LANDSTAR SYSTEM INC

The Company maintains performance-based compensation programs that are designed to encourage the Company’s Named Executives to achieve various financial goals linked to operating objectives both for the Company’s upcoming fiscal year as well as for the longer term performance of the enterprise. The Company’s performance-based compensation programs include the Company’s annual ICP and stock-based awards program, each of which are further described below.

Annual Incentive Compensation Program

The Company’s objective with respect to its annual ICP is to encourage the Company’s Named Executives to achieve various financial goals linked to operating objectives for the Company’s upcoming fiscal year. These annual goals are developed as part of the Company’s budgeting process and in general are aligned with the Company’s long-term objectives with respect to earnings growth. For each annual fiscal period, the Compensation Committee reviews and approves, among other financial metrics, the budgeted amount for diluted earnings per share. In establishing budgeted amounts for diluted earnings per share for 2023, the Company considered 2022 operating results, historical operating trends and forecasted 2023 U.S. economic factors such as industrial production, estimated freight demand and capacity availability. Once the annual budgeted goal is approved by the Compensation Committee, the ICP is designed to incent management to meet and, when possible, to exceed their goals. An executive’s incentive compensation payment continues to increase as actual results for the fiscal year exceed budgeted amounts. As further described below, actual payments under the ICP are calculated based upon how much actual results exceed budgeted diluted earnings per share, using a predetermined formula, up to the maximum annual payment per eligible participant subject to the discretion of the Compensation Committee. For the 2023 fiscal year, the maximum annual ICP payment amount for Mr. Gattoni was $3 million while the maximum annual ICP payment amount for the other eligible participants was $2.5 million.

With respect to the 2023 fiscal year, each of the Named Executives had a “threshold” target under the ICP based on a specific budgeted diluted earnings per share amount approved in connection with the Company’s annual operating budget. The Compensation Committee believes it is appropriate to establish the “threshold” target under the ICP based on diluted earnings per share because (1) each of the Named Executives were in positions of broad responsibility over various components that affect the Company’s diluted earnings per share amount, (2) the Compensation Committee believes that diluted earnings per share is the primary financial measure reflecting the performance of the Company’s overall strategic direction and on that basis evaluates the performance of the Named Executives, (3) the Compensation Committee believes it is appropriate to compensate the Named Executives upon achievement of Company-wide, rather than function-specific budgeted targets in order to focus executive management on Company-wide strategic and financial performance goals, (4) the Compensation Committee, at its discretion, has the ability to adjust calculated bonus amounts in the event of extraordinary or unusual items impacting diluted earnings per share and (5) the Company’s performance-based equity programs use a number of other financial measures, including operating income, pre-tax income per diluted share and total shareholder return (“TSR”), to determine executive compensation under those programs, as further described below under “Stock-based Awards”.

The “threshold” amount of diluted earnings per share under the ICP refers to the amount of diluted earnings per share that would be required to give effect to a“one-time incentive payment.” Budgeted diluted earnings per share does not include the aggregate amount of a“one-time incentive payment.” Therefore, each Named Executive would have received no incentive payout if the Company’s actual diluted earnings per share amount for the fiscal year was less than budgeted diluted earnings per share before giving effect to the funding of aone-time incentive payment. Each Named Executive would have received a“one-time incentive payout” if the Company’s actual diluted earnings per share amount for the fiscal year equaled budgeted diluted earnings per share after giving effect to suchone-time incentive payment.

A“one-time incentive payment” under the ICP equals the executive’s assigned “participant’s percentage participation” multiplied by such executive’s base salary. The participant percentage participations for the Named Executives in 2023 were as follows: Mr. Gattoni, 100%, Mr. Todd, 50%, Mr. Kneller, 50%, Mr. Coro, 50% and Mr. Beacom, 50%.

