Counsel and Corporate Secretary will then submit the matter to the PPGC for its consideration.

From time to time, related persons of Caterpillar may purchase products or services of the Company and its subsidiaries. In connection with these purchases, Caterpillar may provide marketing support directly or indirectly through independent dealers, consistent with sales under similar circumstances to unaffiliated third parties.

For approximately four months in 2018, Joseph E. Creed served as interim Chief Financial Officer of the Company. Mr. Creed’s brother-in-law is employed by the Company as a Product Supply Network Engineer and, consistent with the Company’s compensation policies applicable to other employees of similar title and responsibility, earned aggregate annual compensation of approximately $162,000 for fiscal 2018. Mr. Creed’s father-in-law is a retired employee of the Company and in 2018 received approximately $146,000 for work done as a consultant with CGN & Associates, Inc, including work done for the account of the Company. Caterpillar employs CGN to provide a variety of consulting services, including supply chain optimization, and paid CGN approximately $26 million for its services in 2018. The foregoing relationships existed prior to Mr. Creed's appointment as interim CFO and, consistent with the Company's policy, were reviewed and approved or ratified by the PPGC.

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AUDIT

PROPOSAL 2 – RATIFICATION OF OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

The Audit Committee (AC) is directly responsible for the appointment, compensation, retention and oversight of the Company’s independent auditor. PwC has been Caterpillar's independent auditor since 1925. The AC believes that the retention of PwC to serve as the Company’s independent auditor is in the best interests of the Company and its shareholders. If the appointment of PwC is not approved by the shareholders, the AC will consider whether it is appropriate to select another independent auditor.

Representatives of PwC will be present at the Annual Meeting and will have the opportunity to make a statement if they desire to do so. The representatives will also be available to respond to questions at the meeting.

AUDIT FEES AND APPROVAL PROCESS

The AC pre-approves all audit and non-audit services to be performed by the independent auditors in compliance with the Sarbanes-Oxley Act and the SEC rules regarding auditor independence. The policies and procedures are detailed as to the particular service and do not delegate the AC’s responsibility to management. The policies and procedures address any service provided by the independent auditors and any audit or audit-related services to be provided by any other audit service provider. The pre-approval process includes an annual and interim component.

Annually, not later than February of each year, management and the independent auditors jointly submit a service matrix of the types of audit and non-audit services that management may wish to have the independent auditor perform for the current year. The service matrix categorizes the types of services by audit, audit-related, tax and all other services. Management and the independent auditors jointly submit an annual pre-approval limits request. The request lists aggregate pre-approval limits by service category. The request also lists known or anticipated services and associated fees. The AC approves or rejects the pre-approval limits and each of the listed services on the service matrix.

During the course of the year, the AC chairman has the authority to pre-approve requests for services that were not approved in the annual pre-approval process. However, all services, regardless of fee amounts, are subject to restrictions on the services allowable under the Sarbanes-Oxley Act and SEC rules regarding auditor independence. In addition, all fees are subject to ongoing monitoring by the AC.

 

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INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FEE INFORMATION

Fees for professional services provided by our independent auditor included the following (in millions):

 

ANONYMOUS REPORTING OF ACCOUNTING AND OTHER CONCERNS

The AC has established a means for the anonymous and other reporting (where permitted by law) of (i) suspected or actual violations of the code of conduct, our enterprise policies or applicable laws, including those related to accounting practices, internal controls or auditing matters and procedures; (ii) theft or fraud of any amount; (iii) insider trading; (iv) issues with respect to the performance and execution of contracts; (v) conflicts of interest; (vi) violations of securities and antitrust laws; (vii) violations of prohibited harassment policy; and (viii) violations of any applicable anti-bribery law.

Any employee, supplier, customer, shareholder or other interested party can submit a report via the following methods:

AUDIT COMMITTEE REPORT

The AC operates under a written charter adopted by the Board of Directors and each of its members meets the independence standards contained in the NYSE Listed Company rules, SEC rules and Caterpillar’s Guidelines on Corporate Governance Issues.

Management is responsible for the Company’s internal controls and the financial reporting process. PwC, acting as independent auditor, is responsible for performing an independent audit of the Company’s consolidated financial statements and internal control over financial reporting in accordance with standards established by the Public Company Accounting Oversight Board (PCAOB).

The AC has discussed with the Company’s independent auditor the overall scope and execution of the independent audit and has reviewed and discussed the audited financial statements with management. The AC also discussed with the independent auditors other matters required by PCAOB auditing standards.

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The independent auditors provided to the AC the written communications required by applicable standards of the PCAOB regarding the independent accountant’s communications with the AC concerning independence, and the AC discussed the independent auditors’ independence with management and the auditors. The AC also considered whether the provision of other non-audit services by the Company’s independent auditors to the Company is compatible with maintaining independence.

The AC concluded that the independent auditors’ independence had not been impaired.

Based on the reviews and discussion referred to above, the AC recommended to the Board that the audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

By the members of the Audit Committee:⁽¹⁾

 

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COMPENSATION

PROPOSAL 3 – ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION

 

 

What am I voting on?

Shareholders are being asked to approve, on an advisory basis, the compensation of named executive officers as disclosed in this proxy statement.

Board Voting Recommendation:

FOR approval of executive compensation.

 

On an annual basis, and in compliance with Section 14A of the Securities Exchange Act of 1934, shareholders are being asked to vote on the following advisory resolution:

“RESOLVED, that the compensation of Caterpillar’s named executive officers as described under ‘Compensation Discussion and Analysis,’ the compensation tables and the narrative discussion associated with the compensation tables in Caterpillar’s proxy statement for its 2019 Annual Meeting of Shareholders is hereby APPROVED.”

This vote is advisory and therefore not binding on Caterpillar, the Compensation and Human Resources Committee (CHRC) or the Board. The Board and the CHRC value the opinion of Caterpillar’s shareholders, and to the extent there is any significant vote against Caterpillar’s named executive officer compensation, the Board will consider the reasons for such a vote, and the CHRC will evaluate whether any actions are necessary to address those concerns.

