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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General Dynamics Corporation

 

 

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LOGOLOGO

 

March 23, 201721, 2019

Dear Fellow Shareholder:

We are pleased to presentsend you with the 20172019 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.

Strong 2018 Performance. Our company’s 2018 financial results reflected solid performance across our businesses. Growth in a number of metrics – revenue, operating earnings, earnings from continuing operations, earnings per share – resulted from organic growth as well as our acquisition of CSRA Inc. in April 2018, the largest acquisition in the company’s history. Gulfstream delivered 10 of its new G500 aircraft and continued toward certification of the G600. In the defense businesses, significant backlog growth supports future growth opportunities.

Robust Shareholder Engagement and Responsiveness.Shareholder engagement remains a key focus for our company to ensure we are aware of your top priorities. OverWith feedback received from shareholders, the past year, we have spoken with shareholders aboutadvisory vote on executive compensation at the 2018 annual meeting and a numberreview of critical topics, including company strategy,market practices, the Compensation Committee approved changes to our executive compensation program that are directly responsive to shareholder input. The changes are discussed in this proxy statement and further evidence our commitment to long-term, performance-based compensation. We also engaged with shareholders in 2018 on a number of other important topics, including our acquisition of CSRA, recent achievements in our business, our strong corporate governance practices, human capital management and our corporate governance practices. Overall, wesustainability program. We continue to be encouraged thatvalue the input we receive from our shareholders view favorably our executive compensationshareholders.

Highly Engaged and corporate governance programs.

Well-Qualified Board.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 strengthenscontinues to represent diverse skills and experiences, we have added several new directors over the Board’s expertise in global security issues and understanding of key customer concerns. Catherine Reynolds, who is nominated for electionpast several years. Our newest director, Cecil Haney, brings valuable insight as to the Board atneeds of one of our largest customers, the Annual Meeting, will bring to the Board additional financial and business expertiseU.S. Navy, as well as public company governance experience. Through these additions we will continue to ensure that the tenure of our directors remains balanced.

2016 was a year of continuing improvementimportant knowledge about advanced technology and accomplishment across our company. Our performance was strong with growth in many financial metrics, including earnings, margin, return on sales, return on invested capital and earnings per share, as compared with 2015, which was also an outstanding year for operating performance. With total backlog of nearly $60 billion, our company remains well-positioned for sales and earnings growth in the coming years as we execute on our order book.national security matters.

On behalf of the Board of Directors, I invite you to attend the 20172019 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 recommendations of the Board of Directors’ recommendations.Directors. Your vote is very important.

Sincerely,

 

LOGO

Phebe N. Novakovic

Chairman and Chief Executive Officer

2941 Fairview Park Drive, Suite 100

Falls Church, Virginia 22042


LOGOLOGO

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

Important Notice Regarding the Availability of Proxy Materials

for the Shareholder Meeting to Be Held on May 3, 20171, 2019

The Proxy Statement and 20162018 Annual Report are Available at

www.generaldynamics.com/2017proxy2019proxy

You are invited to our Annual Meeting of Shareholders of General Dynamics Corporation, a Delaware corporation, on Wednesday, May 3, 2017,1, 2019, 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 11 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 20172019 (proposal 2);

 

an advisory vote to approve executive compensation (proposal 3);

 

an advisory vote on the frequencyapproval of future advisory votes on executive compensationthe General Dynamics United Kingdom Share Save Plan (proposal 4);

 

a shareholder proposal as described in this Proxy Statement, provided it is presented properly at the approval of the General Dynamics Corporation Amended and Restated 2012 Equity Compensation Planmeeting (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 5.4.

The Board of Directors unanimously recommends for proposal 4 that you vote to hold future executive compensation advisory votes EVERY YEAR.AGAINST proposal 5.

Shareholders may raise other matters as described in the accompanying Proxy Statement.

The Board of Directors set the close of business on March 6, 2017,7, 2019, 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 20162018 Annual Report accompanies this Notice and Proxy Statement and is available on the website listed above.

By Order of the Board of Directors,

 

LOGO

Gregory S. Gallopoulos

Secretary

Falls Church, Virginia

March 23, 201721, 2019

 

General Dynamics 20172019 Proxy Statement


LOGO

LOGO

 

Table of Contents

 

Proxy Summary

  1 

Voting Matters and Board Recommendations

  1 

2019 Board of Directors Nominees

2

A Commitment to Sound Corporate Governance

  23

Corporate Governance Highlights

4 

Shareholder Engagement

  45 

Performance and Executive Compensation Highlights

  47 

Election of the Board of Directors of the Company

  58 

Governance of the Company

  1314 

Our Commitment to Strong Corporate Governance

  1314 

Our Culture of Ethics

  1314 

Board Leadership Structure

  1415 

Director Independence

  1516 

Board Meetings, Business Unit Visits and Attendance

  1617 

Executive Sessions of the Board

  1617 

Board Committees

  1617 

Risk Oversight

  1819 

Director Orientation and Continuing Education

  1920 

Board and Committee Performance Self-Assessments

  1920 

Communications with the Board

  1920 

Related Person Transactions Policy

  2021 

Director Compensation

  2122

Director Stock Ownership Guidelines

23

Director Compensation Table

23 

Advisory Vote on the Selection of Independent Auditors

  2324 

Audit Committee Report

  2425 

Advisory Vote to Approve Executive Compensation

  25

Advisory Vote on the Frequency of Future Executive Compensation Advisory Votes

2526 

Compensation Discussion and Analysis

  2627 

Executive Summary

  2728 

Executive Compensation Goals and ObjectivesPhilosophy

  3531 

Components of Executive CompensationShareholder Engagement

  3532 

The Compensation Process

  4233

Components of Executive Compensation and Alignment with Company Performance

36 

Other Considerations

  4743 

Executive Compensation

  4946 

Compensation Committee Report

  6057��

Security Ownership of Management

  6158 

Security Ownership of Certain Beneficial Owners

  6259 

Equity Compensation Plan Information

  6259 

Approval of the General Dynamics Corporation Amended and Restated 2012 Equity CompensationUnited Kingdom Share Save Plan

  6360

Shareholder Proposal – Independent Board Chairman

62 

Information Regarding the Annual Meeting and Voting

  7165 

Other Information

  7468 

Appendix A – General Dynamics Corporation Amended and Restated 2012 Equity Compensation PlanUse ofNon-GAAP Financial Measures

  A-1 

Appendix B – Use ofNon-GAAP Financial MeasuresGeneral Dynamics United Kingdom Share Save Plan

  B-1 

 

General Dynamics 20172019 Proxy Statement


General Dynamics 2019 Proxy Statement     1

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, 2017,1, 2019, 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, 2017,21, 2019, to holders of General Dynamics common stock, par value $1.00 per share (Common Stock).

Proxy SummaryPROXY SUMMARY

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


RECOMMENDATION

  

ADDITIONAL

INFORMATION

 

Proposal 1:


Election of Directors

 

  FOR each nominee  

 

See pages 58 through 1213 for more
information on the nominees

 

 

Proposal 2:


Advisory Vote on the Selection of Independent Auditors

 

  FOR  See page 2324 for details

 

Proposal 3:


Advisory Vote to Approve Executive Compensation

 

  FOR  See page 2526 for details

 

Proposal 4:

Advisory Vote on the Frequency of Future Executive Compensation Advisory Votes

EVERY YEARSee page 25 for details

Proposal 5:

Approval of the General Dynamics Corporation Amended andUnited Kingdom Share Save Plan

Restated 2012 Equity Compensation Plan

 

  FOR  See pages 6360 and 61 for details

Proposal 5:

Shareholder Proposal – Independent Board Chairman

AGAINSTSee pages 62 through 7064 for
details

 

ANNUAL MEETING INFORMATION

 

 

Date

 

  

Wednesday, May 3, 20171, 2019

 

 

Time

 

  

9 a.m. local time

 

 

Location

 

  

2941 Fairview Park Drive, Falls Church, Virginia

 

 

How to Vote

 

   

 

  By Internet

 

  

Access www.ProxyVote.com.

 

  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.

 

  By Mail

 

  

Sign and date each proxy card received and return each card using the prepaid postage envelope.

 

  In Person

 

  

Attend the Annual Meeting and vote by ballot.

 

Additional information about the Annual Meeting and voting can be found beginning on page 71.

General Dynamics 2017 Proxy Statement     165.


Proxy Summary

 


20172019 BOARDOF DIRECTORS NOMINEES

 

DIRECTOR NOMINEES

Nominee

  Director  

  Since  

  Independent  Primary Occupation

Nicholas D. Chabraja

1994

Former Chairman and CEO, General Dynamics

James S. Crown*

1987

Yes

President of Henry Crown and Company

Rudy F. deLeon

2014

Yes

Senior Fellow, Center for American Progress

John M. Keane

2004

Yes

Retired General, U.S. Army

Lester L. Lyles

2003

Yes

Retired General, U.S. Air Force

Mark M. Malcolm

2015

Yes

Former President and CEO, Tower International

Phebe N. Novakovic

2012

Chairman and CEO, General Dynamics

William A. Osborn

2009

Yes

Former Chairman and CEO, Northern Trust Corporation

Catherine B. Reynolds

Yes

Chairman and CEO, EduCap

Laura J. Schumacher

2014

Yes

EVP, External Affairs and General Counsel, AbbVie

Peter A. Wall

2016

Yes

Retired General, British Army

DIRECTOR NOMINEES

 

 

 

OTHER
PUBLIC
COMPANY
BOARDS

   NOMINEE

 

  DIRECTOR  

  SINCE  

 

  INDEPENDENT  

  

PRIMARY OCCUPATION

 

James S. Crown*

 

 

 

1987

 

 

 

Yes

 

  

 

Chairman and CEO, Henry Crown and Company

 

 

 

       1

 

 

Rudy F. deLeon

 

 

 

2014

 

 

 

Yes

 

  

 

Senior Fellow, Center for American Progress

 

 

 

Cecil D. Haney

 

 

 

2019

 

 

 

Yes

 

  

 

Retired Admiral, U.S. Navy

 

 

 

Lester L. Lyles

 

 

 

2003

 

 

 

Yes

 

  

 

Retired General, U.S. Air Force

 

 

 

       1

 

 

Mark M. Malcolm

 

 

 

2015

 

 

 

Yes

 

  

 

Former President and CEO, Tower International

 

 

 

       1

 

 

Phebe N. Novakovic

 

 

 

2012

 

   

 

Chairman and CEO, General Dynamics

 

 

 

       1

 

 

C. Howard Nye

 

 

 

2018

 

 

 

Yes

 

  

 

Chairman, President and CEO, Martin Marietta Materials

 

 

 

       1

 

 

William A. Osborn

 

 

 

2009

 

 

 

Yes

 

  

 

Former Chairman and CEO, Northern Trust Corporation

 

 

 

       2

 

 

Catherine B. Reynolds

 

 

 

2017

 

 

 

Yes

 

  

 

Chairman and CEO, EduCap

 

 

 

       1

 

 

Laura J. Schumacher

 

 

 

2014

 

 

 

Yes

 

  

 

Vice Chairman, External Affairs and Chief Legal Counsel, AbbVie

 

 

 

Peter A. Wall

 

 

 

2016

 

 

 

Yes

 

  

 

Retired General, British Army

 

  
*

Lead Director

 

LOGO

EXTENSIVE GOVERNANCE EXPERIENCESTRONG INDUSTRY EXPERIENCE

Balanced Director TenureLOGO

LOGO

(Current Directors)Nineof our nominees have strong corporate governance and public company board experience

  

Strong Director EngagementFiveof our nominees have served in top leadership posts in the military or U.S. Department of Defense

(2016 Attendance)

BALANCED DIRECTOR TENURESTRONG BOARD DIVERSITY

LOGO

LOGO

LOGO

2     General Dynamics 2019 Proxy Statement


Proxy Summary

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 fivefour overarching 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

LOGO

These values:

drive how we operate our business

govern how we interact with each other and our customers, partners and suppliers

guide the way we treat our workforce

determine how we connect with our communities

Adherence to our ethos ensures that we continue to be good stewards of the investments in us by doing the right thing for our shareholders, our customers, our employees and our communities.