If the Company’s actual diluted earnings per share for the fiscal year were greater than the “threshold” amount of diluted earnings per share, the ICP payment for each Named Executive would be calculated by multiplying each such executive’s base salary by such executive’s participant percentage participation multiplied by a “multiplier” that is equal to one plus a predetermined factor. The factor equaled 33 1/3 percent for each one percent by which actual diluted earnings per share exceeded threshold diluted earnings per share up to a multiplier of 3.0 for each executive. In other words, each executive would achieve a multiplier of 1.0 if actual diluted earnings per share equaled threshold diluted earnings per share and would achieve an additional multiplier of 2.0 (for a total multiplier of 3.0) if actual diluted earnings per share exceeded threshold diluted earnings per share by six percent. For purposes of this Compensation, Discussion and Analysis and the “Grants of Plan-Based Awards” table below, we refer to the amount of diluted earnings per share required to achieve a multiplier of 3.0 as the “target” amount of diluted earnings per share.

In the event actual diluted earnings per share exceeded target diluted earnings per share, a bonus pool would accrue as if the multiplier continued to increase above 3.0 for each participant under the ICP. The bonus pool amount would be calculated by multiplying each such executive’s base salary by such executive’s participant percentage participation multiplied by an “additional multiplier” that is equal to a predetermined factor specific to the bonus pool. With respect to the calculation of the bonus pool, the factor equaled 16 2/3 percent, not 33 1/3 percent, for each one percent by which actual diluted earnings per share exceeded target diluted earnings per share. In other words, once each executive achieved a multiplier of 3.0, the bonus pool would be calculated based on an additional multiplier of 2.0 if actual diluted earnings per share exceeded target diluted earnings per share by an additional 12 percent. The bonus pool is allocable among ICP participants based on the discretion of the Compensation Committee. These calculations of individual amounts for each Named Executive may be adjusted upwards or downwards at the discretion of the Compensation Committee, subject to the $3 million maximum for the CEO and the $2.5 million maximum for the other Named Executives.

The “threshold” amount of diluted earnings per share under the ICP with respect to the 2023 fiscal year was $9.41 and the “target” amount of diluted earnings per share under the ICP with respect to the 2023 fiscal year was $9.97. Diluted earnings per share for the 2023 fiscal year was $7.36, lower than “threshold” diluted earnings per share by 21.8%, or $2.05 per share, and was lower than “target” diluted earnings per share by 26.2%, or $2.61 per share. As the threshold amount of diluted earnings per share under the ICP with respect to the 2023 fiscal year was not achieved, no payments were made to any of the Named Executives under the ICP for the 2023 fiscal year.

Inclusive of fiscal year 2023, the Company has achieved the “threshold” amount of diluted earnings per share in two of the five preceding fiscal years and six of the preceding ten fiscal years. Inclusive of fiscal year 2023, the Company has achieved the “target” amount of diluted earnings per share in two of the five preceding fiscal years and five of the preceding ten fiscal years.

Stock-based Awards

Under the Company’s 2011 Landstar System, Inc. Equity Incentive Plan (the “Employee Equity Plan”), stock-based awards may be granted to the Company’s Named Executives and certain other key employees. The Compensation Committee determines the type and number of stock-based awards to be granted to a Named Executive based on such Named Executive’s job responsibilities, the individual performance evaluation of such Named Executive and overall Company performance. Stock-based awards are typically granted to Named Executives once a year.

The Compensation Committee believes that restricted stock, restricted stock units (the “RSUs”) and other forms of stock-based awards that may be granted under the Employee Equity Plan are effective methods that may be used as part of the Company’s long-term compensation program. Over each of the past five years, the Compensation Committee approved to Named Executives on an annual basis the grant of performance related stock awards in the form of RSUs (the “Regular RSU Awards”) and time-based restricted stock awards (the “Regular Restricted Stock Awards”). During the past five years, the Compensation Committee has also approvednon-recurring grants of restricted stock (the “Special Restricted Stock Awards”) primarily as a retention tool in connection with the hiring or promotion of certain specific individuals.

