TDG Transdigm Group Incorporated

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information regarding the beneficial ownership of Company common stock as of January 22, 2021 with respect to each person known to be a beneficial owner of more than five percent of the outstanding common stock.

14

The following table sets forth information regarding the beneficial ownership of Company common stock as of January 22, 2021 with respect to each director and named executive officer of the Company and all directors and executive officers as a group. Except as indicated in the footnotes to this table and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock listed as beneficially owned by them. None of the shares held by directors or executive officers are pledged. The address for each individual listed below is c/o TransDigm Group Incorporated, 1301 East Ninth Street, Suite 3000, Cleveland, Ohio 44114.

15

✓    Robust performance conditions

✓     Ownership policies that encourage long-term stock retention

✓     Dividend equivalent rights to “make-whole” executives who hold vested performance options

✓     Limited fixed cash compensation (i.e., salary and annual incentive)

Performance-based Incentives

Critical to maintaining the link between management and stockholders is our executive compensation program. The performance-based incentives underscore the link between executive pay and Company performance. Our Executive Chairman and Vice Chairman receive all but $7,000 and $10,000 (for healthcare and related taxes), respectively, in performance options – effectively 100% of their compensation is performance-based. Multi-year performance periods with robust performance hurdles ensure execution of initiatives that create long-term value.

Historically both annual and long-term incentives have been tied to Company performance against Annual Operating Performance (“AOP”) growth each year, with minimum vesting for long-term incentives at 10% growth and maximum vesting at 17.5% growth. Historically short-term incentives incorporated both AOP and EBITDA (as defined in the Company’s credit agreement), weighting each factor 50%.

Because of the significant and unpredictable impact of the COVID-19 pandemic on the Company’s performance both in 2020 and anticipated in 2021, the Company has temporarily revised its approach to incentives. As discussed in more detail below, because of the unprecedented disruption to the aviation industry by the COVID-19 pandemic, the Company’s rapid response thereto and the potential disproportionate and unjust impact the market disruption would have on half (but not all) of the Company’s option holders, the Committee decided to vest options that were granted in 2020 and scheduled to vest in 2020 notwithstanding that the AOP targets were not met. In addition, the Committee modified the performance criteria for options granted in 2020 and in 2021 for vesting in 2021 to still be based on performance but to be based in part on EBITDA margin and in part on EBITDA (in each case as defined in the Company’s credit agreement). Performance-based targets for 2022 and beyond will be established in November 2021, with an intention to revert back to AOP. The Company intends to continue its reliance on performance-based compensation as it is critical to the Company’s culture.

For 2021, since the Company was unable to use its existing incentive plan metrics based on guidance (which was not given for fiscal 2021) and AOP, the Committee decided to use the same targets as those in the option plan (i.e., EBITDA and EBITDA margin). However, for 2022 and beyond the Committee intends to use different metrics for the short-term incentive plan and does not intend to revert to AOP as a metric, so that overlapping metrics will be abolished.

Robust Performance Conditions for Options

Under our traditional program, performance incentives are subject to rigorous vesting hurdles: the minimum threshold for any option vesting requires a 10% cumulative growth in AOP. For maximum vesting, the cumulative growth rate required is 17.5% for each performance period. The Committee chose the AOP metric to focus management on EBITDA growth, management of capital structure, cash generation, and acquisition performance.

We believe use of this AOP option target maximally incents our leadership team to drive sustainable long-term value for all stockholders. As defined, AOP growth effectively assesses value creation by taking into account many aspects of the Company’s performance without focusing on a single measure. As such, it is unique — eliminating the need for several different metrics—and achieves an unusually high level of pay-for-performance alignment by emphasizing long-term stockholder value.

17

As discussed above, the Committee intends to revert back to AOP for option vesting in 2022. The temporary performance criteria put in place for 2021 also has minimum and maximum vesting criteria.

Incentivize Long-Term Executive Stock Ownership

Once the performance options vest, stringent stock ownership guidelines ensure the prevalence of an ownership culture amongst executives that underpins the convergence of the interests of management and stockholders, ultimately responsible for the tremendous stockholder value evidenced over the history of the Company.

To ensure continued alignment of management interests with those of stockholders, the Committee has adopted rigorous stock ownership guidelines that require the Executive Chairman to own at least $10 million in Company equity and the Chief Executive Officer to own at least $6 million in Company equity, including in each case at least half in actual common stock. Other named executive officers are subject to lower, though similarly robust, guidelines. These robust guidelines, coupled with a strict prohibition on pledging, hedging and derivative trading for all employees have ensured that all executives have and will continue to have a significant amount of value held in Company stock, thereby solidifying ongoing direct alignment with stockholders. All named executive officers have exceeded their respective guidelines.

To ensure that optionholders are incentivized to retain (as opposed to exercise and sell) fully vested performance options, the Committee believes it critical to equate employees to stockholders, ensuring they are not deprived of the benefits of being a stockholder. To that end, the Committee determined that optionholders be entitled to dividend equivalents.

Dividend Equivalents Explained

Dividend decisions, like at other companies, are a capital structure decision made by the Board based on the Company’s operations, cash flows, credit structure, availability of cash or borrowing capacity, outlook for acquisitions, favorable capital market conditions, the availability of surplus under applicable law as well as certain operating performance covenants under the Company’s credit facilities. However, unlike other companies, because of the Company’s consistent high cash flow and strategic view of leverage, the Company has historically paid special dividends that are unusually large and hard to predict.

				DEP								NO DEP
		Stock Price Before Dividend		$	100							$	100
		Option Strike Price			(25	)							(25	)
		Option Value to Holder			75								75
		$50 Dividend:
		Stock Price After Dividend		$	50							$	50
		Option Strike Price			(25	)							(25	)
		Option Value to Holder			25								25
		Dividend Equivalent Right			50								—
		Value to Option Holder		$	75							$	25

 

				No DEP Would be Significant Disincentive for Executive Management Team Who Receives Majority of Compensation in Stock Options

18

Importantly, pursuant to the DEPs, employees receive dividend equivalent payments on options (i) that have vested based on rigorous performance criteria, and (ii) that the optionholder has chosen not to exercise even though vested.