 

2     General Dynamics 20172019 Proxy Statement     3


Proxy Summary

 


CORPORATE GOVERNANCE HIGHLIGHTS

Highlights of our governance practices include:

 

   

Governance PracticeGOVERNANCE PRACTICE

    For more informationFORMOREINFORMATION  
 

Stock Ownership

LOGO
 

  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 8eight times the annual retainer.

 

  P. 4744
 

  Weprohibit hedgingand pledging of our Common Stock by directors and executive officers.

   P. 4744
 

Board Structure

and Governance

LOGO
 

  9 of our 11 director nominees areThoughtfulindependentBoard refreshment.All of our standing Board committees are chaired by independent directors. Our Audit, Compensation and Nominating and Corporate Governance Committees are 100 percent independent., with seven directors added over the past five years.

 

  P. 152
 

  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.

 

 P. 15

  Ten of our 11 director nominees areindependent. All of our Board committees are chaired by independent directors and are 100 percent independent.

P. 16,17

  Ournon-management directors meet in executive session,without management present,following each regularly scheduled meeting, presided by the Lead Director.

 P. 1417

  Our directors attended 100 percent of board and committee meetingsin 2018.

P. 17

  DiligentBoard oversight of riskis a cornerstone of our risk management program.

P. 19

  AnnualBoard and committee self-assessmentsenable the Board tomonitor the performance and effectiveness of the Board and its committees.

P. 20

  Ourrelated person transactions policyensures appropriate Board review of related person transactions.

P. 21

 

  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.

 

 P. 73
 

   Our directors attended on average more than 97 percent of board and committee meetingsin 2016with no director attending less than 86 percent.P. 67

Bylaws*

P. 16

   Ournon-management directors meet in executive session,without management present,following each regularly scheduled meeting, presided by the Lead Director.

P. 16
 

  Our directors are restricted in the number of other boards on which they may serve toprevent overboarding.

 

  Corporate Governance Guidelines*
 
LOGO

  Our updatedrelated person transactions policyCorporate Sustainability Reportensures appropriate Board review of related person transactions.discussesour ethos, our commitment to our stakeholders and communities and our commitment to diversity and inclusion.

 

 P. 20www.gd.com/Responsibility

   AnnualBoard and committee self-assessmentsmonitor the performance and effectiveness of the Board and its committees.

P. 19

   DiligentBoard oversight of riskis a cornerstone of the company’s risk management program.

P. 18

Corporate

Responsibility

 

  Ourethics program includes strong Codes of Ethics for all employees globally, with specific codes for our directors and financial professionals and directors.

Standards of Business Ethics and
Conduct**

Codes of Ethics**

   ACorporate Sustainability Reportdiscusses our ethos, our commitment to our stakeholders and communities and our commitment to diversity and inclusion.professionals.

 

 Corporate Sustainability Report*

Standards of Business Ethics and Conduct**
Codes of Ethics**

 

  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**

Shareholder
Rights

LOGO 

  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 pill; anypill. Any future rights plan must be submitted to shareholders.

Corporate Governance Guidelines*

  Our shareholders have the right to request aspecial meeting of shareholders.

Voting rights are proportional to economic interests. One share equals one vote.

   

Corporate Governance Guidelines*

Bylaws*

Certificate of Incorporation*

 *

Our Corporate Governance Guidelines, Certificate of Incorporation 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.

 

 

4      General Dynamics 20172019 Proxy Statement     3


Proxy Summary


 

SHAREHOLDER ENGAGEMENT

Our Board is Committed to Robust Shareholder Engagement.  Our shareholder engagement program allows usEach year, we conduct outreach to discuss corporate governance and executive compensation matters with shareholders as well as other items of interest to our shareholders. As part of our ongoing program, in 2016 we reached out to holders representing over 65 percent60% of our outstanding common stock. In addition, in 2015 the Board formedshares to receive feedback on matters regarding our executive compensation and corporate governance practices. Additionally, anad hoc group of directors, anchored by the chairman and the independent Lead Director, is in place to liaise with significant shareholders.

In early 2018 and in advance of our annual meeting, we reached out to shareholders and actively engaged with holders representing over 50% of our outstanding shares to solicit feedback on our executive compensation program and the shareholder proposal presented at the 2018 annual meeting. Our Board remains committedcore shareholder engagement team comprised senior members of our Investor Relations, Corporate Governance and Human Resources (including Executive Compensation) groups, supplemented by our Lead Director as appropriate.

Based on the feedback received, we concluded that the following two items were of most concern:

The allocation within our long-term incentive compensation plan among performance shares, stock options and restricted stock

The absence of a relative metric applicable to solicitingperformance shares under our long-term incentive plan

Considering this feedback and understandingthe results of the advisory vote on executive compensation at our 2018 annual meeting, senior management and the Compensation Committee conducted a comprehensive review of our executive compensation program as applicable to our named executive officers (NEOs). Following this review, significant changes were made to the allocation among our long-term incentive plan components and the metrics applicable to performance shares. In particular, the Compensation Committee approved the following changes to further align pay and performance:

A change to the long-term incentive grant mix by doubling the overall weighting of performance stock units (PSUs) to be 50 percent, with 30 percent in stock options and 20 percent in restricted stock

The addition of a relative Total Shareholder Return (TSR) modifier to be applied against return on invested capital (ROIC) performance results on PSUs

A modification to the peer group to add nine companies that match well to General Dynamics

In the fall of 2018, we continued our shareholder viewsengagement efforts by conducting outreach to holders of approximately 65% of our outstanding shares. Once again, our engagement team, comprised of senior management and responding as appropriate.our Lead Director for select meetings, met with holders representing over 50% of our outstanding shares. During these conversations we discussed the changes made to our executive compensation program for 2019 and other matters of importance to the company and shareholders. Overall, shareholders expressed strong support for the changes made to our future pay structure and the increased alignment of pay with company performance.

LOGO

General Dynamics 2019 Proxy Statement     5


Proxy Summary

OUR SHAREHOLDER ENGAGEMENT PROGRAM

LOGO

KEY ITEMS DISCUSSEDWITH SHAREHOLDERS IN 2018

  Board of Directors and

  Corporate Governance

Risk Management Oversight

Executive Compensation

Corporate Responsibility

  Board Leadership

  Tenure and Refreshment

  Director Skills and Experience

  Diversity

  Shareholder Rights

  Cyber Risk Management

  Human Capital Management

  Supply Chain Management

  Pay-for-Performance Alignment

  Changes to Long-Term Incentive Compensation

  Stock Ownership Guidelines

  Updated Corporate Sustainability Report

  Environmental Initiatives

  Workforce Development, Diversity and Sustainability

6     General Dynamics 2019 Proxy Statement


Proxy Summary

PERFORMANCEAND EXECUTIVE COMPENSATION HIGHLIGHTS

Creating SustainableDelivering Long-Term Shareholder Value. We delivered solid operational and financial performance in 2018, withall-time highs for revenue, earnings from continuing operations and diluted earnings per share from continuing operations. In 2016,April 2018, we continuedcompleted the acquisition of CSRA Inc., combining it with General Dynamics Information Technology (GDIT) to create a premier provider of IT solutions to the defense, intelligence and federal civilian markets. Additionally, we received type certification from the U.S. Federal Aviation Administration and began customer deliveries of theall-new Gulfstream G500 business jet, and we embarked on a multi-year capital investment plan to support growth in our long-term focus on operational excellence, resulting in positive operating leverage, strong earnings and record-setting margin. We deployed capital prudently through continued investment in the future growth areas of our company and by returning 1.6 times our free cash flow from operations to shareholders in the form of dividends and share repurchases. In addition to our strong operating performance, we added new contracts to backlog, creating the opportunity for strong execution well into the future.Marine Systems segment.

 

 

2016 Financial Highlights2018 FINANCIAL HIGHLIGHTS

 

  Revenue

  $36.2 billion

Increased 16.9% over 2017; all five segments expanded

  Earnings from Continuing Operations

 $3.1

  $3.4 billion

 Highest in company history

Increased 15.3% over 2017

  Diluted EPS from Continuing Operations

  $11.22

Double-digit year-over-year growth – up 17.4%

  Operating Margin

 13.7%

  12.3%

 Highest in company history

Continued to generate industry-leading operating margin

 Free

  Cash Flow from Operations*Provided by Operating Activities

 $1.8

  $3.1 billion

 Exceeded company expectations

Good cash flow; supports ongoing investment in the business

  Return on Invested Capital*

 18.1%

  15.2%

 70 basis points higher than 2015

Generated strong return while investing in the continued growth of our company

 

Quarterly Dividends

 $0.76

  $0.93 per share

 19th

21st consecutive year with a dividend increase

 

Order Backlog

 $59.8

  $67.9 billion

 Robust backlog provides stability well into the future

Increased 7.4% over 2017

*

See Appendix BA for a discussion of thesethisnon-GAAP measures and reconciliation to their most directly comparable GAAP measures.measure.

 

A Consistent FocusPay for Performance.  Annual incentive payouts for 2018 were determined taking into account the company’s 2018 performance against its goals. Annual incentives for 2018 performance reflect an average decline of more than 11 percent for the NEOs compared to the prior year. Similarly, for annual long-term incentive grants awarded in March 2019, the amount of long-term incentive compensation granted to the NEOs was comparatively less than in prior years due to 2018 performance, particularly the company’s cash performance. See the Compensation Discussion and Analysis section for more information.

Board Responsiveness to Shareholder Feedback and Executive Compensation Program Changes.  At the 2018 annual meeting, the shareholder advisory vote on Aligningour executive compensation program received the support of 68 percent of our shareholders, which was significantly lower than the support shown in previous years. As part of its ongoing review of the executive compensation program, the Compensation with Performance.  OurCommittee considered this vote and the viewpoints expressed during our extensive shareholder engagement discussions. While the committee noted that the majority of our shareholders supported our executive compensation program and the incentives it has created for strong company performance, the committee determined that changes to the long-term incentive portion of our executive compensation program would enhance further thepay-for-performance philosophy at General Dynamics isthe heart of the program. Accordingly, the Compensation Committee implemented changes to the long-term incentive component to (1) double the portion represented by PSUs from 25 percent to 50 percent and (2) add a relative TSR modifier to be applied to the ROIC performance results on the PSUs. The objective of our executive compensation program remains to align executive compensation with company, business groupsegment and individual performance and to provide the incentives necessary to attract, motivate and retain theour executives that helpto drive the company’s success. We have received positivecompany success and increase shareholder feedback about our executive compensation program, and received a greater than 90% 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.value.

 

4     General Dynamics 20172019 Proxy Statement     7



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.

 

 

LOGOLOGO

 

8     General Dynamics 20172019 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
and Defense
Industry

 

Corporate
Governance
and Public
Company
Board

 

Finance or
Accounting

 

Government
Relations and
Regulatory

 

Global
Business and
Strategy

 

Operations and
Manufacturing

Nicholas D. Chabraja

James S. Crown

  

 

  

 

Rudy F. deLeon

 

 

  

 

 

John M. Keane  Cecil D. Haney

 

  

Lester L. Lyles

 

  

  Lester L. Lyles

Mark M. Malcolm

  

Phebe N. Novakovic

 

William A. Osborn

  

 

Catherine B. Reynolds  Phebe N. Novakovic

  C. Howard Nye

  

 

 

 

 

Laura J. Schumacher  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  core
industry
 Ensures the
background and
knowledge
necessary to
provide effective
oversight and
governance
 Enables

in-depth
analysis of our
financial
statements
and
understanding
of our capital
structure,
financial
transactions
and financial
reporting
processes

 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 sustainable,
complex, global   manufacturing company

 

6     General Dynamics 20172019 Proxy Statement     9


Election of Directors

 


20172019 Director Nominees.The following 11 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.Committee.

 

NICHOLAS D. CHABRAJA

•    Chairman of General Dynamics, 1997 to 2010; Chief Executive Officer, 1997 to 2009; Vice Chairman, 1996 to 1997; Executive Vice President, 1994 to 1996

•    Mr. Chabraja currently serves asnon-executive chairman of Tower International, Inc. He served as a director of Northern Trust Corporation within the past five years.