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COMPENSATION DISCUSSION & ANALYSIS

EXECUTIVE SUMMARY

GOVERNANCE AND PAY FOR PERFORMANCE PHILOSOPHY

The Compensation and Human Resources Committee (CHRC) believes the executive compensation program at Caterpillar should be structured to align the interests of executives and shareholders. Their interest lies in rewarding value creation at all stages of the business cycle and providing an increasing percentage of performance-based compensation at higher levels of executive responsibility. This performance-based compensation should be both market competitive and internally equitable.

Changes made over the years to further align pay with performance have received favorable feedback from our shareholders and our 2018 “say on pay” vote of approximately 94 percent reflects this positive response.

In 2018, we continued our shareholder outreach on environmental, social, governance and compensation topics, reaching out to the holders of approximately 45 percent of our outstanding shares, to discuss various matters including governance, executive compensation, sustainability and operational performance. In these meetings, our shareholders generally expressed a continued positive view with respect to our executive compensation program.

After considering feedback received from our shareholders through our outreach efforts and the 2018 “say on pay” results, the CHRC determined that the Company’s executive compensation philosophy, compensation objectives and compensation elements continued to be appropriate and did not make any material changes to the executive compensation program.

There is an ongoing review of the Company’s executive compensation program to evaluate whether the program supports the Company’s compensation philosophy and objectives and to monitor the program’s alignment with its high-priority business objectives and strategy. In connection with this ongoing review, and based on feedback received through our shareholder outreach, the CHRC continues to implement and maintain what it believes are best practices for executive compensation and governance. Below is a summary of those practices:

 

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COMPENSATION PROGRAM STRUCTURE

We are committed to developing and implementing an executive compensation program that directly aligns the interests of our Named Executive Officers (NEOs) with the long-term interests of shareholders. To that end, the objectives of the Company’s executive compensation program are to attract, motivate and retain talented executive officers who will improve the company’s performance and provide long-term strategic leadership. The majority of targeted total compensation for our NEOs is equity-based, vests over multiple years and is tied directly to long-term value creation for shareholders. NEO compensation is composed of three primary components:

 

 

 

 

 

Approximately 89 percent of our CEO’s 2018 targeted total compensation was variable and/or at-risk compensation, including 50 percent of long-term incentives in the form of PRSUs.

 

 

 

 

2018 CEO COMPENSATION ELEMENTS

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BUSINESS PERFORMANCE AND RESULTS

Caterpillar delivered outstanding results in 2018. Many of our end markets improved, our team capitalized on the opportunity and we achieved excellent results. As demand improved during the year, we stayed disciplined and maintained control of our structural costs while continuing to introduce new products, further develop our digital capabilities, and execute the changes outlined in our strategy. In addition, we delivered the highest profit per share in the Company’s history and strong operating cash flow. As a result, the Company returned $5.8 billion of capital to shareholders, including $3.8 billion in share repurchases and raised the dividend by ten percent in 2018. This marked the 25^th consecutive year we paid higher dividends to our shareholders, earning recognition as a member of the S&P 500 Dividend Aristocrats.

 

Our key financial and business results for 2018 included the following:

 

PROFITABLE GROWTH		SALES AND REVENUES
* Enterprise Operating Profit is used in determining performance under our Annual Incentive Plan. Enterprise Operating Profit and Adjusted Profit Per Share are non-GAAP measures and a reconciliation to the most directly comparable GAAP measure is included on page 62.

 

STRONG BALANCE SHEET AND CASH FLOW		TOTAL SHAREHOLDER RETURN (TSR)

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PAY OUTCOMES DEMONSTRATE ALIGNMENT WITH COMPANY PERFORMANCE

Consistent with the CHRC’s pay-for-performance philosophy, these improvements in business results were reflected in the resulting pay decisions made for our CEO and the other NEOs in 2018. Compensation outcomes for 2018 included the following items:

 

 

 

 

CEO COMPENSATION

In 2018, the CHRC recommended and the Board approved changes to Mr. Umpleby’s compensation, in part to recognize his exceptional performance results and leadership, and also to increase his base salary and annual target incentive to align his target compensation with the peer group median. Mr. Umpleby’s actual annual incentive award reflects the Company’s strong results in 2018. And, the 2018 Long-Term Incentive grant was set at the 80^th percentile of the Company’s peer group reflecting his outstanding performance achievements in 2017 and the Company’s overall TSR results.

 

 

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COMPENSATION DISCUSSION & ANALYSIS

2018 NAMED EXECUTIVE OFFICERS

 

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2018 CHIEF FINANCIAL OFFICER SUCCESSION

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THE COMPENSATION PROCESS

THE COMPENSATION AND HUMAN RESOURCES COMMITTEE (CHRC)

The CHRC is responsible for the executive compensation program design and decision-making process for NEO compensation. Regular reviews are conducted of the Company’s executive compensation practices, including the methodologies for setting NEO total compensation, the goals of the program and the underlying compensation philosophy. Recommendations and market data are provided by the independent compensation consultant to make decisions, as appropriate, regarding executive compensation based on the assessment of performance and achievement of Company goals. The CHRC also exercises its judgment as to what is in the best interests of the Company and its shareholders.

 

The CHRC, with the support of management and its independent compensation consultant, considers many aspects of the Company’s financial and operational performance and other factors when making executive compensation decisions including, but not limited to:

INDEPENDENT COMPENSATION CONSULTANT

The CHRC retained Meridian Compensation Partners, LLC (“Meridian”) as its independent compensation consultant during 2018. Meridian provides executive and director compensation consulting services, including advice regarding the design and implementation of compensation programs, market information, regulatory updates and analyses and trends on executive compensation and benefits. Interactions between Meridian and management are generally limited to discussions on behalf of the CHRC or as required to fulfill requests at its direction. During 2018, Meridian did not

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provide any other services to the Company. Based on these factors, the CHRC's evaluation of Meridian’s independence pursuant to the requirements approved and adopted by the SEC and NYSE, and information provided by Meridian, the CHRC determined that the work performed by Meridian did not raise any conflicts of interest.

