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
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March 23, 201722, 2018
Dear Fellow Shareholder:
We are pleased to presentsend you with the 20172018 General Dynamics Proxy Statement. We remain steadfast in our commitmentcommitted to sound corporate governance practices and maintainingto a strong link between executive pay and company performance in our executive compensation program. The details of our governance and executive compensation programs are presented throughoutcontained in this Proxy Statement and referenced documents.
ShareholderOur shareholder engagement program continued in 2017 and remains a key focus for our company to ensure we are aware of your top priorities. Over the past year, we have spoken with shareholders about a number of critical topics, including our company strategy, changes to our executive compensation program and our corporate governance practices. Overall, weWe continue to be encouraged thatby the positive shareholder feedback regarding our shareholders view favorably ourcorporate governance and executive compensation and corporate governance programs. We value the input we receive from our shareholders.
Our Board continues to reflect a diverse and extremely well-qualified group of business leaders, aerospace and defense industry experts and financial and strategic advisors. The addition of Peter Wall, who joinedTo ensure that our Board in August 2016, further strengthensrepresents diverse skills and experiences, we have added several new directors through a thoughtful and deliberate process over the Board’s expertise in global security issues and understanding of key customer concerns. Catherine Reynolds,past several years. Ward Nye, who is nominated for election to the Board at the Annual Meeting, will bring to the Board additional financialextensive knowledge of manufacturing and business expertiseindustrial operations, as well as providing additional public company governance experience. Through these additions we will continueperspective to ensure that the tenureBoard.
Two of our longer-serving directors remains balanced.will be retiring from the Board in May pursuant to our Director Retirement Policy. We are grateful to Mr. Chabraja for his wise counsel and 24 years of service on the Board, including 13 years as our Chairman. Mr. Keane joined our Board in 2004 and we appreciate the sound guidance he has provided over the years.
2016 was a year of continuing improvement and accomplishment across our company. Our company enjoyed outstanding operating performance was strong with growth in many financial metrics, including2017. Revenue, operating earnings, operating margin, return on sales and earnings per share all increased from 2016. Free cash flow and return on invested capital, andtwo key metrics for our executive compensation program, also increased, with free cash flow representing 119 percent of earnings per share, as compared with 2015, which was also an outstanding year for operating performance. With totalfrom continuing operations. Our backlog ofincreased nearly $60$1 billion from 2016, supporting our company remains well-positioned for sales and earningslong-term growth in the coming years as we execute on our order book.expectations.
On behalf of the Board of Directors, I invite you to attend the 20172018 Annual Meeting of Shareholders and, even if you are not able to attend, encourage you to vote by proxy. The accompanying Proxy Statement contains information about the matters on which you are asked to vote. I urge you to read the materials carefully and vote in accordance with the Board of Directors’ recommendations. Your vote is very important.
Sincerely,
Phebe N. Novakovic
Chairman and Chief Executive Officer
2941 Fairview Park Drive, Suite 100
Falls Church, Virginia 22042
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Important Notice Regarding the Availability of Proxy Materials
for the Shareholder Meeting to Be Held on May 3, 20172, 2018
The Proxy Statement and 20162017 Annual Report are Available at
www.generaldynamics.com/2017proxy2018proxy
You are invited to our Annual Meeting of Shareholders of General Dynamics Corporation, a Delaware corporation, on Wednesday, May 3, 2017,2, 2018, at 9 a.m. local time at the General Dynamics Corporation headquarters located at 2941 Fairview Park Drive, Falls Church, Virginia. Proposals to be considered at the Annual Meeting include:
the election of 1110 directors from the nominees named in the Proxy Statement (proposal 1);
an advisory vote on the selection of KPMG LLP, an independent registered public accounting firm, as the company’s independent auditors for 20172018 (proposal 2);
an advisory vote to approve executive compensation (proposal 3);
an advisory vote ona shareholder proposal as described in this Proxy Statement, provided it is presented properly at the frequency of future advisory votes on executive compensationmeeting (proposal 4);
the approval of the General Dynamics Corporation Amended and Restated 2012 Equity Compensation Plan (proposal 5); and
the transaction of all other business that properly comes before the meeting or any adjournment or postponement of the meeting.
The Board of Directors unanimously recommends that you vote FOR proposals 1, 2 3 and 5.3.
The Board of Directors unanimously recommends for proposal 4 that you vote to hold future executive compensation advisory votes EVERY YEAR.AGAINST proposal 4.
Shareholders may raise other matters as described in the accompanying Proxy Statement.
The Board of Directors set the close of business on March 6, 2017,8, 2018, as the record date for determining the shareholders entitled to receive notice of, and to vote at, the Annual Meeting. It is important that your shares be represented and voted at the meeting. Please complete, sign and return a proxy card, or use the telephone or Internet voting systems.
A copy of the 20162017 Annual Report accompanies this Notice and Proxy Statement and is available on the website listed above.
By Order of the Board of Directors,
Gregory S. Gallopoulos
Secretary
Falls Church, Virginia
March 23, 201722, 2018
General Dynamics 20172018 Proxy Statement
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Components of Executive Compensation and Alignment with Company Performance | 33 | |||
Appendix A | ||||
General Dynamics 20172018 Proxy Statement
PROXY STATEMENT
The Board of Directors of General Dynamics Corporation is soliciting your proxy for the Annual Meeting of Shareholders to be held on May 3, 2017,2, 2018, at 9 a.m. local time, or at any adjournment or postponement of the meeting. This Proxy Statement and the accompanying Notice of Annual Meeting of Shareholders and proxy card are being distributed on or about March 23, 2017,22, 2018, to holders of General Dynamics common stock, par value $1.00 per share (Common Stock).
This summary highlights selected information that is provided in more detail throughout this Proxy Statement. This summary does not contain all of the information you should consider before voting. You should read the full Proxy Statement before casting your vote.
VOTING MATTERSAND BOARD RECOMMENDATIONS
At this year’s Annual Meeting, we are asking our shareholders to vote on the following matters:
PROPOSAL |
BOARD
| ADDITIONAL INFORMATION | ||
Proposal 1:
| FOR each nominee |
See pages
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Proposal 2:
| FOR | See page | ||
Proposal 3:
| FOR | See page | ||
Proposal 4:
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| See pages |
ANNUAL MEETING INFORMATION
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Date
| Wednesday, May
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Time
| 9 a.m. local time
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Location
| 2941 Fairview Park Drive, Falls Church, Virginia
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How to Vote
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• By Internet
| Access www.ProxyVote.com.
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• By Telephone | Call1-800-690-6903 if you are a registered holder. If you are a beneficial holder, call the phone number listed on your voter instruction form.
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• By Mail
| Sign and date each proxy card received and return each card using the prepaid postage envelope.
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• In Person
| Attend the Annual Meeting and vote by ballot.
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Additional information about the Annual Meeting and voting can be found beginning on page 71.58.
General Dynamics 20172018 Proxy Statement 1
Proxy Summary
20172018 BOARDOF DIRECTORS NOMINEES
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DIRECTOR NOMINEES
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Nominee | Director Since | Independent | Primary Occupation | |||||
James S. Crown*
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| President, Henry Crown and Company
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Rudy F. deLeon
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2014
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Yes
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Senior Fellow, Center for American Progress
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Lester L. Lyles
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2003
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Yes
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Retired General, U.S. Air Force
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1
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Mark M. Malcolm
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2015
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Yes
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Former President and CEO, Tower International
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1
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Phebe N. Novakovic
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2012
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Chairman and CEO, General Dynamics
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1
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C. Howard Nye
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—
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Yes
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Chairman, President and CEO, Martin Marietta Materials
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1**
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William A. Osborn
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2009
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Yes
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Former Chairman and CEO, Northern Trust Corporation
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2
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Catherine B. Reynolds
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2017
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Yes
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Chairman and CEO, EduCap
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1
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Laura J. Schumacher
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2014
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Yes
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EVP, External Affairs and General Counsel, AbbVie
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Peter A. Wall
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2016
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Yes
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Retired General, British Army
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* | Lead Director |
** | Mr. Nye also currently serves on the Board of Directors of Cree, Inc. He has announced that he will not be standing forre-election to that board at the 2018 annual meeting of Cree shareholders. |
Balanced Director Tenure (Current Directors) | Strong Director Engagement ( | |
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A COMMITMENTTO SOUND CORPORATE GOVERNANCE
Our Board of Directors believes that a commitment to good corporate governance enhances shareholder value. Sound corporate governance starts with a strong value system, and the value system starts in the boardroom. The General Dynamics ethos – our distinguishing moral nature – is rooted in five overarching values.
THE GENERAL DYNAMICS ETHOS | ||||
Honesty
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We tell the truth to ourselves and to others. Honesty breeds transparency.
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Trust
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We trust each other to do the right thing.
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Humanity
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We are compassionate and empathetic. We respect the dignity, rights and autonomy of others.
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Alignment
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We are united in our commitment to our values.
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Value Creation
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We create value by doing the right thing for our shareholders, our customers, our employees and our communities.
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Years on Board % = Percentage of meetings attended by directors
2 General Dynamics 20172018 Proxy Statement
Proxy Summary
Highlights of our governance practices include:
Governance Practice | For more | |||||||
| • Market-leading stock ownership requirements for our executive officers require them to hold shares of our Common Stock worth eight to 15 times base salary. Director stock ownership guidelines provide that our directors should hold shares of our Common Stock having a value of at least
| P. | ||||||
• Weprohibit hedgingand pledging of our Common Stock by directors and executive officers. | P. | |||||||
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• Anindependent Lead Director with a robust set of responsibilities is elected annually by the Board and provides additional independent oversight of senior management and board matters.
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• Our directors are elected annuallybased on amajority votingstandard for uncontested elections. We have aresignation policy if a director fails to receive a majority of votes cast.
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• Our directors attended on average more than
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• Ournon-management directors meet in executive session,without management present,following each regularly scheduled meeting, presided by the Lead Director.
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• Our directors are restricted in the number of other boards on which they may serve toprevent overboarding.
| Corporate Governance Guidelines* | |||||||
• Ourrelated person transactions policyensures appropriate Board review of related person transactions.
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• AnnualBoard and committee self-assessmentsmonitor the performance and effectiveness of the Board and its committees.
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• DiligentBoard oversight of riskis a cornerstone of the company’s risk management program.
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| • Ourethics program includes strong Codes of Ethics for all employees globally, with specific codes for our directors and financial | Standards of Business Ethics and
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• Disclosure of ourcorporate political contributions and ourtrade association dues describes the process and oversight we employ in each area.
| www.gd.com/AdditionalDisclosure | |||||||
• We have a strong corporate commitment to respect the dignity,human rights and autonomy of others.
| Corporate Sustainability Report** | |||||||
| • Our shareholders have the ability to nominate director candidates and have those nominees included in our proxy statement, subject to meeting the requirements in our Bylaws, a shareholder right known asproxy access. | Bylaws* | ||||||
• Wedo not have a shareholder rights plan, or poison | ||||||||
• Our shareholders have the right to request aspecial meeting of shareholders. | Corporate Governance Guidelines* Bylaws* |
* | Our Corporate Governance Guidelines and Bylaws are available on our website at www.gd.com/CorporateGovernance. |
** | Our Standards of Business Ethics and Conduct, Codes of Ethics and Corporate Sustainability Report are available on our website at www.gd.com/Responsibility. |
General Dynamics 20172018 Proxy Statement 3
Proxy Summary
Our Board is Committed to Robust Shareholder Engagement.Our shareholder engagement program allows us to discuss corporate governance, and executive compensation and corporate responsibility matters with a significant number of shareholders, as well as other items of interest to our shareholders. As part of our ongoing program, in 20162017 we reached out to holders representing overapproximately 65 percent of our outstanding common stock. In addition, in 2015At the Board formedlevel, anad hoc group of directors, anchored by the chairman and the independent Lead Director, is in place to liaise with significant shareholders. Our Board remains committed to soliciting and understanding shareholder views and responding as appropriate.
OUR SHAREHOLDER ENGAGEMENT PROGRAM
KEY THEMES DISCUSSEDWITH SHAREHOLDERSIN 2017 | ||
Board Refreshment and Composition | Shareholders expressed support for recent additions to the Board, as well as the experience and skill set of incumbent directors | |
Risk Management | Shareholders reinforced the importance of a strong and effective risk management program overseen by the Board, including risks associated with cyber security threats, human capital management and key programs | |
Executive Compensation | Shareholders expressed strong overall support for our executive compensation program and link between pay and performance | |
Corporate Responsibility | Shareholders discussed their priorities in the evolving area of corporate responsibility, including consideration of climate change risks, health and safety matters and employee resources |
4 General Dynamics 2018 Proxy Statement
Proxy Summary
PERFORMANCEAND EXECUTIVE COMPENSATION HIGHLIGHTS
Creating SustainableDelivering Long-Term Shareholder Value. In 2016, we continued2017, each of our long-termbusinesses contributed to strong operating performance through exceptional execution and a focus on operational excellence, resulting in positive operating leverage, strong earnings and record-setting margin.delivering shareholder value. We deployed capital prudently through continued investment in the future growth areas of our company and by returning 1.6 times our freethe acquisition of several accretive businesses. We also used $2.9 billion of cash flow from operations to shareholders in the form of dividends2017 for share repurchases and share repurchases.dividends. In addition to our strong operating performance, we added newseveral significant contracts to backlog, creating the opportunity for strong execution well into the future.resulting in a robust backlog that supports our long-term growth expectations.
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Earnings from Continuing Operations | $2.9 billion | Increased 8.7% over 2016 | ||
Operating Margin | 13.5% | Increased in | ||
Free Cash Flow from Operations** | $3.5 billion | Significantly exceeded company expectations | ||
Return on Invested Capital** | 16.8% | 50 basis points higher than | ||
Quarterly Dividends | $0.84 per share | 20th consecutive year with a dividend increase | ||
Order Backlog | $63.2 billion | Increased nearly $1 billion |
* | We adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, on January 1, 2017. Prior-period information for 2015 and 2016 has been restated and any comparisons shown in this proxy statement are to the comparable information. |
** | See Appendix |
A Consistent Focus on Aligning Compensation with Performance. Our compensation philosophy at General Dynamics is to align executive compensation with company, business group and individual performance, and to provide the incentives necessary to attract, motivate and retain the executives that help drive the company’s success. We have received positive shareholder feedback about our executive compensation program, and received a greater than 90%96% vote in favor of our executive compensation program at last year’s annual meeting. Our program’spay-for-performance philosophy has generated strong results for the company.
Commitment to Continuous Assessment of our Compensation Program. As a result of our ongoing conversation with shareholders, we made several changes to our compensation program in 2016 and early 2017. These changes are designed to better align with market best practices and provide for increased transparency and alignment between senior management and shareholders. In 2016, we eliminated all legacy excise taxgross-ups and established a target bonus program for our named executive officers which provides for a cap on bonuses paid to named executive officers. In early 2017, we established market-based long-term incentive (LTI) guidelines for our named executive officers.
4 General Dynamics 20172018 Proxy Statement 5
ELECTIONOFTHE BOARDOF DIRECTORSOFTHE COMPANY
(PROPOSAL 1)
Director Nominations. General Dynamics’ directors are elected at each annual meeting of shareholders and hold office forone-year terms or until successors are elected and qualified. The Nominating and Corporate Governance Committee considers director nominees from various sources and chooses nominees with the primary goal of ensuring the Board collectively serves the interests of shareholders.
Diversity and Inclusion.In order to sustain a global business, we must bring together a group of people with a vision for the future and diversity of thought. We must have leadership, at both the executive and Board levels, to develop and execute our business objectives better than our competition. At the heart of our company are diverse executives, managers and employees worldwide who rely on their intimate knowledge of customer requirements and a unique blend of skillskills and innovation to develop and deliver the best possible products and services.
The nominees for election to the Board come from a variety of backgrounds and bring a diverse set of skills and experiences to the boardroom. This ensures that our directors bring a broad perspective to the company on a range of important issues.
6 General Dynamics 20172018 Proxy Statement 5
Election of Directors
Director Skills and Experience.In assessing director candidates, the Nominating and Corporate Governance Committee considers the background and professional experience of the candidates in the context of the current Board composition to ensure a diverse range of backgrounds, talent, skill and expertise, including gender and racial diversity. Relevant criteria considered by the committee include: business and financial expertise, technical expertise and familiarity with issues affecting aerospace and defense businesses. The committee also carefully considers any potential conflicts of interest. All nominees must possess good judgment, an inquiring and independent mind, and a reputation for the highest personal and professional ethics, integrity and values. Nominees must be willing to devote sufficient time and effort to carrying out their duties and responsibilities through attendance and engagement with the company, as well as a commitment to serving on the Board for an extended period of time.
For the nomination of director candidates forre-election, the committee considers the factors described above and each director’s attendance record at, and participation in, Board and committee meetings and participation in, and contributions to, Board and committee activities.
In considering Board nominees, the Nominating and Corporate Governance Committee considers each individual’s background and personal and professional experiences in addition to the general qualifications. Nominees are evaluated in the context of the Board as a whole, with a focus on achieving an appropriate mix of skills needed to lead the company at the Board level. The committee regularly assesses and communicates with the Board about the current and future skills and backgrounds that wouldto ensure the Board maintains an appropriate mix. SuchThese skills include those highlightedare reflected in the following table. Each nominee also possesses additional skills and experience that are not highlighted among those listed below.
DIRECTOR NOMINEES SKILLS, KNOWLEDGEAND EXPERIENCE MATRIX | ||||||||||||
Aerospace | Corporate | Finance or | Government | Global | Operations and | |||||||
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James S. Crown | ✓ | |||||||||||
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| ✓ |
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Rudy F. deLeon | ✓ | ✓ |
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| ✓ | ✓ | ||||||||||
Lester L. Lyles | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ||||||
Mark M. Malcolm | ✓ | ✓ | ||||||||||
| ✓ | ✓ | ||||||||||
Phebe N. Novakovic | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ||||||
C. Howard Nye | ✓ | ✓ | ✓ | ✓ | ✓ | |||||||
William A. Osborn | ✓ | ✓ | ✓ | ✓ | ||||||||
Catherine B. Reynolds | ✓ | ✓ | ✓ | ✓ | ||||||||
Laura J. Schumacher | ✓ | ✓ | ✓ | ✓ | ||||||||
Peter A. Wall | ✓ | ✓ | ✓ | |||||||||
Why is this important for General Dynamics? | Supports oversight of the company’s business performance and strategic development in our industry | Ensures the background and knowledge necessary to provide effective oversight and governance | Enables in-depth statements | Critical for an understanding of the complex regulatory and governmental environment involving our business | Important for oversight of a complex organization with operations worldwide | Necessary in overseeing a complex, global manufacturing company |
6 General Dynamics 20172018 Proxy Statement 7
Election of Directors
20172018 Director Nominees.The following 1110 nominees are standing for election to the Board of Directors at the Annual Meeting. If any nominee withdraws or for any reason is unable to serve as a director, your proxy will be voted for any remaining nominees (except as otherwise indicated in your proxy) and any replacement nominee designated by the Nominating and Corporate Governance Committee of the Board of Directors.
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JAMES S. CROWN | • Lead Director since May 2010 • President of Henry Crown and Company since 2002; Vice President of Henry Crown and Company, 1985 to 2002 • Mr. Crown currently serves as a director of J.P. Morgan Chase & Co.
Key Attributes/Skills/Expertise:As the longest-serving member of our Board and a significant shareholder, Mr. Crown has an abundance of knowledge regarding General Dynamics and our history. As president of Henry Crown and Company, a private investment firm with diversified interests, Mr. Crown has broad experience in business management and capital deployment strategies. His many years of service as a director of our company and two other large public companies provide him with a deep understanding of the roles and responsibilities of a board of a public company. | |
LEAD DIRECTOR C Audit Compensation Nominating and Corporate Governance
DIRECTORSINCEMAY1987 AGE: |
General Dynamics 2017 Proxy Statement 7
Election of Directors
RUDY F.DELEON | • Senior Fellow with the Center for American Progress since 2007 • Senior Vice President of The Boeing Company, 2001 to 2006 • Deputy Secretary of Defense, 2000 to 2001; Undersecretary of Defense for Personnel and Readiness, 1997 to 2000 • Undersecretary of the U.S. Air Force, 1994 to 1997
Key Attributes/Skills/Expertise: Mr. deLeon’s experience as the second-highest ranking civilian official in the U.S. Department of Defense and as a foreign policy and military advisor give him a keen understanding of the complexities of the U.S. military and the defense industry. His experience in government, combined with his leadership at The Boeing Company as a senior vice president leading all U.S. federal, state and local government liaison operations, provide him with a deep understanding of the aerospace and defense industry, enabling him to serve General Dynamics with valuable perspectives on the business. | |
C Compensation Finance and Benefit Plans
DIRECTORSINCESEPTEMBER2014 AGE: | ||
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8 General Dynamics 20172018 Proxy Statement
Election of Directors
LESTER L. LYLES | • Retired General, U.S. Air Force; Commander, Air Force Materiel Command, 2000 to 2003; Vice Chief of Staff of the Air Force, 1999 to 2000 • Chairman of the Board of United States Automobile Association since November 2012 and Vice Chairman, 2008 to 2012 • Mr. Lyles currently serves as a director of KBR, Inc. He served as a director of Precision Castparts Corp., a former public company, within the past five years.