Key Attributes/Skills/Expertise:Mr. Chabraja’s 15 years of service as a senior executive officer and12-year tenure as chairman and chief executive officer of our company make him an experienced and trusted advisor. He hasin-depth knowledge of all aspects of General Dynamics and a deep understanding and appreciation of our customers, business operations and approach to risk management. His service at General Dynamics combined with his service on other public company boards provides him with a valuable perspective on finance, governance and management matters that face large public companies.

LOGO

COMMITTEES:

Finance and Benefit Plans

DIRECTORSINCEMARCH1994

AGE:74

   
JAMES S. CROWN 

     Lead Director since May 2010

     Chairman and Chief Executive Officer of Henry Crown and Company since 2018; President of Henry Crown and Company, since 2002;2002 to 2018; Vice President of Henry Crown and Company, 1985 to 2002

     Mr. Crown currently serves as a director of J.P. Morgan Chase & Co. He served as a director of Sara Lee Corporation within the past five years.

 

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 presidentchairman and chief executive officer 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.

JAMES S. CROWN

 

LOGO

 

LEAD DIRECTOR

COMMITTEES:OMMITTEES:

Audit

Compensation

Nominating and Corporate Governance (Chair)

 

DIRECTORSINCEMAY1987

AGE:6365

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.

 

LOGO

 

COMMITTEES:
OMMITTEES:Compensation

Compensation


Finance and Benefit Plans (Chair)

     

DIRECTORSINCESEPTEMBER2014
IRECTOR SINCE SEPTEMBER2014

AGE:6466

   
JCOHNECIL M. KD. HEANEANEY 

     Retired General,Admiral, U.S. Army; Vice Chief of Staff of the Army, 1999Navy; Commander, U.S. Strategic Command, 2013 to 2003

•    Chairman of the Institute for the Study of War since 2007

•    President of GSI, LLC (consulting) since 2004

•    Senior Partner of SCP Partners (private equity), 20092016; Commander, U.S. Pacific Fleet, 2012 to 20122013

•    Managing Director of Keane Advisors, LLC (private equity), 2005 to 2009

•    Mr. Keane served as a director of MetLife, Inc. within the past five years.

 

Key Attributes/Skills/Expertise:Prior to retiring from the U.S. ArmyNavy at the rank of General,Admiral, Mr. KeaneHaney served as Vice Chief of StaffCommander of the Army. As a senior officer,U.S. Strategic Command and Commander of the U.S. Pacific Fleet. During this service, Mr. Keane managed significant operating budgets and addressedHaney gained broad global experience in managing complex operational and strategic issues. Mr. Keane’s astute appreciation for the complexities ofbudgetary matters. His nearly four-decade career with the U.S. military andNavy gives him valuable insight into key aspects of the defense industry combinedand national security priorities. Mr. Haney’s engineering and national security educational backgrounds, together with his demonstrated leadership and strategic skills, makeextensive experience with advanced technologies, position him as a valuable advisor to our aerospacebusinesses.

Nominated and defense businesses.elected to the Board in March 2019, Mr. Keane has gainedHaney was initially identified as a strong understanding of public company governance and operations through his service on three public company boards.director candidate by an independent director.

 

LOGO

LOGO

 

COMMITTEES:

Finance and Benefit Plans

Nominating and Corporate GovernanceNot Yet Assigned

     

DIRECTOR SINCEFMEBRUARYARCH2004 2019

AGE: 7463

 

810     General Dynamics 20172019 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.

 

LOGO

 

COMMITTEES:

Audit

Nominating and Corporate Governance

     

DIRECTOR SINCEDECEMBER2003

AGE: 7072

   
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.

 

LOGO

 

COMMITTEES:
OMMITTEES:Audit (Chair)

Audit


Finance and Benefit Plans

     

DIRECTORSINCEAUGUST 2015


AGE:63

General Dynamics 2017 Proxy Statement     9


Election of Directors65

 


   
PHEBE N. NOVAKOVIC 

     Chairman and Chief Executive Officer of General Dynamics since January 2013; President and Chief Operating Officer, May 2012 through December 2012; Executive Vice President, Marine Systems, May 2010 to May 2012; Senior Vice President, Planning and Development, July 2005 to May 2010; Vice President, Strategic Planning, October 2002 to July 2005

     Ms. Novakovic currently serves as a director of Abbott Laboratories.

 

Key Attributes/Skills/Expertise:Ms. Novakovic’s service as a senior officer of General Dynamics since 2002 makes her a valuable and trusted advisor.leader. 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.

 

LOGO

 

COMMITTEES:OMMITTEES:

None

     

DIRECTORSINCEMAY2012

AGE: 5961

General Dynamics 2019 Proxy Statement     11


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. He served as a director of Cree, Inc. within the past five years.

Key Attributes/Skills/Expertise: Mr. Nye’s roles 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.

LOGO

COMMITTEES:

Nominating and Corporate Governance

DIRECTORSINCEMAY 2018

AGE: 56

   
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, , 2003 to 2006

     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.

 

LOGO

 

COMMITTEES:

Audit

Compensation (Chair)

Finance and Benefit Plans

     

DIRECTOR SINCEDECEMBER2009

AGE: 6971

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’Reynolds’s 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. Reynolds was identifiedReynolds’s extensive financial and accounting background qualifies her as a director nominee by the chairman and chief executive officer.an Audit Committee Financial Expert.

 

LOGO

 

COMMITTEES:

N/AAudit

Finance and Benefit Plans

     

NEWDIRECTOR NOMINEE SINCEMAY 2017

AGE: 5961

12     General Dynamics 2019 Proxy Statement


Election of Directors

   
LAURA J. SCHUMACHER 

    Vice Chairman, External Affairs and Chief Legal Counsel of Abbvie Inc. since December 2018; Executive Vice President, External Affairs and General Counsel of Abbvie Inc. since January, 2013 to December 2018

    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.

 

LOGO

 

COMMITTEES:

Compensation

Nominating and Corporate Governance

     

DIRECTOR SINCE FEBRUARY2014

AGE: 5355

General Dynamics 2017 Proxy Statement     11


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.

Nominated to the Board in August 2016, Mr. Wall was initially identified by a formernon-management director and the chief executive officer together with the Nominating and Corporate Governance Committee and was recommended as a director nominee by the Nominating and Corporate Governance Committee.

 

LOGO

 

COMMITTEES:

Finance and Benefit Plans

Nominating and Corporate Governance

     

DIRECTOR SINCEAUGUST2016

AGE: 6163

Director Retirement.  William Fricks will not stand for re-election at the Annual Meeting. General Dynamics and the Board appreciate his many years of dedicated service and valuable counsel as a member of the Board.

YOUR BOARDOF DIRECTORSUNANIMOUSLYRECOMMENDSAVOTE

FOR

ALLDIRECTORNOMINEESLISTEDABOVE.

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 2017,2019, the committee recommended and in March 2017 the Board unanimously requested that Messrs. Chabraja and Keane eachMr. Lyles be nominated to stand forre-election. The Board took this action in recognition ofto retain the continued valuable counsel and insight that each of these directorsMr. Lyles 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 3three 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.

 

12     General Dynamics 20172019 Proxy Statement     13



GOVERNANCEOFTHE COMPANY

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 3.4.

OUR CULTUREOF ETHICS

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 fivefour values: Alignment, Honesty, Transparency and Trust. These 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 dedicateddrive how we operate our business.

govern how we interact with each other and our customers, partners and suppliers.

guide the way we treat our workforce.

determine how we connect with our communities.

Adherence 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 ensureensures that we continue to be good stewards of the investments in us by our shareholders, customers, employees and communities, now and in the future.communities.

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.

General Dynamics 2017 Proxy Statement     13


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.

14     General Dynamics 2019 Proxy Statement


Governance of the Company

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.

BOARD LEADERSHIP STRUCTURE

Our Board comprises independent, accomplished and experienced directors who provide advice and oversight to further the interests of our company and our shareholders. The Board evaluates regularly its leadership structure, including whether to combine the positions of chairman and chief executive officer. This decision cannot be made in the abstract, but rather depends on the then-prevailing facts and circumstances. Academic research into any demonstrable advantage of combining or separating the chairman and chief executive officer roles has been inconclusive. Accordingly, the Board continues to believe that it must exercise its best business judgment in determining the appropriate leadership structure at a particular time under particular circumstances instead of adopting a rigid doctrine favoring one approach at all times and in all circumstances.

Our Board currently believes that its organizational structurethe combination of the chairman and chief executive roles while employing a strong Lead Director position 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 Chairmanchairman annually 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.directors. 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 boardBoard 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.

 

14     General Dynamics 20172019 Proxy Statement     15


Governance of the Company


 

DIRECTOR INDEPENDENCE

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.independent. 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)

 

(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)

 

(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)

 

(4)

is not a current partner of, or employee of, a present internal or external auditor of General Dynamics;

(5)

 

(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)

 

(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,Haney, 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 beginning on page 2021 of this Proxy Statement and found them to be immaterial. For each of the relationships that the Board considered for 2014, 20152016, 2017 and 2016,2018, 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 20162018 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 20162018 payments fell below the greater of $1 million or 2 percent of the consolidated gross revenues of the organizations. None of the 20162018 charitable contributions to these organizations exceeded $110,000.$122,000.

General Dynamics 2017 Proxy Statement     15


Governance of the Company


 

Messrs. Crown, KeaneHaney, Nye 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

16     General Dynamics 2019 Proxy Statement


Governance 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.Company

 

Mr. Mattis’ brother is an employee (and not an executive officer) 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.

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.

BOARD MEETINGS, BUSINESS UNIT VISITSAND ATTENDANCE

During 2016,2018, the Board of Directors held eight11 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%100 percent of the meetings of the Board and committees on which they served in 2016, with 92018. This included amulti-day meeting in February to review our 2018 operating plan, including the operating plans of each of our current 12 directors attending 100 percent ofbusiness segments. In August 2018, the Board visited facilities of our General Dynamics Land Systems business unit and committee meetings.met with that business unit’s management team. We encourage directors to attend each annual meeting of shareholders, and in 2016 all2018 nine of our ten directors attended the annual meeting.

EXECUTIVE SESSIONSOFTHE BOARD

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.

BOARD COMMITTEES

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 2016.2018. Currently, threeall of the fourour 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, 2017.7, 2019. Mr. Haney, who joined the Board in March 2019, has not yet been assigned to a committee.

 

   

AUDIT

COMMITTEE

 

COMPENSATION

COMMITTEE

 

FINANCEAND

BENEFIT PLANS

COMMITTEE

 

NOMINATINGAND  

CORPORATE  

GOVERNANCE  

COMMITTEE

  Mary T. Barra

LOGO

LOGO

 

  Nicholas D. ChabrajaJames S. Crown LOGO

 

 LOGO LOGO 

 

LOGO

 

  James S. Crown LOGO

LOGO

LOGO

LOGO

LOGO

 

  Rudy F. deLeon

 

  

 

LOGO

LOGO

 

 

LOGO

LOGO

 

  William P. Fricks LOGO

LOGO

LOGO

  John M. Keane

LOGO

LOGO

 

  Lester L. Lyles

 

 LOGO

LOGO

 

LOGO  Mark M. Malcolm LOGO

LOGO

LOGO

  C. Howard Nye

   LOGO

 

LOGO  William A. Osborn LOGO

LOGO

LOGOLOGO

 

  Mark M. Malcolm LOGO

  Catherine B. Reynolds LOGO

 

 

LOGO

LOGO

  

 

LOGO

  William A. Osborn LOGO

LOGO

LOGO

LOGO

LOGO

 

 

  Laura J. Schumacher

 

  

LOGO

LOGO
  

LOGO

LOGO

 

  Peter A. Wall

     

 

LOGOLOGO

LOGO

 

LOGOLOGO  Lead Director

  LOGOLOGO  Chairperson  LOGOLOGO  Member  LOGOLOGO  Audit Committee Financial Expert

 

16     General Dynamics 20172019 Proxy Statement     17


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 2016: 2018: 8

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

  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 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

 

  COMPENSATION COMMITTEE  NUMBEROF MEETINGSIN 2016: 4 2018: 5       

 

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 2016: 2018: 3

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

  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 2016: 2018: 3

 

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

 

18     General Dynamics 20172019 Proxy Statement     17


Governance of the Company

 


RISK OVERSIGHT

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.risks that are material to our business. 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, cyber 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 of the company’s risk profile 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 2018 include our cyber security risk management program, human capital management, data privacy 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 groupsegment executive vice president presents the unit’s and group’ssegment’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 groupsegment 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.segment. The Board also receives briefings from senior management concerning a variety of matterstopics and related risks to the company, including defense budget and acquisition matters, cyber security, human capital management 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.