Stock-based Awards – Regular RSU Awards

On February 1, 2019, the Company granted an aggregate of 24,066 RSUs to Named Executives. Under these Regular RSU Awards, Mr. Gattoni received 9,724 RSUs, Messrs. Beacom and Kneller each received 4,862 RSUs, Mr. Coro received 3,646 RSUs and Mr. Todd received 972 RSUs. The Compensation Committee awarded Mr. Gattoni a larger grant in recognition of Mr. Gattoni’s broader responsibilities as President and Chief Executive Officer of the Company. The Compensation Committee awarded Mr. Coro a smaller grant of RSUs in light of the overall compensation package agreed to with Mr. Coro in connection with his hiring as of May 1, 2017, which included, among other compensatory items, a cash sign-on bonus payable over two years and a significant grant of restricted stock upon his first day of employment with the Company. Mr. Todd received a smaller grant than the other Named Executives as he was not an executive officer of the Company at the time of this grant. The number of RSUs that vest under the 2019 Regular RSU Award is determined on the third, fourth and fifth anniversary from the date of grant.

On January 31, 2020, the Company granted an aggregate of 23,270 RSUs to Named Executives. Under these Regular RSU Awards, Mr. Gattoni received 8,950 RSUs, Messrs. Beacom, Coro and Kneller each received 4,475 RSUs and Mr. Todd received 895 RSUs. The Compensation Committee awarded Mr. Gattoni a larger grant in recognition of Mr. Gattoni’s broader responsibilities as President and Chief Executive Officer of the Company. Mr. Todd received a smaller grant than the other Named Executives as he was not an executive officer of the Company at the time of this grant. The number of RSUs that vest under the 2020 Regular RSU Award is determined on the third, fourth and fifth anniversary from the date of grant.

On January 29, 2021, the Company granted an aggregate of 18,440 RSUs to Named Executives. Under these Regular RSU Awards, Mr. Gattoni received 7,093 RSUs, Messrs. Beacom, Coro, and Kneller each received 3,546 RSUs and Mr. Todd received 709 RSUs. The Compensation Committee awarded Mr. Gattoni a larger grant in recognition of Mr. Gattoni’s broader responsibilities as President and Chief Executive Officer of the Company. Mr. Todd received a smaller grant than the other Named Executives as he was not an executive officer of the Company at the time of this grant. The number of RSUs that vest under the 2021 Regular RSU Award is determined on the third, fourth and fifth anniversary from the date of grant.

On January 28, 2022, the Company granted an aggregate of 18,701 RSUs to Named Executives. Under these Regular RSU Awards, Mr. Gattoni received 6,562 RSUs, Mr. Kneller received 4,921 RSUs, Messrs. Beacom and Coro each received 3,281 RSUs, and Mr. Todd received 656 RSUs. The Compensation Committee awarded Mr. Gattoni a larger grant in recognition of Mr. Gattoni’s broader responsibilities as President and Chief Executive Officer of the Company. Mr. Todd received a smaller grant than the other Named Executives as he was not an executive officer of the Company at the time of this grant. The number of RSUs that vest under the 2022 Regular RSU Award is determined on the third, fourth and fifth anniversary from the date of grant.

On February 3, 2023, the Company granted an aggregate of 18,024 RSUs to Named Executives. Under these Regular RSU Awards, Mr. Gattoni received 5,546 RSUs, Mr. Kneller received 4,159 RSUs, and Messrs. Beacom, Coro and Todd each received 2,773 RSUs. The Compensation Committee awarded Mr. Gattoni a larger grant in recognition of Mr. Gattoni’s broader responsibilities as President and Chief Executive Officer of the Company. The number of RSUs that vest under the 2023 Regular RSU Award is determined on the third, fourth and fifth anniversary from the date of grant.

For the Regular RSU Awards, each RSU represents the contractual right to receive up to two shares of Common Stock (subject to adjustment as provided in the Employee Equity Plan) when the award becomes vested. The number of Regular RSU Awards that vest each year is determined by (a) multiplying the number of RSUs credited to the Named Executive as of the applicable vesting date by (b) the Performance Multiple derived from the chart below, and (c) subtracting therefrom the number of RSUs that have previously vested; provided that, in no event, may the aggregate number of RSUs that become vested exceed 200% of the RSUs credited to the Named Executive under the applicable grant.