As illustrated above, the Committee believes that excluding employees from sharing in the capital return to all stockholders would be contrary to incentivizing them to maintain alignment with stockholder interests and would have the perverse result of management being significantly negatively impacted by payment of a dividend.

Limited Cash Compensation

Given the emphasis on performance-conditioned incentives, fixed cash executive compensation represents a reduced percentage of total compensation. In the case of Executive Chairman Mr. Howley and Vice Chairman Mr. Henderson, respectively, they receive no base salary or annual incentive in cash except for nominal amounts to cover participation co-premiums for health insurance and related taxes. Moreover, for other executives that receive cash compensation, the Company benchmarks below the median of the Company’s peers.

Alignment of Executive Interests

The Committee believes that the superior operational performance and consistent stock price outperformance is a direct consequence of the continued alignment of the interests of management with those of stockholders. We believe that the confluence of these interests incentivizes management to execute on initiatives that drive the long-term success of the Company and continue to drive sustainable value creation for all its stakeholders.

Compensation Philosophy is Working

That the Committee philosophy is creating value for stockholders is evidenced by:

19

20

21

Despite the significant and unprecedented impact of the COVID-19 pandemic, the Company’s performance was close to flat year over year from 2019 to 2020. Prior to the COVID-19 pandemic, the Company was on track to generate record high revenue & EBITDA As Defined and reported strong fiscal Q1 and Q2 2020 growth, including both organic and acquisition growth. We declared and paid a $32.50 special dividend, or $1.9 billion, in January 2020. Then the pandemic started to adversely impact our business during the last three weeks of our fiscal Q2 as governments around the world implemented stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments and other measures. As a result, demand for travel declined at a precipitous pace, driving significant reduction in global flight capacity and parked aircraft across the world and has remained depressed.

Management quickly acknowledged the risk to our business and in addition to the safety of our employees, immediately focused to reduce our costs as quickly as possible and assure substantial liquidity. To address these objectives, cost reduction actions taken to help mitigate the significant decline included: (1) reducing our workforce by over 30% to align operations with customer demand; (2) implementing unpaid furloughs and salary reductions across the organization; and (3) delaying non-essential capital projects and minimizing discretionary spending. To address liquidity, we borrowed an additional $1.5 billion in April to act as an “insurance policy”, drew $200 million on our revolving credit facility and strictly managed customer receivables and payment terms.

At the same time, we addressed the ongoing needs of our business to continue to serve our customers. As a result of the COVID-19 pandemic, many of our businesses have taken the opportunity to explore new business opportunities by working on developing highly engineered solutions for emerging needs arising from the pandemic. Product solutions currently being explored include anti-viral or antimicrobial technology, air purification and touchless technologies, among others.

These swift and decisive actions enabled us to maintain our EBITDA as Defined margins above 40% and remain free cash flow positive with continued strong cash generation closing fiscal 2020 with over $4.7 billion of cash.

Management’s efforts allowed us the financial flexibility to continue to focus on effective capital allocation through the recent purchase of Cobham Aero Connectivity for $965 million in January 2021. This acquisition expands the Company’s platform of proprietary, sole source content with significant aftermarket exposure for the aerospace and defense industry and will help us continue to deliver the private equity-like returns our investors have come to expect from investment in our stock.

22

Aerospace Industry Update

To date, the pandemic has caused the worst disruption ever experienced in the commercial aerospace industry. At the trough in April 2020, revenue passenger miles (RPM’s), a metric used to measure air traffic demand, were down 94% from pre-pandemic numbers as world-wide traffic halted, and remains depressed at down 70% in November (the last reported data point as of the print date of this proxy). For comparison, previous disruptions driven by the Gulf War, 9/11 and Great Recession only produced RPM declines of less than 5% as illustrated in chart below. Commercial OEM delivery rates from Boeing and Airbus were also significantly impacted and were down approximately 44% in 2020.

The exact timing and pace of the recovery is indeterminable. Airlines have added back some flight capacity and there have been relatively steady increases in global passenger travel since the trough in April 2020, but it has been a slow recovery thus far. Continued high level of global COVID-19 cases and renewed lockdowns in certain countries have further contributed to the slow recovery. Recent vaccine approvals and the start of vaccination programs are encouraging and should drive recovery, but the timing of vaccine roll-out and global distribution on a broad scale and vaccine effectiveness against COVID variants is still not clear. Considering these variables, the shape and speed of the recovery remains uncertain. Various industry sources do not expect the commercial aerospace industry to return to pre-pandemic levels until 2023 at the earliest.

Conclusion

Although fiscal 2020 was a challenging year, management expertly and swiftly executed through difficult and unprecedented circumstances taking immediate actions to protect employees from the spread of the virus while also dealing with the disruption impacting the broader commercial aerospace industry. Focusing on those things that were under its control, management believes actions taken during 2020 will ensure that the Company emerges from the ongoing weakness in its primary commercial end markets even stronger and will continue to build shareholder value. The Company’s ongoing progress in executing its strategy for building and sustaining shareholder value, coupled with a compensation program heavily leaning towards performance-based criteria, form an appropriate framework within which executive compensation decisions are made by the Committee.

Hence, the Committee and Board are recommending that stockholders approve the advisory vote on executive compensation.