 

18     General Dynamics 20172019 Proxy Statement     19


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 ofto 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 isNew directors also providedhave the opportunity to visit business units within each of the fourour business groupssegments and receive briefings from the respective groupsegment executive vice president and members of the business unit management team.teams.

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 planplans of each of our business units and business groupssegments 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 COMMITTEEPERFORMANCE SELF-ASSESSMENTS

Each year, the directors undertake a self-assessment for the Board and each committee on which they serve that elicitsto elicit 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.committee’s operation. Theself-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.

CCOMMUNICATIONSWITHTHE 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 Chairmanchairman 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

20     General Dynamics 2019 Proxy Statement


Governance of the Company

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.

General Dynamics 2017 Proxy Statement     19


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,Securities and Exchange Commission (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.plans, including plans acquired in the CSRA acquisition. 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 20162018 totaling approximately $1.1$3.1 million. In accordance with the related person transactions policy, the Nominating and Corporate Governance Committee reviewed and approved the services for 20162018 and approved the continuation of the services in 2017.2019.

 

Henry Crown and Company and one of its affiliated entities made payments of approximately $178,000$403,000 to the company in 20162018 for the purchase of business jet spare parts and aircraft maintenance and services from our subsidiary, Gulfstream Aerospace Corporation. Additionally, these companies purchased aircraft services from our subsidiary, Jet Aviation. The amount of payments

General Dynamics 2019 Proxy Statement     21


Governance of the Company

made to Jet Aviation in 2018 was approximately $448,000. 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.

An affiliated entity of Nicholas D. Chabraja, who served as a director of the company until retiring from the Board in May 2018, made payments of approximately $429,000 to the company in 2018 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 2016 was approximately $212,000. TheThese 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 brother of Mark Roualet, an executive officer of the company, served as an employee of one of our subsidiaries in 2016. During the year, he received cash compensation of approximately $234,000, and benefits generally available to other employees with equivalent qualifications, experience and responsibilities.

20     General Dynamics 2017 Proxy Statement


Governance of the Company


DIRECTOR COMPENSATION

We compensate eachnon-management director for service on the Board of Directors. The Compensation Committee reviews director compensation on an annual basis.

20162018 Compensation.Director  Non-management director compensation for 20162018 was:

 

COMPENSATION ELEMENT

  

AMOUNT

Annual Retainer

  $70,00085,000

Lead Director Retainer

  

$25,000

Committee Chair Annual Retainer

  

$10,000

Attendance Fees

  

$3,000 for each meeting of the Board of Directors; $2,000
$2,000 for each meeting of any committee; and $3,000
$3,000 per day for attending strategic or financial planning meetings sponsored by General Dynamics

Annual Equity Award

  

Approximately $142,000$150,000 on the date of award

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 20162018 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 directors’ pay program was approximate to the median for equity compensation and slightly belowof the median for cash compensation. Followingpeer group. Based on this review, the Compensation Committeecommittee recommended no changes to director compensation.

EachNon-managementnon-management directors havedirector has the option of receiving all or part of theirthe annual retainersretainer in the form of Common Stock. The annual retainer, additional committee chair retainer (if any) and attendance fees paid to each director during 20162018 are reflected in the Fees Earned or Paid in Cash column of the Director Compensation for Fiscal Year 20162018 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 20162018 table.

20172019 Compensation.  In early 2017,2019, 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. This information showed that the annual retainer and the value of the annual equity award were below the median.Aon. 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.director compensation.

 

22     General Dynamics 20172019 Proxy Statement     21


Governance of the Company

 


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 officersNEOs and are expected to retain shares received 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 “CompensationCompensation Discussion and Analysis – Stock Ownership Guidelines.

DIRECTOR COMPENSATION TABLE

The table below provides total compensation for 20162018 for each of General Dynamics’non-management directors serving during the year. TheEach director is awarded the same number of shares of restricted stock and stock options awarded to the directors annually are the same for each director.year.

 

DIRECTOR COMPENSATIONFOR FISCAL YEAR 2016 
DIRECTOR COMPENSATIONFOR FISCAL YEAR 2018DIRECTOR COMPENSATIONFOR FISCAL YEAR 2018 
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 

Nicholas D. Chabraja

  $        509,000   $70,642   $71,162   $4,080   $654,884 

Nicholas D. Chabraja (e)

  

 

$

 

 

        258,106

 

 

 

 

  

 

$

 

 

        75,017

 

 

 

 

  

 

$

 

 

        74,705

 

 

 

 

  

 

$

 

 

        450,000

 

 

 

 

  

 

$

 

 

        857,828

 

 

 

 

James S. Crown

  $        170,000   $70,642   $71,162   $2,140   $313,944   

 

$

 

 

197,000

 

 

 

 

  

 

$

 

 

75,017

 

 

 

 

  

 

$

 

 

74,705

 

 

 

 

  

 

$

 

 

2,140

 

 

 

 

  

 

$

 

 

348,862

 

 

 

 

Rudy F. deLeon

  $        149,000   $70,642   $71,162   $2,140   $292,944   

 

$

 

 

176,000

 

 

 

 

  

 

$

 

 

75,017

 

 

 

 

  

 

$

 

 

74,705

 

 

 

 

  

 

$

 

 

2,140

 

 

 

 

  

 

$

 

 

327,862

 

 

 

 

William P. Fricks

  $        137,000   $70,642   $71,162   $4,080   $282,884 

John M. Keane

  $        112,000   $70,642   $71,162   $4,080   $257,884 

John M. Keane (e)

  

 

$

 

 

60,106

 

 

 

 

  

 

$

 

 

75,017

 

 

 

 

  

 

$

 

 

74,705

 

 

 

 

  

 

$

 

 

—  

 

 

 

 

  

 

$

 

 

209,828

 

 

 

 

Lester L. Lyles

  $        127,000   $70,642   $71,162   $4,080   $272,884   

 

$

 

 

152,000

 

 

 

 

  

 

$

 

 

75,017

 

 

 

 

  

 

$

 

 

74,705

 

 

 

 

  

 

$

 

 

4,080

 

 

 

 

  

 

$

 

 

305,802

 

 

 

 

Mark M. Malcolm

  $        123,000   $70,642   $71,162   $2,140   $266,944   

 

$

 

 

172,000

 

 

 

 

  

 

$

 

 

75,017

 

 

 

 

  

 

$

 

 

74,705

 

 

 

 

  

 

$

 

 

2,140

 

 

 

 

  

 

$

 

 

323,862

 

 

 

 

James N. Mattis (e)

  $        122,000   $70,642   $71,162   $2,140   $265,944 

C. Howard Nye (f)

  

 

$

 

 

52,894

 

 

 

 

  

 

$

 

 

50,343

 

 

 

 

  

 

$

 

 

49,445

 

 

 

 

  

 

$

 

 

2,461

 

 

 

 

  

 

$

 

 

155,143

 

 

 

 

William A. Osborn

  $        141,000   $70,642   $71,162   $4,080   $286,884   

 

$

 

 

172,000

 

 

 

 

  

 

$

 

 

75,017

 

 

 

 

  

 

$

 

 

74,705

 

 

 

 

  

 

$

 

 

4,080

 

 

 

 

  

 

$

 

 

325,802

 

 

 

 

Catherine B. Reynolds

  

 

$

 

 

150,000

 

 

 

 

  

 

$

 

 

75,017

 

 

 

 

  

 

$

 

 

74,705

 

 

 

 

  

 

$

 

 

2,140

 

 

 

 

  

 

$

 

 

301,862

 

 

 

 

Laura J. Schumacher

  $117,000   $70,642   $71,162   $2,140   $260,944   

 

$

 

 

146,000

 

 

 

 

  

 

$

 

 

75,017

 

 

 

 

  

 

$

 

 

74,705

 

 

 

 

  

 

$

 

 

2,140

 

 

 

 

  

 

$

 

 

297,862

 

 

 

 

Peter A. Wall (f)

  $34,870   $29,564   $29,396   $1,858   $95,688   

 

$

 

 

182,000

 

 

 

 

  

 

$

 

 

75,017

 

 

 

 

  

 

$

 

 

74,705

 

 

 

 

  

 

$

 

 

2,140

 

 

 

 

  

 

$

 

 

333,862

 

 

 

 

(a)

Ms. Barra,Reynolds, Ms. Schumacher and Messrs. Crown, FricksKeane and KeaneNye elected to receive 100 percent of their annual retainer in Common Stock. As a result, they each received 470 shares of Common Stock with a grant date fair value of approximately $70,000. Mr.Messrs. deLeon, Lyles and Wall elected to receive 50 percent of histheir annual retainer in Common Stock. As a result, Mr. deLeonBased upon these elections and each director’s length of service for the year, they received 234the following number of shares of Common Stock with athe associated approximate grant date fair value of approximately $35,000.value: Mr. deLeon — 217 shares ($42,054); Mr. Keane — 150 shares ($31,847); Mr. Lyles — 217 shares ($42,054); Mr. Nye — 286 shares ($52,686); Ms. Reynolds — 437 shares ($84,727); Ms. Schumacher — 437 shares ($84,727); and Mr. Wall — 151 shares ($29,286).

(b)

The amounts reported in the Stock Awards column reflect the aggregate grant date fair value computed in accordance with Financial Accounting Standards Board (FASB) ASC Topic 718,Compensation — Stock Compensation.Assumptions used in the calculation of these amounts are included in Note OP to our audited financial statements for the fiscal year ended December 31, 2016,2018, included in our Annual Report on FormForm 10-K filed with the SEC on February 6, 2017. Restricted13, 2019.Restricted stock awards outstanding as of December 31, 2016,2018, for each director were as follows: 2,4801,508 for Ms. Barra and Messrs. Chabraja and Keane; 1,765 for Messrs. Crown, Fricks, Keane,deLeon, Osborn and Lyles and Osborn; 1,860 for Mr. Mattis; 1,580 for Ms. Schumacher; 1,040 for Mr. deLeon; 7301,455 for Mr. Malcolm; 250 for Mr. Nye; 580 for Ms. Reynolds; and 200925 for Mr. Wall.

(c)

The amounts reported in the Option Awards column reflect the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. Assumptions used in the calculation of these amounts are included in Note OP to our audited financial statements for the fiscal year ended December 31, 2016,2018, included in our Annual Report on Form10-K filed with the SEC on February 6, 2017.Option13, 2019.Option awards outstanding as of December 31, 2016,2018, for each director were as follows: 26,950 for Ms. Barra; 26,88022,146 for Messrs. Chabraja and Keane; 21,350 for Messrs. Crown Fricks, Keane and Lyles; 21,670Osborn; 10,050 for Mr. Osborn; 12,690deLeon; 25,930 for Mr. Mattis; 10,190Lyles; 8,690 for Mr. Malcolm; 1,450 for Mr. Nye; 3,460 for Ms. Reynolds; 14,450 for Ms. Schumacher; 5,790 for Mr. deLeon; 4,430 for Mr. Malcolm; and 1,3205,580 for Mr. Wall.