Key Attributes/Skills/Expertise:Prior to retiring from the U.S. Air Force at the rank of General, Mr. Lyles served as Commander of the Air Force Materiel Command and Vice Chief of Staff of the U.S. Air Force. In these positions, Mr. Lyles managed significant operating budgets and addressed complex operational issues. The broad knowledge of the U.S. military and the defense industry he attained through these experiences, combined with his engineering and aerospace educational background, enable Mr. Lyles to provide critical strategic and business advice to our aerospace and defense businesses. In addition, Mr. Lyles has gained a thorough understanding of challenges that face public companies through his service on public company boards. | |
COMMITTEES: Audit Nominating and Corporate Governance
DIRECTOR SINCEDECEMBER2003 AGE: | ||
MARK M. MALCOLM | • President and Chief Executive Officer of Tower International, Inc., 2007 to 2016 • Senior Advisor, Cerberus Capital Management, 2006 to 2007 • Executive Vice President and Controller of Ford Motor Credit, 2004 to 2005; Director of Finance and Strategy, Global Purchasing, of Ford Motor Company, 2002 to 2004 • Mr. Malcolm currently serves as a director of Tower International, Inc.
Key Attributes/Skills/Expertise: Mr. Malcolm’s senior executive positions at Tower International and Ford provide him with critical knowledge of the management, financial and operational requirements of a large company. In these positions, Mr. Malcolm gained extensive experience in dealing with accounting principles and financial reporting, evaluating financial results and the financial reporting process of a public company. Mr. Malcolm brings to the Board a broad knowledge of the complex business issues facing a public company in areas such as risk management, global supply chain management and corporate governance. Based on his experience, the Board has determined that Mr. Malcolm is an Audit Committee Financial Expert. | |
COMMITTEES: Audit Finance and Benefit Plans
DIRECTOR SINCEAUGUST 2015 AGE: |
General Dynamics 2017 Proxy Statement 9
Election of Directors
PHEBE N. NOVAKOVIC | • •
Key Attributes/Skills/Expertise:Ms. Novakovic’s service as a senior officer of General Dynamics since 2002 makes her a valuable and trusted advisor. Through her roles as chairman and chief executive officer, president and chief operating officer, and executive vice president, Marine Systems, she has developed a deep understanding of the company’s business operations, growth opportunities, risks and challenges. As senior vice president, planning and development, she gained a strong understanding of our core customers and the global marketplace in which we operate. Ms. Novakovic’s current service as a public company director provides her with a valuable perspective on corporate governance matters and the roles and responsibilities of a public company board. | |
C None
DIRECTORSINCEMAY2012 AGE: |
General Dynamics 2018 Proxy Statement 9
Election of Directors
C. HOWARD NYE | • Chairman of Martin Marietta Materials, Inc. since 2014 and President and CEO since 2010; President and Chief Operating Officer, 2006 to 2009 • Executive Vice President of Hanson Aggregates North America, a producer of aggregates for the construction industry, 2003 to 2006 • Mr. Nye currently serves as Chairman of the Martin Marietta Materials, Inc. Board of Directors and as a Director of Cree, Inc. He has announced that he will not be standing forre-election to the Cree board at its 2018 annual meeting of shareholders. Key Attributes/Skills/Expertise: Mr. Nye’s positions with Martin Marietta, a leading supplier of aggregates and heavy building materials, position him well to advise our businesses on a range of matters in the areas of engineering and manufacturing. Mr. Nye also brings extensive risk management experience, particularly in the area of employee safety. His strong business background and service on public company boards provide him with a deep understanding of the challenges and risks facing large public companies and their boards. Mr. Nye was identified as a director nominee by the chairman and chief executive officer. | |
COMMITTEES: N/A NEW DIRECTOR NOMINEE AGE: 55 | ||
WILLIAM A. OSBORN | • Chairman of Northern Trust Corporation, 1995 to 2009; Chief Executive Officer of Northern Trust Corporation, 1995 through 2007 and President of Northern Trust Corporation and The Northern Trust Company, • Mr. Osborn currently serves as a director of Abbott Laboratories and Caterpillar, Inc.
Key Attributes/Skills/Expertise:Mr. Osborn’s prior service as a senior executive of Northern Trust Corporation, including as chairman and chief executive officer, and president, provides him with extensive knowledge of the complex financial, operational and governance issues of a large public company. He brings to our Board a well-developed awareness of financial strategy, asset management and risk management and a strong understanding of public company governance. The Board has determined that Mr. Osborn’s extensive experience with accounting principles, financial reporting and evaluation of financial results qualifies him as an Audit Committee Financial Expert. | |
COMMITTEES: Audit Compensation Finance and Benefit Plans
DIRECTOR SINCEDECEMBER2009 AGE: |
10 General Dynamics 2017 Proxy Statement
Election of Directors
CATHERINE B. REYNOLDS | • Chairman and Chief Executive Officer of EduCap, Inc. since 1988 • Chairman and Chief Executive Officer of The Catherine B. Reynolds Foundation since 2000 • Founder and Chairman of Servus Financial Corporation, 1993 to 2000 • Ms. Reynolds currently serves as a director of Lindblad Expeditions Holdings, Inc.
Key Attributes/Skills/Expertise:Ms. Reynolds’ sound business experience and financial background, including her innovative development of the first asset-backed securitization structure for consumer education loans, enables her to provide valuable financial and business advice to the company. Ms. Reynolds is a certified public accountant and has served on the audit and compensation committees of a public company. Through her senior executive and board positions with EduCap and Servus Financial, she has developed critical knowledge of the financial and risk management challenges that companies face. Ms. Reynolds also has gained valuable insight into public company governance and operations through her prior and current service on public company boards. The Board has determined that Ms. | |
COMMITTEES:
AGE: |
10 General Dynamics 2018 Proxy Statement
Election of Directors
LAURA J. SCHUMACHER | • Executive Vice President, External Affairs and General Counsel of Abbvie Inc. since January 2013 • Executive Vice President, General Counsel and Secretary of Abbott Laboratories, 2007 to 2012
Key Attributes/Skills/Expertise:Ms. Schumacher’s positions as chief legal officer of two large public companies provide her with extensive experience with respect to risk management and a deep knowledge of the types of legal and regulatory risks facing public companies. Her experience as a senior executive in the healthcare industry has provided her with a keen awareness of strategic considerations and challenges associated with a complex, highly-regulated industry. Additionally, through her key role in the strategic consideration and execution of the separation of Abbvie from Abbott Laboratories, Ms. Schumacher brings an important understanding of and insight into corporate governance matters and complex corporate transactions. | |
COMMITTEES: Compensation Nominating and Corporate Governance
DIRECTOR SINCE FEBRUARY2014 AGE: |
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Election of Directors
PETER A. WALL | • Retired General, British Army; Chief of the General Staff, 2010 to 2014; Commander in Chief, Land Command, 2009 to 2010 • Director of Operations, United Kingdom Ministry of Defence, 2007 to 2009 • Director, Amicus (strategic leadership advisory firm) since 2014
Key Attributes/Skills/Expertise:Mr. Wall had a distinguished career in the British Army before retiring at the rank of General in 2014. He also served as Director of Operations for the United Kingdom Ministry of Defence. As Chief of the General Staff of the British Army, Mr. Wall managed significant operating budgets and led the British Army through significant transformation to ensure its relevance for the future. Mr. Wall’s service in the United Kingdom Ministry of Defence and British Army give him anin-depth understanding and appreciation of the complexities of the U.K. military and the defense industry. Mr. Wall brings to the Board important insight into the operational requirements of our customers, as well as a deep understanding of global security issues.
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COMMITTEES: Finance and Benefit Plans Nominating and Corporate Governance
DIRECTOR SINCEAUGUST2016 AGE: | ||
Director RetirementRetirements. . William Fricks will not standThe Board is grateful to Mr. Chabraja for re-election at the Annual Meeting. General Dynamicshis wise counsel and 24 years of service on the Board, including 13 years as our Chairman. Mr. Keane joined our Board in 2004 and we appreciate his many years of dedicated service and valuable counsel as a member of the Board.sound guidance he has provided over the years.
YOUR BOARDOF DIRECTORSUNANIMOUSLYRECOMMENDSAVOTE FORALLDIRECTORNOMINEESLISTEDABOVE.
Director Retirement Policy.Under the company’s Bylaws, no director shall stand for election beyond the age of 75. Additionally, the Bylaws provide that under circumstances of significant benefit to the company, an individual over the age of 72 years may stand for election as director only with the approval of the Nominating and Corporate Governance Committee and atwo-thirds vote of the directors then in office. In February 2017, the committee recommended and in March 2017 the Board unanimously requested that Messrs. Chabraja and Keane each be nominated to stand forre-election. The Board took this action in recognition of the continued valuable counsel and insight that each of these directors provides to the Board.
Nominees to the Board Submitted by Shareholders.The committee will consider director nominees recommended by shareholders in the same manner as it considers and evaluates potential directors identified by the company. Additionally, our bylaws permit a shareholder or a group of up to 20 shareholders who have owned 3 percent or more of our outstanding shares of capital stock continuously for 3 years to submit director nominees for inclusion in our proxy statement if the shareholder(s) and the nominee(s) satisfy the requirements specified in our bylaws (a process known as proxy access). The requirements for director nominations, including requirements for proxy access, can be found in Article II, Section 10 of our Amended and Restated Bylaws available on our website at www.gd.com/CorporateGovernance, or in print upon request.
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OUR COMMITMENTTO STRONG CORPORATE GOVERNANCE
The General Dynamics Board of Directors believes that a commitment to good corporate governance enhances shareholder value. To that end, General Dynamics is committed to employing strong corporate governance practices to promote a culture of ethics and integrity that defines how we do business. At the core, we are in business to earn a fair return for our shareholders.
On the recommendation of the Nominating and Corporate Governance Committee, the Board has adopted the General Dynamics Corporate Governance Guidelines to provide a framework for effective governance of the Board and the company. The guidelines establish policies and practices with respect to Board operations and responsibilities, including board structure and composition, director independence, executive and director compensation, succession planning and the receipt of concerns and complaints by the Board. The Board regularly reviews these guidelines and updates them periodically in response to changing regulatory requirements, feedback from shareholders on governance matters and evolving best practices in corporate governance.
The Board believes that its commitment to good governance is demonstrated by key corporate governance practices, including:
✓ | a majority voting standard for the election of directors coupled with a director resignation policy; |
✓ | an independent Lead Director; |
✓ | a market-leading executive stock ownership policy; |
✓ | a policy prohibiting hedging and pledging by directors and officers; |
✓ | an executive compensation recoupment (clawback) policy; |
✓ | disclosure of corporate political contributions and trade association dues; |
✓ | shareholders’ right to call a special meeting; and |
✓ | shareholders’ ability to nominate director candidates and have those nominees included in the company’s proxy statement. |
These and other practices are highlighted on page 3.
As part of our commitment to strong corporate governance practices, we maintain an active and robust ethics program. Our ethics program is rooted in our ethos – our distinguishing moral nature. Our ethos is defined by five values:
THE GENERAL DYNAMICS ETHOS | ||
Honesty | We tell the truth to ourselves and to others. Honesty breeds transparency. | |
Trust | We trust each other to do the right thing. | |
Humanity | We are compassionate and empathetic. We respect the dignity, rights and autonomy of others. | |
Alignment | We are united in our commitment to our values. | |
Value Creation | We create value by doing the right thing for our shareholders, our customers, our employees and our communities. |
As a community of people dedicated to our ethos, we stand against those who betray others, trod upon others’ rights or disrespect the rule of law. Each of us has an obligation to behave according to our values. In that way, we can ensure that we continue to be good stewards of the investments in us by our shareholders, customers, employees and communities, now and in the future.
We have a Standards of Business Ethics and Conduct Handbook that applies to all employees. This handbook, known as the Blue Book, has been updated and improved as we have grown and changed over the years. Our ethics program also includes periodic training on ethics and compliance topics for all employees and a24-hour ethics helpline, which employees can access via telephone or online to communicate any business-related ethics concerns.
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Governance of the Company
We have adopted ethics codes specifically applicable to our Board of Directors and our financial professionals. The Code of Conduct for Members of the Board of Directors embodies our Board’s commitment to manage our business in accordance with the highest standards of ethical conduct. The Code of Ethics for Financial Professionals, which supplements the Blue Book, applies to our chief executive officer, chief financial officer, controller and persons performing similar financial functions.
Any amendments to or waivers from the Standards of Business Ethics and Conduct, Code of Ethics for Financial Professionals or Code of Conduct for Members of the Board of Directors on behalf of any of our executive officers, financial professionals or directors will be disclosed on our website. The current Standards of Business Ethics and Conduct are available on our website at www.gd.com/Responsibility.
Our Board comprises independent, accomplished and experienced directors who provide advice and oversight to further the interests of our company and our shareholders. Our Board believes that its organizational structure provides a framework for it to provide independent leadership and engagement while ensuring appropriate insight into the operations and strategic issues of the company.
Chairman – Strong and Effective Leadership.Our Board elects a Chairman from among the directors and determines whether to separate or combine the roles of Chairman and Chief Executive Officer based on what it believes best serves the needs of the company and its shareholders at any particular time. The Board believes that Ms. Novakovic’s deep understanding of the company’s business,day-to-day operations, growth opportunities, challenges and risk management practices gained through several leadership positions enable her to provide strong and effective leadership to the Board and to ensure the Board is informed of important issues facing the company. The Board also believes that having a combined role promotes a cohesive, strong and consistent vision and strategy for the company.
Independent Lead Director – Additional Independent Oversight.The Board has created the position of a Lead Director, elected annually by the Board from among the independent directors. Mr. Crown currently serves as Lead Director. The Board believes the Lead Director position provides additional independent oversight of senior management and board matters. The selection of a Lead Director facilitates communication among the directors or between any of them and the chairman. Directors frequently communicate among themselves and directly with the chairman. The Lead Director’s authority and responsibilities are as follows:
LEAD DIRECTOR AUTHORITYAND RESPONSIBILITIES | ||
(1) | acts as chair at Board meetings when the chairman is not present, including meetings of thenon-management directors; | |
(2) | has the authority to call meetings of thenon-management directors; | |
(3) | coordinates activities of thenon-management directors and serves as a liaison between the chairman and thenon-management directors; | |
(4) | works with the chairman to develop and agree to meeting schedules and agendas, and agree to the nature of the information that will be provided to directors in advance of meetings; | |
(5) | is available for consultation and communication with significant shareholders, when appropriate; and | |
(6) | performs such other duties as the Board may determine from time to time. |
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Governance of the Company
Independence Standards.Our Board of Directors assesses the independence of our directors and examines the nature and extent of any relationships between General Dynamics and our directors, their families and their affiliates. Our Board has established an objective that at leasttwo-thirds of the directors be independent directors. For a director to be considered independent, the Board must determine that a director does not have any direct or indirect material relationship with General Dynamics. Our Board has established director independence guidelines (the Director Independence Guidelines) as part of the Corporate Governance Guidelines to assist in determining director independence in accordance with the rules of the New York Stock Exchange.
AN INDEPENDENT DIRECTORUNDEROUR DIRECTOR INDEPENDENCE GUIDELINES: | ||||
(1) | is not a current employee, nor has an immediate family member who is a current executive officer, of General Dynamics; | |||
(2) | has not received, nor has an immediate family member who has received, during the immediately preceding fiscal year, more than $120,000 in direct compensation from General Dynamics, other than director and committee fees and pension or other forms of deferred compensation; | |||
(3) | is not, nor has an immediate family member who is, currently employed as an executive officer of another company where any executive officer of General Dynamics currently serves on that company’s compensation committee; | |||
(4) | is not a current partner of, or employee of, a present internal or external auditor of General Dynamics; | |||
(5) | does not have an immediate family member who is a current partner of, or an employee assigned to work personally on General Dynamics’ audit by, a present internal or external auditor of General Dynamics; | |||
(6) | except as otherwise provided in (7) below, is not a current executive officer or an employee, nor has an immediate family member who is a current executive officer, of a company that made payments to, or received payments from, General Dynamics for property or services in an amount that, in the immediately preceding fiscal year, exceeded the greater of $1 million or 2 percent of the consolidated gross revenues of that company; and | |||
(7) | is not an executive officer of a charitable organization that, in the immediately preceding fiscal year, received contributions from General Dynamics in an amount that exceeded the greater of $1 million or 2 percent of the consolidated gross revenues of that organization. |
Independence Determinations.In March of each year and at other times during the year for director nominations or appointments occurring outside of the annual meeting,the Board of Directors considers whether each director and nominee to the Board meets the definition of an “independent director” in accordance with the rules of the New York Stock Exchange and the Director Independence Guidelines. The Board has determined that Ms. Barra, Ms. Reynolds, Ms. Schumacher and Messrs. Crown, deLeon, Fricks, Keane, Lyles, Malcolm, Nye, Osborn and Wall each qualifies as an independent director. The Board had previously determined that James Mattis, who resigned from the Board in January 2017, qualified as an independent director. The Board has also determined that Mr. Chabraja and Ms. Novakovic are not independent directors. To make these independence determinations, the Board reviewed all relationships between General Dynamics and the directors or nominees and affirmatively determined that none of the individuals qualifying as independent has a material business, financial or other type of relationship with General Dynamics, other than as a director or shareholder of the company. Specifically, the Board considered the relationships listed below and the related person transactions listed on page 2019 of this Proxy Statement and found them to be immaterial. For each of the relationships that the Board considered for 2014, 2015, 2016 and 2016,2017, the payments made or received by General Dynamics, and the charitable contributions made by General Dynamics, fell below the thresholds in our Director Independence Guidelines (the greater of $1 million or 2 percent of the consolidated gross revenues of the other company). Listed below are the relationships that existed in 20162017 that were considered by the Board as part of their independence determinations.
Ms. Barra and Ms. Reynolds and Messrs. Crown, deLeon, Keane, Lyles and Osborn serve as members of the boards of trustees or boards of directors of charitable and othernon-profit organizations to which General Dynamics (i) has made payments for memberships, sponsorships, tradeshow exhibit space or tuition in the usual course of our business, (ii) made and received payments for products and services in the usual course of our business or (iii) made contributions as part of our annual giving program. The 20162017 payments fell below the greater of $1 million or 2 percent of the consolidated gross revenues of the organizations. None of the 20162017 charitable contributions to these organizations exceeded $110,000.$105,000.
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Governance of the Company
Messrs. Crown, KeaneNye and Osborn serve as directors of companies, and Ms. BarraMr. Nye and Ms. Schumacher are executive officers of companies to which General Dynamics has sold products and services, or from which General Dynamics has purchased products and services, in the ordinary course of business. None of the directors had any material interest in, or received any compensation in connection with, these ordinary-course business relationships. Each of the payments made or received by General Dynamics fell below the greater of $1 million or 2 percent of the other company’s revenues.
14 General Dynamics 2018 Proxy Statement
Mr. Mattis’ brother is an employee (and not an executive officer)Governance of a subsidiary of General Dynamics. The compensation paid to Mr. Mattis’ brother in 2016 did not exceed $120,000. Mr. Mattis resigned from the Board in January 2017.Company
BOARD MEETINGS, BUSINESS UNIT VISITSAND ATTENDANCE
During 2016,2017, the Board of Directors held eightnine meetings. This included athree-day meeting in February to review our 2016 operating plan, including the operating plans of each of our business groups. In August 2016, the Board visited the San Diego facility of our General Dynamics NASSCO business unit and met with that business unit’s management team. Each of our directors attended at least 86%85 percent of the meetings of the Board and committees on which they served in 2016,2017, with 9nine of our current 1211 directors attending 100 percent of the Board and committee meetings. This included amulti-day meeting in February to review our 2017 operating plan, including the operating plans of each of our business groups. In October 2017, the Board visited facilities of our General Dynamics European Land Systems and Jet Aviation business units and met with those business units’ management teams. We encourage directors to attend each annual meeting of shareholders, and in 20162017 all of our directors attended the annual meeting.
Our Board holds executive sessions of thenon-management directors following all regularly scheduled Board meetings. Thenon-management directors may also meet without management present at other times as requested by anynon-management director. The independent Lead Director serves as chair at the executive sessions.
The Board of Directors has established the following four standing committees to assist in executing its duties: Audit, Compensation, Finance and Benefit Plans, and Nominating and Corporate Governance. The primary responsibilities of each of the committees are described below, together with the current membership and number of meetings held in 2016.2017. Currently, three of the four Board committees are composed entirely of independent,non-management directors, including those committees that are required by the rules of the New York Stock Exchange to be composed solely of independent directors. Each of the Board committees has a written charter. Copies of these charters are available on our website at www.gd.com/CorporateGovernance, or in print upon request.
Committee Members.Listed below are the members of each of the four standing committees as of March 6, 2017.8, 2018.
AUDIT COMMITTEE | COMPENSATION COMMITTEE | FINANCEAND BENEFIT PLANS COMMITTEE | NOMINATINGAND CORPORATE GOVERNANCE COMMITTEE | |||||
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Nicholas D. Chabraja
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James S. Crown
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Rudy F. deLeon
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John M. Keane
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Lester L. Lyles
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Mark M. Malcolm
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William A. Osborn
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Catherine B. Reynolds
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Laura J. Schumacher
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Peter A. Wall
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Governance of the Company
Committee Responsibilities.Following are descriptions of the primary areas of responsibility for each of the four committees.