23

Executive Compensation Program

The Committee has overall responsibility for establishing, implementing, and monitoring the executive compensation program for executive officers. Mr. Howley recommends to the Committee, for its approval, option awards and salary and bonus awards for Mr. Stein and, in conjunction with Chief Executive Officer Mr. Stein, recommends to the Committee, for its approval, option awards and compensation arrangements for Messrs. Lisman, Henderson and Valladares. Mr. Stein recommends to the Committee, for its approval, option awards and salary and bonus amounts for all other officers (other than Mr. Howley). The Committee determines Mr. Howley’s salary and bonus amounts (from which his option award is determined) without input. Generally, individual performance, company performance, market conditions and other factors are considered in determining compensation. The Committee generally does not consider the tax or accounting treatment of items of compensation in structuring its compensation packages, except that it makes an effort to ensure that any deferred compensation is compliant with Section 409A of the Internal Revenue Code.

Significant 2020 Compensation Committee Actions

Plan design changes for 2021 and beyond

During 2020, investors expressed concern over use of the same metric (AOP) used in both the Company’s stock option plan and used, in part, in the Company’s short-term incentive plan. The Committee discussed elimination of the overlapping metrics and had intended to do so by year-end. However, in light of the COVID-19 pandemic, the Committee was unable to use as a metric for 2021 either performance against EBITDA guidance (the other metric in the short-term incentive plan) due to lack of any issued guidance or AOP. Accordingly, in light of the highly unusual circumstances related to the COVID-19 pandemic, the Committee adopted alternate metrics for 2021 (discussed below), which do overlap. However, the Committee is committed to eliminating having an overlapping metric in 2022.

Also in response to investor concern, the Committee eliminated the alternate vesting aspect of the options on a going-forward basis commencing with grants made in fiscal 2021. Previously, if, beginning in the second fiscal year following the date of grant of an option, the price of the Company’s common stock on the NYSE exceeded two times the exercise price of the options less dividends paid since the date of grant, then, to the extent that the options did not otherwise vest in accordance with their terms, the options would vest 50% in the fourth fiscal year from the date of grant and 50% in the fifth fiscal year from the date of grant (or if such market price is achieved in the fifth year, 100% may vest in the fifth fiscal year). This feature was eliminated for all options commencing in fiscal 2021.

The Committee considered the comments from a few investors to eliminate the carry forwards and carry backs in the option vesting calculation, but determined that the carry forwards and carry backs are important to view performance over the entire five year vesting period and not as a snapshot in any given year. This, in turn, is important so that management has a long-term view of performance and reflects our strategy to maximize long-term shareholder growth and also serves to mitigate any compensation risk associated with evaluating performance solely in one-year increments.

2020 compensation decisions impacted by COVID-19 pandemic

2020 was a difficult year for the Company and for the aviation industry. Management had to keep employees safe in the context of the pandemic, make difficult decisions, rationalize scarce resources, work long hours, try to keep employee morale up in light of furloughs and layoffs and continue to implement the Company’s value drivers. Retention of management – at the corporate and at the local operating unit level – was critical during these difficult times. The Committee’s decisions impacted by the pandemic were made in light of this backdrop.

24

In April 2020, in light of the swift and significant impact the COVID-19 pandemic had on the aerospace industry – particularly in commercial aviation, management took quick reactive and proactive measures to maintain margins and liquidity. During that time, the executive team indicated its willingness to forego short-term incentives for 2020 and to forego some of their salaries, and publicly announced that intention. However, after the fiscal year end, the Committee felt strongly that it wanted to award the short-term incentives because liquidity was no longer a significant concern and management had expended significant effort to maintain EBITDA As Defined margins protecting shareholder value in a very difficult economic environment. The Committee awarded cash incentives (or options in the case of Messrs. Howley and Henderson) to all of the management except Mr. Stein who refused to accept a cash incentive for 2020. Subsequent to award, Mr. Howley and Mr. Henderson forfeited one-half of their incentive payment (paid in options).

In September 2020 the Committee determined to allow the portion of options granted in fiscal 2020 with a scheduled vesting date in 2020 to vest effective September 30, 2020, notwithstanding that performance criteria for such options was not going to be met. The action impacted xx options granted to 85 individuals, including all of the independent directors and four executive officers, including Messrs. Henderson and Valladares. Options granted in fiscal 2016-2019 met the performance criteria for vesting in fiscal 2020. The Committee took this extreme action in light of the severe and unprecedented disruption to the aerospace industry in the second half of fiscal 2020 due to the COVID-19 pandemic. The Committee noted that because of the Company’s biennial granting pattern, half of the employees would be permanently and disproportionately affected long-term by the pandemic’s impact on the business, whereas employees that received options in 2019 and 2021 would not see the impact. The Committee also noted that the Company had record revenue and EBITDA for its first half of fiscal 2020 (prior to the pandemic), appropriately strengthened the Company’s balance sheet during the time when the pandemic was having the most severe impact, and highlighted management’s significant focus, agility and resilience throughout the ensuing industry downturn. Management’s strong performance resulted in maintaining EBITDA margin in excess of 40% in very challenging industry circumstances. The Committee’s actions were designed to retain and motivate management through economically uncertain and challenging times and period of increased workload in order to promote long-term shareholder value and reduce business risk.

In light of the COVID-19 pandemic, the Company’s named executive officers, as well as certain other executives, voluntarily forfeited certain compensation.

Temporary plan design changes in light of the COVID-19 pandemic

As discussed above, for 2021, the Committee was prepared to adopt a different metric from AOP as a result of investor concern over the AOP being an overlapping metric in both the short-term incentive

25

and stock option plans. However, because of the unpredictability of earnings due to the impact of the COVID-19 pandemic, the Company has not issued guidance. Further, the Company has not established AOP targets for 2021. Ultimately the Committee determined to measure 2021 performance against the primary metric to which the Company has been managing – EBITDA margin – and also, as incentive to maintain earnings, EBITDA As Defined. For 2021 these metrics are temporarily also being used for certain grants under the Company’s option program – those being options granted in 2020 with vesting in 2021 (predominantly those are for promotion and new hire grants) and options granted in 2021 with vesting in 2021 (again, predominantly those are for promotion and new hire grants). The Company will use different metrics under the short-term and long-term incentive plans in 2022 when performance can again be evaluated with some normalcy and predictability and the intent is that performance will be based on factors within management’s control. For options granted in 2020 and 2021, the performance criteria for vesting in 2022 through 2025 has been left open and the Committee will establish criteria based on Company performance in the fall of 2021, with the hopes of being able to re-establish a baseline from which to grow the Company’s intrinsic value (AOP) by 10-17.5% as COVID-related market impacts stabilize. For the short-term incentive plan, new criteria will be established starting in 2022.