(d)

Amount for Mr. Chabraja reflects payments for services provided to the company following his retirement from the Board at the May 2018 annual meeting. Amounts for other directors reflect payments by General Dynamics for accidental death and dismemberment (AD&D) insurance.

(e)

Mr. Mattis resignedMessrs. Chabraja and Keane retired from the Board in January 2017.at the May 2018 annual meeting.

(f)

Mr. WallNye joined the Board in August 2016.May 2018.

 

22     General Dynamics 20172019 Proxy Statement     23


 


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 2017.2019. 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 20172019 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 20162018 and 2015,2017, and fees billed for other services rendered by KPMG during those years.

 

  2018   2017 
  2016   2015 

Audit Fees (a)

  $18,333,000   $17,900,000   $

 

23,415,000

 

 

 

  $

 

19,967,000

 

 

 

Audit-related Fees (b)

   4,731,000    3,036,000    

 

3,149,000

 

 

 

   

 

1,882,000

 

 

 

Tax Fees (c)

   1,063,000    1,250,000    

 

1,107,000

 

 

 

   

 

1,226,000

 

 

 

All Other Fees (d)

   51,000    70,000    

 

76,000

 

 

 

   

 

5,000

 

 

 

Total Fees

  $24,178,000   $22,256,000   $

 

 

27,747,000

 

 

 

 

 

  $

 

 

23,080,000

 

 

 

 

 

 

(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,SEC, 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.

 

24     General Dynamics 20172019 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.

AUDIT COMMITTEE REPORT

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 eight meetings in 2016.2018.

The Audit Committee has reviewed and discussed with management and the company’s independent auditors for 2016,2018, KPMG LLP, an independent registered public accounting firm, the company’s audited consolidated financial statements as of December 31, 2016,2018, 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, 2016,2018, for filing with the SEC.Securities and Exchange Commission.

This report is submitted by the Audit Committee.

 

William P. Fricks      Mark M. Malcolm (Chair)

James S. Crown

Lester L. Lyles

  

Mark M. Malcolm

William A. Osborn

Catherine B. Reynolds

February 4, 20179, 2019

 

24     General Dynamics 20172019 Proxy Statement     25


 


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 this26     General Dynamics 2019 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:

Table of Contents

 

Executive Summary

  2728 

Business Overview

  2729 

Company Performance Highlights

  2829

Executive Compensation Philosophy

31 

Components ofOur Executive Compensation and Alignment with Company Performance

30

Continued Changes to Compensation Program in Response to Shareholder FeedbackGovernance Practices

  31 

2016 Variable Compensation Drivers and OutcomesShareholder Engagement

  32 

2016 Shareholder OutreachThe Compensation Process

33

Setting Compensation Levels and Say on Pay Result and Program UpdatesEvaluating Performance

  33 

Strong, Independent2018 Evaluation and Compensation Governance and PracticesProcess Timeline

  34 

Executive Compensation GoalsPeer Group and ObjectivesBenchmarking to the Market

  35 

Components of Executive Compensation and Alignment with Company Performance

  3536 

Variable and Performance-Based CompensationAnnual Base Salary

  3637 

Annual Incentive Compensation

  37 

Long-Term Incentive Compensation

  3739 

Fixed CompensationBenefits and BenefitsPerquisites

  3942

Other Considerations

43 

Potential Severance and Change in Control Benefits

  41

The Compensation Process

42

Setting Compensation Levels and Evaluating Performance

42

Peer Group and Benchmarking to the Market

43

NEO Performance Metrics and Targets for 2016

44 

Role of the Independent Compensation Consultant

  4644 

Other ConsiderationsAnti-Hedging and Anti-Pledging Policies

  4744 

Stock Ownership Guidelines and Holding Requirements

  47

Anti-Hedging and Anti-Pledging Policies

4744 

Clawback Policy

  47

Monitoring Dilution and Annual Equity Usage

4845 

Compensation and Risk Management

  4845 

Tax Considerations

  48

Executive Compensation Tables

4945 

 

26     General Dynamics 20172019 Proxy Statement     27


Compensation Discussion and Analysis

 


 

EXECUTIVE SUMMARY

This Compensation Discussion and Analysis (CD&A) describes the 2018 compensation of our Named Executive Officers (NEOs) for 2016 and includes the following individuals:who are identified below:

 

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 JohnsonJohnson*

 

Executive Vice President, Information SystemsTechnology and Mission Systems

*Mr. Johnson retired from General Dynamics on December 31, 2018. Christopher Marzilli, then-Vice President of the Corporation and President of General Dynamics Mission Systems, succeeded Mr. Johnson as Executive Vice President, Information Technology and Mission Systems on January 1, 2019.

EXECUTIVE SUMMARYOF RESPONSIVENESSTO SHAREHOLDER FEEDBACK

At the 2018 annual meeting, the advisory vote in favor of our executive compensation program received 68 percent support, which is significantly lower than the support shown in recent years. As part of its ongoing consideration of the executive compensation program, the Compensation Committee (the Committee) reviewed this vote and viewpoints expressed during our extensive shareholder engagement discussions. While the Committee noted that many shareholders support our executive compensation program and the incentives it has created to drive strong company performance, the Committee determined that changes to the long-term incentive portion of our executive compensation program would further enhance thepay-for-performance philosophy at the heart of the program. Accordingly, the Committee implemented changes to the program for our NEOs effective in 2019 as follows:

Doubled the portion of the long-term incentive award represented by performance stock units (PSUs) from 25 percent to50 percent

Added a relative Total Shareholder Return (TSR) modifier to be applied to the existing Return on Invested Capital (ROIC) performance metric on the PSUs

Modified the peer group adding eight companies that match well to General Dynamics

The objective of our executive compensation program remains to align NEO compensation with company, business segment and individual performance and provide the incentives necessary to attract, motivate and retain our NEOs to drive company success and increase shareholder value.

 

28     General Dynamics 2019 Proxy Statement


EXECUTIVE SUMMARYCompensation Discussion and Analysis

BUSINESS OVERVIEW

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 services;

C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) solutions; and

 

Shipbuilding and ship repair.

We operate and manage our ten business units through fourfive business groups,segments as shown below:

LOGO

COMPANY PERFORMANCE HIGHLIGHTS

Financial Performance Summary.  In 2018, the company’s commitment to operational excellence delivered another year of revenue and earnings growth and a double-digit increase in earnings per share for shareholders. The success of our approach under Ms. Novakovic’s leadership is evident in higher revenue at each of our five business segments, which drove growth in earnings from continuing operations. We continue to balance our focus on operations with each group leda thoughtful capital deployment strategy. As stewards of your capital, in 2018 we enhanced shareholder value through our prudent use of capital, including investment in long-term business opportunities, an increase in the dividend for the 21st consecutive year, tactical share repurchases and the acquisition of complementary businesses. In the sixth year under Ms. Novakovic’s leadership, the company added new, key contracts, which helped us grow our backlog by an executive vice president:over 7 percent, providing the opportunity to deliver strong operating results in the future.

CSRA Acquisition.  On April 3, 2018, we completed a $9.7 billion acquisition of CSRA Inc. (CSRA), our largest acquisition to date. The combination of General Dynamics Information Technology (GDIT) and CSRA created a premier provider of technology solutions and mission services to help customers across defense, intelligence and federal civilian markets advance mission performance and transform operations. Integrating these two businesses has enhanced our ability to develop cost-effective, next-generation technology solutions, leverage our expanded and deep experience across multiple agencies and pursue large-scale enterprise solutions for our customers.

General Dynamics 2019 Proxy Statement     29


Compensation Discussion and Analysis

 

GENERAL DYNAMICS
Dividend History

Aerospace

LOGO

 Combat Systems

Information SystemsWe returned to shareholders over 115 percent of our free cash flow from operations in 2018. In addition to tactical share repurchases over the course of 2018, we raised our quarterly dividend for the 21st consecutive year and Technologypaid $1.1 billion in cash dividends.

 Marine Systems

Earnings from Continuing

Operations

(in millions)

2018 marked another strong year for growth in earnings from continuing operations. Earnings from continuing operations and operating margin exceeded the challenging target amounts set forth in our operating plan.

LOGO

Diluted Earnings Per Share

from Continuing Operations

In 2018, we achieved record-high diluted earnings per share from continuing operations, an increase of 17 percent from 2017.

LOGO

Return on Invested Capital

We focus our management team on driving Return on Invested Capital (ROIC) because it reflects our ability to generate returns from the capital we have deployed in our operations. 2018 reflects primarily the impact of the increased average invested capital resulting from the acquisition of CSRA.

LOGO

†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. See Appendix A for additional information.

30     General Dynamics 2019 Proxy Statement


Compensation Discussion and Analysis

EXECUTIVE COMPENSATION PHILOSOPHY

Our management team delivers shareholder returns through disciplined execution on backlog, efficient cash-flowcash 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 principlesmetrics 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, NEO performance is assessed based on 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.

General Dynamics 2017 Proxy Statement     27


Compensation Discussion and Analysis


COMPANY PERFORMANCE HIGHLIGHTS

Shareholder Value.  In 2016, Ultimately, the company’s commitmentpay delivered to operational excellence delivered another year of value creation for shareholders. The success of our approach under Ms. Novakovic’s leadershipNEOs is evident inbased on our strong operating results. We balance our focus on operations with a thoughtful capital deployment strategy. As stewards of your capital, in 2016 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 19th 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.

Financial Performance Summary.  In 2016, 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. In the fourth 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*

LOGOlong-standing pay-for-performance philosophy.

 

    Earnings from Continuing Operations                Operating Margin

LOGO

LOGO

    Return on Invested Capital**            Free Cash Flow from Operations**

LOGO

LOGO

*

Dividends are paid quarterly.

**

See Appendix B for a discussion of thesenon-GAAP measures and a reconciliation to their more directly comparable GAAP measures.

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.

CEO Compensation Allocation for 2016*Other NEO Compensation Allocation for 2016*

LOGO

LOGO

*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:

Key Components of Pay

2015 Benchmark

2016 Benchmark

2017 Benchmark

Base

Salary

•    Cash

Not to exceed the market median of our peer group

Annual

Incentive

•    Cash

Peer medianEach NEO’s target is established using market data from our peer group and is set as a percentage of base salary and paid based upon a business and individual achievement scorecard

Long-

Term

Incentive

•    PRSUs

•    Restricted Stock

•    Stock Options

Targeted at peer median;

Indexed to total cash compensation

Committee decides LTI awards in a range in accordance with individual assessments, business performance and market benchmarks

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.

Financial PerformanceOur Executive Compensation Governance Practices

Metrics

2016 Target

2016 Actual

2016
Achievement

2015 Actual

 

Earnings from Continuing

Operations

$2.89 billion  $3.06 billion  Exceeded  $2.97 billion  

Free Cash Flow from

Operations

$1.49 billion  $1.81 billion  Exceeded  $1.93 billion  

Return on Invested Capital

15.3%*  18.1%**Exceeded  17.4%**
*Represents a target three-year ROIC performance measure applicable to PRSUs. ROIC excludes accumulated other comprehensive income (AOCI) because changes in AOCI are not reflective of company performance or a result of management’s decision making regarding the business.
**Represents one-year ROIC performance.

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 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 strongest in our peer group. The PRSUs granted in 2015 remain subject 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.

Executive Compensation

Program Changes in 2016

Description/Rationale

Eliminated legacy excise taxgross-ups

    We ended the practice of providing new executives with excise taxgross-ups in 2009

•    In 2016, remaining executives with taxgross-ups were asked to sign new agreements removing that provision

•    This change further aligns our compensation program with market best practices

Implemented target bonuses as a percent of base salary

•    As part of our continued effort to use best practices, this year we established NEO bonus targets and maximums as a percentage of base salary

•    This change further aligns our compensation program with market best practices

Adopted LTI grant guidelines for NEOs

•    For equity grants made in March 2017, the Committee used LTI guidelines to determine the value of the awards

•    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

General Dynamics 2017 Proxy Statement     33


Compensation Discussion and Analysis


STRONG, INDEPENDENT COMPENSATION GOVERNANCEAND PRACTICES

The executive compensation program is independently governed by the Committee with the support of company management and an independent compensation consultant. The following are characteristics of the program that demonstrate strong governance of the program.