 

 

BENCHMARKING COMPENSATION TO PEERS

2018 COMPENSATION PEER GROUP

The CHRC regularly assesses the market competitiveness of the Company’s executive compensation programs based on peer group data. The 2018 Compensation Peer Group was established based on the following criteria:

BENCHMARKING METHODOLOGY

To account for differences in the size of the compensation peer group companies, market data is statistically adjusted allowing for a comparison of the compensation levels to similarly-sized companies. Market data provided by the independent consultant is sourced from the Aon Total Compensation Measurement Database, and size-adjusted to Caterpillar’s three-year average revenues using regression analysis. Each element of our NEOs’ compensation is then targeted to the median of the peer group and adjusted above or below based on performance. To the extent an NEO’s total actual compensation exceeds the peer group median, it is due to outstanding performance, critical skills and notable experience. If an NEO’s compensation is below the median, it is generally due to underperformance against relevant metrics or reflective of an individual who is newer in his or her role.

2018 COMPETITOR PEER GROUP

For 2018, the CHRC also assessed the Company's business performance against a group of competitors that it deems to compete directly with the Company. Although the Company’s peer group described above is an appropriate benchmark for executive compensation at other similarly sized companies, the peer group data does not always provide useful comparisons to other companies that might be experiencing similar business conditions. To that end, and consistent with pay-for-performance, the Company’s business performance is compared to its competitors by establishing a “Competitor Peer Group.”

The CHRC uses the Competitor Peer Group (along with the 2018 Compensation Peer Group) to assess relative performance when awarding long-term incentive awards. The 2018 Competitor Peer Group was established based on the following criteria:

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CEO PERFORMANCE EVALUATION AND COMPENSATION

The Board, excluding the CEO, all of whom are independent directors, annually conducts the CEO’s performance evaluation. Prior to the Board’s evaluation of the CEO’s performance and its approval of CEO compensation, the CHRC makes a preliminary compensation recommendation to the Board based on its initial evaluation and performance review of the CEO. The Board then makes its final determination for CEO compensation.

EXECUTIVE COMPENSATION AND RISK MANAGEMENT

Each year, the CHRC assesses the Company’s risk profile relative to the executive compensation program and confirms that its compensation programs and policies do not create or encourage excessive risks that are reasonably likely to have a material adverse impact on the Company. Also, the CHRC has concluded that the total compensation structure for senior leadership does not inappropriately emphasize short-term stock price performance at the expense of longer-term value creation. In particular, long-term incentive awards, as a significant portion of total compensation, and stock ownership guidelines which NEOs are required to maintain pre- and post-retirement are structured to align management’s compensation with principles of risk management by maintaining a focus on the long-term performance of the Company. The stock ownership requirement for the CEO is six times base salary and three times base salary for each of the other NEOs, except two times base salary for the Interim CFO.

COMPONENTS OF EXECUTIVE COMPENSATION

NEOs receive a mix of fixed and variable compensation with a focus on long-term and performance-based components:

CEO		AVERAGE OF OTHER NEOS

 

BASE SALARY

Base salary is the only fixed component of NEO compensation. The CHRC targets base salaries at the size-adjusted median level of the peer group. Each NEO’s base salary is determined by the individual’s level of responsibility and historic performance with reference to the market median. Base salary increases, if any, are based on achievement of individual and Company objectives, contributions to Caterpillar’s performance and culture, leadership accomplishments and a comparison to those in comparable positions at peer companies.

In 2018, Mr. Umpleby’s salary was increased from $1.2 million to $1.5 million, which was meant to bring his salary nearer to the peer group median. In setting Mr. Umpleby’s base salary, several factors were considered including market data of other CEOs relative to peer group medians and Mr. Umpleby’s strong performance as CEO.

Upon his appointment to the position of CFO, Mr. Bonfield, who had previously served for 15 years as a public company CFO with three organizations, had his salary set at $800,000, which was aligned with the peer group median. Effective April 1, 2018, adjustments were made for the other NEOs and salaries were set at or below the peer group median.

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NEO BASE SALARY

ANNUAL INCENTIVE

2018 ANNUAL INCENTIVE PLAN DESIGN

The Company’s Annual Incentive Plan (AIP) is designed to provide each NEO with an annual cash payout based on the short-term performance of the Company and each NEO’s respective businesses. The AIP places the majority of each NEO’s annual cash compensation at risk and aligns the interests of executives and shareholders.

Beginning in 2016, the CHRC modified the AIP design to more closely align pay outcomes with business performance by annually comparing the Company’s forecasted Enterprise Operating Profit to the prior year’s actual Enterprise Operating Profit. The comparison is conducted to determine whether the current year will be an “up year” (improved performance) or “down year” (weaker performance) versus the prior year’s actual Enterprise Operating Profit results. All NEOs, except Mr. Creed, participated in the AIP.

2018 ANNUAL INCENTIVE PLAN DESIGN

 

 

 

 

2018 ANNUAL INCENTIVE PERFORMANCE MEASURES AND RESULTS

In addition to Enterprise Operating Profit performance, a portion of each NEO’s annual incentive was based on Operating Profit After Capital Charge (OPACC) and Services Revenues, all of which were subject to the same design above. Consistent with this design process, after reviewing the Company’s 2018 business plan, the CHRC determined that 2018 would be an “up year,” as Enterprise Operating Profit was forecasted to be above 2017. As a result, there were no adjustments to the target annual incentive opportunity for NEOs.

For the annual incentive, at its February 2018 meeting, the CHRC approved the performance measures described below to be used for determining actual payouts. The largest portion (ranging from 60 percent to 80 percent) of each NEO’s 2018 annual incentive opportunity was based on Enterprise Operating Profit and the Operating Profit After Capital Charge (OPACC) for their respective businesses. The remaining portion of each NEO’s annual incentive award opportunity was determined by the newly introduced Services Revenues metric for the enterprise or their respective businesses. Consistent with the Operating & Execution model, Services Revenues align the Company's emphasis on the aftermarket strategy with variable incentive opportunity.