AUDIT COMMITTEE | NUMBEROF MEETINGSIN |
Provides oversight for accounting, financial reporting, internal control, auditing and regulatory compliance activities
Selects and oversees the independent auditor
Approves audit andnon-audit services provided by the independent auditor
Reviews the scope of the audit to be conducted by the independent auditor
Reviews our audited consolidated financial statements with management and the independent auditor
Evaluates the performance, responsibilities, budget and staffing of the internal audit function
Evaluates the scope of the internal audit plan
Monitors management’s implementation of the policies, practices and programs of the company with respect to business ethics and conduct and environmental matters
COMPENSATION COMMITTEE | NUMBEROF MEETINGSIN |
Evaluates the performance of the chief executive officer and other officers and reviews and approves their compensation
Recommends to the Board the level and form of compensation and benefits for directors
Reviews and approves incentive compensation and equity-based compensation plans
Reviews and monitors succession plans for the chief executive officer and other officers
Has authority to retain and terminate external advisors in connection with the discharge of its duties
Has sole authority to approve compensation consultant fees (to be funded by the company) and the terms of the consultant’s retention
FINANCEAND BENEFIT PLANS COMMITTEE | NUMBEROF MEETINGSIN |
Oversees the management of the company’s finance policies to ensure the policies are in keeping with the company’s overall business objectives
With respect to employee benefit plans that name the company or one of its subsidiaries as the investment fiduciary (and for which the company or one of its subsidiaries has not appointed the management investment committee as investment fiduciary):
provides strategic oversight of the management of the assets
reviews and approves investment policy recommendations made by management
reviews and approves the retention of third parties for administration and management services related to trust assets
NOMINATINGAND CORPORATE GOVERNANCE COMMITTEE | NUMBEROF MEETINGSIN |
Evaluates Board and management effectiveness
Advises the Board on the appropriate size, composition, structure and operations of the Board and its committees
Reviews and recommends to the Board committee assignments for directors
Advises the Board on corporate governance matters and monitors developments, trends and best practices in corporate governance
Recommends to the Board corporate governance guidelines that comply with legal and regulatory requirements
Identifies qualified individuals to serve as directors and recommends director nominees
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Governance of the Company
General Dynamics has aOur comprehensive risk management program is conducted by senior management and overseen by the Board of Directors. In particular, the Board oversees management’s identification and prioritization of risks. We believe that our risk management processes are well supported by the current board leadership structure.
How We Manage Risk.The following summarizes the key elements of the Board’s, senior management’s and external advisors’ roles in our risk management program.
The Board oversees risk management, focusing on the most significant risks facing the company, including strategic, operational, financial, legal and reputational risks.
Each Board committee is integral to risk management and reports specific risk-management matters as necessary to the full Board.
Senior management is responsible forday-to-day risk management and conducts a thorough assessment through internal management processes and controls.
The chief executive officer and senior management team provide to the Board a dedicated and comprehensive briefing of material risks at least twice per year, and the Board is briefed throughout the year as needed on specific risks facing the company. Topics discussed in 2017 include our cyber security risk management program, human capital management and program-specific matters.
External advisors provide independent advice on specific risks and review and comment on risk management processes and procedures as necessary.
The Role of the Board of Directors in Risk Management.The full Board reviews and approves annually a corporate policy addressing the delegation of authority and assignment of management responsibility to ensure that the responsibilities and authority delegated to senior management are appropriate from an operational and risk-management perspective. In addition, the Board assesses the company’s strategic and operational risks throughout the year, with particular focus on these risks at an annualthree-daymulti-day Board meeting in early February. At this meeting, senior management reports on opportunities and risks in the markets in which the company conducts business. Additionally, each business unit president and each business group executive vice president presents the unit’s and group’s respective operating plan and strategic initiatives for the year, including notable business opportunities and risks. The Board reviews, adjusts where appropriate, and approves the business unit and business group goals and adopts our company operating plan for the year. These plans and related risks are monitored throughout the year as part of periodic financial and performance reports given to the Board by the chief financial officer and executive vice presidents of each business group. The Board also receives briefings from senior management concerning a variety of matters and related risks to the company, including defense budget and acquisition matters and specific customer or program developments.
In addition, each of the Board committees considers risk as it relates to its particular areas of responsibility.
Audit Committee. The Audit Committee has responsibility for oversight of the company’s policies and practices concerning overall risk assessment and risk management. The committee reviews and takes appropriate action with respect to the company’s annual and quarterly financial statements, the internal audit program, the ethics program and internal controls over financial reporting. To facilitate these risk oversight responsibilities, the committee receives regular briefings from members of senior management on accounting matters; the internal audit plan; internal control over financial reporting matters; significant litigation and other legal matters; and ethics program matters; and environmental matters. The committee also holds regular executive sessions with internal audit and regular executive sessions with the partners of the KPMG LLP audit team.
Compensation Committee. The Compensation Committee oversees our executive compensation program to ensure that the program creates incentives for strong operational performance and for the long-term benefit of the company and its shareholders without encouraging excessive risk-taking. The committee receives briefings from the chairman and chief executive officer, human resources senior management and outside consultants and advisors on compensation matters.
Finance and Benefit Plans Committee. The Finance and Benefit Plans Committee oversees the management of the company’s finance policies and the assets of the company’s defined benefit plans for employees. The committee oversees market risk exposure with respect to its assets within the company’s defined benefit plans and related to the capital structure of the company, including borrowing, liquidity, allocation of capital and funding of benefit plans. To assess risks in these areas, the committee receives regular briefings from our senior management or external advisors on finance policies, pension plan liabilities and funding, and asset performance.
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Governance of the Company
Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee oversees risks related to the company’s governance structure and processes and risks arising from related person transactions. The committee receives briefings from the senior vice president, general counsel and secretary.
The Role of External Advisors in Risk Management. The company’s external advisors support the risk management program in a number of ways. Specifically, external advisors support the program by: (1) auditing our financial statements; (2) reviewing and suggesting updates and improvements of our risk management processes and procedures; (3) assisting in the implementation of Board and senior management responsibilities regarding risk management; and (4) supporting and assisting with public disclosure regarding risk management and company risks.
Succession Planning and Risk Management. The Board considers senior management succession planning a core part of the company’s risk management program. At least annually, the Board reviews with the chief executive officer succession planning for senior leadership positions, and the timing and development required to ensure continuity of leadership over the short term and long term.
DIRECTOR ORIENTATIONAND CONTINUING EDUCATION
Within six months of election to the Board, each new director receives an orientation that consists of a series ofin-person briefings provided by corporate officers on our business operations; significant financial, accounting and risk-management matters; corporate governance; ethics; and key policies and practices. The new director receives briefings on the responsibilities, duties and activities of the committees on which the director will initially serve. The new director is also provided the opportunity to visit business units within each of the four business groups and receive briefings from the respective group executive vice president and members of the business unit management team.teams. Each of the directors joining our Board over the past three years has conducted at least one of these business unit visits.
In addition, toTo further support directors, the general counsel and chief financial officer periodically provide materials and briefing sessions on subjects that assist directors in fulfilling their duties. Annually, the Board holds athree-daymulti-day meeting with our senior management to review and approve the operating plan of each of our business units and business groups and the company as a whole. Directors also visit our business units periodically. These visits allow the directors to interact with the business unit management teams and employees and gain a firsthand view of our operations.
BOARDAND COMMITTEE PERFORMANCE SELF-ASSESSMENTS
Each year, the directors undertake a self-assessment for the Board and each committee on which they serve that elicits feedback on the performance and effectiveness of the Board and its committees. As part of this self-assessment, the directors are asked to consider the Board’s role, relations with management, composition and meetings. Each committee is asked to consider its role and the responsibilities articulated in the committee charter, the composition of the committee and the committee meetings. The self-assessment responses and comments are compiled by the Corporate Secretary and presented to the Nominating and Corporate Governance Committee for initial review. The responses and comments are presented toreviewed with each committee and the full Board.
Any shareholder or other interested party who has a concern or question about the conduct of General Dynamics may communicate directly with ournon-management directors, the Chairman or the full Board. Communications may be confidential or anonymous. Communications should be submitted in writing to the chair of the Nominating and Corporate Governance Committee in care of the Corporate Secretary, General Dynamics Corporation, 2941 Fairview Park Drive, Suite 100, Falls Church, Virginia 22042. The Corporate Secretary will receive and process all written communications and will refer all substantive communications to the chair of the Nominating and Corporate Governance Committee in accordance with guidelines approved by the independent members of the Board. The chair of the Nominating and Corporate Governance Committee will review and, if necessary, investigate and address all such communications and will report the status of these communications to thenon-management directors as a group or the full Board on a quarterly basis.
Our employees and other interested parties may also communicate concerns or complaints about our accounting, internal control over financial reporting or auditing matters directly to the Audit Committee. Communications may be confidential or anonymous and can be submitted in writing or reported by telephone. Written communications should be submitted to the chair of the Audit Committee in care of our ethics officer at the address in the preceding paragraph or at the address in the Standards of Business Ethics and Conduct Handbook provided to all employees. Our employees can call a toll-free helpline number or access the helpline online, each of which is provided to all employees. The ethics officer will review, investigate and address any concerns or complaints unless the Audit Committee instructs otherwise. The ethics officer will report the status of all concerns and complaints to the Audit Committee. The Audit Committee may also direct that matters be presented to the full Board and may direct special treatment of any concern or complaint addressed to it, including the retention of outside advisors or counsel.
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Governance of the Company
RELATED PERSON TRANSACTIONS POLICY
Our Board of Directors has adopted a written policy on the review and approval of related person transactions. Related persons covered by the policy are:
(1) | executive officers, directors and director nominees; | |
(2) | any person who is known to be a beneficial owner of more than 5 percent of our voting securities; | |
(3) | any immediate family member of any of the foregoing persons; or | |
(4) | any entity in which any of the foregoing persons has or will have a direct or indirect material interest. |
A related person transaction is defined by this policy as a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which: General Dynamics will be a participant; the amount involved exceeds $120,000; and any related person will have a direct or indirect material interest. The following interests and transactions are not subject to the policy:
(1) | director compensation that has been approved by the Board; | |
(2) | a transaction where the rates or charges are determined by competitive bid; or | |
(3) | a compensatory arrangement solely related to employment with General Dynamics (or a subsidiary) that has been approved by the Compensation Committee, or recommended by the Compensation Committee to the Board. |
The Nominating and Corporate Governance Committee is responsible for reviewing, approving and, where applicable, ratifying related person transactions. If a member of the committee has an interest in a related person transaction, then he or she will not be part of the review process.
In considering the appropriate action to be taken regarding a related person transaction, the committee or the Board will consider the best interests of General Dynamics and whether the transaction is fair to the company, is on terms that would be obtainable in anarm’s-length transaction or is pursuant to a company discount program for which the related person is eligible, serves a compelling business reason and any other factors it deems relevant. As a condition to approving or ratifying any related person transaction, the committee or the Board may impose whatever conditions and standards it deems appropriate, including periodic monitoring of ongoing transactions.
The following transactions with a related person were determined to pose no actual conflict of interest and were reviewed and approved by the committee or the Board pursuant to our related person transactions policy:
Based upon Schedule 13G filings made with the SEC, BlackRock, Inc., a global provider of investment, advisory and risk management solutions, has reported beneficial ownership of more than 5 percent of our outstanding common stock. An affiliate of BlackRock provides investment management services for certain of our defined benefit plans. The agreements with BlackRock were negotiated inarm’s-length transactions and the ownership of General Dynamics stock plays no role in the business relationship between General Dynamics and BlackRock. In addition, we believe the agreements represent standard terms and conditions for investment management services. For providing the services, BlackRock received fees in 20162017 totaling approximately $1.1$1.2 million. In accordance with the related person transactions policy, the Nominating and Corporate Governance Committee reviewed and approved the services for 20162017 and approved the continuation of the services in 2017.2018.
Henry Crown and Company and one of its affiliated entities made payments of approximately $178,000$453,000 to the company in 20162017 for the purchase of business jet spare parts and aircraft maintenance from our subsidiary, Gulfstream Aerospace Corporation. Additionally, these companies purchased aircraft charter services from our subsidiary, Jet Aviation. The amount of payments made to Jet Aviation in 20162017 was approximately $212,000.$269,000. The purchases from Gulfstream and Jet Aviation were in the ordinary course of business and onarm’s-length terms. Henry Crown and Company is an affiliated entity of Mr. Crown.
Dean Roualet, the late brotherAn affiliated entity of Mark Roualet, an executive officerMr. Chabraja made payments of approximately $189,000 to the company served as an employeein 2017 for the purchase of onebusiness jet spare parts and aircraft maintenance from our subsidiary, Gulfstream Aerospace Corporation. These purchases were in the ordinary course of our subsidiaries in 2016. During the year, he received cash compensation of approximately $234,000,business and benefits generally available to other employees with equivalent qualifications, experience and responsibilities.onarm’s-length terms.
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Governance of the Company
We compensate eachnon-management director for service on the Board of Directors. The Compensation Committee reviews director compensation on an annual basis.
20162017 Compensation. Director compensation for 20162017 was:
COMPENSATION ELEMENT | AMOUNT | |
Annual Retainer | $ | |
Lead Director Retainer | $25,000 | |
Committee Chair Annual Retainer | $10,000 | |
Attendance Fees | $3,000 for each meeting of the Board of Directors; | |
Annual Equity Award | Approximately | |
Per Diem Fee forNon-Employee Directors Performing Specific Projects for the Company | $10,000 |
As part of the Compensation Committee’s annual review in early 20162017 and at its request, management engaged Aon Hewitt to conduct a director compensation survey. Aon Hewitt provided director compensation data for the peer group that we used to benchmark executive compensation whichcompensation. This information showed General Dynamics slightly abovethat the median forannual retainer and the value of the annual equity compensation and slightlyaward were below the median for cash compensation. Followingmedian. Based on this review, the Compensation Committee recommended no changescommittee increased the annual retainer to director compensation.$85,000 and increased the value of the annual equity award to approximately $150,000. Although the program is reviewed annually, this was the first change to cash compensation since 2011 and the first change to equity compensation since 2015.
Non-management directors have the option of receiving all or part of their annual retainers in the form of Common Stock. The annual retainer, additional committee chair retainer (if any) and attendance fees paid to each director during 20162017 are reflected in the Fees Earned or Paid in Cash column of the Director Compensation for Fiscal Year 20162017 table, irrespective of whether a director took the annual retainer in shares of Common Stock. The annual equity award consists of restricted stock and stock options granted pursuant to our shareholder-approved equity compensation plan and on the same terms, limits and schedule as awards to other plan participants.
In light of the travel required by service on the Board, we also provide each director with accidental death and dismemberment insurance coverage. Payments by General Dynamics for director accidental death and dismemberment insurance premiums are reflected in the All Other Compensation column of the Director Compensation for Fiscal Year 20162017 table.
20172018 Compensation. In early 2017,2018, as part of its annual review of director compensation, the Compensation Committee requested that management update its director compensation analysis. Management again engaged Aon Hewitt to provide survey data for the peer group used to benchmark executive compensation. The committee reviewed the survey data regarding director compensation provided by Aon Hewitt.Aon. This information showed that the annual retainer anddirectors’ pay program was approximate to the valuemedian of the annual equity award were below the median.peer group. Based on this review, the committee increased the annual retainerrecommended no changes to $85,000 and increased the value of the annual equity award to approximately $150,000. Although the program is reviewed annually, this is the first change to cash compensation since 2011 and the first change to equity compensation since 2015.
General Dynamics 2017 Proxy Statement 21
Governance of the Company
director compensation.
DIRECTOR STOCK OWNERSHIP GUIDELINES
The Board of Directors believes that each director should develop a meaningful ownership position in General Dynamics. Therefore, the Board of Directors adopted stock ownership guidelines fornon-management directors. Pursuant to these guidelines, eachnon-management director is expected to own shares of our Common Stock having a value equal to at least 8eight times the then-current annual retainer.Non-management directors are subject to the same holding requirements as our named executive officers and are expected to retain shares upon the vesting of restricted stock or exercise of options until the ownership guidelines are met. Management directors are subject to the ownership requirements discussed under “Compensation Discussion and Analysis – Stock Ownership Guidelines.”
20 General Dynamics 2018 Proxy Statement
Governance of the Company
DIRECTOR COMPENSATION TABLE
The table below provides total compensation for 20162017 for each of General Dynamics’non-management directors serving during the year. The number of shares of restricted stock and stock options awarded to the directors annually are the same for each director.
DIRECTOR COMPENSATIONFOR FISCAL YEAR 2016 | ||||||||||||||||||||||||||||||||||||||||
DIRECTOR COMPENSATIONFOR FISCAL YEAR 2017 | DIRECTOR COMPENSATIONFOR FISCAL YEAR 2017 | |||||||||||||||||||||||||||||||||||||||
NAME | FEES EARNED OR PAID IN CASH (a) | STOCK AWARDS (b) | OPTION AWARDS (c) | ALL OTHER COMPENSATION (d) | TOTAL | FEES EARNED OR PAID IN CASH (a) | STOCK AWARDS (b) | OPTION AWARDS (C) | ALL OTHER COMPENSATION (d) | TOTAL | ||||||||||||||||||||||||||||||
Mary T. Barra | $ | 126,000 | $ | 70,642 | $ | 71,162 | $ | 2,140 | $ | 269,944 | ||||||||||||||||||||||||||||||
Mary T. Barra (e)
|
$
|
48,899
|
|
$
|
74,767
|
|
$
|
75,092
|
|
$
|
0
|
|
$
|
198,758
|
| |||||||||||||||||||||||||
Nicholas D. Chabraja | $ | 509,000 | $ | 70,642 | $ | 71,162 | $ | 4,080 | $ | 654,884 |
$
|
530,000
|
|
$
|
74,767
|
|
$
|
75,092
|
|
$
|
4,080
|
|
$
|
683,939
|
| |||||||||||||||
James S. Crown | $ | 170,000 | $ | 70,642 | $ | 71,162 | $ | 2,140 | $ | 313,944 |
$
|
189,000
|
|
$
|
74,767
|
|
$
|
75,092
|
|
$
|
2,140
|
|
$
|
340,999
|
| |||||||||||||||
Rudy F. deLeon | $ | 149,000 | $ | 70,642 | $ | 71,162 | $ | 2,140 | $ | 292,944 |
$
|
164,195
|
|
$
|
74,767
|
|
$
|
75,092
|
|
$
|
2,140
|
|
$
|
316,194
|
| |||||||||||||||
William P. Fricks | $ | 137,000 | $ | 70,642 | $ | 71,162 | $ | 4,080 | $ | 282,884 | ||||||||||||||||||||||||||||||
William P. Fricks (f)
|
$
|
68,399
|
|
$
|
74,767
|
|
$
|
75,092
|
|
$
|
60,000
|
|
$
|
278,258
|
| |||||||||||||||||||||||||
John M. Keane | $ | 112,000 | $ | 70,642 | $ | 71,162 | $ | 4,080 | $ | 257,884 |
$
|
146,000
|
|
$
|
74,767
|
|
$
|
75,092
|
|
$
|
4,080
|
|
$
|
299,939
|
| |||||||||||||||
Lester L. Lyles | $ | 127,000 | $ | 70,642 | $ | 71,162 | $ | 4,080 | $ | 272,884 |
$
|
155,000
|
|
$
|
74,767
|
|
$
|
75,092
|
|
$
|
4,080
|
|
$
|
308,939
|
| |||||||||||||||
Mark M. Malcolm | $ | 123,000 | $ | 70,642 | $ | 71,162 | $ | 2,140 | $ | 266,944 |
$
|
164,195
|
|
$
|
74,767
|
|
$
|
75,092
|
|
$
|
2,140
|
|
$
|
316,194
|
| |||||||||||||||
James N. Mattis (e) | $ | 122,000 | $ | 70,642 | $ | 71,162 | $ | 2,140 | $ | 265,944 | ||||||||||||||||||||||||||||||
James N. Mattis (g)
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
| |||||||||||||||||||||||||
William A. Osborn | $ | 141,000 | $ | 70,642 | $ | 71,162 | $ | 4,080 | $ | 286,884 |
$
|
166,000
|
|
$
|
74,767
|
|
$
|
75,092
|
|
$
|
4,080
|
|
$
|
319,939
|
| |||||||||||||||
Catherine B. Reynolds (h)
|
$
|
91,663
|
|
$
|
49,590
|
|
$
|
50,318
|
|
$
|
2,140
|
|
$
|
193,711
|
| |||||||||||||||||||||||||
Laura J. Schumacher | $ | 117,000 | $ | 70,642 | $ | 71,162 | $ | 2,140 | $ | 260,944 |
$
|
150,000
|
|
$
|
74,767
|
|
$
|
75,092
|
|
$
|
2,140
|
|
$
|
301,999
|
| |||||||||||||||
Peter A. Wall (f) | $ | 34,870 | $ | 29,564 | $ | 29,396 | $ | 1,858 | $ | 95,688 | ||||||||||||||||||||||||||||||
Peter A. Wall
|
$
|
144,000
|
|
$
|
74,767
|
|
$
|
75,092
|
|
$
|
2,140
|
|
$
|
295,999
|
|
(a) | Ms. |
(b) | The amounts reported in the Stock Awards column reflect the aggregate grant date fair value computed in accordance with |
(c) | The amounts reported in the Option Awards column reflect the aggregate grant date fair value computed in accordance with |
(d) | Amounts reflect payments by General Dynamics for accidental death and dismemberment (AD&D) insurance. |
(e) |
|
(f) | Mr. |
(g) | Mr. Mattis departed the Board in January 2017 and received no payments, equity awards or other compensation from the company in 2017. |
(h) | Ms. Reynolds joined the Board in |
22 General Dynamics 20172018 Proxy Statement 21
ADVISORY VOTEONTHE SELECTIONOF INDEPENDENT AUDITORS
(PROPOSAL 2)
The Audit Committee of the Board of Directors has the sole authority to retain the company’s independent auditors and is responsible for the compensation and oversight of the work of the independent auditors for the purpose of preparing or issuing an audit report or related work. The Audit Committee has selected KPMG LLP (KPMG), an independent registered public accounting firm, as our independent auditors for 2017.2018. KPMG has been retained as the company’s independent auditors since 2002. In order to assure continuing auditor independence, the Audit Committee periodically considers whether there should be a regular rotation of the independent audit firm. The members of the Audit Committee believe that the continued retention of KPMG to serve as the company’s independent auditors is in the best interests of the company and its shareholders.