Elements of the Executive Compensation Program

Equity Based Incentives

Performance-Based Stock Options

Overview

We intend that the largest portion of management’s potential earnings be based on total stockholder return. We accomplish that by granting performance-based stock options pursuant to our option plans; the option plans authorize only stock options and do not authorize the issuance of any full value awards, such as stock, restricted stock or other stock-based units. We believe that performance-based stock option grants motivate and incentivize management to focus on long-term performance. Our stock option program covers management at the corporate level and our 50 operating units, for a total of approximately 270 people. Performance-based stock options reinforce the long-term goal of increasing stockholder value and yielding returns comparable to or higher than well-performing private equity funds. Although we have had to temporarily deviate from use of our AOP targets because of the unpredictability of the Company’s results based on matters largely outside of management’s control, we intend to reimplement AOP or similar performance based targets and continue to believe that our program of holding management to a minimum 10% AOP growth trajectory before any options can vest is a solid incentive strategy. Such structure effectively aligns the interests of stockholders and management.

Generally, the Committee does not make regular annual grants of options to its employees (other than to the Executive Chairman and the CEO). Rather, it grants options that vest over five years in connection with hirings, promotions and the assumption of increased responsibilities. Thereafter, unless there has been an intervening five year award because of a promotion, the Company grants biennial extension awards that vest in the fourth and fifth year following the award. These grants are generally made in the third year of vesting under the initial award so that the employee has four or five years of future option vesting in order to promote maximizing long-term value and retention. We continue to support issuing biennial grants so that the performance period is always four or five years and employees have significant long-term incentives. However, it is this granting pattern of issuing a large five-year grant and then subsequent two-year grants that resulted in the Committee’s strong conviction to vest the options granted in 2020 for those new hire and promotional grants that had vesting in 2020.

26

Stock options vest based on the achievement of specific performance-based targets. Generally, initial options vest up to 20% annually based on the achievement of annual targets and two-year extension options vest up to 50% in the fourth fiscal year after the grant and up to 50% in the fifth year after the grant based on the achievement of performance targets. Options are awarded to Mr. Stein annually and vest in the fifth fiscal year after grant. Options awarded to Mr. Howley have different vesting provisions and options awarded to Mr. Howley and Mr. Henderson in lieu of salary and incentive compensation also have different vesting provisions. See “Employment Agreements – Employment Agreement with Mr. Howley, Executive Chairman” and “Employment Agreements – Employment Agreements with Other Named Executive Officers” on pages 51-53 and 53-54, respectively, for further information.

Performance-based Option Vesting at Rigorous Targets

Option vesting generally is subject to rigorous performance hurdles: under our normal program the minimum threshold for any option vesting requires a 10% cumulative growth in AOP. For maximum vesting, the growth rate required is 17.5% for each performance period. The Committee identified this CAGR range as an appropriate driver of our management team at the base and maximum payout thresholds because it will incent them to create value for stockholders at a rate that outperforms the typical private equity model. The AOP metric focuses management on EBITDA growth, management of capital structure, cash generation, and acquisition performance, as appropriate to the different performance periods. Through these performance-based options with five year performance periods, we believe we have optimized management incentive to drive stockholder value creation over the long term and appropriately linked compensation with Company performance.

Specifically, AOP targets are set at the time of grant and represent an intrinsic share price. As described below, they are set by taking the prior year’s AOP and increasing such amount by 10% and 17.5%, respectively, to establish the minimum and maximum targets. In other words, as demonstrated in the chart below, the intrinsic share price must grow at a compound annual growth rate of 10% for any vesting to even occur at all; for 100% vesting, the intrinsic share price must grow at a compound annual growth rate of 17.5%. Targets are thus robust, requiring 17.5% compound annual growth from the most recently completed year for maximum vesting. Targets were set with a 17.5% compound annual growth rate in an effort to achieve growth at or above the long-term returns of top performing private equity funds, with the hope that market growth will reflect the Company’s intrinsic growth. This is consistent with our objective of providing stockholders with returns at or above those of well-performing private equity funds. If these returns are achieved, both investors and management benefit significantly.

27

Targets are calculated based on a ratio of (a) the excess of (i) the product of EBITDA (as defined in the Company’s credit agreement) and an acquisition-weighted market multiple over (ii) net debt to (b) the Company’s number of diluted shares as of such date based on the treasury stock method of accounting (the “operational performance per diluted share”). The targets are adjusted for dividends and share repurchases. To simplify, option targets and vesting are basically calculated as follows:

AOP, as reflected above, takes into consideration the following:

We use AOP growth (i.e., growth in intrinsic equity value) as the performance-based metric for a number of reasons:

Targets are adjusted for dividends paid to stockholders and share repurchases. The Committee believes the adjustments are appropriate and necessary to account for the early return of value to stockholders because if a portion of the investment is returned early via special dividend or return of capital, the subsequent years’ targets must be adjusted to reflect the revised capital structure and maintain the same IRR-based performance requirements. Adjustment of the targets does not make the targets any easier to achieve but rather maintains the IRR targets.