For purposes of the Regular RSU Awards, the determination of the Performance Multiple is based on the achievement of the applicable Performance Hurdle. The Performance Hurdle means the sum of the average of the percentage change (positive or negative) in operating income andpre-tax income per diluted share, in each case from continuing operations, from the most recently completed fiscal year as compared to the results from continuing operations for the base year, and is as set forth in the chart below, with linear interpolation between Performance Hurdles:

Pre-tax income per diluted share rather than anafter-tax financial earnings metric is used as part of the Performance Hurdle because it is a financial metric that will not be impacted by changes to applicable tax rates, and in particular, potential future changes to the federal corporate tax rate, during the performance period of the applicable RSU. With respect to the 2021 Regular RSU Awards only, the Compensation Committee adjusted the Performance Hurdle to reflect the add back ofnon-cash impairment charges of approximately $2.6 million recorded in the Company’s 2020 fiscal year related to certain assets, primarily customer contract and related customer relationship intangible assets, held by the Company’s Mexican subsidiaries.

No dividends are paid on the Regular RSU Awards and Regular RSU Awards have no voting rights. However, dividend equivalents are credited to the Named Executive with respect to the Regular RSU Awards each time that a dividend is paid on the Company’s Common Stock. The aggregate amount of such dividend equivalents so credited in respect of each such dividend are equal to the dividend paid on a share of Common Stock multiplied by, respectively, the number of outstanding 2019, 2020, 2021, 2022 and 2023 Regular RSU Awards credited to the Named Executive on the dividend record date. The dividend equivalents are converted into additional 2019, 2020, 2021, 2022 and 2023 Regular RSU Awards credited to the Named Executive on the dividend payment date based upon the fair market value of a share of Common Stock on such date.

The Compensation Committee has designed the manner in which Regular RSU Awards are deemed to be earned to reflect the level of performance that the Committee expects to be achieved, with a targeted number of units earned if the targeted level of performance is attained, and a maximum number of units earned if the maximum level of performance is attained. An increasing percentage of the Regular RSU awards is earned based on an increasing level of positive average change in operating income andpre-tax income per diluted share during the five year performance period, such that no portion of the award is earned if there is no positive change based on the applicable calculation, 100% of the number of units credited is earned if the “target” level of positive increase is achieved, and a maximum of 200% of the number of units credited is earned if the “maximum” level of positive increase is achieved, with interpolation between these levels of performance. The Compensation Committee believes the use of a “target” and “maximum” sets expectations associated with these awards both internally to employee recipients as well as to stockholders and other third parties to help them understand the derivation of the value attributed by the Company to these awards at the time of grant. The Compensation Committee further believes that the manner in which these awards are deemed to be earned emphasizes to employee recipients and investors that the expectation at the time of grant is that the employee recipients would need to perform at a high level in order for the Company’s performance to reach the targeted level of operating income andpre-tax income per diluted share for the employees to earn the “target” number of units during the term of the award, and, moreover, that superior performance by the Company is required for the employee recipients to earn the “maximum” performance-based award. With respect to each of these Regular RSU Awards, the number of RSUs that vest is determined on the third, fourth and fifth anniversary from the date of grant. The Compensation Committee believes a vesting schedule of no less than three, and up to five, years in duration from the date of grant is consistent with the long-term performance goals these awards are intended to reward.

The Compensation Committee has established post-vesting holding period requirements with respect to shares of Common Stock received upon vesting of Regular RSU Awards. Each Named Executive is subject to a one year post-vesting holding requirement with respect to the shares received upon settlement of Regular RSU Awards, net of any applicable withholding obligations in connection with such settlement.

Stock-based Awards – Regular Restricted Stock Awards

On January 31, 2020, 11,633 shares of restricted stock were issued in aggregate to Named Executives that vested in three equal annual installments on January 31 of 2021, 2022 and 2023. Under these restricted stock awards, Mr. Gattoni received 4,475 shares, Messrs. Beacom, Coro and Kneller each received 2,237 shares and Mr. Todd received 447 shares. The Compensation Committee awarded Mr. Gattoni a larger grant in recognition of Mr. Gattoni’s broader responsibilities as President and Chief Executive Officer of the Company. Mr. Todd received a smaller grant than the other Named Executives as he was not an executive officer of the Company at the time of this grant.