Your Board of Directors is submitting this selection of KPMG as the independent auditors for 20172018 to an advisory vote of the shareholders. The Sarbanes-Oxley Act of 2002 requires that the Audit Committee be directly responsible for the appointment, compensation and oversight of the audit work of the independent auditors. Nevertheless, as a good corporate governance practice, your Board has determined to solicit the vote of the shareholders on an advisory basis in making this appointment.
If the shareholders do not vote on an advisory basis in favor of the selection of KPMG as our independent auditors, the Audit Committee will reconsider whether to engage KPMG and may ultimately determine to engage that firm or another audit firm without resubmitting the matter to shareholders. Even if the shareholders vote in favor of the selection of KPMG, the Audit Committee may in its sole discretion terminate the engagement of KPMG and direct the appointment of another independent audit firm at any time during the year.
Audit andNon-Audit Fees.The following table shows aggregate fees for professional services rendered by KPMG for the audit of our annual consolidated financial statements for the years 20162017 and 2015,2016, and fees billed for other services rendered by KPMG during those years.
2017 | 2016 | |||||||||||||||
2016 | 2015 | |||||||||||||||
Audit Fees (a) | $ | 18,333,000 | $ | 17,900,000 | $
| 19,967,000
|
| $
| 18,333,000
|
| ||||||
Audit-related Fees (b) | 4,731,000 | 3,036,000 |
| 1,882,000
|
|
| 4,731,000
|
| ||||||||
Tax Fees (c) | 1,063,000 | 1,250,000 |
| 1,226,000
|
|
| 1,063,000
|
| ||||||||
All Other Fees (d) | 51,000 | 70,000 |
| 5,000
|
|
| 51,000
|
| ||||||||
Total Fees | $ | 24,178,000 | $ | 22,256,000 | $ | 23,080,000 | $ | 24,178,000 |
(a) | Audit fees are fees for professional services performed by KPMG for the audit of our consolidated annual financial statements (including the audit of internal control over financial reporting) and review of our consolidated quarterly financial statements. These fees also include fees for services that are normally provided in connection with statutory and regulatory filings. |
(b) | Audit-related fees are fees for assurance and related services performed by KPMG that are reasonably related to the performance of the audit or review of our consolidated financial statements. These fees consist primarily of fees for professional services for benefit plan audits and evaluation of new accounting standards. |
(c) | Tax fees are fees for professional services performed by KPMG for tax compliance, tax advice and tax planning. These fees consist primarily of fees for tax return preparation and review, tax compliance services for expatriates and advice regarding tax implications of certain transactions. |
(d) | All other fees are primarily related to professional services performed by KPMG for information technology contract compliance, assessment and advisory services. |
Auditor Independence.The Audit Committee has considered whether the services rendered by KPMG are compatible with maintaining KPMG’s independence. Representatives of KPMG are expected to attend the Annual Meeting, may make a statement if they desire to do so and will be available to respond to questions.
Policy onPre-Approval.The company and the Audit Committee are committed to ensuring the independence of the externalindependent auditors, both in fact and in appearance. Therefore, in accordance with the applicable rules of the Securities and Exchange Commission, the Audit Committee has established policies and procedures forpre-approval of all audit and permittednon-audit services provided by the independent auditors. The Audit Committee determines annually whether to approve all audit and permittednon-audit services proposed to be performed by the independent auditors (including an estimate of fees). If other audit or permittednon-audit services not included in thepre-approved services are required during the year, such services must be approved in advance by the Audit Committee. The Audit Committee may delegate authority to grantpre-approvals to its chair or a subcommittee as it deems appropriate, subject to a reporting obligation to the Audit Committee. All audit and permittednon-audit services listed above werepre-approved.
YOUR BOARDOF DIRECTORSUNANIMOUSLYRECOMMENDSAVOTE FORTHISPROPOSAL.
22 General Dynamics 20172018 Proxy Statement 23
The following Audit Committee Report shall not be deemed incorporated by reference by any general statement incorporating by reference this Proxy Statement or any portion hereof into any filing under the Securities Act of 1933, as amended (Securities Act) or the Securities Exchange Act of 1934, as amended (Exchange Act), and shall not otherwise be deemed filed under such acts.
The Audit Committee of the Board of Directors has furnished the following report.
The following five directors serve on the Audit Committee: William P. FricksMark M. Malcolm (Chair), James S. Crown, Lester L. Lyles, Mark M. Malcolm and William A. Osborn.Osborn and Catherine B. Reynolds.
None of these directors is an officer or employee of General Dynamics. They all meet the independence requirements of the New York Stock Exchange and Rule10A-3 of the Exchange Act. The Board has determined that Mr. Fricks,Malcolm, Mr. MalcolmOsborn and Mr. OsbornMs. Reynolds each qualifies as an “audit committee financial expert” as defined by the Securities and Exchange Commission (SEC) in Item 407(d) of RegulationS-K. The Audit Committee is governed by a written charter approved by the Board. In accordance with that charter, the Committee assists the Board in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing and financial reporting practices of General Dynamics. The Committee held eightnine meetings in 2016.2017.
The Audit Committee has reviewed and discussed with management and the company’s independent auditors for 2016,2017, KPMG LLP, an independent registered public accounting firm, the company’s audited consolidated financial statements as of December 31, 2016,2017, and for the year ended on that date. Management is responsible for the company’s financial reporting process, including maintaining a system of internal controls, and for preparing the consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP). KPMG is responsible for auditing those consolidated financial statements and for expressing an opinion on the conformity of the consolidated financial statements with GAAP. In addition, in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, the Audit Committee reviewed and discussed with management, the company’s internal auditors and KPMG, management’s report on the operating effectiveness of internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act includingand KPMG’s relatedattestation report and attestation.on the company’s internal control over financial reporting.
The Audit Committee has discussed with KPMG the matters required under applicable professional auditing standards and regulations adopted by the Public Company Accounting Oversight Board. In addition, the Audit Committee has received and reviewed the written disclosures and letter from KPMG required by applicable requirements of the Public Company Accounting Oversight Board regarding KPMG’s communications with the Audit Committee concerning independence, and has discussed with KPMG its independence, including the compatibility ofnon-audit services with maintaining KPMG’s independence. Based on the foregoing discussions and reviews, the Audit Committee has satisfied itself as to the independence of KPMG.
In reliance on the reviews and discussions described above, the Audit Committee recommended to the Board, and the Board approved, the inclusion of the audited consolidated financial statements in the company’s Annual Report on Form10-K as of and for the year ended December 31, 2016,2017, for filing with the SEC.Securities and Exchange Commission.
This report is submitted by the Audit Committee.
James S. Crown Lester L. Lyles |
William A. Osborn Catherine B. Reynolds |
February 4, 201710, 2018
24 General Dynamics 20172018 Proxy Statement 23
ADVISORY VOTETO APPROVE EXECUTIVE COMPENSATION
(PROPOSAL 3)
As required by Section 14A of the Exchange Act, we are seeking shareholder input on our executive compensation as disclosed in this Proxy Statement. The Board and the Compensation Committee actively monitor our executive compensation practices in light of the industry in which we operate and the marketplace for talent in which we compete. We remain focused on compensating our executive officers fairly and in a manner that emphasizes performance while providing the tools necessary to attract and retain the best talent.
As described in the Compensation Discussion and Analysis section, our executive compensation program is designed to create incentives both for strong operational performance in the current year and for the long-term benefit of the company, thereby closely aligning the interests of management with the interests of our shareholders.
For these reasons, the Board recommends shareholders vote in favor of the following resolution:
“Resolved, that the compensation paid to the company’s named executive officers, as disclosed pursuant to Item 402 of RegulationS-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, is hereby APPROVED.”
The vote is advisory and is not binding on the Board. However, the Compensation Committee of the Board expects to take into account the outcome of the vote as it continues to consider the company’s executive compensation program.
YOUR BOARDOF DIRECTORSUNANIMOUSLYRECOMMENDSAVOTE FORTHISPROPOSAL.
ADVISORY VOTEONTHE FREQUENCYOF FUTURE EXECUTIVE COMPENSATION ADVISORY VOTES
(PROPOSAL 4)
As required by Section 14A of the Exchange Act, we are seeking shareholder input on how often we will seeknon-binding advisory votes regarding the compensation of our named executive officers as disclosed in future proxy statements, similar to Proposal 3 in this24 General Dynamics 2018 Proxy Statement (we refer to those future votes as “Future Advisory Compensation Votes”). We are required to hold Future Advisory Compensation Votes at least once every three years. Accordingly, shareholders may indicate their preference on the frequency of Future Advisory Compensation Votes by voting for one of the following options:
That Future Advisory Compensation Votes be held every year;
That Future Advisory Compensation Votes be held every two years; or
That Future Advisory Compensation Votes be held every three years.
The Board recommends that shareholders vote in favor of holding Future Advisory Compensation Votes every year. Please note that you are being asked to indicate your preference on the above choices, and you are not voting to approve or disapprove the Board’s recommendation.
The Board believes that the optimal frequency for holding Future Advisory Compensation Votes is every year. The Board believes an annual vote, together with the company’s shareholder engagement program, will allow the company to stay aligned with shareholders’ views on our executive compensation program.
YOUR BOARDOF DIRECTORSUNANIMOUSLYRECOMMENDSAVOTE
INFAVOROFHOLDING FUTURE ADVISORY COMPENSATION VOTES EVERY YEAR.
General Dynamics 2017 Proxy Statement 25
COMPENSATION DISCUSSIONAND ANALYSIS
In the Compensation Discussion and Analysis, we describe the details of our named executive officer executive compensation program.
The section is organized as follows:
| ||||
| ||||
| ||||
29 | ||||
30 | ||||
30 | ||||
32 | ||||
Components of Executive Compensation and Alignment with Company Performance | ||||
| ||||
34 | ||||
35 | ||||
37 | ||||
39 | ||||
39 | ||||
26 General Dynamics 20172018 Proxy Statement 25
Compensation Discussion and Analysis
This Compensation Discussion and Analysis (CD&A) describes the compensation of our Named Executive Officers (NEOs) for 20162017 and includes the following individuals:
Name | Title | |
Phebe N. Novakovic | Chairman and Chief Executive Officer | |
Jason W. Aiken | Senior Vice President and Chief Financial Officer | |
John P. Casey | Executive Vice President, Marine Systems | |
Mark C. Roualet | Executive Vice President, Combat Systems | |
S. Daniel Johnson | Executive Vice President, Information Systems and Technology |
General Dynamics is a global aerospace and defense company that offers a broad portfolio of products and services in:
Business aviation;
Combat vehicles, weapons systems and munitions;
Information technology services and C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) solutions; and
Shipbuilding and ship repair.
We operate and manage our ten business units through four business groups with each group led by an executive vice president:as shown below:
GENERAL DYNAMICS | ||
Aerospace | Combat Systems | |
• Gulfstream Aerospace • Jet Aviation | • European Land Systems • Land Systems • Ordnance and Tactical Systems | |
Information Systems and Technology | Marine Systems | |
• Information Technology • Mission Systems | • Bath Iron Works • Electric Boat • NASSCO |
Our management team delivers shareholder returns through disciplined execution on backlog, efficient cash-flow conversion and prudent capital deployment. We manage costs, undertake continuous improvement initiatives, and collaborate across our businesses to achieve our goals of maximizing earnings and cash and creating value for our shareholders. Management’s focus on these principles is reflected in the goals set forth in the company’s incentive plans because we believe successful execution in these areas directly translates to shareholder value creation. Thus, company-wide and business group performance measures are the key metrics the Compensation Committee (the Committee) considers when making executive compensation decisions for the NEOs.
26 General Dynamics 20172018 Proxy Statement 27
Compensation Discussion and Analysis
COMPANY PERFORMANCE HIGHLIGHTS
Shareholder Value. In 2016,2017, the company’s commitment to operational excellence delivered another year of value creation for shareholders. The success of our approach under Ms. Novakovic’s leadership is evident in our strong operating results. We balance our focus on operations with a thoughtful capital deployment strategy. As stewards of your capital, in 20162017 we maintained a deliberate approach to creating shareholder value through our prudent use of capital including investment in long-term business opportunities, an increase in the dividend for the 19th20th consecutive year and tactical share repurchases. Despite early concerns regarding the near-term health of thebusiness-jet market, our Aerospace group exceeded its plan and achieved the highest margin in the company’s history.
Dividend History | ||||
Our management team strongly believes in returning capital to shareholders. In addition to tactical share repurchases over the course of 2017, General Dynamics raised its quarterly dividend for the 20th consecutive year. |
Financial Performance Summary. In 2016,2017, the company demonstrated the successful results of a continued focus on operational excellence, resulting in positive operating leverage, strong earnings and record-setting margin. The following charts show key performance metrics over relevant periods. On January 1, 2017, we adopted a new revenue recognition standard, Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. Prior-period information for 2015 and 2016 has been restated and any comparisons shown in this proxy statement are to the comparable information. In the fourthfifth year under Ms. Novakovic’s leadership, the company has improved performance while also adding new contracts to backlog, thereby sustaining the opportunity for strong execution in the future. In addition, our prudent capital allocation has enabled the company to invest in our businesses while also returning capital to shareholders through dividends and share repurchases.
28 General Dynamics 2017 Proxy Statement
Compensation Discussion and Analysis
Dividend Payment History*
|
|
General Dynamics 2017 Proxy Statement 29
Compensation Discussion and Analysis
COMPONENTSOF COMPENSATIONAND ALIGNMENTWITH COMPANY PERFORMANCE
We pay each NEO through three primary forms of compensation: base salary, an annual incentive and a long-term incentive. The annual and long-term incentives are variable depending on achieving specific performance objectives.
Structural Alignment of Pay with Performance. We demonstrate our commitment to aligning compensation with company performance through the following key elements of the program:
Executive compensation is linked strongly to the financial and operational performance of the business. Over 90 percent of the CEO’s total compensation is at risk, while over 85 percent of the other NEOs’ compensation is at risk. A significant amount of the compensation at risk is delivered through equity: performance restricted stock units (PRSUs), restricted stock and stock options.
In order to emphasize a culture of ownership and strengthen management’s alignment with long-term shareholder interests, the Committee requires one of the strictest set of stock ownership guidelines in our industry for the NEOs. Our CEO is required to hold General Dynamics stock with a value equal to 15 times base salary. Other NEOs are required to hold 10 times base salary.
*Fixed compensation represents base salary, and variable compensation represents annual incentive and equity awards.
30 General Dynamics 2017 Proxy Statement
Compensation Discussion and Analysis
CONTINUED CHANGESTO COMPENSATION PROGRAMIN RESPONSETO SHAREHOLDER FEEDBACK
In 2016 and 2017, we continued to make changes to our compensation program to better align with market best practices and respond to feedback from our shareholders. We believe these changes to the way we pay our NEOs provides for increased alignment and transparency between senior management and our shareholders.
First, we eliminated all remaining legacy excise taxgross-ups. We also implemented a target bonus structure for 2016 and instituted long-term incentive guidelines for equity awards granted in March 2017 for our NEOs. These changes demonstrate our commitment to continuous assessment of our compensation program, our responsiveness to shareholders’ feedback and our focus on ensuring we meet the needs of our business and provide strong value creation for our shareholders.
The following table summarizes the key components of each NEO’s compensation and how we have made changes in our approach in the past several years:
Operations |
|
2017 marked another strong year for operating earnings. Our efficient conversion of backlog translated to higher than expected earnings growth over 2016 |
| |||||||
|
| |||||||||
|
| |||||||||
|
|
|
Employing a Disciplined, Structured Approach to Compensation. NEO compensation is based on clear, measurable goals related to company and business group performance. In March 2016, Ms. Novakovic proposed, and the Committee reviewed and approved, scorecards for each of the NEOs to ensure a continued focus on structure and discipline around performance management and compensation. Details of each NEO’s scorecard are included beginning on page 44 of this CD&A. Annual bonuses are tied directly to these measurable objectives.
Linking Pay Levels to the Market and General Dynamics Performance. Each component of our NEO compensation is targeted to the median of a core group of aerospace, defense and industrial companies with whom we compete for business and executive talent. To the extent compensation exceeds targeted levels, it is directly attributable to performance which increases shareholder value and exceeds measurable, clearly defined performance goals. Conversely, total compensation can be substantially less than target for performance that does not meet company or business group goals, and can include no annual bonus.
General Dynamics 2017 Proxy Statement 31
Compensation Discussion and Analysis
2016 VARIABLE COMPENSATION DRIVERSAND OUTCOMES
Both annual and long-term incentives are based on measurable and objective performance metrics. The following summarizes company-wide performance targets against actual 2016 performance for certain key financial metrics. Detailed business group performance targets and achievements along with NEO scorecards are described in detail in The Compensation Process section on page 42 of this CD&A.
Operating Margin
|
Management’s focus on profitability propelled operating margin to one of the highest levels in company history in 2017. Continued focus across the business on continuous improvement and cost cutting aided in providing one of the highest operating margins in the industry.
|
|
General Dynamics 2018 Proxy Statement 27
Compensation Discussion and Analysis
2016Achievement
2015 Actual
Free Cash Flow from Operations†
| Free cash flow from operations increased in 2017 with contributions across our business groups. Free cash flow was at the highest level since 2015 and exceeded the amount set forth in the operating plan by almost $1 billion. |
| ||||||||
|
Setting Challenging Targets Based on Market Conditions. Annual incentive compensation targets were set in early 2016 based on backlog, anticipated order activity, and expected market conditions. They were in line with guidance provided to the market by company management. Our operating metric targets were set based on our assessment of our backlog and the market conditions for our company.
The following explains each financial metric:
Earnings from Continuing Operations. The earnings target for 2016 was $2.89 billion, relative to a 2015 actual of $2.97 billion. Actual results for 2016 were $3.06 billion. The 2016 target, set early in 2016, was based on management’s assessment of backlog, expected order activity and market conditions which resulted in modest anticipated top line and operating earnings growth but lower net earnings due to a higher effective tax rate. Management’s focus on operational efficiency and cost reduction initiatives resulted in stronger than forecasted earnings.
Free Cash Flow from Operations. The free cash flow from operations target for 2016 was $1.49 billion, relative to a 2015 actual of $1.93 billion. The decline in expected free cash flow in 2016 relative to the free cash flow result in 2015 was due to the continued utilization of a significant customer deposit received in 2014 by our Combat Systems group, and an increase in operating working capital at our Gulfstream business unit. Actual results for 2016 were $1.81 billion, which exceeded our expectations.
Return on Invested Capital. The three-year ROIC target applicable for PRSUs granted in 2016 is 15.3 percent. The three-year ROIC target applicable for PRSUs granted in 2015 is 14.1 percent. These three-year targets represented†
We focus on Return on Invested Capital (ROIC) because it reflects our ability to generate returns from the company’s expectation of average ROIC performance over the 2015–2017 and 2016–2018 performance periods. The actual result for 2016 was 18.1 percent and was among the strongestcapital we have deployed in our peer group. The PRSUs granted in 2015 remain subjectoperations. In 2017, ROIC improved 50 basis points to ROIC performance for the third year of the performance period, and the PRSUs granted in 2016 remain subject to ROIC performance for the second and third years of the performance period.
32 General Dynamics 2017 Proxy Statement
Compensation Discussion and Analysis
2016 SHAREHOLDER OUTREACHAND SAYON PAY RESULTAND PROGRAM UPDATES
Every year we engage with holders of at least 65 percent of our outstanding Common Stock to understand shareholder views on our executive compensation program. Following changes to our executive compensation program resulting in part from shareholder engagement, our shareholders have expressed very strong support for our program and the results it is driving. At our 2016 annual shareholder meeting, investors strongly supported our executive compensation program with over 90 percent of shares voted in favor of our Say on Pay proposal.
The Committee and company management continually seek to improve the executive compensation program and have made several enhancements to the program in recent years. With the support of management and the independent compensation consultant, each change was based on the Committee’s review of emerging corporate governance practices, feedback from shareholders, and an effort to more closely align executive compensation with company performance.
New in 2016. The program updates described in the following table were approved by the Committee and were in place for compensation granted in 2016.
| ||||||
|
16.8%. | |||||
|
|
†See Appendix A for a discussion of these non-GAAP measures and a reconciliation to their more directly comparable GAAP measures.
• This change further aligns our compensation program with market best practices
Annual Incentive Financial Performance Metrics | 2017 Target | 2017 Actual | 2017 Achievement | ||||||||||||
Earnings from Continuing Operations | $2.922 billion | $3.031 billion* | Exceeded | ||||||||||||
Free Cash Flow from Operations | $2.500 billion | $3.451 billion | Exceeded |
*Represents adjustednon-GAAP earnings from continuing operations which excludes a $119 million tax impact as a result of the passage of the Tax Cuts and Jobs Act of 2017 in late December 2017. The Compensation Committee chose to adjust the result because the tax impact resulting primarily from the change in value of deferred tax assets and liabilities was not reflective of the actual operating performance of the company in 2017. A reconciliation to the GAAP figure can be found in Appendix A.