28

As discussed above, for 2021, the Company determined it was unable to establish AOP targets for 2021 due to the ongoing impact of the COVID-19 pandemic on the aviation industry. The Company believes 10-17.5% AOP growth from 2020 is unattainable for 2021 because of the record performance in the first half of the year. The Committee considered using the latter half of the year as a baseline but ultimately concluded that the Company has no visibility into whether those targets would be too easy or unreasonably unattainable and the Committee strongly believes that in order to provide appropriate incentive the performance goals need to be based on matters within management’s control. Therefore, the Committee determined to measure 2021 performance against the primary metric to which the Company has been managing – EBITDA margin percentage – and also, as incentive to maintain earnings, EBITDA As Defined. These metrics are temporarily being used for certain grants under the Company’s option program – those being options granted in 2020 with vesting in 2021 (predominantly those are for promotion and new hire grants) and options granted in 2021 with vesting in 2021 (again, predominantly those are for promotion and new hire grants). For options granted in 2020 and 2021, the performance criteria for vesting in 2022 through 2025 has been left open and the Committee will establish criteria based on Company performance in the fall of 2021, with the hopes of being able to re-establish a baseline from which to grow the Company’s intrinsic value (AOP) by 10-17.5%.

Other Option Terms

Because we view our performance on a long-term basis and the targets are set to achieve long-term compound annual and cumulative growth, if the annual performance per share exceeds the maximum target in an applicable year, such excess may be treated as having been achieved in the following two fiscal years and/or the prior two fiscal years (without duplication) if less than the full amount of options would otherwise have vested for such years. This allows management to focus on long-term value without having to make short-term decisions to maximize vesting in a particular year. We believe this feature acts similarly to long-term incentive plans that take into account performance over a multi-year period. We also believe this plan feature mitigates compensation risk, because if performance were measured in only one-year “snap-shot” increments, management could be incentivized to sacrifice longer term goals to achieve vesting in the short term.

In addition to vesting based on operational targets, in the event of a change in control, options become fully vested. The Company does not provide for any gross up to any payments that would be deemed to be “excess parachute payments” under Section 280G of the Internal Revenue Code.

For options granted prior to 2021, the options also have an alternate market-based performance measurement, such that if, beginning in the second fiscal year following the date of grant, the price of the Company’s common stock on the NYSE exceeds two times the exercise price of the options less dividends paid since the date of grant, then, to the extent that the options did not otherwise vest in accordance with their terms, the options may vest 50% in the fourth fiscal year from the date of grant and 50% in the fifth fiscal year from the date of grant (or if such market price is achieved in the fifth year, 100% may vest in the fifth fiscal year); but vesting of the options will not accelerate as compared to their original vesting schedule. This feature was eliminated for all options granted in in fiscal 2021 and thereafter.

29

The option agreements for options awarded to Mr. Howley provide for continued vesting following a termination of Mr. Howley by reason of death, disability, without cause, for good reason or retirement as described in detail under “Potential Payments Upon Termination or a Change in Control – Termination Payments for W. Nicholas Howley, Executive Chairman” on pages 46-47.

2020 Grants

Options are granted generally at regularly scheduled board meetings during November through April. Because all options vest based on performance criteria and vesting occurs at the end of each fiscal year, grants for any new hire or promoted employee who would otherwise receive a grant after April in any year are deferred until November.

Options to purchase 742,840 shares of common stock were granted under the program in fiscal 2020. The number of shares subject to the 2014 Stock Option Plan is 5,000,000, of which 1,316,998 shares remained available for granting under the plan as of September 30, 2020. The number of shares subject to the 2019 Stock Option Plan is 4,000,000, of which all shares remain available for granting under the plan as of September 30, 2020.

Dividends and Dividend Equivalents

Dividends

Dividend decisions, like at other companies, are a capital structure decision made by the Board. We do not have a policy of paying regular dividends. Instead, the Board regularly evaluates our capital allocation optionality and will declare a special dividend based on an assessment of availability of cash or borrowing capacity, outlook for acquisitions and other operating needs, favorable capital market conditions, and the availability of surplus under applicable law as well as certain operating performance covenants under the Company’s credit facilities.

Our preference for capital allocation is to invest in existing businesses or make accretive acquisitions. But, when internal business needs are met and acquisitions are not available, we elect to allocate capital to return to stockholders. Because of the constantly dynamic state of acquisition opportunities, as well as other external forces such as the health of credit markets, geo-political activity, competitive industry opportunities and pressures, these special dividends are unpredictable, episodic, and, unlike other companies, have historically been very large. Most recently, the Company paid a dividend of $30.00 per share in fiscal 2019 and a $32.50 dividend in fiscal 2020. The Company also paid two dividends, totaling $46.00 per share, in fiscal 2017. However, the Company paid no dividends in fiscal 2015, 2016 or 2018. As of the date hereof, we do not anticipate paying a dividend in 2021.

30

Dividend decisions are made exclusive of compensatory impact. And compensation decisions are made without regard to the possibility of dividend equivalent payments. However, due to the unique structure of our executive compensation program, which targets significantly less cash compensation relative to peers in the short term but provides extraordinary upside in the long term, the Committee believes our use of DEPs are critical to the understanding of what motivates our executive team and assures alignment between management and investors on capital allocation decisions.

Dividend Equivalent Payments (DEPs)

In order to closely align management and stockholder interests in all aspects of the Company’s operations and capital structure, we have dividend equivalent plans that provide optionholders the right to receive dividend equivalent payments (DEPs) if the Board declares a dividend on the Company’s common stock. Maintaining an even playing field between constituencies is important to and consistent with the Company’s private equity compensation philosophy. As such, the Committee strongly believes that absent the DEPs, the optionholders are at a clear disadvantage to stockholders, which would incentivize the exercise and sale (e.g., to satisfy tax obligations) of vested options and could undermine the alignment of their interests with those of stockholders.