On January 29, 2021, 9,219 shares of restricted stock were issued in aggregate to Named Executives that vest in three equal annual installments on January 31 of 2022, 2023 and 2024. Under these restricted stock awards, Mr. Gattoni received 3,546 shares, Messrs. Beacom, Coro, and Kneller each received 1,773 shares and Mr. Todd received 354 shares. The Compensation Committee awarded Mr. Gattoni a larger grant in recognition of Mr. Gattoni’s broader responsibilities as President and Chief Executive Officer of the Company. Mr. Todd received a smaller grant than the other Named Executives as he was not an executive officer of the Company at the time of this grant.

On January 28, 2022, 8,529 shares of restricted stock were issued in aggregate to Named Executives that vest in three equal annual installments on January 31 of 2023, 2024 and 2025. Under these restricted stock awards, Mr. Gattoni received 3,281 shares, Messrs. Beacom, Coro and Kneller each received 1,640 shares, and Mr. Todd received 328 shares. The Compensation Committee awarded Mr. Gattoni a larger grant in recognition of Mr. Gattoni’s broader responsibilities as President and Chief Executive Officer of the Company. Mr. Todd received a smaller grant than the other Named Executives as he was not an executive officer of the Company at the time of this grant.

On February 3, 2023, 8,317 shares of restricted stock were issued in aggregate to Named Executives that vest in three equal annual installments on January 31 of 2024, 2025 and 2026. Under these restricted stock awards, Mr. Gattoni received 2,773 shares and Messrs. Beacom, Coro, Kneller and Todd each received 1,386 shares. The Compensation Committee awarded Mr. Gattoni a larger grant in recognition of Mr. Gattoni’s broader responsibilities as President and Chief Executive Officer of the Company.

The Compensation Committee believes that whereas the Regular RSU Awards are designed to incentivize the attainment of specific financial goals over a multi-year period (as well as rewarding for stock price appreciation), the Regular Restricted Stock Awards serve as a retention tool as they retain value during periods of adverse market volatility while also rewarding for stock price appreciation over time. The Compensation Committee believes that these two equity vehicles when used in conjunction with each other serve to reward long-term financial performance and stock price appreciation while also providing a retention-based benefit for the Named Executive in the event of shorter term market and/or economic turbulence. In determining the amount of the Regular RSU Awards and the Regular Restricted Stock Awards for each Named Executive, the Compensation Committee considered the full equity compensation component of each Named Executive’s annual compensation and allocated such component between Regular RSU Awards and Regular Restricted Stock Awards.

Stock-based Awards – Special Restricted Stock Awards

On January 29, 2021, the Compensation Committee awarded 1,773 shares of restricted stock to Mr. Todd that vest in three equal annual installments on January 31 of 2024, 2025 and 2026. The Compensation Committee awarded Mr. Todd thisnon-recurring grant as a special retention award and in connection with his appointment as principal accounting officer.

Stock-based Awards – Grants of TSR-based RSU Awards to the CEO

During 2018, the Company and Mr. Gattoni entered into an agreement granting Mr. Gattoni 9,324 RSUs that vest based on a market condition (the “2018 TSR RSU Award”). Portions of the 2018 TSR RSU Award vested on June 30, 2022 and June 30, 2023. In general, the remainder of the 2018 TSR RSU Award may vest on June 30, 2024 based on the Company’s TSR compound annual growth rate (“CAGR”) over the vesting period, adjusted to reflect dividends (if any) paid during such period and capital adjustments as may be necessary. The maximum number of common shares available for issuance under the 2018 TSR RSU Award equals 150% of the number of RSUs awarded. The fair value of this RSU award was determined at the time of grant based on the expected achievement of the market condition at the end of each vesting period.

During 2019, the Company and Mr. Gattoni entered into an agreement granting Mr. Gattoni 9,725 RSUs that vest based on a market condition (the “2019 TSR RSU Award”). A portion of the 2019 TSR RSU Award vested on June 30, 2023. In general, the remainder of the 2019 TSR RSU Award may vest on June 30 of 2024 and 2025 based on the Company’s TSR CAGR over the vesting periods, adjusted to reflect dividends (if any) paid during such periods and capital adjustments as may be necessary. Upon Mr. Gattoni’s retirement from employment, anticipated to occur on July 1, 2024, he will forfeit the opportunity for additional vesting under the 2019 TSR RSU Award following his retirement date. The maximum number of common shares available for issuance under the 2019 TSR RSU Award equals 150% of the number of RSUs awarded. The fair value of this RSU award was determined at the time of grant based on the expected achievement of the market condition at the end of each vesting period.