When establishing the performance targets for 2018, the CHRC reviewed the Company’s business plan, historical performance, management recommendations and feedback provided by the independent compensation consultant. Targets were set for each of the performance measures at levels that were designed to be reasonably achievable with strong management performance. Maximum performance levels were designed to be difficult to achieve in light of historical performance and the Company’s business forecast at the time the measures were approved. The business forecast is based on market, economic and geopolitical factors. The performance measures were also weighted according to the Company’s business priorities and the responsibilities of each NEO.

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The charts below and on the following page summarize the performance measures, weightings and results for the 2018 annual incentive for each NEO. However, during 2018, including while serving as Interim CFO, Mr. Creed was a participant in the Company’s Short-Term Incentive Plan (STIP), an annual cash incentive plan in which the Company’s vice presidents and other management employees participate, instead of the AIP. STIP awards are calculated similar to the AIP, except the STIP also includes an individual performance factor (IPF) within the final payout calculation. The IPF takes into account the individual’s performance and contributions to the enterprise recognizing initiative, achievement and impact, and can range from 80 percent to 200 percent of the calculated payout prior to final award determination. Mr. Creed’s individual performance and contributions in 2018, including his performance relative to peers, superior strategy execution and strong performance against goals were considered and an IPF of 120 percent was applied.

 

DESCRIPTION OF PERFORMANCE MEASURES

 

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2018 ANNUAL INCENTIVE PERFORMANCE MEASURES AND RESULTS

 

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2018 INCENTIVE PAYMENTS

In early 2019, the results for each performance measure noted above were converted into a performance factor and reviewed by the CHRC. Each performance factor was multiplied by the respective weightings for each NEO to obtain a final weighted performance factor which was then used to determine actual incentive payments for each of the NEOs.

The following are the calculated 2018 cash incentive payments made to the NEOs:

 

 

LONG-TERM INCENTIVE

2018 DESIGN AND SIZING OF GRANT

In 2018, the CHRC granted one-half of each NEO’s total long-term incentive (LTI) value in Performance-based Restricted Stock Units (PRSUs) and one-half in non-qualified stock options (stock options). The stock options vest equally in one-third increments beginning on the first anniversary of the grant date. Beginning with the 2018 equity grant, to align with market practice, Dividend Equivalent Units (DEUs) accrued on unvested PRSUs, but are settled only if the vesting requirements are met. The DEUs will settle in additional shares, rounded to the nearest whole unit.

For the 2018 grant, the CHRC selected Return on Equity (ROE) as the PRSU performance measure as it aligns management with shareholders by measuring and rewarding profitability relative to shareholders’ investment in the business. The use of the ROE metric and the determination of the performance hurdle for each performance cycle are calibrated with historical performance of the competitor peer group (as well as S&P 500 Industrials more broadly) and are intended to reward for the achievement of sustained, long-term returns throughout the cycles in the Company’s business. The CHRC believes that a strong focus on ROE reinforces effective capital management along with the need to deliver returns above the cost of capital even in a highly cyclical and often challenging macro-economic operating environment, thus aligning leadership priorities with long-term shareholder interests. The Company's ROE performance is annually reviewed including any one-time, non-operational or other special items that might impact the ROE result. Although certain items may significantly impact the Company’s reported financial results, they are not always indicative of the underlying operational performance of the Company or its management. To that end, in its evaluation of the Company’s ROE results, the CHRC uses its discretion to make adjustments to ROE to align compensation outcomes with the operating performance of the Company.

The CHRC’s process for sizing and awarding LTI grant values for NEOs is as follows:

 

 

In February 2018, the CHRC reviewed the Company’s exemplary 1-, 3- and 5-year relative TSR and financial performance at the end of 2017. As TSR captures volatility in share price which may not fully reflect the Company's underlying performance, other factors such as strategy execution and consistency of performance against goals are considered when determining LTI awards. Therefore, LTI awards for the NEOs were granted at the 75^th percentile of the benchmarked LTI values of the Company’s compensation peer group and 80^th percentile for the CEO.

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RELATIVE TSR PERFORMANCE (PERCENTILE RANKING VS. PEERS)

 

 

 

 

2016 – 2018 PERFORMANCE RESTRICTED STOCK UNITS (PRSUs)

For the 2016 – 2018 performance period, adjustments were made to the ROE to account for restructuring costs, the effect of an accounting principle change impacting the accounting for pension and other post-employment benefits and the impact of the 2017 tax reform legislation in the U.S. Gains from divestitures were excluded as well as deferred tax valuation allowance adjustments. In each case, the CHRC determined that these adjustments were an appropriate use of its discretion and in the best interest of the Company and its shareholders.

For the 2016 grant, the PRSUs were eligible to cliff vest based on a three-year average adjusted ROE result of 31.1 percent, which exceeded the goal of 15 percent. Therefore, the 2016 PRSU award cliff vested. The chart below describes the Company’s ROE performance and results for the 2016 – 2018 performance period:

2016-2018 PRSUs

 

 

 

 

OTHER COMPENSATION, BENEFITS AND CONSIDERATIONS

NEO RETIREMENTS IN 2018

Bradley M. Halverson retired as Group President and Chief Financial Officer on May 4, 2018. Upon his retirement, and pursuant to the Retention and Retirement Agreement between him and the Company, (i) Mr. Halverson received a cash payment of $2,612,250, and (ii) his outstanding equity awards were treated in accordance with their terms, except that the performance-based restricted stock unit award granted to Mr. Halverson in 2017 will not be prorated should the company meet the performance hurdle.

Robert B. Charter retired as Group President, Customer & Dealer Support on June 1, 2018. Upon his retirement, and pursuant to the Retention and Retirement Agreement between him and the Company, (i) Mr. Charter received a cash payment of $2,967,125, (ii) the Company waived the application of the provision of its relocation policy that would otherwise require Mr. Charter to reimburse the Company for relocation allowances and benefits provided in connection with his relocation to Deerfield, Illinois, and (iii) his outstanding equity awards were treated in accordance with their terms, except that the performance-based restricted stock unit award granted to Mr. Charter in 2017 will not be prorated should the company meet the performance hurdle.