Long-term Incentive |
2015 – 2017 Performance Period
| |||||
Financial Performance Metrics
| Target
| Actual
| Achievement
| |||
Return on Invested Capital**
|
14.1% |
17.4% |
Exceeded |
**For purposes of determining the achievement for PRSUs granted in 2015, the calculation reflects the average of the ROIC reported on Form10-K for each year during the performance period. As such, amounts for 2015 and 2016 do not reflect the adoption of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers.
28 General Dynamics 2018 Proxy Statement
Compensation Discussion and Analysis
|
|
The goals of our executive compensation program are to incentivize management to achieve operational excellence and align the interests of management and shareholders. To achieve these goals, compensation for NEOs is driven by how the company performs on metrics that the Board of Directors believes create shareholder value.
Our management team delivers shareholder returns through disciplined execution on backlog, efficient cash flow conversion and prudent capital deployment. We manage costs, undertake continuous improvement initiatives, and collaborate across our businesses to achieve our goals of maximizing earnings and cash flow and creating value for our shareholders. Management’s focus on these metrics is reflected in the goals set forth in the company’s incentive plans because we believe successful execution in these areas directly translates to shareholder value creation. Thus, company-wide performance measures are the key metrics the Compensation Committee (the Committee) considers when making executive compensation decisions for the NEOs.
Our program is evolving constantly to ensure alignment with shareholders and market best practices. Over the past several years, we have made strategic changes to the structure of our plans to maintain this alignment. In 2017, we introduced long-term incentive (LTI) guidelines which allow the Committee to make LTI grants within a set range determined by market data. The Committee also engaged a new independent compensation consultant to provide an outside, independent perspective on issues relating to executive compensation.
We believe that compensation decisions for NEOs should be made within a strong and independent governance framework. The executive compensation program is independently governed by the Committee with the support of company management and the Committee’s independent compensation consultant. The following are characteristics of the program that demonstrate strong governance.
• This change allows the Committee to consider multiple factors in making equity grants to ensure a strong linkage between pay and performance while balancing other factors such as individual assessments, business performance and market benchmarks
Aligned restricted stock vesting with other equity vehicles
• To match our other equity vehicles (stock options and PRSUs) restricted stock granted in 2017 will vest three years after the date of grant
• This change aligns the vesting schedule of all equity vehicles
Leading Executive Compensation Governance Practices
|
✓
General Dynamics 2017 Proxy Statement 33
100 percent independent Compensation Discussion and AnalysisCommittee
✓
Independent compensation consultant reporting to the Compensation Committee
✓
Thoughtfully selected peer group consisting of other aerospace and defense firms, with annual Committee review of the group
✓
Market-leading stock ownership requirements of 15 times base salary for the CEO and 10 times for the other NEOs
✓
Each component of pay is targeted to the median of the peer group
✓
No merit pools for base salaries; they are tied to the peer group median
✓
Incentive compensation based on scorecards identifying clear, measurable goals with key financial and operational metrics that drive business performance
✓
The value of long-term incentives that are ultimately earned is based on our future, multi-year performance and shareholder value creation
✓
No employment agreements with NEOs
✓
Double-trigger change in control arrangements
✓
No excise taxgross-ups paid in conjunction with a termination as part of a change in control
✓
Clawback policy
✓
Anti-hedging policy
✓
Anti-pledging policy
✓
Director and management engagement with shareholders
General Dynamics 2018 Proxy Statement 29
Compensation Discussion and Analysis
The Committee approves and is actively engaged in the development and implementation of the executive compensation program, with the support of the independent compensation consultant and company management. The program is structured to:
General Dynamics 2018 Proxy Statement 31
Compensation Discussion and Analysis
PEER GROUPAND BENCHMARKINGTOTHE MARKET
Each year, the Committee, with support from its independent compensation consultant, identifies a core group of companies that are:
In similar industries and where General Dynamics competes for business
Likely sources of or destinations for executive talent
Reasonably comparable in size, as measured by revenue and market capitalization
Reasonably similar in organizational structure and complexity
Consist of some of the peers of our peer companies
The companies in our peer group for 2017, which is unchanged from 2016, are listed below. We believe this peer group is appropriate for our industry and where we compete for talent. Peer group proxy data and survey data provided by Aon are utilized to assess the competitiveness of our executive compensation practices, structures and levels. The Committee will continue to review and analyze the peer group for reasonableness and competitiveness with General Dynamics’ business offerings.
Peer Group Companies*
|
| |||||||||
Market (in millions) | (in millions) | Employee Population | Peer of Peers | |||||||
The Boeing Company
| $ 175,642
| $ 93,392
| 140,800
|
| ✓
|
| ||||
Honeywell International Inc.
| $ 116,064
| $ 40,534
| 131,000
|
| ✓
|
| ||||
L-3 Technologies Inc.
| $ 15,460
| $ 9,573
| 31,000
|
| ✓
|
| ||||
Lockheed Martin Corporation
| $ 92,056
| $ 51,048
| 100,000
|
| ✓
|
| ||||
Northrop Grumman Corporation
| $ 53,426
| $ 25,803
| 70,000
|
| ✓
|
| ||||
Raytheon Company
| $ 54,305
| $ 25,348
| 64,000
|
| ✓
|
| ||||
Rockwell Collins, Inc.
| $ 22,214
| $ 7,640
| 29,000
|
| ✓
|
| ||||
Textron Inc.
| $ 14,907 | $ 14,198
| 37,000
|
| ✓
|
| ||||
United Technologies Corporation
| $ 101,874
| $ 59,837
| 204,700
|
| ✓
|
| ||||
Median
| $ 54,305
| $ 25,803
| 70,000
| |||||||
General Dynamics
| $ 60,747
| $ 30,973
| 98,600
|
| ✓
|
| ||||
General Dynamics (Percentile Rank)
| 52%
| 54%
| 62%
|
*Peer group data are as of December 31, 2017.
32 General Dynamics 2018 Proxy Statement
Compensation Discussion and Analysis
COMPONENTSOF EXECUTIVE COMPENSATIONAND ALIGNMENTWITH COMPANY PERFORMANCE |
Each NEO receives a mix of fixed and variable components of compensation. The following charts summarize the various forms of compensation.
Structural Alignment of Pay with Performance. We demonstrate our commitment to aligning compensation with company performance through the following key elements of the program:
Executive compensation is linked strongly to the financial and operational performance of the company. Over 90 percent of the CEO’s total compensation is at risk, while over 85 percent of the other NEOs’ compensation is at risk. A significant amount of theat-risk compensation is delivered through equity: performance restricted stock units (PRSUs), restricted stock and stock options.
To emphasize a culture of ownership and strengthen management’s alignment with long-term shareholder interests, the Committee requires one of the strictest set of stock ownership guidelines across the Fortune 100 for the NEOs. Our CEO is required to hold General Dynamics stock with a value equal to 15 times base salary. The other NEOs are required to hold 10 times base salary.
CEO Target Compensation Mix | Other NEO Target Compensation Mix | |
Linking Pay Levels to the Market and General Dynamics Performance. Each component of our NEO compensation is targeted to the median of the peer group. To the extent compensation exceeds targeted levels, it is directly attributable to
General Dynamics 2018 Proxy Statement 33
Compensation Discussion and Analysis
performance which increases shareholder value and exceeds measurable, clearly defined performance goals. Conversely, total compensation can be substantially less than target for performance that falls significantly short ofpre-established targets.
Setting Challenging Targets Based on Market Conditions. Annual and long-term incentives are based on measurable and objective performance metrics. Annual incentive performance targets were set in early 2017 based on backlog, anticipated order activity and expected market conditions. Three-year target goals for the PRSUs were set in early 2017 based on our long-term operating plans. Targets were in line with guidance provided to the market by company management.
We pay executives an annual salary in cash that is tied to the peer group median (50th percentile) for salaries of executives in comparable positions at our peer group companies based on survey data. Salaries are reviewed annually, and increases, when they occur, are driven by changes in the market. We believe that organizations that perform well over the long term, like General Dynamics, make an effort to pay salaries at or near the market median and create opportunities for executives to earn above-median compensation through annual and long-term incentives that are awarded based on performance relative to challenging and clear performance goals. The goal of our base salary is to provide a competitive, fixed rate of cash compensation. In 2017, the market median for base salary increased for all NEOs except the CEO.
NAMEAND TITLE
|
2016 BASE
|
2017 BASE
|
% INCREASE
| ||||||||||||
Ms. Novakovic Chairman and Chief Executive Officer
|
$ 1,585,000
|
$ 1,585,000
|
0%
| ||||||||||||
Mr. Aiken Senior Vice President and Chief Financial Officer
|
$ 710,000
|
$ 770,000
|
8%
| ||||||||||||
Mr. Casey Executive Vice President, Marine Systems
|
$ 755,000
|
$ 780,000
|
3%
| ||||||||||||
Mr. Roualet Executive Vice President, Combat Systems
|
$ 755,000
|
$ 780,000
|
3%
| ||||||||||||
Mr. Johnson Executive Vice President, Information Systems and Technology
|
$ 725,000
|
$ 780,000
|
8%
|
The NEOs are eligible to earn an annual incentive paid in cash based on the company’s prior-year performance. The incentive is designed to place at risk a significant portion of each NEO’s annual compensation. The incentive is based on performance against specific, measureable goals established at the beginning of the year and approved by the Committee as well as the Committee’s assessment of each NEO’s individual performance during the year. The goals are designed to be difficult but achievable through solid execution. The Committee believes the chosen incentive metrics are good indicators of the company’s overall performance and lead to the creation of long-term value for our shareholders.
NEO PERFORMANCE METRICSAND TARGETS
In 2017, the annual incentive for each NEO was determined based on the same metrics: company operating earnings and free cash flow from operations. The Committee decided that, because the executive vice presidents play a major role in the overall success of the company in addition to overseeing their business group, they should be evaluated on the same company-wide metrics as the chief executive officer and the chief financial officer. The below charts demonstrate the NEO goals for 2017.
Each NEO’s target annual incentive, as a percentage of base salary, was determined during our annual compensation benchmarking process and is designed to provide total cash compensation near the 50th percentile of the peer group if targets are met. Consistent with peer and market practice, the maximum incentive that can be earned under this plan is two times the target amount. For performance that falls significantly short of thepre-established target, there may be no payout. 2017 was a strong operational year
34 General Dynamics 2018 Proxy Statement
Compensation Discussion and Analysis
for General Dynamics. Above-target annual incentives were awarded to NEOs in recognition of their role in driving these results as well as for their individual performance and achievements throughout the year. The below table summarizes each NEO’s target and the Committee’s determination of final incentives.
NEO Financial Goals
Performance Metric | Weighting | 2017 Target | 2017 Actual | ||||||||||||
Earnings from Continuing Operations | 50% | $2.922 billion | $3.031 billion* | ||||||||||||
Free Cash Flow from Operations | 50% | $2.500 billion | $3.451 billion |
*Represents adjustednon-GAAP earnings from continuing operations which excludes a $119 million tax impact as a result of the passage of the Tax Cuts and Jobs Act of 2017 in late December 2017. The Committee chose to adjust the result because the tax impact resulting primarily from the change in value of deferred tax assets and liabilities was not reflective of the actual operating performance of the company in 2017. A reconciliation to the GAAP figure can be found in Appendix A.
NEO Annual Incentive Achievement
NAMEAND TITLE
|
2017 BASE
|
TARGET
|
MAXIMUM
|
TARGET
|
MAXIMUM
|
ANNUAL
| ||||||
Ms. Novakovic Chairman and Chief Executive Officer
|
$ 1,585,000
|
170%
|
340%
|
$ 2,694,500
|
$5,389,000
|
$5,300,000
| ||||||
Mr. Aiken Senior Vice President and Chief Financial Officer
|
$ 770,000
|
100%
|
200%
|
$ 770,000
|
$1,540,000
|
$1,386,000
| ||||||
Mr. Casey Executive Vice President, Marine Systems
|
$ 780,000
|
100%
|
200%
|
$ 780,000
|
$1,560,000
|
$1,404,000
| ||||||
Mr. Roualet Executive Vice President, Combat Systems
|
$ 780,000
|
100%
|
200%
|
$ 780,000
|
$1,560,000
|
$1,404,000
| ||||||
Mr. Johnson Executive Vice President, Information Systems and Technology
|
$ 780,000
|
100%
|
200%
|
$ 780,000
|
$1,560,000
|
$1,378,000
|
LONG-TERM INCENTIVE COMPENSATION
Long-term incentive compensation (LTI) is provided to NEOs to align management’s interest with that of shareholders several years into the future. LTI comprises a major portion of total compensation provided to NEOs and thus gives management a significant personal stake in the long-term success of General Dynamics. By awarding LTI through various types of equity instruments, different elements of shareholder alignment are achieved. We award LTI based on the following allocation:
Each NEO receives a mix of fixed and variable components of compensation. The following charts summarize the various forms of compensation and demonstrate that over 90 percent of the CEO’s compensation and over 85 percent of other NEO compensation is variable and tied to company performance.
|
| |||
General Dynamics 2017 Proxy Statement 35
Compensation Discussion and Analysis
VARIABLEAND PERFORMANCE-BASED COMPENSATION
| ||||||
| ||||||
| ||||||
|
The Committee has carefully considered the value drivers of the company and each business group when structuring incentive compensation and has determined to use the following factors and metrics to set compensation for the reasons summarized in the table below. Some of the metrics for the business group executive vice presidents are different, as described below.
|
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|
|
|
| |||||
| ||||||||
| ||||||||
| ||||||||
|
|
|
| |||||
|
36 General Dynamics 2017 Proxy Statement
Compensation Discussion and Analysis
NEOs are eligible for an annual cash incentive based on the company’s prior-year performance and, for NEOs other than the CEO and CFO, that of their business groups. The incentive is designed to place at risk a significant portion of each NEO’s annual compensation. The incentive is based on performance against specific, measurable goals established at the beginning of the year and approved by the Committee as well as the Committee’s assessment of each NEO’s individual performance during the year. The goals are designed to be difficult but achievable through solid execution. The Committee believes the chosen incentive metrics are good indicators of the company’s overall performance and lead to the creation of long-term value for our shareholders. Each year the committee evaluates each NEO’s performance against apre-established scorecard and makes a determination on the amount of the annual incentive that may range from no incentive for performance that falls short of expectations or up to two times the target amount for performance that exceeds the goals.
LONG-TERM INCENTIVE COMPENSATION
In 2016 we based long-term incentive grants for each NEO on two factors:
Each NEO’s actual total cash compensation for the most recently completed performance year, and
The peer group median of long-term incentive awards as a percent of total cash compensation (TCC).
We award long-term incentive compensation in three forms of equity: performance restricted stock units (25 percent of award value), restricted stock (25 percent of award value) and stock options (50 percent of award value). Each of these forms of equity aligns the NEOs with the company’s shareholders and provides retention incentives through multi-year, performance-based vesting periods.
Setting Long-term Grant Amounts:
2017. Starting withequity grants made in March 2017, the Committee uses guidelines that are constructed around a benchmark of the market median and balances other considerations such as prior-year performance, complexity of the role, length of service, future expected contributions to the company and impact on dilution. We believe that this approach allows for the consideration of factors in addition to the quantitative metrics that drive annual incentive payments. This change allows the Committee to make grant decisions that better meet the needs of our business and shareholders.
2016. To ensure that long-term incentive awards are reasonably in line with long-term awards at our peer group companies and reflect the financial performance of the company, we used a multiple of TCC to determine the amount of the equity grant. We based the multiple on survey data for the ratio of long-term incentives to cash compensation that our peer group companies award to their executives in similar positions.
Long-Term Incentive Allocation
General Dynamics 2017 Proxy Statement 37
Compensation Discussion and Analysis
Performance Restricted Stock Units
Performance Restricted Stock Units (PRSUs) are a form of equity compensation tied to the achievement of specific performance goals and linked to the long-term performance of the company. This element of executive compensation closely connects executives to the company’s financial and stock performance over the long term. PRSUs at General Dynamics are structured as follows:
PRSU Award = Total LTI Grant x 25%
PRSU grants are calculated by multiplying the overall target LTI economic value determined as noted above by the weighting assigned to the PRSU component (25 percent) and dividing the result by the value of a single share of General Dynamics Common Stock.
Target Setting:
The three-year ROIC target is set on the date of grant each year and will release at the end of the performance period.
The Committee does not have discretion to reset the target during the three-year performance cycle.
The performance target is set to be challenging, yet achievable.
For the 2016-2018 performance period the ROIC target was established at 15.3 percent which was higher than the target set for grants made in prior years. Consistent with prior years, this target reflects the multi-year operating plan for the company and takes into account management’s assessment of future backlog, earnings and capital deployment. The Committee believes this target is challenging but achievable through continued strong operating performance.
Plan Operation:
After the three-year performance period, the number of PRSUs will be adjusted upward or downward subject to a+/-2.5 percent collar adjustment around the ROIC target to reflect rigorous alignment with company performance. The adjustment provides for the following payouts:
General Dynamics 2018 Proxy Statement 35
Compensation Discussion and Analysis
Setting Long-term Grant Amounts. The Committee uses guidelines that are constructed around the market median and balances other considerations such as prior-year performance, complexity of the role, length of service, future expected contributions to the company and impact on dilution, when determining actual LTI grant amounts. We believe that this approach allows for the consideration of factors in addition to the quantitative metrics that drive annual incentive payments. This allows the Committee to make grant decisions that better meet the needs of our business and shareholders.
PERFORMANCE RESTRICTED STOCK UNITS
Performance Restricted Stock Units (PRSUs) are a form of equity compensation tied to the achievement of specific performance goals and linked to the long-term performance of the company. This element of executive compensation closely connects executives to the company’s financial and stock performance over the long term and acts as a retention tool. NEOs who voluntarily resign or are terminated for cause immediately forfeit all PRSUs that have not vested unless otherwise determined by the Committee. PRSUs at General Dynamics are structured as follows:
Target Setting:
The three-year ROIC target is set on the date of grant. The Committee does not have discretion to reset the target during the three-year performance cycle.
The performance target is set to be challenging, yet achievable.
For the 2017-2019 performance period, the ROIC target was established at 15.2 percent. This target reflects the multi-year operating plan for the company and takes into account management’s assessment of future performance. Because we operate in a dynamic and competitive environment, the target established each year represents the outlook for the three-year period and may not be comparable to past targets or past achievement. In light of these circumstances, the Committee believes this three-year target is challenging but achievable through continued strong operating performance.
Plan Operation:
After the three-year performance period, the number of PRSUs earned will be determined based on the following performance and payout schedule, which applies a +/- 2.5 percent collar around the three-year average ROIC target:
The ROIC calculation for purposes of PRSU performance does not include accumulated other comprehensive income (AOCI), goodwill write-offs in the year of the event ornon-economic accounting changes.
Restricted Stock
Restricted stock awards are designed to attract and retain executives by providing them with some of the benefits associated with stock ownership during the restriction period, while incentivizing them to remain with General Dynamics. The Committee has determined that the use of cliff vesting (the entire grant vests at once as opposed to ratably over time) on our restricted stock ensures that executives are focused on long-term value creation while supporting the company’s need to attract and retain executives during all market conditions. Awards granted in 2016 vest after approximately four years. Restricted stock awards granted in March 2017 will vest three years from the grant date. This change increased the alignment across all of our equity vehicles which also vest in three years and mirrors the vesting schedule utilized by most of our peers.
Restricted Stock Award = Total LTI Grant x 25%
38 General Dynamics 2017 Proxy Statement
Compensation Discussion and Analysis
Restricted stock grants are calculated by multiplying the overall target LTI economic value determined as noted above by the weighting assigned to the restricted stock component (25 percent) and dividing the result by the value of a single share of General Dynamics Common Stock. During the restriction period, executives may not sell, transfer, pledge, assign, or otherwise convey their restricted shares. Executives are eligible, however, to vote their shares and receive dividend payments and other distributions on our Common Stock when declared by the Board of Directors. Restricted stock awards are service-based, meaning that executives who voluntarily resign or are terminated for cause prior to the end of the holding period forfeit their restricted stock unless otherwise determined by the Committee.
Stock Options
The Committee grants stock options to align executive interests with shareholder interests for many years into the future. They serve as both a retention tool and a value driver. Stock options give our NEOs the right to buy a share of our Common Stock in the future at a predetermined exercise price, which is established as the average of the high and low sales price of our Common Stock on the date of award. In 2016, the exercise price for granted options was $135.85 for each stock option. Stock options vest after three years, with 50 percent of the grant exercisable after two years and 50 percent exercisable after three years. Our outstanding options granted since 2015 expire 10 years after the grant date.
Stock Options Award = Total LTI Grant x 50%
Stock option grants are calculated by multiplying the overall target LTI economic value determined as noted above by the weighting assigned to the stock options component (50 percent) and dividing the result by the value of a single option, determined under the Black-Scholes methodology applying the same assumptions used for recognizing option expense in our audited financial statements. These assumptions are set out in Note O to our financial statements contained in our Annual Report. The Black-Scholes formula is based on a set of key variables and assumptions and is an accepted model for valuing stock options under FASB ASC Topic 718.
As with restricted stock and PRSU awards, NEOs who voluntarily resign or are terminated for cause immediately forfeit all options that have not vested unless otherwise determined by the Committee. Our equity compensation plan prohibits the repricing of stock options without the approval of shareholders.
FIXED COMPENSATIONAND BENEFITS
Base Salary
We pay executives an annual salary in cash that is strictly tied to the peer group median (50th percentile) for salaries of executives in comparable positions at our peer group companies based on survey data. Salaries are reviewed annually, and increases, when they occur, are driven by changes in the market. We believe that organizations that perform well over the long term, like General Dynamics, make an effort to pay salaries at or near the market median and create opportunities for executives to earn above median compensation through annual and long-term incentives that are awarded based on performance relative to challenging and clear performance goals. The goal of our base salary is to provide a competitive, fixed rate of cash compensation.