It is important to note that because our executives believe that our options are a good long-term investment, many of them hold options for a long period of time, maintaining alignment with stockholders. For example, over 60% of the DEPs paid to Mr. Howley were from the January dividend of $32.50 and related to options that were already vested as of the dividend declaration date.

As you will see, our executives have greater compensation reflected in the summary compensation table than one might expect given the COVID-19 pandemic and its impact on the business. The vast majority of this compensation is in the form of dividend equivalents and options. In the first half of 2020 (through March 2020), the Company had a record-breaking year. And in light of its strong operations and good liquidity position and prospects, the Board declared and the Company paid a special dividend in January 2020 of $32.50–the largest dividend the company has ever paid. The payment of that dividend, which occurred prior to the widespread impact of COVID-19, resulted in significant payments to executives, as well as a significant return to our investors. As we have previously stated, we do not view dividend equivalents as compensation and we make compensation decisions regardless of the amount of divided equivalents paid and our Board makes dividend declaration and capital deployment decisions regardless of “compensatory” impact.

Notwithstanding what appears like out-sized compensation in a year that turned out radically differently from how it started, we continue to believe that failure to align management and stockholders could create incentives for management to deploy cash flow and utilize borrowing capacity in a manner other than the return of capital in the form of extraordinary dividends, which might not be in the best interests of stockholders. Further, management may be incentivized to seek short-term market gains rather than focusing on long-term equity value and stockholder returns. Dividend equivalents align management with the stockholders to permit the best allocation of capital resources and incentivize long-term share value growth without a hyper focus on short term stock price fluctuations.

Importantly, pursuant to the dividend equivalent plans, employees receive DEPs on options (i) that have vested based on rigorous performance criteria, and (ii) that the optionholder has chosen not to exercise even though vested. Optionholders who hold vested stock options at the time a dividend is paid will receive a cash DEP equal to the amount that he or she would otherwise have been entitled to receive had his or her vested stock option been exercised immediately prior to payment of the dividend. Optionholders who hold unvested stock options will receive a cash DEP equal to the amount he or she would otherwise have been entitled to receive had his or her unvested stock option been vested and exercised immediately prior to payment of the dividend, but only if and when such stock option vests pursuant to its terms. We believe that we have structured DEPs under the Company’s

31

dividend equivalent plans such that they are not subject to any excise tax under Section 409A of the Internal Revenue Code. Certain investors and proxy advisory firms have raised the issue as to whether the Company should pay dividend equivalents only upon an exercise of the options; however, we believe that tying payment of the dividend equivalents to the exercise of an option would result in excise taxes under Section 409A.

Restricted Stock and Other Equity Awards

Neither the 2014 stock option plan nor the 2019 stock option plan include the ability to issue restricted stock or any equity awards other than options.

Stock Ownership Guidelines

We require management to maintain a significant personal investment in the Company. Therefore, during their employment, all of the Company’s existing optionholders are required to maintain ownership of a minimum value of stock or vested options. In general, the holding requirements, which are specific for each individual, require optionholders to retain shares or in-the-money vested options with significant value. Elected officers must retain half of their retention limit in stock. Mr. Howley is required to hold $10 million in aggregate value, Mr. Stein is required to retain $6 million in aggregate value and the other named executive officers are required to hold $1.5 - $2.5 million in aggregate value of stock or vested options.

New optionholders have five years to meet their holding requirements. If a holding requirement has been met but is no longer met because of a decline in value of the Company’s common stock, the optionholder will have three years to achieve compliance with the holding requirement.

No director, officer or employee is permitted to pledge Company stock or engage in short sales or other transactions that hedge or offset, or are designed to hedge or offset, any decrease in the market value of the Company’s stock. All of the directors and executive officers are in compliance with this policy.

Base Salary

Executive Officers

Our philosophy is to pay base salaries at a level pegged at the lower end of similarly situated companies, preferring instead to weight the compensation of officers through performance-based equity. Specifically, we aim to pay fixed cash compensation to most executives below the median of the Company’s peers. Cash compensation for executive officers in fiscal 2020 was determined with reference to the executives’ experience, the Company’s past practice, individual performance and the prior year’s survey described below.

Consistent with the factors annually considered by the Committee, the Committee determined that, effective January 1, 2020, the base salaries of Messrs. Stein, Lisman and Valladares should be $1,125,000, $535,000 and $618,000 per year, respectively. As discussed elsewhere in this proxy statement, Mr. Howley and Mr. Henderson do not receive a salary pursuant to the terms of their respective employment agreements. The only cash compensation each is entitled to is in the amount of $7,000 and $10,000, respectively, and is for health insurance and related taxes. The remaining compensation of each is paid in performance-based stock options. To put this in context, 100% of compensation of two of the top executives with the ability to influence the achievement of targets, have been incentivized purely through rigorous incentives that will drive value for stockholders. The Committee is confident this structure will promote the best alignment possible with our stockholders by holding these top executives to rigorous operational achievements to achieve vesting of their options.

32

More specifically, and again in accordance with his employment agreement, the Committee granted Mr. Henderson options to purchase 8,525 shares in lieu of 2020 salary. Mr. Howley received options to purchase 10,217 shares in lieu of 2020 salary, calculated in accordance with his employment agreement. See “Employment Agreements—Employment Agreements with Other Named Executive Officers” and “Employment Agreements—Employment Agreement with Mr. Howley, Executive Chairman” on pages 51-54 for more details.