  

Leading Compensation Governance PracticesWhat We Do

  

✓  

 

Each component of pay is targeted to the median of the peer group

100% independent Compensation Committee

 

 

✓  

 

The value of long-term incentives that are ultimately earned is based on our future, multi-year performance and shareholder value creation

Independent compensation consultant reporting to the Compensation Committee

 

 

✓  

 

No merit pools for base salaries; they are strictly tied to the peer group median

Director and management engagement with shareholders

 

 

✓  

 

Thoughtfully selected peer group consisting of

Market-leading stock ownership requirements (15x salary for the CEO and 10x salary for the other aerospace and defense firms, with annual Committee review of the groupNEOs)

 

 

✓  

 

Incentive compensation based on scorecards identifying clear, measurable goals with key financial and operational metrics that drive business performance

 

 

✓  

 

Market-leading stock ownership requirements

The value of 15 times base salary for the CEOearned long-term incentives is based on our future performance and 10 times for the other NEOsvalue creation

 

 

✓  

 

Double-trigger change in control arrangements

✓  

Clawback, Anti-hedging and Anti-pledging policies

✓  

Thoughtfully selected peer group consisting of other aerospace and defense firms (and, starting in 2019, other large-cap companies in related industries) with annual Committee review

✓  

Starting in 2019, 50% of the long-term incentive will be delivered in performance-based stock units subject to two metrics, ROIC and Relative TSR

What We Don’t Do

✓  

No single-trigger equity acceleration on change in control

✓  

No excessive perquisites

✓  

No excise tax gross-ups paid in conjunction with a termination as part of a change in control

✓  

No employment agreements with NEOs

 

 

✓  

 

Directors and management engagement with shareholders

✓      

100 percent independent Compensation Committee

✓      

Independent compensation consultant reportingNo merit pools for base salaries; they are tied to the Compensation Committee

✓      

Double-trigger change in control arrangements

✓      

Clawback policy

✓      

Anti-hedging policy

✓      

Anti-pledging policy

✓      

No excise taxgross-ups paid in conjunction with a termination as part of a change in controlpeer group median

 

  

 

34     General Dynamics 20172019 Proxy Statement     31


Compensation Discussion and Analysis


 

 

SHAREHOLDEREXECUTIVENGAGEMENT COMPENSATION GOALSAND OBJECTIVES

At our 2018 annual shareholders’ meeting, approximately 68 percent of the votes cast were in favor of the advisory resolution to approve our company’s executive compensation program. This level of support was a significant decline from the 2017 vote, when approximately 96 percent of the votes cast were in favor of this proposal. In connection with the 2018 annual meeting, we conducted an extensive shareholder outreach campaign through which senior representatives of our Investor Relations, Corporate Governance and Human Resources (including Executive Compensation) groups, supplemented by our Lead Director as appropriate met in-person or by phone with shareholders representing over 50 percent of our outstanding shares of Common Stock to gather feedback on our executive compensation program, operational performance and other business topics.

Based on the feedback received, we concluded that the following two items were of most concern:

The allocation within our long-term incentive compensation plan among performance shares, stock options and restricted stock

The absence of a relative metric applicable to performance shares under our long-term incentive plan

Considering this feedback and the results of the advisory vote on executive compensation at our 2018 annual meeting, senior management and the Committee conducted a comprehensive review of our executive compensation program as applicable to our NEOs. Following this review, significant changes were made as shown below.

Shareholder
Feedback

Changes Made in Response

 

The objectiveA greater proportion of annual equity in the form of PSUs

Starting with 2019 equity awards, annual grants reflect 50 percent PSUs, 30 percent stock options and 20 percent shares of restricted stock.

A relative performance measure should be incorporated into the program

Starting with the 2019 equity awards, a relative Total Shareholder Return (TSR) modifier will be applied against ROIC performance results on performance stock units. The TSR modifier can increase or decrease the PSU payout by as much as one-third depending on the company’s performance ranking relative to the TSRs of the companies in the S&P 500 thus better aligning long-term compensation to the relative stock performance of the company and ensuring alignment with our shareholders.

Peer group should be expanded

The Committee revised the peer group it uses to benchmark executive pay levels. Eight new companies of reasonably similar size, scope and complexity were added, and two companies, Rockwell Collins, Inc. and L-3 Technologies, Inc., were removed. The Committee believes this new peer group of 15 companies is appropriate for our industry and reflects companies with whom we compete for talent.

Revised Peer Group

*Addition for 2019

3M Company*Johnson Controls International plc*Accenture plc*Lockheed Martin CorporationCaterpillar Inc.*Northrop Grumman CorporationCisco Systems, Inc.*Raytheon CompanyDeere & Company*Textron Inc.Eaton Corporation plc*The Boeing CompanyEmerson Electric Co.*United Technologies CorporationHoneywell International Inc.

In the fall of 2018, we continued our shareholder engagement efforts by conducting outreach to holders of approximately 65 percent of our outstanding shares. Once again, our engagement team, comprised of senior management and our Lead Director for select meetings, met with holders representing over 50 percent of our outstanding shares. During these conversations, we discussed the changes made to our executive compensation program isfor 2019 and other matters of importance to incentivize NEOsthe company and shareholders. Overall, the shareholders with whom we engaged expressed strong support for the changes made to achieve strong operational performanceour future pay structure and to align the interestsincreased alignment of each NEOpay with our shareholders. The majority of compensation is equity-based, vests over several yearscompany performance.

32     General Dynamics 2019 Proxy Statement


Compensation Discussion and is tied directly to long-term shareholder value creation. Our NEOs have stock ownership requirements of 10 or 15 times base salary, which strengthens their alignment with our shareholders.Analysis

 

 

THE COMPENSATION PROCESS

The Committee approves and is actively engaged in the design and implementation of the executive compensation program, with the support of the independent compensation consultant and company management. The program is structured to:

Provide market-competitive total target compensation

Compensate executives subject to clear and challenging performance metrics

Align executive compensation with shareholder value creation

Ensure retention and growth for executives in a competitive environment

The program objective of pay for performance is achieved through the use of short- and long-term incentives. The company 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 goals.

SETTING COMPENSATION LEVELSAND EVALUATING PERFORMANCE

Setting compensation for senior executives is a 16-month process that begins in the fall of each year. The first steps in this process focus on establishing the operating goals for the company for the upcoming year. During this phase, the business units develop challenging but achievable goals which then form the basis of the business segment operating plans. In consultation with the chairman and chief executive officer and the chief financial officer, these plans are presented to the Board of Directors early the next year. After review and, where appropriate, adjustment, by the Board, the company operating plan for the year is adopted. 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.

Compensation discussions begin immediately following the execution of the operating plan. Based on company and individual performance for the prior fiscal year, the chairman and chief executive officer calculates and assigns a score to each NEO (other than herself) using a scorecard. The score for the chief executive officer is calculated solely by a review of independent directors. The scores determine the compensation recommendations that are made in the first quarter of the year. In February, the Committee reviews the NEO scorecards, calculates the score for the chief executive officer and reviews the compensation recommendations supported by the scores. As part of this process, the Committee reviews market data to ensure that any base salary increase does not place the NEOs’ annual salary in excess of the 50th percentile of our peer group.

The Committee convenes again in early March to review the final scorecards for the company and approves any base salary increases, annual incentive payments for the prior year’s performance and current-year long-term incentive grants. The Committee reviews, refines and approves compensation for the chairman and chief executive officer in executive session at the March meeting. The Committee approves compensation based 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.

General Dynamics 2019 Proxy Statement     33


Compensation Discussion and Analysis

2018 EVALUATIONAND COMPENSATION PROCESS TIMELINE

November 2017

 Business units present plans to the Chairman and Chief Executive Officer

 The Chairman and Chief Executive Officer, in consultation with Chief Financial Officer and Executive Vice Presidents, establishes company operating goals

February 2018

 Business units present business plans to the Board of Directors

 The Board reviews, adjusts where appropriate, and approves business unit operating goals and adopts the company operating plan

 The company operating plan serves as the financial goals for the annual incentive and long-term incentive

January – February 2019

 Based on achievement against the 2018 operating plan, the Chairman and Chief Executive Officer proposes an annual incentive payout for each NEO other than herself and the Committee evaluates the Chairman and Chief Executive Officer’s performance and reviews peer compensation data in preparation for determining an annual incentive payout for the Chairman and Chief Executive Officer

 The proposed annual incentive payouts for 2018, together with proposed 2019 base salary and long-term incentive grant values, are presented to the Committee on a scorecard for each executive, along with commentary on financial performance accomplishments and any factors not contemplated at the start of the year

 The proposed payouts are based on performance against the company’s operating plan, the difficulty of the operating plan and the individual’s contributions to the success of the operating plan

 The Committee ensures base salary recommendations do not exceed the market 50th percentile

March 2019

 The Committee reviews NEO scorecards and pay recommendations and approves 2019 base salary, 2018 earned annual incentive and 2019 long-term incentive amounts

 The Committee reviews, refines and approves compensation for the Chairman and Chief Executive Officer in executive session

34     General Dynamics 2019 Proxy Statement


Compensation Discussion and Analysis

PEER GROUPAND BENCHMARKINGTOTHE MARKET

Each year the Committee, in consultation with management and with support from its independent compensation consultant, develops a peer group comprised of companies that are:

In similar industries and where General Dynamics competes for business

Likely sources of or competition for executive talent

Reasonably comparable in size, as measured by revenue and market capitalization

Reasonably similar in organizational structure and complexity

Included as peers of some of our peer companies

In 2018, the Committee made material revisions to the peer group to arrive at a peer group of 15 companies. Seven of the nine similarly-sized aerospace and defense companies from the 2017 peer group were retained; two companies were removed: Rockwell Collins, which was acquired by current peer United Technologies, and L-3 due to its smaller size. Eight new companies that met the above-listed criteria were added. 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 reviews and analyzes the peer group annually for reasonableness and alignment with the objectives listed above.

                PEER GROUP COMPANIES*

 

   

Market     
Capitalization     

(in millions)     

      
Revenue     
(in millions)     
  Employee     
Population     
  Peer of Peers

3M Company**

 

  $ 110,949     

 

  $ 32,765     

 

    93,516     

 

  

 

Accenture plc**

 

  $ 108,331     

 

  $ 39,574     

 

  469,000     

 

  

The Boeing Company

 

  $ 183,143     

 

  $ 101,127     

 

  153,000     

 

  

 

Caterpillar Inc.**

 

  $ 74,985     

 

  $ 54,722     

 

  104,000     

 

  

 

Cisco Systems, Inc.**

 

  $ 200,202     

 

  $ 49,330     

 

    74,200     

 

  

 

Deere & Company**

 

  $ 42,783     

 

  $ 37,318     

 

    74,413     

 

  

 

Eaton Corporation plc**

 

  $ 29,757     

 

  $ 21,609     

 

    99,000     

 

  

 

Emerson Electric Co.**

 

  $ 48,128     

 

  $ 17,408     

 

    87,500     

 

  

 

Honeywell International Inc.

 

  $ 97,807     

 

  $ 41,802     

 

  114,000     

 

  

 

Johnson Controls International plc**

 

  $ 27,398     

 

  $ 31,559     

 

  122,000     

 

  

 

Lockheed Martin Corporation

 

  $ 74,474     

 

  $ 53,762     

 

  105,000     

 

  

 

Northrop Grumman Corporation

 

  $ 42,520     

 

  $ 30,095     

 

    85,000     

 

  

 

Raytheon Company

 

  $ 43,640     

 

  $ 27,058     

 

    67,000     

 

  

 

Textron Inc.

 

  $ 11,091     

 

  $ 13,972     

 

    35,000     

 

  

 

United Technologies Corporation

 

  $ 91,933     

 

  $ 66,501     

 

  240,200     

 

  

 

     

General Dynamics

 

  $ 46,558     

 

  $ 36,193     

 

  105,600     

 

   

General Dynamics (Percentile Rank)  

 

  40%  

 

  48%     

 

  65%     

 

   

Peer group data are as of their latest annual filing

**

New addition to peer group

General Dynamics 2019 Proxy Statement     35


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.