Under the terms of the 2018 TSR RSU Award and the 2019 TSR RSU Award (collectively the “TSR RSU Awards”), TSR CAGR over the applicable vesting period is determined as of the beginning and end of each performance period using a sixty day measurement period, other than in the event of a change in control. The “payout percentage” as of each vesting date is as follows, with straight line interpolation between performance levels:

To the extent these RSUs are not vested at the maximum level in the chart above as of the first or second vesting dates, such RSUs will again be eligible to vest at the next vesting date based on the “payout percentage” achieved as of such next vesting date. In addition, if any dividends are paid by the Company during the vesting period, dividend equivalents will be credited to Mr. Gattoni under the applicable award as additional RSUs that are eligible to vest based on the “payout percentage” achieved as of the future vesting dates of the underlying RSUs to which such dividend equivalents relate. Any RSUs that vest will be settled in shares of Common Stock as soon as practicable after the applicable vesting date. With respect to the 2018 TSR RSU Award, any units that do not become vested as of June 30, 2024 (or earlier upon Mr. Gattoni’s termination of employment or a change in control of the Company) will be forfeited. With respect to the 2019 TSR RSU Award, any units that do not become vested upon the earlier of Mr. Gattoni’s termination of employment (anticipated to occur on July 1, 2024) or a change in control of the Company will be forfeited.

Mr. Gattoni’s right to receive shares underlying each of the TSR RSU Awards is generally conditioned upon his continued employment through the applicable vesting dates. In the event of his death or disability prior to a vesting date, a pro rata number of the units then credited to Mr. Gattoni pursuant to the applicable award (based on the number of days he remained employed during the vesting period) will vest based on the “payout percentage” achieved as of his termination of employment. Similarly, if there is a change in control of the Company prior to a vesting date, a pro rata number of the units then credited to Mr. Gattoni pursuant to the applicable award (based on the number of days during the vesting period prior to the change in control) will vest based on the “payout percentage” achieved as of the date of the change in control.

There are several reasons why the Compensation Committee believes the nature and terms of these grants of TSR RSU Awards to Mr. Gattoni, on the one hand, as opposed to the Regular RSU Awards, including those to Mr. Gattoni, on the other, are appropriate. The TSR RSU Awards are intended to tie the amount of future vesting directly to the Company’s TSR over the vesting period, using the growth in TSR as an additional means to measure the performance of the Chief Executive Officer of the Company. The Regular RSU Awards are intended to be annual, recurring grants, subject to the discretion of the Compensation Committee, that the Compensation Committee believes will be the principal long-term performance based compensation vehicle through which the Named Executives will be granted additional equity in the Company, along with, to a lesser extent, grants of restricted stock. The Compensation Committee believes that growth in operating income andpre-tax income per diluted share are key financial measures reflecting the long-term growth of the enterprise. The Compensation Committee also believes that the Company would have to achieve superior financial performance in order for a Named Executive to vest at the maximum level with respect to a Regular RSU Award granted in 2023. For example, in order for a Named Executive to vest at the maximum level with respect to a Regular RSU Award granted in 2023, the Company would need to achieve in 2025, 2026 or 2027, an average of a 100% increase in operating income andpre-tax earnings per diluted share compared to those achieved in fiscal year 2022.

The Company believes that the granting of stock-based awards in the form of RSUs and restricted stock is designed to encourage the creation of long-term stockholder value as the number of RSUs that vest is dependent upon growth in the Company’s operating income andpre-tax income per diluted share and their value varies directly with the Company’s stock price and the benefit realized from restricted stock varies directly with the Company’s stock price. Further, the Compensation Committee believes that the Company’s use of stock-based awards is key as a retention tool, as the continued employment of the Named Executives is an important factor relating to the Company’s strategic execution and growth.