Due to the impact of the COVID-19 pandemic on the Company, most of the Company’s officers took salary reductions, in lieu of furloughs, for a portion of fiscal 2020. For the named executive officers, Mr. Stein forfeited 25% of his salary for five months, or $117,188, Mr. Lisman and Mr. Valladares forfeited 10% of their respective salaries for five months, or $55,729 and $64,375, respectively. Even though Messrs. Howley and Henderson do not receive cash compensation, they also gave up a portion of their salary for 2020 in light of the impact of the COVID-19 pandemic. Each forfeited 25% of the options they received for the entire year’s salary, constituting 426 options for Mr. Henderson and 2,554 options for Mr. Howley, valued at $63,558 and $381,049, respectively, on a Black Scholes basis as of the date of grant. Consequently, this also resulted in the forfeiture by Messrs. Henderson and Howley of $13,845 and $83,005, respectively, of dividend equivalent payments relating to the $32.50 dividend paid in January 2020. Accordingly, Messrs. Henderson and Howley forfeited $77,403 and $464,054 of options and dividend equivalent payments in lieu of salary in light of the impact of the COVID-19 pandemic.

Use of Independent Compensation Consultant; Peer Considerations

The Compensation Committee typically engages a compensation consultant to review aspects of compensation every two years. In September 2019 the Committee engaged Veritas Executive Compensation Consultants to do a survey of total standard compensation components for the certain executives, including the named executive officers. In doing so we specifically asked that they exclude DEPs for two reasons—first, because we think of DEPs more as putting the executive in the place of the stockholder without requiring an exercise (and typically accompanying sale to, for example, offset taxes) and second, because including episodic DEPs in a compensation exercise is not going to be as insightful as the anomalies of DEPs will distort any peer analysis.

Veritas used a peer group based on revenue, market capitalization and enterprise value. We use a size based peer group because we manage our business based on EBITDA growth and enterprise value. The Committee previously rejected a peer group based solely on revenue as being not comparable with the Company because the Company’s market capitalization and enterprise value far exceeded those of the potential revenue-based peers. The Company used as its peer group the following companies:

The survey determined that the named executive officers and executive vice presidents as a whole were positioned at the low end of the peer group in terms of cash compensation (at or below the 25^th percentile), but competitively positioned in terms of total standard compensation and opportunities

33

(between the 69^th and 100^th percentiles), but that the general counsel trailed competitive market positions and the chief operating officer received cash compensation in the above the median compared to peers.

Annual Incentives

Executive officers participate in an annual incentive program. The annual incentives are paid in cash to the executive officers other than Messrs. Howley and Henderson (who receive their annual incentives in performance-based options). Target incentive amounts are based on a percentage of the officer’s salary pursuant to their respective employment agreements. The award structure, pay out contingencies and mechanics are fully transparent and can be easily ascertained by a third party following the calculations set forth below. Importantly, this process is non-discretionary and, through 2020, based on an objective assessment of the Company’s financial performance as follows:

For 2021, the Committee was prepared to adopt a different metric from AOP as a result of investor concern over the AOP being an overlapping metric in both the annual incentive and stock option plans. However, because of the unpredictability of earnings due to the impact of the COVID-19 pandemic, the Company has not issued guidance. Further, the Company has not established AOP targets for 2021. Ultimately the Committee determined to measure 2021 performance against the primary metric to which the Company has been managing—EBITDA margin—and also, as incentive to maintain earnings, EBITDA As Defined. For 2021 these metrics are temporarily also being used for certain grants under the Company’s option program. But the Company will use different metrics under the short-term and long-term incentive plans in 2022 when performance can again be evaluated with some normalcy and predictability and performance will hopefully be based on factors within management’s control.

Committee Discretion

The Committee retains the authority to increase or decrease the award by up to 20%, based on assessment of individual performance, including without limitation, (1) degree of difficulty of the job and the achievement of metrics and the individual’s job effectiveness given the aerospace and capital market environment, operating conditions and the level of flexibility/responsiveness required; (2) the effectiveness of the Company’s three value drives of price, productivity and new business; (3) a pattern of clear, open, honest and regular communication with the Board and investors, as applicable; (4) effective succession planning and organizational development; (5) support, maintenance and regular evaluation of the effectiveness of the Company’s long term value focused strategy; or (6) other factors. Final assessment of results will be determined following completion of the fiscal year and will be based on audited financial results. Positive discretion was not exercised in 2020, except to round amounts.

34

2020 Targets and Actual Awards

In April 2020 the Company’s officers volunteered to relinquish their annual incentives for fiscal 2020 given concerns about the Company’s potential cash situation due to the COVID-19 pandemic and the pandemic’s impact on the workforce.

In fiscal 2020, the non-discretionary incentive calculation of EBITDA As Defined and AOP, with each component weighted equally, yielded 76.5% of the target. The Company’s EBITDA As Defined was $2,278 million and the midpoint of the Company’s initial guidance, as adjusted by the incremental EBITDA As Defined guidance was $2,825 million. The Company’s actual AOP was $187.97 as compared to the AOP target of $259.55. The $259.55 target represented growth of 17.5% from the fiscal 2019 Annual Operational Performance per Diluted Share. The decrease in the actual Annual Operational Performance per Diluted Share under the target was attributable to the impact of the COVID-19 pandemic during the year.

For fiscal 2020, Messrs. Stein, Lisman and Valladares’s target incentives were set at 125%, 80% and 80%, respectively, of their base salaries. Mr. Stein refused to accept cash payment for his incentive. The target incentives (in dollars), the calculated incentives based on the plan as described above, and the actual amounts awarded are set forth in the table below.

Mr. Henderson’s target incentive value was set at 80% of his annual salary, or, in dollars $636,000 and his calculated incentive value was $486,540. The Committee determined that Mr. Henderson should be awarded an incentive reflecting that same calculated value for fiscal 2020. Mr. Henderson receives his annual incentive by means of a grant of options in lieu of cash. See “Employment Agreements—Employment Agreement with Other Named Executive Officers on pages 53-54 for more details. Subsequent to award, Mr. Henderson forfeited one-half of the option award he received in lieu of incentive.