Benefits
General Dynamics-provided benefits are an important tool used to attract and retain outstanding executives. Benefit levels are reviewed periodically to ensure they are cost-effective and competitive and support the overall needs of our employees. The company makes available medical, dental, life insurance and disability coverage to all of the NEOs. NEOs can select the level of coverage appropriate for their circumstances. The company also provides NEOs group life insurance coverage worth two times base salary and 50 percent long-term disability coverage.
General Dynamics 2017 Proxy Statement 39
Compensation Discussion and Analysis
Company-Sponsored Retirement Plans
We provide retirement plans to our eligible employees, including the eligible NEOs, through a combination of qualified andnon- qualified plans. Following is a description of the retirement plans in which the NEOs participate:
Defined-Benefit Retirement Plan. Each NEO other than Mr. Johnson participates in a company-sponsored defined-benefit plan called the General Dynamics Salaried Retirement Plan.Beginning January 1, 2014, pension accruals under this plan stoppedfor employees at our corporate headquarters, including the participating named executive officers.
The benefit under the plan is payable as a life annuity. The Salaried Retirement Plan is a funded, tax-qualified, noncontributory defined-benefit pension plan. It was amended effective January 1, 2007, to exclude any employee initially hired after that date. The benefit formula under the Salaried Retirement Plan for employees hired before December 31, 2006, is 1.0 percent times a participant’s highest final average pay multiplied by years of service earned on and after January 1, 2007, plus 1.333 percent times a participant’s highest final average pay frozen as of December 31, 2010, multiplied by years of service earned prior to January 1, 2007. Final average pay for purposes of calculating retirement benefits includes a NEO’s base salary and cash bonus. The company makes contributions to the Salaried Retirement Plan through payments into a trust fund from which the benefits are paid.
Supplemental Retirement Plan. The amount of cash compensation used to calculate pension benefits for participants in the Salaried Retirement Plan is limited by the Internal Revenue Code ($265,000 in 2016). To provide a benefit calculated on compensation in excess of this compensation limit, the company provides eligible executives coverage under the General Dynamics Corporation Supplemental Retirement Plan. Benefits under the Supplemental Retirement Plan are general unsecured obligations of General Dynamics. Each NEO, other than Mr. Johnson, participates in the Supplemental Retirement Plan.Beginning January 1, 2014, pension accruals under this plan stopped for employees at our corporate headquarters including the participating named executive officers.
Anteon International Corporation Supplemental Retirement Savings Plan. Mr. Johnson has an account balance under the frozen Anteon International Corporation Supplemental Retirement Savings Plan. Under the plan, certain eligible employees of Anteon could defer receipt of all or a portion of their annual cash compensation prior to the plan being frozen in 2007. Upon his retirement or other separation from the company, Mr. Johnson may elect to receive the deferred compensation in either a lump sum or in annual installments over a period of up to ten years.
401(k) Plan. Each NEO is eligible to participate in the General Dynamics Corporation 401(k) Plan, atax-qualified defined contribution retirement plan. Each NEO is eligible to makebefore-tax contributions and receive company matching contributions under the 401(k) Plan. During 2016, for NEOs other than Mr. Johnson, the 401(k) Plan provided for a company-matching contribution of (1) 100 percent onbefore-tax contributions up to the first 3 percent of a participant’s eligible pay and (2) 50 percent onbefore-tax contributions on the next 3 percent of a participant’s eligible pay. Mr. Johnson participates in a version of the 401(k) plan that provides for a company-matching contribution of 50 percent onbefore-tax contributions up to the first 6 percent of his eligible pay. Our matching contributions during 2016 for the NEOs are included in footnote (d) to the All Other Compensation column of the Summary Compensation Table on page 49 of this Proxy Statement.
Supplemental Savings Plan. The company provides a Supplemental Savings Plan to key employees, including each NEO. The purpose of the Supplemental Savings Plan is to allow key executives to defer salary and receive matching contributions on compensation in excess of the compensation limit imposed by the Internal Revenue Service on earnings used to calculate 401(k) contributions. Matching contributions during 2016 for the NEOs are included in footnote (d) to the All Other Compensation column of the Summary Compensation Table on page 49 of this Proxy Statement.
Other Retiree Benefits. Eligible key executives throughout the company, including the NEOs, can purchase group term life insurance prior to retiring of up to two times their base pay. For executives who retire early (prior to age 65), we pay for insurance coverage equal toone-half the executive’s base salary until the executive reaches age 65. For early retirees who elect coverage in excess ofone-half of base pay they will pay monthly premiums for the additional coverage. For executives retiring at or after age 65, we pay for insurance coverage up to two times an executive’s base salary. This coverage is ratably reduced over a five-year period following the executive’s retirement, or beginning at age 65 for early retirees, subject to a maximum coverage level of 25 percent of the coverage in effect at the time of retirement.
40 General Dynamics 2017 Proxy Statement
Compensation Discussion and Analysis
Perquisites
We continue to offer only perquisites that the Committee believes are reasonable yet competitive. The company provides perquisites to key executive officers, including the NEOs, for purposes of recruiting, retention and security.
We provide perquisites to ensure the security and accessibility of our executives and to facilitate the transaction of business. As a reasonableness test, we compare these perquisites to generally accepted corporate practices.
The perquisites provided to our NEOs in 2016 were: financial planning and tax preparation services, physical examinations, home security systems, personal liability and supplemental accidental death and dismemberment insurance, and the personal use of automobiles owned or leased by the company. In addition, personal use of our aircraft was provided only to our chairman and chief executive officer as required by the Board to help ensure her security and accessibility.
We have provided additional information on perquisites in footnote (d) to the All Other Compensation column of the Summary Compensation Table on page 49 of this Proxy Statement.
POTENTIAL SEVERANCEAND CHANGEIN CONTROL BENEFITS
The company has change in control agreements, also known as severance protection agreements, with each of the NEOs. The company believes that these agreements are an important tool for recruiting and retaining highly qualified executives. The agreements are structured to protect the interests of shareholders by including a “double trigger” mechanism that results in a severance payout only when:
A change of control is consummated, and
The executive’s employment is terminated by the company without cause or by the executive for good reason within 24 months following the change in control.
A “change in control” is defined to include specified stock acquisition, merger or disposition transactions involving General Dynamics. The Committee evaluates and reviews payment and benefit levels under the change in control agreements regularly. These reviews support the view that the agreements are consistent with the practices of our peer group companies. The form of severance protection agreement for NEOs appointed after April 2009 excludes any provision for reimbursement of excise taxes that may become due upon a change in control.
Updated Agreements in 2016. This year, Ms. Novakovic, the only remaining NEO eligible for reimbursement of excise taxes signed a new severance protection agreement which eliminated this provision. All employees with severance protection agreements are no longer eligible for reimbursement on excise taxes after signing new agreements effective this year.
Payments and benefits provided to NEOs pursuant to the change in control agreements are described in the Potential Payments upon Termination or Change in Control section beginning on page 57 of this Proxy Statement.
General Dynamics 2017 Proxy Statement 41
Compensation Discussion and Analysis
The Committee approves and is actively engaged in the development and implementation of the executive compensation program, with the support of the independent compensation consultant and company management. The program is structured to:
Align executive compensation with shareholder value creation
Ensure retention and growth for executives in a competitive environment
Compensate executives subject to clear and challenging performance metrics
Program objectives are achieved through the use of both short-term and long-term incentives. The company currently targets the median pay of our peers as further discussed in detail below. In addition, through the annual incentive plan, the NEOs are rewarded for achieving annual company and business group goals.
SETTING COMPENSATION LEVELSAND EVALUATING PERFORMANCE
Setting compensation for senior executives is a16-month process that begins in the fall of each year when senior management establishes company operating goals for the coming year. The business plans are presented to the chairman and chief executive officer annually in November. The chairman, in consultation with the chief financial officer and the executive vice presidents, establishes the business group operating goals and the company operating plan for the coming year based on those business group plans. The business group plans include challenging but achievable goals that could result in incentive compensation payouts above the peer group median for superior performance or as little as zero if goals are not met. At athree-day Board meeting in the first quarter of each year, the business unit presidents present their plans to the Board of Directors. The Board then reviews, adjusts where appropriate, and approves the business group operating goals and adopts our company operating plan for the year. Throughout the year, the Board reviews and monitors company performance as compared to the operating plan through a series of financial and operating reports given by the chief financial officer and the executive vice presidents.
The Committee reviews performance beginning the following February. At that time, the chairman and chief executive officer and the executive vice presidents assess the performance of the business groups and the company compared with the operating plan goals adopted the prior year. The chairman and chief executive officer along with senior management report the results of that assessment to the Board of Directors at a meeting in the first quarter of the year. Following these reports, the chairman and chief executive officer, after consultation with senior management, undertakes an initial discussion with the Committee regarding executive compensation for the year. At this meeting, the chairman and chief executive officer provides the Committee with a performance assessment of each NEO (other than herself) against their scorecard goals. The Committee convenes in early March to review scorecards for the company and approve final executive compensation proposals. The Committee reviews, refines and approves compensation against the goals reflected on the scorecard for the chairman and chief executive officer in executive session at the March meeting.
The Committee bases compensation on the clearly defined and disclosed performance goals described in this Proxy Statement. The Committee’s decisions also reflect factors such as the degree of difficulty of goals, market conditions and exceptional individual achievement.
42 General Dynamics 2017 Proxy Statement
Compensation Discussion and Analysis
PEER GROUPAND BENCHMARKINGTOTHE MARKETThree-Year Average ROIC
Each year, the Committee, with support from an independent compensation consultant, peer group proxy data and survey data provided by Aon Hewitt, identifies a core group of companies that are, in comparison to General Dynamics:Performance
In similar industries and where General Dynamics competes for business (aerospace and defense)
Likely sources of executive talent
Reasonably comparable in size, as measured by revenue and market capitalization
Reasonably similar in organizational structure and complexity
Consist of some of the peers of our peer companies
The companies in our peer group for 2016 are listed below. This peer group is appropriate for our industry and where we compete for talent. The peer group is utilized for purposes of comparing our executive compensation practices, structures and levels. The Committee will continue to review and analyze the peer group for reasonableness and competitiveness with General Dynamics’ business offerings.PRSU Payout After 3 Years from Grant Date
Peer Group Companies*
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Market Capitalization (in millions) | Revenue (in millions) | Employee Population | Peer of Peers | |||||
The Boeing Company | $ 96,086 | $ 94,571 | 150,500 | ✓ | ||||
Honeywell International Inc. | $ 88,184 | $ 39,302 | 131,000 | ✓ | ||||
L-3 Communications Holdings Inc. | $ 11,748 | $ 10,511 | 38,000 | ✓ | ||||
Lockheed Martin Corporation | $ 72,483 | $ 47,248 | 97,000 | ✓ | ||||
Northrop Grumman Corporation | $ 40,608 | $ 24,508 | 67,000 | ✓ | ||||
Raytheon Company | $ 41,589 | $ 24,069 | 63,000 | ✓ | ||||
Rockwell Collins, Inc. | $ 12,136 | $ 5,283 | 19,000 | ✓ | ||||
Textron Inc. | $ 13,262 | $ 13,788 | 36,000 | ✓ | ||||
United Technologies Corporation | $ 88,339 | $ 57,244 | 201,600 | ✓ | ||||
Median | $ 41,589 | $ 24,508 | 67,000 | |||||
General Dynamics | $ 52,216 | $ 31,353 | 98,800 | ✓ | ||||
General Dynamics (Percentile Rank) | 55% | 56% | 63% |
* Peer group data are as of December 31, 2016.
2.5% or more above target
General Dynamics 2017 Proxy Statement 43
Compensation Discussion and Analysis150% of target PRSUs
NEO PERFORMANCE METRICSAND TARGETSFOR 2016
The following scorecards demonstrate each NEO’s goals and objectives for the year and performance against those goals and objectives. There is a scorecard for the CEO, CFO and each other NEO who leads one of the General Dynamics business groups.At target
|
| 100% of target PRSUs | ||
2.5% below target | 50% of target PRSUs | |||
More than 2.5% below target | 0% of target PRSUs
| |||
|
We define ROIC as net operating profit after taxes divided by average invested capital. Net operating profit after taxes is defined as earnings from continuing operations plusafter-tax interest and amortization expense. Average invested capital is defined as the sum of the average debt and shareholders’ equity excluding accumulated other comprehensive loss (AOCL). ROIC excludes goodwill impairments andnon-economic accounting changes as they are not reflective of company performance. The ROIC calculation for purposes of measuring PRSU performance would be adjusted if a significant business acquisition or divestiture (as defined in RegulationS-X of the Exchange Act) occurs during the performance period.
2015-2017 PRSU Achievement. For PRSUs granted in 2015, the Committee has certified the three-year ROIC achievement against the target established for the 2015-2017 performance period. After reviewing company results, the Committee certified our three-year average ROIC of 17.4% which was 3.3% above the target and translated into a payout of 150% of the target number of shares.
36 General Dynamics 2018 Proxy Statement
Compensation Discussion and Analysis
RESTRICTED STOCK
Restricted stock awards are designed to attract and retain executives by providing them with some of the benefits associated with stock ownership during the restriction period, while incentivizing them to remain with General Dynamics. Restricted stock awards are service-based, meaning that executives who voluntarily resign or are terminated for cause prior to the end of the vesting period forfeit their restricted stock unless otherwise determined by the Committee. The Committee has determined that the use of three-year cliff vesting on our restricted stock ensures that executives are focused on long-term value creation while supporting the company’s need to attract and retain executives during all market conditions. During the vesting period, executives may not sell, transfer, pledge, assign or otherwise convey their restricted shares. Executives are eligible, however, to vote their shares and receive dividend payments and other distributions on our Common Stock when declared by the Board of Directors.
STOCK OPTIONS
The Committee grants stock options to align executive interests with shareholder interests for many years into the future. They serve as a retention tool and a value driver. Stock options give our NEOs the right to buy a share of our Common Stock in the future at a predetermined exercise price, which is established as the average of the high and low stock price of our Common Stock on the date of award. In 2017, the exercise price for stock options granted in March was $191.71 for each stock option. Stock options vest after three years, with 50 percent of the grant exercisable after two years and 50 percent exercisable after three years, and expire 10 years after the grant date.
Stock option values are determined using the Black-Scholes methodology applying the same assumptions used for recognizing stock option expense in our audited financial statements. These assumptions are set out in Note P to our financial statements contained in our Form10-K. The Black-Scholes formula is based on a set of key variables and assumptions and is an accepted model for valuing stock options under FASB ASC Topic 718.
As with restricted stock and PRSU awards, NEOs who voluntarily resign or are terminated for cause immediately forfeit all stock options that have not vested unless otherwise determined by the Committee. Our equity compensation plan prohibits the repricing of stock options, including the exchange of underwater stock options for another award or for cash, without the approval of shareholders.
BENEFITS
General Dynamics-provided benefits are an important tool used to attract and retain outstanding executives. Benefit levels are reviewed periodically to ensure they are cost-effective, competitive and support the overall needs of our employees. The company makes available medical, dental, vision, life insurance and disability coverage to all NEOs. NEOs can select the level of coverage appropriate for their circumstances. The company also provides NEOs group life insurance coverage worth two times base salary and long-term disability coverage worth 50 percent of base salary.
COMPANY-SPONSORED RETIREMENT PLANS
We provide retirement plans to our eligible employees, including the eligible NEOs, through a combination of qualified andnon-qualified plans. Following is a description of the retirement plans in which the NEOs participate:
Defined-Benefit Retirement Plan. Each NEO other than Mr. Johnson participates in a company-sponsored defined-benefit plan called the General Dynamics Salaried Retirement Plan.Beginning January 1, 2014, pension accruals under this plan stopped for employees at our corporate headquarters, including the participating NEOs.
The benefit under the plan is payable as a life annuity. The Salaried Retirement Plan is a funded,tax-qualified, noncontributory defined-benefit pension plan. It was amended effective January 1, 2007, to exclude any employee initially hired or who incurs a break in service after that date. The benefit formula under the Salaried Retirement Plan for employees hired before December 31, 2006, is
General Dynamics 2018 Proxy Statement 37
Compensation Discussion and Analysis
1.0 percent times a participant’s highest final average pay frozen as of December 31, 2013, multiplied by years of service earned on or after January 1, 2007, and before January 1, 2014, plus 1.333 percent times a participant’s highest final average pay frozen as of December 31, 2010, multiplied by years of service earned prior to January 1, 2007. Final average pay for purposes of calculating retirement benefits includes a NEO’s base salary and annual incentive. The company makes contributions to the Salaried Retirement Plan through payments into a trust fund from which the benefits are paid.
Supplemental Retirement Plan. The amount of cash compensation used to calculate pension benefits for participants in the Salaried Retirement Plan is limited by the Internal Revenue Code ($270,000 in 2017). To provide a benefit calculated on compensation in excess of this compensation limit, the company provides eligible executives coverage under the General Dynamics Corporation Supplemental Retirement Plan. Benefits under the Supplemental Retirement Plan are general unsecured obligations of General Dynamics. Each NEO, other than Mr. Johnson, participates in the Supplemental Retirement Plan.Beginning January 1,2014, pension accruals under this plan stopped for employees at our corporate headquarters including the participating NEOs.
Anteon International Corporation Supplemental Retirement Savings Plan. Mr. Johnson has an account balance under the frozen Anteon International Corporation Supplemental Retirement Savings Plan. Under the plan, certain eligible employees of Anteon could defer receipt of all or a portion of their annual cash compensation prior to the plan being frozen in 2007. Upon his retirement or other separation from the company, Mr. Johnson may elect to receive the deferred compensation in either a lump sum or in annual installments over a period of up to ten years.
401(k) Plan. Each NEO is eligible to participate in the General Dynamics Corporation 401(k) Plan, atax-qualified defined contribution retirement plan. Each NEO is eligible to makebefore-tax contributions and receive company matching contributions under the 401(k) Plan. During 2017, for NEOs other than Mr. Johnson, the 401(k) Plan provided for a company-matching contribution of 100 percent onbefore-tax contributions up to the first 6 percent of a participant’s eligible pay. From January 1, 2017, through July 13, 2017, Mr. Johnson participated in a version of the 401(k) Plan that provided for a company-matching contribution of 50 percent onbefore-tax contributions up to the first 6 percent of a participant’s eligible pay. From July 14, 2017, through August 31, 2017, Mr. Johnson participated in a version of the 401(k) Plan that provided for a company-matching contribution of 100 percent onbefore-tax contributions up to the first 1 percent of a participant’s eligible pay and 50 percent onbefore-tax contributions of the next 5 percent of a participant’s eligible pay. Finally, Mr. Johnson became eligible on September 1, 2017, for the version of the 401(k) Plan that provides for a company-matching contribution of 100 percent onbefore-tax contributions up to the first 6 percent of a participant’s eligible pay. Our matching contributions during 2017 for the NEOs are included in footnote (d) to the All Other Compensation column of the Summary Compensation Table.
Supplemental Savings Plan. The company provides a Supplemental Savings Plan to key employees, including each NEO. The purpose of the Supplemental Savings Plan is to allow key executives to defer salary and receive matching contributions on compensation in excess of the compensation limit imposed by the Internal Revenue Service on earnings used to calculate 401(k) contributions. Matching contributions during 2017 for the NEOs are included in footnote (d) to the All Other Compensation column of the Summary Compensation Table.
Other Retiree Benefits. Eligible key executives throughout the company, including the NEOs, can purchase group term life insurance prior to retiring of up to two times their base pay. For executives who retire early (prior to age 65), we pay for insurance coverage equal toone-half the executive’s base salary until the executive reaches age 65. For early retirees who elect coverage in excess ofone-half of base pay they will pay monthly premiums for the additional coverage. For executives retiring at or after age 65, we pay for insurance coverage up to two times an executive’s base salary. This coverage is ratably reduced over a five-year period following the executive’s retirement, or beginning at age 65 for early retirees, subject to a maximum coverage level of 25 percent of the coverage in effect at the time of retirement.
PERQUISITES
We continue to offer only perquisites that the Committee believes are reasonable yet competitive. The company provides perquisites to key executive officers, including the NEOs, for purposes of recruiting, retention and security. We provide perquisites to ensure the security and accessibility of our executives and to facilitate the transaction of business. As a reasonableness test, we compare these perquisites to generally accepted corporate practices.
38 General Dynamics 2018 Proxy Statement
Compensation Discussion and Analysis
The perquisites provided to our NEOs in 2017 were financial planning and tax preparation services, physical examinations, home security systems, personal liability and supplemental accidental death and dismemberment insurance, and the personal use of automobiles owned or leased by the company. In addition, personal use of our aircraft was provided only to our chairman and chief executive officer as required by the Board to help ensure her security and accessibility.
We have provided additional information on perquisites in footnote (d) to the All Other Compensation column of the Summary Compensation Table.
As part of our ongoing shareholder engagement program, each year we engage with our largest shareholders to understand their views on our executive compensation program or executive compensation generally. In 2017 and the past several years, we have engaged with holders of approximately 65 percent of our outstanding Common Stock. Following changes to our executive compensation program resulting in part from shareholder engagement, our shareholders have expressed very strong support for our program and the results the program is driving. At our 2017 annual shareholder meeting, investors strongly supported our executive compensation program with over 95 percent of shares voted in favor of our Say on Pay proposal. We consider feedback from our shareholder engagement program, the results of our annual Say on Pay vote and other considerations to ensure that our executive compensation program continues to meet our compensation objectives.