LOGO

  *See discussion regarding the 2019 changes to long-term incentive compensation on page 32

Structural Alignment of Pay with Performance.We demonstrate our commitment to aligning compensation with company performance through the following key elements of the executive compensation program:

Executive compensation is linked strongly to the financial and demonstrate thatoperational performance of the company. In 2018, over 90 percent of the CEO’sChairman and Chief Executive Officer’s total compensation was linked to metrics assessing company or stock performance and therefore meaningfully at risk, while over 8580 percent of the other NEONEOs’ compensation was in line with a similar risk profile. A significant amount of the at-risk compensation is variabledelivered through equity: PSUs, stock options and tiedrestricted stock.

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 Chairman and Chief Executive Officer is required to company performance.hold General Dynamics stock with a value at least equal to 15 times base salary. The other NEOs are required to hold General Dynamics stock with a value at least equal to 10 times base salary.

LOGOThe following charts demonstrate the Chairman and Chief Executive Officer’s target compensation mix and other NEOs’ average target compensation mix.

 

2018 CEO Target Compensation Mix

 

 

2018 Other NEO Target Compensation Mix

 

LOGOLOGO LOGOLOGO

 

36     General Dynamics 20172019 Proxy Statement     35


Compensation Discussion and Analysis

 


Linking Pay Levels to the Market and General Dynamics Performance.NEO compensation is generally targeted to the median of the peer group by component and in total. To the extent compensation exceeds targeted levels, it is directly attributable to performance that 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 of pre-established targets.

Setting Challenging Targets Based on Market Conditions. The annual incentive and the PSUs are based on measurable and objective performance metrics. Annual incentive performance targets were set in early 2018 based on backlog, anticipated order activity and expected market conditions. Three-year target goals for the PSUs were set in early 2018 based on our long-term operating plans. Targets were in line with guidance provided to the market by company management.

VAARIABLEANDNNUAL PBERFORMANCE-BASEDASE CSOMPENSATIONALARY

Variable Incentive Compensation

Annual Incentive

Cash
Long-Term Incentive

Performance Restricted Stock Units

(25%)

Restricted Stock

(25%)

Stock Options

(50%)

The Committee has carefully consideredWe pay each NEO a base salary that reflects the value drivers of the companypeer group median (50th percentile) salary. Salaries are reviewed annually, and each business groupincreases, when structuring incentive compensation and has determined to use the following factors and metrics to set compensation for the reasons summarizedthey occur, are driven primarily by changes in the table below. Somemarket. 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 the metrics for the business group executive vice presidents are different, as described below.our base salary is to provide a competitive, fixed-rate of cash compensation.

 

 Component of Compensation 

 Setting Target 
Amounts
 Factors Determining 
Value

 Objectives 

Annual

Incentive

•    Cash

Percentage of

Base Salary Benchmarked to

Peer Group

Median

Earnings from Continuing Operations

Measures company’s ability to maximize profitability and drive shareholder value

Free Cash Flow from Operations

Measures company’s ability to turn operating earnings into cash flow (operating efficiency)

Business Group Performance and Individual Performance

Measures performance against goals that are unique to each business group and individual

Stock Price

Determines value of equity grants realized by executives; aligns executives with shareholders’ interests

Long-Term

Incentive

•    PRSUs

•    Restricted Stock

•    Stock Options

Targeted to Peer Group Median;

Indexed to Total Cash Compensation

Return on Invested Capital

Measures efficient use of capital over three-year performance period for PRSUs

Indexed to Total Cash Compensation

Links long-term incentive grant size to key company financial metrics, such as earnings, free cash flow, revenue, ROIC, and business group performance

 

NAMEAND TITLE

 

  

 

2017 BASE
SALARY

 

   

 

2018  BASE
SALARY

 

  

 

% INCREASE*

 

 

 

Ms. Novakovic

Chairman and Chief Executive Officer

 

  

 

 

 

 

$ 1,585,000

 

 

 

 

  

 

$ 1,585,000

 

  

 

 

 

 

0

 

 

 

 

Mr. Aiken

Senior Vice President and Chief Financial Officer

 

  

 

 

 

 

$    770,000

 

 

 

 

  

 

$    850,000

 

  

 

 

 

 

10.4

 

 

 

 

Mr. Casey

Executive Vice President, Marine Systems

 

  

 

 

 

 

$    780,000

 

 

 

 

  

 

$    800,000

 

  

 

 

 

 

2.6

 

 

 

 

Mr. Roualet

Executive Vice President, Combat Systems

 

  

 

 

 

 

$    780,000

 

 

 

 

  

 

$    800,000

 

  

 

 

 

 

2.6

 

 

 

 

Mr. Johnson

Executive Vice President, Information Technology and Mission Systems

 

 

  

 

 

 

 

$    780,000

 

 

 

 

  

 

$    800,000

 

  

 

 

 

 

2.6

 

 

 

36     General Dynamics 2017 Proxy Statement


Compensation Discussion and Analysis


*Ms. Novakovic’s base salary has remained constant since 2015. For 2018, Mr. Aiken’s 10.4 percent increase, as well as the 2.6 percent increases for each of our three Executive Vice Presidents, were made to align their base pay with the market median.

ANNUAL INCENTIVE COMPENSATION

The NEOs are eligible forto earn an annual incentive paid in cash incentive based on the company’s prior-year performance and for NEOs other than the CEO and CFO, that of their business groups.performance. The incentive is designed to place at risk a significant portion of each NEO’s annualtotal target 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 a

pre-establishedNEO PERFORMANCE METRICS scorecard and makes a determination on the amount of

In 2018, the annual incentive for each NEO was determined initially based on the same two financial metrics: company earnings from continuing operations and free cash flow from operations. Because the executive vice presidents play a major role in the overall success of the company in addition to overseeing their business segment, the Committee believes that may rangethey should be evaluated on similar company-wide metrics as the chief executive officer and the chief financial officer.

General Dynamics 2019 Proxy Statement     37


Compensation Discussion and Analysis

The Committee approved these target goals, in alignment with our annual operating plan, in 2018 and believes these goals were appropriately challenging considering our business outlook at the time. The 2018 earnings from nocontinuing operations target represented a 9.3 percent growth from the 2017 actual performance for this metric, demonstrating significant goal rigor. The 2018 free cash flow from operations goal was set below 2017 actual performance for this metric because of the anticipated operating working capital growth required to support an international wheeled armored vehicle contract with the Canadian government in our Combat Systems segment and the new G500 and G600 aircraft programs in our Aerospace segment.

NEO Annual Targets and Achievement - 2018

Performance Metric

Weighting

Target

Actual

Achievement

Earnings from Continuing Operations

50

$

3,184 million

$

3,358 million

Exceeded

Free Cash Flow from Operations*

50

$

2,830 million

$

2,458 million

Below Target

*

See Appendix A for a discussion of thisnon-GAAP measure.

General Dynamics delivered strong financial results in 2018. Our actual performance in 2018 was above target by 5.5 percent for earnings from continuing operations, reflecting solid performance, but below target for free cash flow from operations. The free cash flow from operations for 2018 was $2.5 billion compared with a target of $2.8 billion or approximately $370 million lower. The modest shortfall versus the free cash flow from operations target was due to delays in payments on the international wheeled armored vehicle contract resulting from diplomatic issues between the Canadian government and its customer on our armored vehicle supply contract referenced above. Absent this issue, we would have exceeded our free cash flow target for 2018.

The annual incentive payouts for 2018 were determined taking into account the company’s outperformance on the earnings from continuing operations goal and the below-target performance on the free cash flow from operations goal. However, the impact of the below-target performance on the free cash flow from operations was tempered somewhat as it resulted from a unique and unexpected diplomatic situation between the Canadian government and its customer on our armored vehicle supply contract and was not reflective of operational issues or management’s deficiency. Ultimately, all of our NEOs exhibited exceptional individual performance and the company delivered solid operational and financial performance in 2018, with all-time highs for revenue, earnings from continuing operations and diluted earnings per share from continuing operations.

Other notable 2018 accomplishments included:

Each of our five segments experienced organic revenue growth. We, once again, achieved double-digit year-over-year growth in diluted earnings per share, which was up 17.4 percent over 2017. We had a book-to-bill ratio of 1:1 on a consolidated basis and ended the year with total backlog of $67.9 billion, up 7.4 percent over 2017.

Our Aerospace segment successfully managed through a new model transition while achieving good order intake, industry leading operating margins and increased deliveries of large cabin aircraft. We achieved FAA certification and began customer deliveries of the all-new G500 business jet. Additionally, we resolved a significant supplier challenge, which will support improved quality and lower costs.

Our Defense businesses demonstrated strong operating performance while continuing to book significant new business. Backlog in the defense segments grew by 11.4 percent over 2017 with each of the segments achieving an organic book-to-bill ratio equal to or greater than 1:1. We embarked on a multi-year capital investment plan to support the substantial growth we anticipate in our Marine Systems segment driven by the Columbia-class submarine program.

With the combination of General Dynamics Information Technology (GDIT) and CSRA, we have created a premier provider of technology solutions and mission services to help customers across defense, intelligence and federal civilian markets advance mission performance and transform operations. Integrating these two businesses has enhanced our ability to develop cost-effective, next-generation technology solutions, leverage our expanded and deep experience across multiple agencies and pursue large-scale enterprise solutions for our customers.

38     General Dynamics 2019 Proxy Statement


Compensation Discussion and Analysis

The below table summarizes the NEO’s targets and the Committee’s determination of annual incentives. Annual incentives for 2018 performance reflect an average decline of more than 11 percent from the prior year.

 

 

  NAMEAND TITLE

 

 

 

 

 

   2018 BASE   
   SALARY   

 

 

 

 

   TARGET   
   INCENTIVE   
    (% OF BASE)   

 

 

 

   MAXIMUM   
   INCENTIVE   
   (% OF BASE)   

 

 

 

 

   TARGET   
   INCENTIVE    

 

 

 

 

 

   MAXIMUM   
   INCENTIVE    

 

 

 

 

   ANNUAL   
   INCENTIVE   
    PAYOUT   

 

 

Ms. Novakovic

 

 

 

$ 1,585,000

 

 

 

170%

 

 

 

340%

 

 

 

$ 2,694,500

 

 

 

$5,389,000

 

 

 

$4,727,000

 

 

Mr. Aiken

 

 

 

$   850,000

 

 

 

100%

 

 

 

200%

 

 

 

$   850,000

 

 

 

$1,700,000

 

 

 

$1,275,000

 

 

Mr. Casey

 

 

 

$   800,000

 

 

 

100%

 

 

 

200%

 

 

 

$   800,000

 

 

 

$1,600,000

 

 

 

$1,344,000

 

 

Mr. Roualet

 

 

 

$   800,000

 

 

 

100%

 

 

 

200%

 

 

 

$   800,000

 

 

 

$1,600,000

 

 

 

$1,288,000

 

 

Mr. Johnson

 

 

 

$   800,000

 

 

 

100%

 

 

 

200%

 

 

 

$   800,000

 

 

 

$1,600,000

 

 

 

$1,000,000

 

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 falls short of expectations or up tocan be earned under this plan is two times the target amount foramount. For performance that exceedsfalls significantly short of the goals.pre-established target, there may be no payout.

LONG-TERM INCENTIVE COMPENSATION

In 2016 we based long-termLong-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(LTI) is provided to NEOs to align management’s interest with that of long-term incentive awards asshareholders. LTI comprises a percentmajor portion of total cashtarget 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 alignsprovided to each NEO. This provides the NEOs with a significant personal stake in the company’s shareholders and provides retention incentiveslong-term success of General Dynamics. By awarding LTI through multi-year, performance-based vesting periods.various types of equity instruments, different elements of shareholder alignment are achieved. The following charts illustrate the allocation of LTI in our 2018 annual grants as well as how our LTI allocation changed for 2019 grants:

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

2018 and Prior

 

LOGONew Long-Term Incentive Allocation

Beginning in 2019

 

General Dynamics 2017 Proxy Statement     37LOGO

LOGO


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.