Mr. Howley’s target incentive value was set at 125% of his annual salary or, in dollars $1,814,810 and his calculated incentive value was $1,388,330. The Committee determined that Mr. Howley should be awarded a bonus reflecting that same calculated value for fiscal 2020. Mr. Howley receives his annual incentive by means of a grant of options in lieu of cash. See “Employment Agreements—Employment Agreement with Mr. Howley, Executive Chairman” on pages 51-53 for more details. Subsequent to award, Mr. Howley forfeited one-half of the option award he received in lieu of incentive.

Perquisites

The Company provided no perquisites in 2020.

Employment Agreements

For a description of existing employment agreements, see “Employment Agreements” below.

Severance

All of the Company’s executive officers have severance provisions in their employment agreements, as described below.

35

Talent Retention and Development

We value our employees as they are the talent that helps ensure our future success. As we grow and complete large acquisitions, like the Esterline acquisition in 2019, our reliance on our employees and management and our succession planning become more critical. To support the advancement of our employees, we offer training and development programs encouraging advancement from within and continue to fill our team with strong and experienced management talent. We believe that the opportunity presented by our option program, versus cash compensation, is a key tool in attracting and retaining talent.

We leverage both formal and informal programs to identify, foster, and retain top talent.

As a fast-growing company, we have a continuing need for strong leaders, and with a large workforce, we look internally for emerging leaders. We have established TransDigm University to satisfy this need. TransDigm University is a formal mentoring and education program with a formal curriculum and with established leadership serving as mentors. Program participants learn and develop more advanced skills leading to higher contribution and satisfaction within their roles, while mentors enhance their leadership capabilities by helping others progress. This program helps in identifying top performers, improving employee performance and retention, increasing our organizational learning, and supporting the promotion of our current employees.

TransDigm’s Management Development Program (MDP) identifies new talent and prepares them for success within our organization. The program hires recent MBA graduates who will work for three eight- month stints at a selection of operating units. Program participants gain experience in developing, manufacturing, and selling aerospace components with the intent of becoming fully immersed in the operations of our business. Once the program is complete, MDP participants will be better equipped with the knowledge and experience needed to excel as a manager at TransDigm. Our goal for successful MDP participants is to hire them on a full-time basis at an operating unit.

TransDigm’s executive team also mentors rising talent on a more informal basis. This informal mentorship achieves a number of goals including accelerating the development of top performers, increasing organizational learning, and improving employee performance and retention. The executive team also commits substantial time to evaluating the bench strength of our leadership and working with our leadership to improve their performance.

TransDigm University, MDP, and informal mentoring demonstrate our ongoing commitment and initiatives towards accelerating our future leaders.

Overview of Say-On-Pay Vote History & Advisory Firm Recommendation Effect

Our compensation philosophy and means of compensation have remained consistent over time. As more fully reflected in this Compensation Discussion and Analysis, we believe in paying below our peers in salary and bonus compensation and above our peers in equity compensation—in the form of options that vest on performance criteria. We pay dividend equivalent payments on options because of our unusual capital allocation strategy and we do not want dividend decisions to negatively impact our management. The Committee considers the ability of optionholders to share in the benefits of value creation right alongside our stockholders as essentially making them whole for keeping fully vested options. The Committee does not consider the amount of DEPs when considering compensation. None of these features or philosophies have changed in over a decade.

The Company has historically and routinely engaged with stockholders regarding the Company’s compensation and other issues of importance to stockholders. The outreach is conducted by some combination of members of our Compensation Committee, Chief Financial Officer, General Counsel and Vice President of Investor Relations participated in the outreach, utilizing an interview and

36

discussion format during which management answered shareholders’ questions and provided rationale and context for various features of our compensation program.

Outreach for preceding annual meetings in 2018 and 2019 had the following results:

Outreach for the fiscal year 2020 had the following results:

37

38

Results of Say-On-Pay Vote

Say-On-Pay results for 2015-2017 annual meetings were 90.80%, 89.94% and 95.19%, respectively, in favor of SOP. The compensation plan structure remained consistent in 2017 but the Company reported a large magnitude of pay for the Company’s then-Chief Executive Officer, Mr. Howley, resulting from dividend equivalent payments related to two dividends totaling $46.00 per share paid during the year and one proxy advisory firm recommended against SOP at the 2018 annual meeting and the stockholder vote of 64.64% reflected that adverse recommendation. For fiscal 2018, compensation for Mr. Howley was significantly less but Mr. Stein was promoted to Chief Executive Officer and received a large grant of options upon his promotion. On a combined basis, our CEO compensation again appeared to be high, but our compensation program features and philosophy remained steadfast. Again, one proxy advisory firm recommended against SOP at the 2019 annual meeting and the stockholder votes of 67.48% in favor reflected that adverse recommendation. At the 2020 annual meeting two proxy advisory firms recommended against due to the prior low votes with no responsive action and the vote registered at 66.21% in favor. No action was taken because our investor outreach did not reflect any common concern and the issue appeared to be magnitude but not the structure of our compensation program and the vote appeared to reflect the adverse recommendations. However, the Committee acknowledges the three years of consecutive low SOP vote and responded with the changes previously mentioned.

Compensation Risk

The Compensation Committee has reviewed and evaluated the incentive compensation policies and practices that cover all employees. On the basis of that review, the Company does not believe that its compensation policies and practices pose risks that are reasonably likely to have a material adverse effect on the Company.

40

In light of the COVID-19 pandemic, the Company’s named executive officers, as well as certain other executives, forfeited certain compensation.

The Company recognizes the magnitude of Mr. Howley’s reported “compensation,” particularly in light of the COVID-19 pandemic and notes that over 80% of his reported “compensation” comes from dividend equivalents from dividends paid prior to the COVID-19 pandemic. These dividend equivalents are so high because of Mr. Howley’s long tenure with the Company and tendency to hold his options for a long period, rather than exercise, due to his confidence in the Company’s performance. As a reminder, the Company does not view dividend equivalent payments as compensation and sets compensation exclusive of the impact of dividends and makes dividend decisions exclusive of the compensatory impact.

41

42