Both agreements mentioned above also contain various covenants, including restrictive covenants relating to non-competition, non-solicitation, non-disparagement, confidentiality and cooperation.

INTERIM CHIEF FINANCIAL OFFICER POSTING OF JOSEPH E. CREED

Joseph E. Creed assumed the role of Interim Chief Financial Officer (CFO) while carrying out his duties as Vice President, Finance Services Division from May 4, 2018 to August 31, 2018. Moreover, in addition to his annual LTI award, upon successfully serving in the Interim CFO role, Mr. Creed was granted an additional equity award described in the Grants of Plan-Based Awards 2018 table. As Interim CFO, Mr. Creed participated in the Short-Term Incentive Plan (STIP) rather than the AIP.

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APPOINTMENT OF ANDREW R. J. BONFIELD

Andrew R. J. Bonfield was hired as Caterpillar’s Chief Financial Officer on September 1, 2018. As a component of his recruitment to join the Company, Mr. Bonfield was awarded a cash sign-on bonus of $800,000, a time vested Restricted Stock Unit grant valued at $3,700,040 (to offset forfeited equity to join the Company), a Non-Qualified Stock Option grant valued at $993,465 and a Performance-based Restricted Stock Unit grant valued at $749,985. All equity compensation values above are based on the aggregate grant date fair value computed in accordance with FASB ASC Topic 718.

POST-TERMINATION AND CHANGE IN CONTROL BENEFITS

Except for customary provisions in employee benefit plans and as required by applicable law, the NEOs do not have any pre-existing executive severance packages or contracts; however, the CHRC will consider the particular facts and circumstances of an NEO’s separation to determine whether payment of any severance or other benefit to such NEO is appropriate. Change in control benefits are provided under the Company’s long-term and annual incentive plans and represent customary provisions for these types of plans and have no direct correlation with other compensation decisions. There is no cash severance or other benefits for a termination related to change in control beyond what is provided under the long-term and annual incentive plans.

The Company’s change in control provisions are subject to a “double trigger” and, when both a change in control and involuntary termination of employment without cause occur, provide accelerated vesting and target payouts under the incentive plans, as described further below.

Additional information is disclosed in the “Potential Payments Upon Termination or Change in Control” section of this proxy statement.

In the event of a qualifying termination of employment following a change in control, target payouts are provided under the incentive plans.

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RETIREMENT AND OTHER BENEFITS

In addition to the annual and long-term components of compensation, NEOs participate in health and welfare benefit plans generally available to employees to provide competitive benefits.

The defined contribution and defined benefit retirement plans available to the NEOs are also available to many U.S. Caterpillar management and salaried employees. Under the defined benefit pension plans, the benefit is calculated based on years of service and final average monthly earnings. All NEOs participate in one or more of the U.S. retirement plans described in the following table:

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LIMITED PERQUISITES

The Company provides NEOs a limited number of perquisites that the CHRC believes are reasonable and consistent with the overall compensation program and those commonly provided in the marketplace. An annual review of perquisites provided to the NEOs is conducted and beginning in 2018, all NEOs became eligible to receive financial planning services and executive physicals through approved providers. These and other services are intended to provide for the security and safety of our executives, such as home security systems and limited use of company aircraft and ground transportation, and will allow our NEOs to devote additional time to Caterpillar business. The costs associated with these perquisites are included in the “2018 All Other Compensation Table.”

CLAWBACK POLICY

Under the Company’s compensation clawback policy, the Board may require reimbursement of any bonus or incentive compensation awarded to an officer or cancel unvested restricted or deferred stock awards previously granted to the officer if all the following apply:

NO HEDGING OR PLEDGING

The Company’s insider trading policy prohibits directors, officers and employees from engaging in hedging transactions, holding Company securities in a margin account or otherwise pledging Company securities.

TAX IMPLICATIONS: DEDUCTIBILITY OF NEO COMPENSATION

Under Section 162(m) of the Internal Revenue Code, generally NEO compensation over $1 million for any year is not deductible for United States income tax purposes. Historically, there was an exemption from this $1 million deduction limit for compensation payments that qualified as “performance-based” under applicable IRS regulations. With the enactment of the 2017 Tax Cuts and Jobs Act, the performance-based compensation exemption was eliminated under Section 162(m) of the Internal Revenue Code, except with respect to certain grandfathered arrangements. The CHRC believes that it must maintain flexibility in its approach to executive compensation in order to structure a program that it considers to be the most effective in attracting, motivating and retaining the Company’s key executives, and therefore, the deductibility of compensation is one of several factors considered when making executive compensation decisions.

COMPENSATION AND HUMAN RESOURCES COMMITTEE REPORT

The Compensation and Human Resources Committee (CHRC) has reviewed and discussed the Compensation Discussion & Analysis (CD&A) included in this proxy statement with management and is satisfied that the CD&A fairly and completely represents the philosophy, intent and actions of the CHRC with regard to executive compensation. Based on such review and discussion, we recommend to the Board that the CD&A be included in this proxy statement and the Company’s Annual Report on Form 10-K for filing with the SEC.

 

By the members of the Compensation and Human Resources Committee:⁽¹⁾

 

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2018 SUMMARY COMPENSATION TABLE

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2018 ALL OTHER COMPENSATION TABLE

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GRANTS OF PLAN-BASED AWARDS IN 2018

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OUTSTANDING EQUITY AWARDS AT 2018 FISCAL YEAR END

 

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2018 OPTION EXERCISES AND STOCK VESTED

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2018 PENSION BENEFITS

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2018 NONQUALIFIED DEFERRED COMPENSATION

The “2018 Nonqualified Deferred Compensation” table describes unfunded, non-qualified deferred compensation plans that permit the deferral of salary, bonus and short-term cash performance awards by NEOs. These plans also provide for matching and/or annual non-elective contributions by the Company. NEOs are eligible to receive the amount in their deferred compensation accounts following termination under any termination scenario unless the NEO elected to further defer the payment as permitted by the plans.