POTENTIAL SEVERANCEAND CHANGEIN CONTROL BENEFITS
The company has change in control agreements, also known as severance protection agreements, with each of the NEOs. The company believes that these agreements are an important tool for recruiting and retaining highly qualified executives. The agreements are structured to protect the interests of shareholders by including a “double trigger” mechanism that results in a severance payout only when:
A change of control is consummated, and
The executive’s employment is terminated by the company without cause or by the executive for good reason within 24 months following the change in control.
A “change in control” is defined to include specified stock acquisition, merger or disposition transactions involving General Dynamics. The Committee evaluates and reviews payment and benefit levels under the change in control agreements regularly. These reviews support the view that the agreements are consistent with the practices of our peer group companies. Our severance protection agreements for NEOs exclude any provision for reimbursement of excise taxes that may become due upon a change in control.
Payments and benefits provided to NEOs pursuant to the change in control agreements are described in the Potential Payments upon Termination or Change in Control section beginning on page 50 of this Proxy Statement.
General Dynamics 2018 Proxy Statement 39
Compensation Discussion and Analysis
ROLEOFTHE INDEPENDENT COMPENSATION CONSULTANT
The Committee’s charter provides that the Committee has sole authority to engage the services of an independent compensation consultant for the Committee and approve fees paid to the consultant by the company. The Committee engaged Meridian Compensation Partners, LLC (Meridian) as an independent compensation consultant to provide advice on executive compensation matters. The Committee found that Meridian provided important perspectives about market practices for executive compensation, peer company analysis and selection, the levels and structure of the compensation program and compensation governance. During 2017, at the Committee’s request, Meridian performed the following specific services:
Attended all Committee meetings
Provided a regulatory education session for the Committee
Provided information and advice relating to executive compensation matters
Reviewed compensation-related disclosures in the company’s proxy statement
Before engaging Meridian, the Committee reviewed the factors influencing independence (as specified by the New York Stock Exchange listing standards) and determined that no conflict of interest exists.
ANTI-HEDGINGAND ANTI-PLEDGING POLICIES
The company has a longstanding policy in place that prohibits all directors and executive officers from hedging company securities. Since 2014, the company has maintained a policy prohibiting all directors and executive officers from pledging company securities that they own directly.
Mr. Crown has the ownership of certain shares attributed to him that arise from the business of Henry Crown and Company, an investment company where Mr. Crown serves as President, and trusts of which Mr. Crown serves as trustee (Attributed Shares). Mr. Crown disclaims beneficial ownership of such shares, except to the extent of his pecuniary interest. The Attributed Shares are distinct from shares owned by Mr. Crown or his spouse individually, or shares held in trusts for the benefit of his children (Crown Personally Held Shares). The company has reviewed the potential pledging of the Attributed Shares with Mr. Crown, recognizes Mr. Crown’s distinct obligations with respect to Henry Crown and Company and the trusts, and believes such shares may be prudently pledged or held in margin loan accounts. Under the company’s anti-pledging policy, Crown Personally Held Shares are considered company securities that are owned directly by Mr. Crown and, accordingly, may not be and are not held in margin accounts or otherwise pledged as collateral, nor may the economic risk of such shares be hedged.
STOCK OWNERSHIP GUIDELINESAND HOLDING REQUIREMENTS
Our stock ownership and retention guidelines are the most stringent in our peer group. Stock ownership guidelines strongly align the interests of management with the interests of shareholders because executives become shareholders with a considerable investment in General Dynamics.
Our stock ownership and retention guidelines preclude NEOs from selling shares of General Dynamics common stock until they own shares with a market value of 10 times their base salary and 15 times for the CEO. Shares held outright and shares held through our 401(k) plans are counted for purposes of meeting the ownership guidelines. Stock options (whether vested or not), PRSUs and unvested shares of restricted stock are not counted in the ownership calculation.
• Mission Systems
• Bath Iron Works
• Electric Boat
• NASSCO
Stock Ownership Guidelines
|
New for 2016, annual incentives for
CEO
15x Base Salary
Other NEOs are based on a percentage of base salary. Each NEO’s target was determined during our annual compensation benchmarking process and is designed to provide total cash compensation near the 50th percentile of the peer group if targets are met. Consistent with peer and market practice, the maximum incentive that can be earned under this plan is two times the target amount. For performance that falls short of thepre-established target, there may be no payout. 2016 was a strong operational year for General Dynamics which resulted in significant outperformance against all incentive plan metrics. Above target bonuses were awarded to NEOs in recognition of their role in driving these results as well as for their individual performance and achievements throughout the year. The below table summarizes each NEO’s target and the Compensation Committee’s determination of final incentives.
Name and Title
| 2016 Base Salary
| Target Incentive (% of Base)
| Maximum Incentive (% of Base)
| Target Incentive
| Maximum Incentive
| Annual Incentive Payout
| ||||||
P. Novakovic Chairman and Chief Executive Officer | $1,585,000 | 170% | 340% | $2,694,500 | $5,389,000 | $5,150,000 | ||||||
J. Aiken Senior Vice President and Chief Financial Officer | $ 710,000 | 100% | 200% | $ 710,000 | $1,420,000 | $1,200,000 | ||||||
J. Casey Executive Vice President, Marine Systems | $ 755,000 | 100% | 200% | $ 755,000 | $1,510,000 | $1,400,000 | ||||||
M. Roualet Executive Vice President, Combat Systems | $ 755,000 | 100% | 200% | $ 755,000 | $1,510,000 | $1,400,000 | ||||||
S. Johnson Executive Vice President, Information Systems and Technology | $ 725,000 | 100% | 200% | $ 725,000 | $1,450,000 | $1,250,000 |
44 General Dynamics 2017 Proxy Statement
Compensation Discussion and Analysis10x Base Salary
Chairman and Chief Executive Officer
40 General Dynamics 2018 Proxy Statement
Compensation Discussion and Analysis
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|
When exercising options, executives who have not met the ownership guideline may sell shares acquired upon exercise to cover transaction costs and taxes and are expected to hold any remaining shares until the guidelines are met. Similarly, shares received upon vesting of restricted stock and PRSUs may not be sold until the ownership guidelines are met. Once an officer attains the required ownership level, the officer must maintain that ownership level until he or she no longer serves as an officer. The stock ownership and retention guidelines are reviewed annually by the Committee. The company has in place an executive compensation recoupment policy, or “clawback” policy, which applies to senior executive officers of the company (referred to as the covered executive officers), including the NEOs. In the event of a restatement of our financial results due to a covered executive officer engaging in fraud or intentional illegal conduct, the result of which is that any equity or other performance-based compensation paid to that covered executive officer would have been a lower amount had it been calculated based on the restated results, the Committee will have the authority to recover any excess compensation that was awarded to that covered executive officer. In determining the excess compensation, the Committee will take into account its good faith estimate of the value of awarded and actual compensation that may have been affected by the restatement and the events leading to it. This includes all performance-based cash incentives and equity-based grants which may have vested or been exercised during the period in question. COMPENSATIONAND RISK MANAGEMENT With the support of management and the independent compensation consultant, the Committee evaluates the company’s overall risk profile relative to the incentive components of compensation to ensure that NEOs are not overly incentivized to focus on short-term stock performance. The use of long-term equity incentive awards as a significant portion of total direct compensation and robust stock ownership guidelines are structured to ensure management is focused on the long term and not incentivized to take excessive risk. As part of the annual compensation review process, the Committee considers the implications of Section 162(m) of the Internal Revenue Code, which is a provision that precludes the company from taking a tax deduction for individual compensation in excess of $1 million. The Committee also considers the exemptions to the $1 million limit, which are also provided in Section 162(m), including the exemption for “performance-based compensation” as defined in Section 162(m). The exemption from Section 162(m)’s deduction limit for performance-based compensation has been repealed as of 2018, such that compensation paid to our covered executive officers in excess of $1 million will not be deductible, unless it qualifies for transition relief applicable to certain arrangements in place as of November 2, 2017. General Dynamics 2018 Proxy Statement 41Senior Vice President and Chief Financial OfficerPerformance MetricWeighting2016 Target2016 ActualEarnings from Continuing Operations45%$2,888 million$3,062 millionFree Cash Flow from Operations45%$1,486 million$1,806 millionMeet /Under-run 2016 Budget5%Operate corporateheadquarters andfinance department belowbudgeted costsExceeded goalComplete Two Continuous Improvement Projects5%Complete Lean Six SigmaprojectsExceeded goalExecutive Vice President, Marine SystemsPerformance MetricWeighting2016 Target2016 ActualEarnings from Continuing Operations45%$2,888 million$3,062 millionFree Cash Flow from Continuing Operations45%$1,486 million$1,806 millionBusiness Group Financial MetricsContinuous Improvement Savings10%$75 million$192 millionExecutive Vice President, Combat Systems
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Executive Vice President, Information Systems and Technology
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General Dynamics 2017 Proxy Statement 45
Compensation Discussion and Analysis
SUMMARY COMPENSATIONROLEOFTHE INDEPENDENT CONSULTANTThe Committee’s charter provides that the Committee has sole authority to engage the services of an independent compensation consultant for the Committee and approve fees paid to the consultant by the company. The Committee engaged PricewaterhouseCoopers LLP (PwC) as an independent compensation consultant to provide advice on executive compensation matters. The Committee found that PwC provided important perspectives about the market for executive compensation, peer company analysis and selection, the levels and structure of the compensation program, and compensation governance.In early 2016, the Committee, after reviewing the factors influencing independence (as specified by the New York Stock Exchange listing standards) including the fees paid by the company to PwC for other services, engaged PwC for compensation consulting services. PwC is also available to provide advice to the chairman of the Committee or the Committee as a whole on executive compensation matters on anas-needed basis. PwC attends Committee meetings upon the request of the Committee’s chair and may also provide observations and insights to the Committee related to the amount or form of compensation for our executives.During 2016, at the Committee’s request, PwC performed the following specific services:Attended all Committee meetingsProvided regulatory education session with the CommitteeProvided information relating to executive compensation mattersReviewed compensation-related disclosures in the company’s proxy statementIn 2016, the chair of the Committee approved fees of approximately $18,400 to PwC in its capacity as external advisor to the Committee. Management neither made, nor recommended, the decision to engage PwC. The PwC group providing compensation services to the Committee reports directly to the chair of the Committee and is not involved in providing any other services to the company. During 2016, the company retained PwC to provide services to the company unrelated to executive compensation, including tax and other business-related services. The aggregate fees paid for those services in 2016 were approximately $2.8 million. In February 2017, the Committee undertook an assessment of PwC’s services for the Committee and the company as well as other factors influencing independence (as specified by the New York Stock Exchange listing standards) and determined that no conflict of interest exists. The Committee further concluded that PwC is independent of management as a consultant and is duly qualified to assist the Committee.In March 2017, the Committee ended its engagement with PwC and began using Meridian Compensation Partners, LLC as its independent compensation consultant.46 General Dynamics 2017 Proxy Statement
Compensation Discussion and Analysis
STOCK OWNERSHIP GUIDELINESAND HOLDING REQUIREMENTS
Our stock ownership and retention guidelines are the most stringent in our peer group. Stock ownership guidelines strongly align the interests of management with the interests of shareholders because executives become shareholders with a considerable investment in General Dynamics.
Our stock ownership and retention guidelines preclude NEOs from selling shares of common stock until they own shares with a market value of 10 times their base salary and 15 times for the CEO. Shares held outright and shares held through our 401(k) plans are counted for purposes of meeting the ownership guidelines. Stock options (whether vested or not), PRSUs and unvested shares of restricted stock are not counted in the ownership calculation.
When exercising options, executives who have not met the ownership guideline may sell shares acquired upon exercise to cover transaction costs and taxes and are expected to hold any remaining shares until the guidelines are met. Similarly, shares received upon vesting of restricted stock and PRSUs may not be sold until the ownership guidelines are met. Once an officer attains his or her required ownership level, the officer must maintain that ownership level until he or she no longer serves as an officer. The stock ownership and retention guidelines are reviewed annually by the Committee.
ANTI-HEDGINGAND ANTI-PLEDGING POLICIES
The company has a longstanding policy in place that prohibits all directors and executive officers from hedging company securities. Since 2014, the company has maintained a policy prohibiting all directors and executive officers from pledging company securities that they own directly.
Mr. Crown has the ownership of certain shares attributed to him that arise from the business of Henry Crown and Company, an investment company where Mr. Crown serves as President, and trusts of which Mr. Crown serves as trustee (Attributed Shares). Mr. Crown disclaims beneficial ownership of such shares, except to the extent of his pecuniary interest. The Attributed Shares are distinct from shares Mr. Crown or his spouse own individually, or shares held in trusts for the benefit of his children (Crown Personally Held Shares). The company has reviewed the potential pledging of the Attributed Shares with Mr. Crown, recognizes Mr. Crown’s distinct obligations with respect to Henry Crown and Company and the trusts, and believes such shares may be prudently pledged or held in margin loan accounts. Under the company’s anti-pledging policy, Crown Personally Held Shares are considered company securities that are owned directly by Mr. Crown and, accordingly, may not be and are not held in margin accounts or otherwise pledged as collateral, nor may the economic risk of such shares be pledged.
The company has in place an executive compensation recoupment policy, or “clawback” policy, which applies to senior executive officers of the company (referred to as the covered executive officers), including the NEOs. In the event of a restatement of our financial results due to a covered executive officer engaging in fraud or intentional illegal conduct, the result of which is that any equity or other performance-based compensation paid to that covered executive officer would have been a lower amount had it been calculated based on the restated results, the Committee will have the authority to recover any excess compensation that was awarded to that covered executive officer. In determining the excess compensation, the Committee will take into account its good faith estimate of the value of awarded and actual compensation that may have been affected by the restatement and the events leading to it. This includes all performance-based cash incentives and equity-based grants which may have vested or been exercised during the period in question.
General Dynamics 2017 Proxy Statement 47
Compensation Discussion and Analysis
MONITORING DILUTIONAND ANNUAL EQUITY USAGE
The Committee is focused on using equity to compensate executives in a manner that links executive and shareholder interests while focusing on the overall dilutive effect of that equity. The Committee achieves this balance by managing reasonable levels of equity dilution
The Summary Compensation Table conforms to requirements of the SEC and shows base salary, annual share usage (“burn rate”) when granting equity-based compensation. The Committee considers the need to attract, motivate and retain the level of executive talent required to execute the business strategy and achieve operational excellence at General Dynamics.
The dilution and grant/burn rate are calculated as follows:
Actual dilution is calculated as the amount of outstanding PRSUs, restricted stock and stock options granted to all employees (not just NEOs) andnon-employee directors, divided by shares outstanding.
Grant rate, or burn rate, is calculated as the amount of PRSUs, restricted stock and stock options granted to all employees (not just NEOs) andnon-employee directors, divided by shares outstanding.
The table below shows the dilution and one and three-year grant rate for 2014, 2015 and 2016:
2014 | 2015 | 2016 | ||||||||||
Actual Dilution | 5.12% | 4.80% | 4.54% | |||||||||
1-Yr Grant Rate | 1.67% | 0.82% | 1.06% | |||||||||
3-Yr Average Grant Rate | 1.97% | 1.63% | 1.19% |
COMPENSATIONAND RISK MANAGEMENT
With the support of management and the independent compensation consultant, the Committee evaluates the company’s overall risk profile relative to the incentive components of compensation to ensure that NEOs are not overly incentivized to focus on short-term stock performance. The use of long-term equity incentive awards as a significant portion of total direct compensation and robust stock ownership guidelines are structured to ensure management is focused on the long term and not incentivized to take excessive risk.
As part of the annual compensation review process, the Committee considers the implications of Section 162(m) of the Internal Revenue Code, which is a provision that precludes the company from taking a tax deduction for individual compensation in excess of $1 million. The Committee also considers the exemptions to the $1 million limit, which are also provided in Section 162(m), including the exemption for “performance-based compensation” as defined in Section 162(m). In May 2016, shareholders approved the General Dynamics Corporation Executive Annual Incentive Plan that supports the deductibility of payments made under the incentive component of total cash compensation. This change affects incentive payments made in 2017 based on 2016 performance.
48 General Dynamics 2017 Proxy Statement
SUMMARY COMPENSATION
The Summary Compensation Table conforms to requirements of the SEC and shows base salary, cash incentive, equity awards (restricted stock, performance restricted stock units and stock options) and all other compensation, which includes among other things the value of perquisites, 401(k) contributions and tax reimbursements (see footnote (d) to the Summary Compensation Table for a complete listing of categories included in All Other Compensation). The table also includes a column titled Change in Pension Value and Nonqualified Deferred Compensation Earnings. For our eligible named executive officers, this includes only the change in pension value (see footnote (c)), which is an actuarial estimate of the present value of the future cost of pension benefits. The value does not reflect a current cash cost to General Dynamics or, necessarily, the pension benefit that an executive would receive, since that is determined by a number of factors, including length of service, age at retirement and longevity.
SUMMARY COMPENSATION TABLE | ||||||||||||||||||||||||||||||||||||
NAMEAND PRINCIPAL POSITION | YEAR | SALARY | BONUS (a) | STOCK AWARDS (b) | OPTION AWARDS (b) | NON-EQUITY INCENTIVE PLAN COMPENSATION (a) | CHANGEIN PENSION VALUEAND NONQUALIFIED DEFERRED COMPENSATION EARNINGS (c) | ALL OTHER COMPENSATION (d) | TOTAL | |||||||||||||||||||||||||||
Phebe N. Novakovic Chairman and Chief Executive Officer | 2017 2016 2015 | $ | 1,585,000 1,585,000 1,583,750 | $ | — — 4,850,000 | $ | 6,999,332 7,079,144 6,856,781 | $ | 7,000,390 7,077,746 6,855,267 | $5,300,000 5,150,000 — | $300,661 155,239 — | $316,046 310,948 278,306 | $ | 21,501,429 21,358,077 20,424,104 | ||||||||||||||||||||||
Jason W. Aiken Senior Vice President and Chief Financial Officer | 2017 2016 2015 | $ | 755,000 701,250 662,500 | $ | — — 900,000 | $ | 1,625,701 1,490,275 1,344,547 | $ | 1,624,228 1,489,540 1,345,267 | $1,386,000 1,200,000 — | $ 85,192 38,464 — | $ 65,619 139,984 58,305 | $ | 5,541,740 5,059,513 4,310,619 | ||||||||||||||||||||||
John P. Casey Executive Vice President, Marine Systems | 2017 2016 2015 | $ | 773,750 747,500 716,250 | $ | — — 1,020,000 | $ | 1,610,364 1,642,427 1,299,410 | $ | 1,609,342 1,642,472 1,300,360 | $1,404,000 1,400,000 — | $447,894 242,463 — | $ 63,650 64,724 58,204 | $ | 5,909,000 5,739,586 4,394,224 | ||||||||||||||||||||||
Mark C. Roualet Executive Vice President, Combat Systems | 2017 2016 2015 | $ | 773,750 747,500 713,750 | $ | — — 995,000 | $ | 1,610,364 1,619,332 1,299,410 | $ | 1,609,342 1,620,593 1,300,360 | $1,404,000 1,400,000 — | $330,396 168,004 — | $ 83,926 69,278 67,230 | $ | 5,811,778 5,624,707 4,375,750 | ||||||||||||||||||||||
S. Daniel Johnson Executive Vice President, Information Systems and Technology | 2017 2016 2015 | $ | 766,250 713,750 680,000 | $ | — 850,000 | $ | 1,560,519 1,457,671 1,236,491 | $ | 1,559,351 1,457,274 1,235,342 | $1,378,000 1,250,000 — | $ — — — | $ 52,508 54,297 44,752 | $ | 5,316,628 4,932,992 4,046,585 |
(a) | Payments are reported for the fiscal year in which the related services were rendered, although the actual payments are made in the succeeding year. Bonus awards for 2017 performance were made under the General Dynamics Corporation Executive Annual Incentive Plan and are shown in theNon-Equity Incentive Plan Compensation column. |
(b) | The amounts reported in the Stock Awards and the Option Awards columns reflect aggregate grant date fair value computed in accordance with ASC Topic 718. These amounts reflect our calculation of the value of these awards at the grant date and do not necessarily correspond to the actual value that may ultimately be realized by the named executive officer. Assumptions used in the calculation of these amounts are included in Note P to our audited financial statements for the fiscal year ended December 31, 2017, included in our Annual Report on Form10-K filed with the SEC on February 12, 2018. Stock Awards include awards of restricted stock and performance restricted stock units (PRSUs). The maximum grant date value of 2017 PRSUs for each named executive officer, which assumes a 150 percent maximum payout, is $5,249,403 for Ms. Novakovic; $1,219,276 for Mr. Aiken; $1,207,773 for Mr. Casey; $1,207,773 for Mr. Roualet; and $1,170,390 for Mr. Johnson. |
(c) | The values listed in this column represent the change in the present value of accumulated benefits from December 31 of the prior year to December 31 of the respective year calculated for all the pension plans in which the executive participates. The values are an actuarial estimate of the present value of the future cost of pension
|
42 General Dynamics 2018 Proxy Statement
Executive Compensation
(d) | All Other Compensation for 2017 includes the following items: |
ALL OTHER COMPENSATION
| ||||||||
NAME | REIMBURSEMENT | RETIREMENT PLAN | TERM LIFE INSURANCE | PERQUISITES (3) | ||||
Ms. Novakovic
|
$2,565
|
$47,900
|
$16,253
|
$249,328
| ||||
Mr. Aiken
|
$3,989
|
$30,400
|
$ 4,666
|
$ 26,114
| ||||
Mr. Casey
|
$3,860
|
$31,300
|
$13,154
|
$ 15,336
| ||||
Mr. Roualet
|
$4,276
|
$31,300
|
$ 9,042
|
$ 39,308
| ||||
Mr. Johnson
|
$ 803
|
$22,600
|
$19,558
|
$ 9,547
|
(1) | Reflects amounts reimbursed for the payment of |
(2) | Represents amounts contributed by General Dynamics to the 401(k) Plan and allocations by General Dynamics to the Supplemental Savings Plan. |
(3) | Noncash items (perquisites) provided to named executive officers in 2017, which for one or more named executive officers is in the aggregate equal to or greater than $10,000, were as follows: financial planning and tax preparation services, home security systems and, solely for the chairman and chief executive officer, personal use of company aircraft. Perquisites that exceeded the greater of $25,000 or 10 percent of the total amount of perquisites were as follows: Ms. Novakovic — $195,641 related to personal travel on company aircraft, and $30,959 related to a home security system installed at Ms. Novakovic’s personal residence. The |
General Dynamics 2018 Proxy Statement 43
Executive Compensation
2017 EQUITY-BASED AWARDS
General Dynamics’ long-term compensation for senior executives, including the named executive officers, consists of equity awards in the form of restricted stock, PRSUs and stock options. The following table provides information on the equity awards in 2017 for the named executive officers. The table includes the grant date of each equity award, the number of shares of restricted stock, PRSUs and stock options, the exercise price of the stock options, the closing price of our Common Stock on the date of grant and the grant date fair value of the equity awards. As discussed in the Compensation Discussion and Analysis section, we use the average of the high and low stock price of our Common Stock on the date of the grant, not the closing price, to value the restricted stock and PRSUs and set the exercise price for stock options.