 

 

 

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POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

Except for customary provisions in employee compensation plans and as required by law, there are no pre-existing severance or change in control agreements with the NEOs.

The following is a summary of the compensation that would become payable under the existing compensation plans if an NEO’s employment had terminated on December 31, 2018 in each of the following scenarios:

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POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

TERMS AND POTENTIAL PAYMENTS – CHANGE IN CONTROL

The following tabular information quantifies certain payments that would become payable under existing plans and arrangements if the NEO’s employment had terminated on December 31, 2018. The information is provided relative to the NEO’s compensation and service levels as of the date specified. If applicable, they are based on the Company’s closing stock price on December 31, 2018.

 

 

 

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COMPENSATION RISK

The CHRC regularly reviews the Company’s compensation policies and practices, including the risks created by the Company’s compensation plans. In addition, the Company also conducted a review of its compensation plans and related risks to the Company. The Company reviewed its analysis with the CHRC and the independent compensation consultant, and the CHRC concluded that the compensation plans reflected the appropriate compensation goals and philosophy. Based on this review and analysis, the Company has concluded that any risks arising from the Company’s compensation policies and practices are not reasonably likely to have a material adverse effect on the Company.

CEO PAY RATIO

The Company is providing the following disclosure about the relationship of the annual total compensation of its employees to the annual total compensation of Mr. Umpleby, the Chairman and CEO. To better understand this disclosure, it is important to emphasize that the Company’s compensation programs are designed to reflect local market practices across our global operations. The Company strives to create a competitive global compensation program in terms of both the position and the geographic location in which Caterpillar employees are located. As a result, the Company’s compensation programs vary among each local market to provide for a competitive compensation package.

As permitted by SEC rules, we determined that for 2018 we could refer to the same median employee that was identified for 2017. There has been no change in either our employee population or our employee compensation arrangements in 2018 that we believe would significantly impact our pay ratio disclosure. We identified our median employee by including all full- and part-time employees as of October 1, 2017, of which approximately 43 percent were in the U.S. and 57 percent were outside of the U.S. The Company did not exclude any of its employees when determining the employee population from which to identify the median employee. For purposes of identifying the Company’s median employee, the Company considered the base salary and annual cash incentive. Base salary and annual cash incentive were chosen because (i) they represent the principal forms of compensation delivered to all employees and (ii) this information is readily available in each country. In addition, compensation was measured using the 12-month period ending December 31, 2017.

The Company’s median employee’s total compensation for 2018 was calculated in accordance with Item 402(c)(2)(x) of Regulation S-K, as required pursuant to the SEC executive compensation disclosure rules.

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SHAREHOLDER PROPOSALS

PROPOSAL 4 – SHAREHOLDER PROPOSAL – AMEND PROXY ACCESS TO REMOVE RESUBMISSION THRESHOLD

PROPOSAL

PROPOSAL 4 — IMPROVE SHAREHOLDER PROXY ACCESS

RESOLVED: Shareholders ask the board of directors to amend its proxy access bylaw provisions and any associated documents, to include the following change: A shareholder proxy access director candidate shall not need to obtain a specific percentage vote in order to qualify as a shareholder proxy access director candidate at any future shareholder meeting.

SUPPORTING STATEMENT

This proposal is important because a shareholder proxy access candidate might not obtain the currently required 25% - vote (and thus unfortunately be disqualified the following year under our current rule) even if he or she is better qualified than certain existing directors. Shareholders may simply believe that at the time of the annual meeting that the company is not ready for a proxy access candidate and hence may not support the candidate because the timing is not right.

A year later a majority of shareholders might determine that circumstances have changed due to mismanagement or economic downturn and that the timing is then right. Hence shareholders should be able to vote for such a highly qualified candidate.

The following are just a few of the scores of companies that do not require a proxy access director candidate to obtain a specific percentage vote in order to be a candidate in the following year:

Citigroup (C)
eBay (EBAY)
FedEx (FDX)
Goodyear (GT)
Home Depot (HD)

Improved shareholder proxy access would put shareholders in a better position to question the wisdom and timing of stock buybacks.

Stock buybacks can be a sign of short-termism for executives - sometimes boosting share price without boosting the underlying value, profitability, or ingenuity of the company. A dollar spent repurchasing a share is a dollar that cannot be spent on new equipment, an acquisition or entry into a new market.

Please vote yes: Improve Shareholder Proxy Access — Proposal 4

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COMPANY RESPONSE

After careful consideration, the Board recommends a vote AGAINST this proposal for the reasons provided below:

 

 

The Board believes that the Company’s current proxy access provisions reflect an appropriate balance between the benefits and risks of proxy access. The proposal seeks an amendment that would disrupt that balance.

Before adopting a bylaw amendment in December 2015 to allow proxy access, the Company reviewed the provisions adopted by many other companies and consulted widely with its major investors to understand their views on proxy access and the specific provisions they considered important. In adopting proxy access, the Board considered whether to include a resubmission threshold for proxy access candidates, and elected to include a threshold similar to those adopted by many other public companies.

The Company’s proxy access provisions prohibit renomination of a proxy access candidate who was nominated at either of the preceding two annual meetings and did not receive support of at least 25 percent of the shares voted in the prior election.

This limitation on renominations prevents a candidate who has not received significant shareholder support from continuing to impose on those shareholders who do not support their candidacy the expense and disruption of the proxy access process. The limitation also means that a candidate with low levels of support cannot restrict the ability of other candidates who may have more support to effectively use the proxy access provision.

The proxy access rights adopted by the Company should also be viewed in the context of Caterpillar’s other governance practices, which include the opportunity for shareholders to nominate directors outside of the proxy access process, the annual election of all directors, majority voting for directors in uncontested elections, a policy allowing no more than two non-independent directors (currently eleven independent directors out of twelve), and tenure policies for directors that promote board refreshment.

Given these governance practices, the fact that the Company’s proxy access provisions are consistent with market practices, and the Board’s belief that the proponent’s requested revisions may impose expense and disruption on other shareholders who do not support a particular proxy access candidate, the Board does not believe that changing the Company’s proxy access framework is necessary or advisable.

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PROPOSAL 5 – SHAREHOLDER PROPOSAL – REPORT ON ACTIVITIES IN CONFLICT-AFFECTED AREAS

PROPOSAL

PROPOSAL 5 — REPORT ON ACTIVITIES IN CONFLICT-AFFECTED AREAS

WHEREAS, Caterpillar is committed to respecting internationally recognized human rights throughout its global operations and considered principles in the Universal Declaration of Human Rights (UDHR) in developing its Human Rights Policy;

Caterpillar envisions a world in which all people’s basic needs - shelter, clean water, sanitation, food and reliable power - are fulfilled in a sustainable way and a company that improves the quality of the environment and the communities where its employees live and work;

Business activities in conflict-affected areas may cause or contribute to violations of international humanitarian law (IHL) and human rights, such as the UDHR, and voluntary corporate commitments, such as Caterpillar’s human rights policy, entailing an array of legal, financial, and reputational risks for the companies involved;

Caterpillar is committed to not knowingly providing support to, contributing to, assisting with, or facilitating armed conflict in the Democratic Republic of Congo through the extraction and trade of “conflict materials” in the DRC and adjoining countries and following due diligence procedures, which are consistent with a nationally or internationally recognized due diligence framework;⁽¹⁾

As shareholders we believe that in an increasingly unstable world, it is prudent for Caterpillar to ensure that any business it conducts in conflict-affected areas, including international armed conflicts (e.g., Iraq⁽²⁾), internal armed conflicts (e.g., Myanmar⁽³⁾) and military occupations (e.g., Occupied Palestinian Territory⁽⁴⁾), also avoids providing support to, contributing to, assisting with, or facilitating armed conflict and follows due diligence procedures consistent with these frameworks;

RESOLVED, Shareholders request that Caterpillar assess and report to shareholders, at reasonable expense and excluding proprietary information, on the company’s approach to mitigating the risks associated with business activities in conflict-affected areas other than areas already addressed through its conflict minerals policy.

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SUPPORTING STATEMENT

We believe that it is in Caterpillar’s best interest, advancing its corporate reputation and human rights leadership, to establish such policies that would be applicable to any conflict-affected area in which the company and its brands and subsidiaries may operate. In particular, the report should assess whether additional policies are needed to supplement Caterpillar’s current Human Rights Policy to avoid causing or contributing to violations of human rights, such as:

Please vote your proxy FOR this proposal.

COMPANY RESPONSE

After careful consideration, the Board recommends a vote AGAINST this proposal for the reasons provided below:

 

 

Caterpillar has deep respect and compassion for all persons affected by conflict wherever it occurs. We have implemented standards and policies that define the behavior we expect from our directors, officers, employees and business partners which apply globally, including in conflict-affected areas.

Caterpillar is committed to operating under the values outlined in our Code of Conduct and to complying with all applicable laws and regulations. As described in our Code of Conduct, “We are pro-active members of our communities. As individuals and as a company, we contribute our time and resources to promote the health, welfare and economic stability of communities around the world. We conduct our business in a manner that respects human rights.”

In support of the statements in our Code of Conduct, the Company maintains a compliance program designed to ensure compliance with all applicable laws and regulations, including export controls and economic sanctions adopted by the U.S. and other countries. That program prohibits, among other things, sales to countries, entities and individuals that would violate applicable export controls or economic sanctions.

In addition to our Code of Conduct, Caterpillar has adopted a supplier code of conduct and a human rights policy that is informed by and incorporates many elements of internationally recognized human rights standards, including the Universal Declaration of Human Rights. Implementation of this policy includes an ongoing assessment of the impact our operations have on human rights, due diligence, performance tracking, mechanisms to report grievances and remediation processes.

The Board believes that the Company has already adopted and implemented appropriate policies and practices that address the concerns raised by the proponents as they pertain to the Company’s activities. Accordingly, we believe that the proposal’s additional reporting requirements would impose an unnecessary administrative burden that is not in the best interest of the Company or its shareholders.

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OTHER IMPORTANT INFORMATION

MATTERS RAISED AT THE ANNUAL MEETING NOT INCLUDED IN THIS STATEMENT

We do not know of any matters to be acted upon at the 2019 Annual Meeting other than those discussed in this statement. If any other matter is properly presented, proxy holders will vote on the matter in their discretion.

SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS FOR THE 2020 ANNUAL MEETING

A proposal for action or the nomination of a director to be presented by any shareholder at the 2020 annual meeting of shareholders must be delivered in the manner and accompanied by the information required in our bylaws.

Our bylaws are available on our website at www.caterpillar.com/governance. Shareholder proposals, director nominations and requests for copies of our bylaws should be delivered to Caterpillar Inc. c/o General Counsel and Corporate Secretary, 510 Lake Cook Road, Suite 100, Deerfield, IL 60015.

PERSONS OWNING MORE THAN FIVE PERCENT OF CATERPILLAR COMMON STOCK

The following table lists those persons or groups (based on a review of Schedule 13Gs filed with the SEC) who beneficially own more than five percent of Caterpillar common stock as of December 31, 2018:

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SECURITY OWNERSHIP OF EXECUTIVE OFFICERS AND DIRECTORS*

Security ownership of Caterpillar’s Executive Officers, Board of Directors and Nominees to the Board of Directors (as of January 1, 2019) is included in the following table:

 

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers, directors and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC and the NYSE, and to furnish Caterpillar with copies of such forms. Based on our review of the forms we have received, or written representations from reporting persons, we believe that, during the current fiscal year and in prior fiscal years, each of our executive officers and directors complied with all such filing requirements, with the exception of one late Form 4 filing by each of Juan Gallardo, Miles D. White and Ramin Younessi, each of which disclosed one transaction and was filed late due to administrative error.

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ACCESS TO FORM 10-K

Upon written request, without charge to each record or beneficial holder of Caterpillar common stock as of April 15, 2019, we will provide a copy of our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC. Written requests should be directed to Caterpillar Inc. General Counsel and Corporate Secretary at 510 Lake Cook Road, Suite 100, Deerfield, IL 60015.