GRANTSOF PLAN-BASED AWARDSIN FISCAL YEAR 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||
NAME
| GRANT
| DATEOF
| ESTIMATED POSSIBLE PAYOUTS UNDER NON-EQUITY INCENTIVE PLAN AWARDS (A) |
ESTIMATED FUTURE PAYOUTS UNDER EQUITY INCENTIVE PLAN AWARDS (B) | ALL OTHER (C)
| ALL OTHER
| EXERCISE (D)
| GRANT DATE (E)
| ||||||||||||||||||||||||||||||||||||||||
THRESHOLD
| TARGET
| MAXIMUM
| THRESHOLD
| TARGET
| MAXIMUM
| |||||||||||||||||||||||||||||||||||||||||||
Ms. Novakovic | 0 | $2,694,500 | $5,389,000 | |||||||||||||||||||||||||||||||||||||||||||||
3/1/17 | 2/28/17 | 0 | 18,255 | 27,382 | 18,255 | — | — | $ | 6,999,332 | |||||||||||||||||||||||||||||||||||||||
| 3/1/17
|
|
| 2/28/17
|
|
| —
|
|
| —
|
|
| —
|
|
| —
|
|
| 211,620
|
| $
| 191.71
|
|
| 7,000,390
|
| ||||||||||||||||||||||
Mr. Aiken | 0 | $ 770,000 | $1,540,000 | |||||||||||||||||||||||||||||||||||||||||||||
3/1/17 | 2/28/17 | 0 | 4,240 | 6,360 | 4,240 | — | — | $ | 1,625,701 | |||||||||||||||||||||||||||||||||||||||
| 3/1/17
|
|
| 2/28/17
|
|
| —
|
|
| —
|
|
| —
|
|
| —
|
|
| 49,100
|
| $
| 191.71
|
|
| 1,624,228
|
| ||||||||||||||||||||||
Mr. Casey | 0 | $ 780,000 | $1,560,000 | |||||||||||||||||||||||||||||||||||||||||||||
3/1/17 | 2/28/17 | 0 | 4,200 | 6,300 | 4,200 | — | — | $ | 1,610,364 | |||||||||||||||||||||||||||||||||||||||
| 3/1/17
|
|
| 2/28/17
|
|
| —
|
|
| —
|
|
| —
|
|
| —
|
|
| 48,650
|
| $
| 191.71
|
|
| 1,609,342
|
| ||||||||||||||||||||||
Mr. Roualet | 0 | $ 780,000 | $1,560,000 | |||||||||||||||||||||||||||||||||||||||||||||
3/1/17 | 2/28/17 | 0 | 4,200 | 6,300 | 4,200 | — | — | $ | 1,610,364 | |||||||||||||||||||||||||||||||||||||||
| 3/1/17
|
|
| 2/28/17
|
|
| —
|
|
| —
|
|
| —
|
|
| —
|
|
| 48,650
|
| $
| 191.71
|
|
| 1,609,342
|
| ||||||||||||||||||||||
Mr. Johnson | 0 | $ 780,000 | $1,560,000 | |||||||||||||||||||||||||||||||||||||||||||||
3/1/17 | 2/28/17 | 0 | 4,070 | 6,105 | 4,070 | — | — | $ | 1,560,519 | |||||||||||||||||||||||||||||||||||||||
| 3/1/17
|
|
| 2/28/17
|
|
| —
|
|
| —
|
|
| —
|
|
| —
|
|
| 47,140
|
| $
| 191.71
|
|
| 1,559,351
|
|
(a) | These amounts represent cash awards that are possible under the company’s annual incentive plan. The value earned can be found in the Summary Compensation Table in the“Non-Equity Incentive Plan Awards” column. |
(b) | These amounts relate to PRSUs granted in 2017. Each PRSU represents the right to receive a share of Common Stock upon release of the PRSU. The exact number of PRSUs that may be earned is determined based upon a performance metric set by the Compensation Committee, which for 2017 grants is the company’s return on invested capital over the three-year period from 2017-2019, and can range from 0 to 150 percent of the PRSUs originally awarded. Dividend equivalents accrue on PRSUs during the performance period and are subject to the same vesting conditions based upon performance. For PRSUs granted in 2017, the PRSUs are released to the participant following the three-year performance period, to the extent earned. |
(c) | These amounts relate to shares of restricted stock that are released three years after the grant date, subject to continuous service requirements. |
(d) | The exercise price for stock options is the average of the high and low stock price of our Common Stock on the date of grant. |
(e) | For PRSUs, the grant |
44 General Dynamics 2018 Proxy Statement
Executive Compensation
OPTION EXERCISESAND STOCK VESTED
The following table shows the stock options exercised by the named executive officers and restricted stock released to them during 2017. As explained in the Compensation Discussion and Analysis section, we require officers to retain shares of Common Stock issued to them as compensation, up topre-determined levels, based on their position with General Dynamics. Once an ownership level is attained, the officer must maintain that minimum ownership level until he or she no longer serves as an officer of General Dynamics. The amounts reported in the Value Realized on Exercise and the Value Realized on Vesting columns in the table below arebefore-tax amounts.
OPTION EXERCISESAND STOCK VESTEDIN FISCAL YEAR 2017 | ||||||||||||||||||||
OPTION AWARDS
| STOCK AWARDS
| |||||||||||||||||||
NAME | NUMBER OF | VALUE REALIZED | NUMBER OF | VALUE REALIZED | ||||||||||||||||
Ms. Novakovic
|
|
75,000
|
|
|
$8,893,500
|
|
|
118,352
|
|
|
$20,769,592
|
| ||||||||
Mr. Aiken
|
| 21,500
|
|
| $2,563,445
|
|
| 4,649
|
|
| $ 815,853
|
| ||||||||
Mr. Casey
|
| 69,895
|
|
| $9,021,706
|
|
| 22,577
|
|
| $ 3,962,038
|
| ||||||||
Mr. Roualet
|
| 59,460
|
|
| $7,993,208
|
|
| 23,615
|
|
| $ 4,144,196
|
| ||||||||
Mr. Johnson
|
| —
|
|
| —
|
|
| 8,135
|
|
| $ 1,427,611
|
|
General Dynamics 2018 Proxy Statement 45
Executive Compensation
OUTSTANDING EQUITY AWARDS
The following table provides information on outstanding stock option and stock awards held by the named executive officers as of December 31, 2017. The table shows the number of stock options that a named executive officer holds (both exercisable and unexercisable), the option exercise price and its expiration date. For stock awards, the table includes the number of shares of restricted stock that are still subject to the restriction period (i.e., have not vested). For restricted stock and PRSUs, the market value is based on the closing price of the company’s Common Stock on December 31, 2017.
OUTSTANDING EQUITY AWARDSAT 2017 FISCAL YEAR-END
| ||||||||||||||||||||||||||||||||||||||||
OPTION AWARDS (A) | STOCK AWARDS | |||||||||||||||||||||||||||||||||||||||
NAME
| NUMBEROF
| NUMBEROF
| OPTION
| OPTION
| NUMBER
| MARKET VALUE
| EQUITY INCENTIVE
| EQUITY INCENTIVE THAT HAVE
| ||||||||||||||||||||||||||||||||
Ms. Novakovic | 157,356 | $32,014,078 | 85,122 | $17,318,071 | ||||||||||||||||||||||||||||||||||||
— | 211,620 | $191.71 | 2/28/2027 | |||||||||||||||||||||||||||||||||||||
— | 320,260 | 135.85 | 3/1/2026 | |||||||||||||||||||||||||||||||||||||
124,415 | 124,415 | 136.78 | 3/3/2025 | |||||||||||||||||||||||||||||||||||||
466,380 | — | 112.40 | 3/4/2021 | |||||||||||||||||||||||||||||||||||||
733,000 | — | 67.70 | 3/5/2020 | |||||||||||||||||||||||||||||||||||||
39,500 | — | 67.90 | 5/1/2019 | |||||||||||||||||||||||||||||||||||||
14,720 | — | 71.01 | 3/6/2019 | |||||||||||||||||||||||||||||||||||||
Mr. Aiken | 31,660 | $6,441,227 | 17,747 | $3,610,627 | ||||||||||||||||||||||||||||||||||||
— | 49,100 | $191.71 | 2/28/2027 | |||||||||||||||||||||||||||||||||||||
— | 67,400 | 135.85 | 3/1/2026 | |||||||||||||||||||||||||||||||||||||
24,415 | 24,415 | 136.78 | 3/3/2025 | |||||||||||||||||||||||||||||||||||||
90,180 | — | 112.40 | 3/4/2021 | |||||||||||||||||||||||||||||||||||||
28,890 | — | 67.70 | 3/5/2020 | |||||||||||||||||||||||||||||||||||||
Mr. Casey | 32,015 | $6,513,452 | 17,190 | $3,497,306 | ||||||||||||||||||||||||||||||||||||
— | 48,650 | $191.71 | 2/28/2027 | |||||||||||||||||||||||||||||||||||||
— | 74,320 | 135.85 | 3/1/2026 | |||||||||||||||||||||||||||||||||||||
23,600 | 23,600 | 136.78 | 3/3/2025 | |||||||||||||||||||||||||||||||||||||
90,470 | — | 112.40 | 3/4/2021 | |||||||||||||||||||||||||||||||||||||
Mr. Roualet | 29,175 | $5,935,654 | 17,935 | $3,648,876 | ||||||||||||||||||||||||||||||||||||
— | 48,650 | $191.71 | 2/28/2027 | |||||||||||||||||||||||||||||||||||||
— | 73,330 | 135.85 | 3/1/2026 | |||||||||||||||||||||||||||||||||||||
23,600 | 23,600 | 136.78 | 3/3/2025 | |||||||||||||||||||||||||||||||||||||
75,640 | — | 112.40 | 3/4/2021 | |||||||||||||||||||||||||||||||||||||
68,650 | — | 70.08 | 3/19/2020 | |||||||||||||||||||||||||||||||||||||
Mr. Johnson | 20,444 | $4,159,332 | 16,825 | $3,423,046 | ||||||||||||||||||||||||||||||||||||
— | 47,140 | $191.71 | 2/28/2027 | |||||||||||||||||||||||||||||||||||||
— | 65,940 | 135.85 | 3/1/2026 | |||||||||||||||||||||||||||||||||||||
| 22,420
|
|
| 22,420
|
|
| 136.78
|
|
| 3/3/2025
|
|
(a) | Of the
|
Of the 49,100 stock options held by Mr. Aiken with an exercise price of $191.71, 24,550 will become exercisable on March 1, 2019, and 24,550 will become exercisable on March 1, 2020. Of the 67,400 stock options held by Mr. Aiken with an exercise price of $135.85, 33,700 became exercisable on March 2, 2018, and 33,700 will become exercisable on March 2, 2019. Of the 48,830 stock options held by Mr. Aiken with an exercise price of $136.78, 24,415 became exercisable on March 4, 2018.
Of the 48,650 stock options held by Mr. Casey with an exercise price of $191.71, 24,325 will become exercisable on March 1, 2019, and 24,325 will become exercisable on March 1, 2020. Of the 74,320 stock options held by Mr. Casey with an exercise price of $135.85, 37,160 became exercisable on March 2, 2018, and 37,160 will become exercisable on March 2, 2019. Of the 47,200 stock options held by Mr. Casey with an exercise price of $136.78, 23,600 became exercisable on March 4, 2018.
Of the 48,650 stock options held by Mr. Roualet with an exercise price of $191.71, 24,325 will become exercisable on March 1, 2019, and 24,325 will become exercisable on March 1, 2020. Of the 73,330 stock options held by Mr. Roualet with an exercise price of $135.85, 36,665 became exercisable on March 2, 2018, and 36,665 will become exercisable on March 2, 2019. Of the 47,200 stock options held by Mr. Roualet with an exercise price of $136.78, 23,600 became exercisable on March 4, 2018.
Of the 47,140 stock options held by Mr. Johnson with an exercise price of $191.71, 23,570 will become exercisable on March 1, 2019, and 23,570 will become exercisable on March 1, 2020. Of the 65,940 stock options held by Mr. Johnson with an exercise price of $135.85, 32,970 became exercisable on
46 General Dynamics 2018 Proxy Statement
Executive Compensation
March 2, 2018, and 32,970 will become exercisable on March 2, 2019. Of the 44,840 stock options held by Mr. Johnson with an exercise price of $136.78, 22,420 became exercisable on March 4, 2018.
(b) |
|
Of the 157,356 restricted shares or units held by Ms. Novakovic, 28,740 restricted shares were released on January 2, 2018, with a market value of $5,805,193; 25,065 restricted shares will be released on January 2, 2019; 26,055 restricted shares will be released on January 2, 2020; 18,255 restricted shares will be released on March 2, 2020; and 59,241 PRSUs were released on January 2, 2018, with a market value of $11,966,090.
Of the 31,660 restricted shares or units held by Mr. Aiken, 5,560 restricted shares were released on January 2, 2018, with a market value of $1,123,064; 4,915 restricted shares will be released on January 2, 2019; 5,485 restricted shares will be released on January 2, 2020; 4,240 restricted shares will be released on March 2, 2020; and 11,460 PRSUs were released on January 2, 2018, with a market value of $2,314,805.
Of the 32,015 restricted shares or units held by Mr. Casey, 5,560 restricted shares were released on January 2, 2018, with a market value of $1,123,064; 4,750 restricted shares will be released on January 2, 2019; 6,045 restricted shares will be released on January 2, 2020; 4,200 restricted shares will be released on March 2, 2020; and 11,460 PRSUs were released on January 2, 2018, with a market value of $2,314,805.
Of the 29,175 restricted shares or units held by Mr. Roualet, 4,660 restricted shares were released on January 2, 2018, with market value of $941,273; 4,750 restricted shares will be released on January 2, 2019, 5,960 restricted shares will be released on January 2, 2020; 4,200 restricted shares will be released on March 2, 2020; and 9,605 PRSUs were released on January 2, 2018, with a market value of $1,940,114.
Of the 20,444 restricted shares or units held by Mr. Johnson, 2,120 restricted shares were released on January 2, 2018, with a market value of $428,219; 4,520 restricted shares will be released on January 2, 2019; 5,365 restricted shares will be released on January 2, 2020; 4,070 restricted shares will be released on March 2, 2020; and 4,369 PRSUs were released on January 2, 2018, with a market value of $882,494.
(c) |
|
For Ms. Novakovic, 39,736 PRSUs released during the first quarter of 2018; 26,898 may release during the first quarter of 2019; and 18,488 may release during the first quarter of 2020.
For Mr. Aiken, 7,791 PRSUs released during the first quarter of 2018; 5,662 may release during the first quarter of 2019; and 4,294 may release during the first quarter of 2020.
For Mr. Casey, 7,530 PRSUs released during the first quarter of 2018; 6,240 may release during the first quarter of 2019; and 4,253 may release during the first quarter of 2020.
For Mr. Roualet, 7,530 PRSUs released during the first quarter of 2018; 6,152 may release during the first quarter of 2019; and 4,253 may release during the first quarter of 2020.
For Mr. Johnson, 7,165 PRSUs released during the first quarter of 2018; 5,538 may release during the first quarter of 2019; and 4,122 may release during the first quarter of 2020.
General Dynamics 2018 and 26,449 PRSUs may release during the first quarter of 2019.
For Mr. Aiken, 5,087 PRSUs may release during the first quarter of 2018 and 5,568 PRSUs may release during the first quarter of 2019.
For Mr. Casey, 4,916 PRSUs may release during the first quarter of 2018 and 6,136 PRSUs may release during the first quarter of 2019.
For Mr. Roualet, 4,916 PRSUs may release during the first quarter of 2018 and 6,050 PRSUs may release during the first quarter of 2019.
For Mr. Johnson, 4,678 PRSUs may release during the first quarter of 2018 and 5,446 PRSUs may release during the first quarter of 2019.
54 General Dynamics 2017 Proxy Statement 47
Executive Compensation
COMPANY-SPONSORED RETIREMENT PLANS
General Dynamics offers retirement programs through a combination of qualified and nonqualified Employee Retirement Income Security Act of 1974 plans. The named executive officers other than Mr. Johnson participate in each of the retirement programs indicated next to their name in the table below. Mr. Johnson is not eligible to participate in the company’s pension plans.
Beginning January 1, 2014, pension accruals stopped for employees at our corporate headquarters, including the participating named executive officers.
The table shows the actuarial present value as of December 31, 2017, of the pension benefits earned for each named executive officer over the course of the officer’s career. All retirement plans in the table operate in exactly the same manner for the named executive officers as for all other plan participants. A description of the material terms and conditions of each of these plans and agreements follows the table.
PENSION BENEFITSFOR FISCAL YEAR 2017
| ||||||||
NAME
| PLAN NAME
| NUMBER OF
| PRESENT VALUE OF
| PAYMENTS DURING
| ||||
Ms. Novakovic (b) |
Salaried Retirement Plan |
13 |
$ 416,616 |
None | ||||
Supplemental Retirement Plan
| 13
| $2,111,699
| ||||||
Mr. Aiken (c) |
Salaried Retirement Plan |
11 |
$ 218,311 |
None | ||||
Supplemental Retirement Plan
| 11
| $ 227,777
| ||||||
Mr. Casey (d) |
Salaried Retirement Plan |
32 |
$1,282,577 |
None | ||||
Supplemental Retirement Plan
| 32
| $3,035,542
| ||||||
Mr. Roualet (e) |
Salaried Retirement Plan |
29 |
$ 990,611 |
None | ||||
Supplemental Retirement Plan
| 29
| $1,644,920
| ||||||
Mr. Johnson
|
—
|
—
|
—
|
—
|
(a) | The Present Value of Accumulated Benefit under each plan has been calculated as of December 31, |
(b) |
Salaried Retirement Plan. The General Dynamics Salaried Retirement Plan is atax-qualified defined-benefit pension plan that provides benefits as a life annuity to retired participants. A participant’s benefit under the Salaried Retirement Plan increases with each year of service. Participants who leave before they are eligible for early retirement are paid a substantially reduced amount. All the named executive officers, other than Mr. Johnson, participate in the Salaried Retirement Plan. Earnings used to calculate pension benefits (pensionable earnings) include only a participant’s base salary and cash bonus and exclude all other items of income, including equity awards. Under the Internal Revenue Code, the Salaried Retirement Plan does not take into account any earnings over a predetermined compensation limit, which was $270,000 for 2017, and does not pay annual benefits beyond a predetermined benefit limit, which was $215,000 for 2017. Beginning January 1, 2014, pension accruals stopped for employees at our corporate headquarters, including the participating named executive officers. The Salaried Retirement Plan pays a monthly benefit equal to the product of (1) the benefit percentage times (2) the final average monthly pay times (3) the years of credited service. For credited service earned prior to January 1, 2007, the benefit percentage equals 1.333 percent. For credited service earned on or after January 1, 2007, the benefit percentage equals 1.0 percent. Final average monthly pay is equal to the average of the participant’s highest 60 consecutive months of pensionable earnings out of the participant’s last 120 months of employment. For credited service earned prior to January 1, 2007, the final average monthly pay used in the benefit calculation froze as of December 31, 2010. The normal retirement age under the Salaried Retirement Plan is age 65. The Salaried Retirement Plan benefit is calculated as a single-life monthly annuity beginning at age 65 and has multiple actuarially equivalent payment forms from which participants can choose to take their benefit. A cash lump sum is only available if a participant’s accrued benefit is less than $5,000. None of the eligible named executive officers had reached the normal retirement age as of December 31, 2017. 48 General Dynamics 2018 Proxy Statement Executive Compensation A participant with at least 10 years of service qualifies for early retirement at age 55. Ms. Novakovic and Messrs. Casey and Roualet qualified for early retirement as of December 31, 2017. A participant who is eligible for early retirement is entitled to receive the following:
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