NON-GAAP FINANCIAL MEASURES

The following definitions are provided for the non-GAAP financial measures used in this proxy statement. These non-GAAP financial measures have no standardized meaning prescribed by U.S. GAAP and therefore are unlikely to be comparable to the calculation of similar measures for other companies. Management does not intend these items to be considered in isolation or as a substitute for the related GAAP measures.

Adusted Profit: The Company believes it is important to separately quantify the profit impact of several significant items in order for the Company’s results to be meaningful to readers. These items consist of (i) restructuring costs, which are incurred in the current year to generate longer-term benefits, (ii) pension and OPEB mark-to-market losses resulting from plan remeasurements, (iii) certain deferred tax valuation allowance adjustments, (iv) U.S. tax reform impact and (v) a gain on the sale of an equity investment. The Company does not conisder these items indicative of earnings from ongoing business activities and believes the non-GAAP measures will provide useful perspective on underlying business results and trends, and a means to asses the Company’s period-over-period results.

 

Reconciliations of enterprise operating profit to the most directly comparable GAAP measure, consolidated operating profit, are as follows:

 

Reconciliations of adjusted profit per share to the most directly comparable GAAP measure, diluted profit per share, are as follows:

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FREQUENTLY ASKED QUESTIONS REGARDING MEETING ATTENDANCE AND VOTING

You must provide evidence of your ownership of shares along with your ticket request and follow the requirements for obtaining an admission ticket specified in the “Admission and Ticket Request Procedure” on page 66. Accredited members of the media and analysts are also permitted to attend the Annual Meeting by following the directions provided in the “Admission and Ticket Request Procedure” on page 66.

A list of all registered shareholders as of the record date will be available for examination by shareholders during normal business hours at 510 Lake Cook Road, Suite 100, Deerfield, IL 60015 at least ten days prior to the Annual Meeting and will also be available for examination at the Annual Meeting.

If you vote by phone, mobile device or the Internet, please have your Internet Notice, proxy and/or voting instruction card or email notice available. The control number appearing on your Internet Notice, proxy and/or voting instruction card or email notice is necessary to process your vote. A mobile device, phone or Internet vote authorizes the named proxies in the same manner as if you marked, signed and returned the card by mail.

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You may revoke previously given voting instructions by following the instructions provided by the trustee.

Whether or not you plan to attend the Annual Meeting, we encourage you to vote your shares promptly.

Street name holders can authorize someone other than the individual(s) named on the legal proxy obtained from their broker to attend the meeting or vote on their behalf by providing a written authorization to the individual being authorized along with the legal proxy.

To obtain an admission ticket for an authorized proxy representative, see the requirements specified in the “Admission and Ticket Request Procedure” on page 66.

Holders in street name: You may change or revoke your voting instructions by following the specific directions provided to you by your bank or broker.

In a contested election, director nominees are elected by a plurality of the votes cast, meaning that the nominees with the most affirmative votes are elected to fill the available seats.

All other actions presented for a vote of the shareholders at the Annual Meeting require an affirmative vote of the majority of shares present in person or by proxy and entitled to vote on the subject matter.

Abstentions will have no effect on director elections. Abstentions will have the effect of a vote against all other proposals. Broker non-votes will not have an effect on any of the proposals presented for your vote.

Votes submitted by mail, telephone, mobile device or internet will be voted by the individuals named on the

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card (or the individual properly authorized) in the manner indicated. If you do not specify how you want your shares voted, they will be voted in accordance with the Board’s recommendations. If you hold shares in more than one account, you must vote each proxy and/or voting instruction card you receive to ensure that all shares you own are voted.

Street shares are not combined with registered or plan shares and may result in your receipt of more than one proxy card. For example, shares held by a broker for your account will not be combined with shares registered directly in your name.

If you hold shares in more than one form, you must vote separately for each notice, proxy and/or voting instruction card or email notification you receive that has a unique control number to ensure that all shares you own are voted.

If you receive more than one proxy card for accounts that you believe could be combined because the registration is the same, contact our transfer agent (for registered shares) or your broker (for street shares) to request that the accounts be combined for future mailings.

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ADMISSION AND TICKET REQUEST PROCEDURE

ADMISSION

Admission is limited to shareholders of record as of April 15, 2019 and one immediate family member, or one individual designated as a shareholder’s authorized proxy holder or one representative designated in writing to present a shareholder proposal. In each case, the individual must have an admission ticket and valid government issued photo identification to be admitted to the Annual Meeting. In addition, share ownership will be verified by one of the following methods:

TICKET REQUEST DEADLINE

Ticket requests must include all information specified in the applicable table above and be submitted in writing and received by Caterpillar on or before May 29, 2019. No requests will be processed after that date.

TO SUBMIT A REQUEST

Submit ticket requests by email to catshareservices@cat.com or by mail to Caterpillar Inc. c/o Corporate Secretary, 510 Lake Cook Road, Suite 100, Deerfield, IL 60015. Ticket requests by telephone will not be accepted.

AUTHORIZED PROXY REPRESENTATIVE

A shareholder may appoint a representative to attend the Annual Meeting and/or vote on his/her behalf. The admission ticket must be requested by the shareholder but will be issued in the name of the authorized representative. Individuals holding admission tickets that are not issued in their name will not be admitted to the Annual Meeting. The shareholder information specified above and a written proxy authorization must accompany the ticket request.

PROPONENT OF A SHAREHOLDER PROPOSAL

For each shareholder proposal included in this proxy statement, the shareholder sponsor should notify the Company in writing of the individual authorized to present the proposal on behalf of the shareholder at the Annual Meeting. One admission ticket will be issued for the designated representative.

MEDIA

Accredited members of the media must register with the Company prior to the Annual Meeting. To register, please contact Corrie Scott by phone (224-551-4133) or email (scott_corrie@cat.com).

ANALYSTS

Analysts must register with the Company prior to the Annual Meeting. To register, please contact Jennifer Driscoll, Director of Investor Relations, by phone (309-675-4549) or email (catir@cat.com).

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