 

General Dynamics 2019 Proxy Statement     39


Compensation Discussion and Analysis

As shown below, for annual LTI grants awarded in March 2019, the amount of LTI compensation granted to the NEOs was comparatively less than in prior years due to 2018 performance, particularly the company’s cash performance.

 

NAMEAND TITLE*

 

  

 

2018 LTI

GRANT

 

  

 

2019 LTI

GRANT

 

  

 

% DECREASE

 

Ms. Novakovic

 

  $ 14,000,000

 

  $ 12,488,000

 

  10.8%

 

Mr. Aiken

 

  $   3,300,000

 

  $   2,970,000

 

  10.0%

 

Mr. Casey

 

  $   3,220,000

 

  $   2,960,000

 

  8.1%

 

Mr. Roualet

 

  $   3,220,000

 

  $   2,898,000

 

  10.0%

 

*Mr. Johnson retired December 31, 2018, and therefore is not included above.

PERFORMANCE STOCK UNITS

Performance Restricted Stock Units (PSUs) 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 NEOs 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 prior to the end of the applicable performance period immediately forfeit all PSUs that have not vested unless otherwise determined by the Committee.

2016-2018 PSU Achievement.In March 2019, the Committee certified the three-year ROIC achievement for PSUs granted in 2016, against the target established for the 2016 – 2018 performance period. After reviewing company results, the Committee certified our three-year average ROIC of 17.8 percent which was 2.5 percent above the target and translated into a payout of 150 percent of the target number of PSUs granted to each NEO. Because the PSU target did not contemplate the acquisition of CSRA, the Committee excluded the impact of the acquisition from the 2018 ROIC results (see discussion in Appendix A).

2018 PSU GRANT (2018 – 2020 PERFORMANCE CYCLE)

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:

 

For the 2018 – 2020 performance period, the ROIC target was set at 13.4 percent. This target is modestly below the 15.2 percent target of the previous performance period. In setting the target, the Committee considered the company’s 2018 $9.7 billion acquisition of CSRA and the impact that this important investment will have on ROIC results. In particular, the Committee acknowledged the limitations of comparing the ROIC target to prior-period targets and performance due to the significant amount of capital deployed to fund the CSRA acquisition. The acquisition-related indebtedness increased the company’s invested capital, a key component of the ROIC computation, and therefore decreased the ROIC target for the 2018 – 2020 performance period.

The three-year ROIC target is set on the date of grant each year and will release atreflects the endbest judgment of the performance period.

The Committee does not have discretion to reset the target during the three-year performance cycle.at that time.

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 thanThe company operates in a dynamic and competitive environment. As such, the target setestablished each year represents the outlook for grants made inthe upcoming three-year period and may not be comparable to past targets or prior years. Consistent with prior years, thisachievement.

Additionally, the Committee and management believe that the target reflects the multi-year operating plan for the company and takes into accountreflects management’s assessment of future backlog, earningscompany performance and capital deployment. The Committee believes this target is challenging but achievable through continued strong operating performance.

Plan Operation:

Afterneeded investments in the three-year performance period,company’s businesses to support the numberlong-term growth 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:company.

40     General Dynamics 2019 Proxy Statement


Compensation Discussion and Analysis

After the three-year performance period (2018 – 2020), the number of PSUs earned will be determined based on our three-year average ROIC subject to a +/- 2.5 percent collar.

 

ROIC PerformancePRSU Payout After 3 Years from Grant Date
2.5% or more above target150% of target PRSUs
At target100% of target PRSUs
2.5% below target50% of target PRSUs
More than 2.5% below target0% of target PRSUs

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 COMPENSATION PROCESS

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 Performance

Each year, the Committee, with support

PSU Payout After 3 Years 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:Grant Date

 

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.2.5% or more above target

 

Peer Group Companies*

 

  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

150% of December 31, 2016.target PSUs

 

General Dynamics 2017 Proxy Statement     43


Compensation Discussion and AnalysisAt target

 


 

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 one100% of the General Dynamics business groups.target PSUs

 

GENERAL DYNAMICS
AerospaceCombat Systems

•       Gulfstream Aerospace

•       Jet Aviation

•       European Land Systems

•       Land Systems

•       Ordnance and Tactical Systems

2.5% below target

50% of target PSUs

More than 2.5% below target

0% of target PSUs

 

Information Systems and TechnologyMarine Systems

•       Information Technology

•       Mission Systems

•       Bath Iron Works

•       Electric Boat

•       NASSCO

New for 2016, annual incentives for 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 Analysis


Chairman and Chief Executive Officer

Payout interpolated for performance between 2.5% below and 2.5% above target

Relative Total Shareholder Return Metric Beginning in 2019.Starting with the 2019 PSU award, the resulting percentage earned from three-year average ROIC will be subject to a relative TSR modifier, which compares our relative TSR performance to the TSR performance of the S&P 500 to produce the final number of earned shares. The Committee believes that the S&P 500 provides a more comprehensive comparison for our share price performance compared to our compensation peer group, which is a customized benchmark based on a limited number of companies. The relative TSR modifier will increase or decrease the PSU payout by as much asone-third, resulting in a payout range between zero percent and 200 percent of the units granted.

 

Performance MetricWeighting2016 Target2016 Actual

Earnings from Continuing Operations

50%$2,888 million$3,062 million

Free Cash Flow from Operations

50%$1,486 million$1,806 million

Senior Vice President and Chief Financial Officer
         

  Maximum

 Total Payout

 

 

ROIC PERFORMANCE

(AS SHOWN IN THE
CHART ABOVE)

(0 — 150%)

 

   

TSR Modifier

 

       200%     
   Relative TSR Performance

 

  Payout

 

       LOGO       
 LOGO 75th Percentile and Above

 

  133.3%

 

    LOGO
   50th Percentile

 

  100%

 

     
   25th Percentile and Below

 

  66.7%

 

       0%   
  

Payout interpolated for performance between 25th and 75th percentile

  

RESTRICTED STOCK

Restricted stock awards are a form of equity compensation tied to the completion of a service period. This element of executive compensation closely connects NEOs to the company’s stock performance over the vesting period and therefore acts as a retention tool. NEOs who voluntarily resign or are terminated for cause prior to the end of the applicable vesting period forfeit their restricted stock unless otherwise determined by the Committee.

In 2018, the Committee approved the grant of restricted stock to each NEO. The shares are subject to a three-year cliff vesting period (i.e., 100 percent of the shares vest on the third anniversary of the grant). 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 restriction period, NEOs may not sell, transfer, pledge, assign, or otherwise convey their restricted shares. NEOs 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

Stock options are a form of equity compensation linked to the long-term share performance of the company. This element of executive compensation closely connects NEOs to the company’s stock performance over the long term and acts as a retention tool. A stock option gives our NEOs the right to buy up to a specified number of shares of our Common Stock over the term of the option at a predetermined fixed exercise price. A stock option’s exercise price is the average of the high and low share price of our Common Stock on the date of grant.

In March 2018, the Committee approved a grant of stock options to each NEO. The exercise price of these stock options was set at $223.93. The stock options vest as follows: 50 percent of the grant becomes exercisable after two years and 50 percent becomes exercisable after three years. Vested stock options remain exercisable through the options’ expiration date, which occurs on the tenth

 

Performance MetricWeighting2016 Target2016 Actual

Earnings from Continuing Operations

45%$2,888 million$3,062 million

Free Cash Flow from Operations

45%$1,486 million$1,806 million

Meet /Under-run 2016 Budget

5%Operate corporate
headquarters and
finance department below
budgeted costs
Exceeded goal

Complete Two Continuous Improvement Projects

5%Complete Lean Six Sigma
projects
Exceeded goal

Executive Vice President, Marine Systems

General Dynamics 2019 Proxy Statement     41


Compensation Discussion and Analysis

 

Performance MetricWeighting2016 Target2016 Actual

Earnings from Continuing Operations

45%$2,888 million$3,062 million

Free Cash Flow from Continuing Operations

45%$1,486 million$1,806 million

Business Group Financial Metrics

Continuous Improvement Savings

10%$75 million$192 million

Executive Vice President, Combat Systems

anniversary of the grant date. Due to our strenuous stock ownership guidelines (10 times base salary and 15 times for the chief executive officer) stock options must be exercised and held as shares until the ownership requirement is met.

As with restricted stock and PSU 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.

BENEFITSAND PERQUISITES

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 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 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 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 ($275,000 in 2018). 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, Mr. Johnson elected to receive the deferred compensation in a lump sum.

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 2018, 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. Our matching contributions during 2018 for the NEOs are included in footnote (d) to the All Other Compensation column of the Summary Compensation Table.

 

Performance MetricWeighting2016 Target2016 Actual

Earnings from Continuing Operations

45%$2,888 million$3,062 million

Free Cash Flow from Continuing Operations

45%$1,486 million$1,806 million

Business Group Financial Metrics

Continuous Improvement Savings

10%$110 million$170 million

Executive Vice President, Information Systems and Technology

42     General Dynamics 2019 Proxy Statement


Compensation Discussion and Analysis

 

Performance MetricWeighting2016 Target2016 Actual

Earnings from Continuing Operations

45%$2,888 million$3,062 million

Free Cash Flow from Continuing Operations

45%$1,486 million$1,806 million

Business Group Financial Metrics

IS&T Revenue

10%$8,995 million$9,187 million

General Dynamics 2017 Proxy Statement     45


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 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 meetings

Provided regulatory education session with the Committee

Provided information relating to executive compensation matters

Reviewed compensation-related disclosures in the company’s proxy statement

In 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


OTHER CONSIDERATIONS

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

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 2018 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 provide our NEOs perquisites that the Committee believes are reasonable yet competitive. The company provides perquisites to the NEOs for purposes of recruitment, retention and security. We provide perquisites to ensure the security and accessibility of our executives to facilitate the transaction of business. As a reasonableness test, we compare these perquisites to generally accepted corporate practices.

In 2018, the perquisites provided to our NEOs 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.

OTHER CONSIDERATIONS

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 53 of this Proxy Statement.

General Dynamics 2019 Proxy Statement     43


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 2018, at the Committee’s request, Meridian performed the following specific services:

Attended all Committee meetings

Provided regulatory education to 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 Chairman and Chief Executive Officer, 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 chief executive officer. 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), PSUs and unvested shares of restricted stock are not counted in the ownership calculation.

 

Stock Ownership Guidelines
CEO15x Base Salary
NEOs (other than CEO)10x Base Salary

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.

CLAWBACK POLICY

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 USAGEStock Ownership Guidelines

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 and 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.Chief Executive Officer

The table below shows the dilution and one and three-year grant rate for 2014, 2015 and 2016:

15x Base Salary

Other NEOs

 

     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.

TAX CONSIDERATIONS

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.10x Base Salary

 

48     General Dynamics 2017 Proxy Statement



EXECUTIVE COMPENSATION

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

44     General Dynamics 2019 Proxy Statement


Compensation Discussion and Analysis

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 PSUs 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.

CLAWBACK POLICY

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.

TAX CONSIDERATIONS

Section 162(m) of the Internal Revenue Code generally precludes the company from taking a tax deduction for certain executive officers’ compensation in excess of $1 million. Prior to 2018, Section 162(m) exempted “performance-based compensation” from the $1 million limitation. The Tax Cuts and Jobs Act of 2017 repealed this exemption effective for our 2018 year, such that compensation paid to our covered executive officers in excess of $1 million will not be deductible for 2018 or future years, unless the compensation qualifies for transition relief applicable to certain compensation arrangements in place as of November 2, 2017. For our arrangements to which transition relief applies, the Committee will continue to consider the implications of Section 162(m) when taking any actions concerning outstanding performance-based or other compensation.

General Dynamics 2019 Proxy Statement     45


EXECUTIVE COMPENSATION

SUMMARY COMPENSATION

The Summary Compensation Table conforms to requirements of the SEC and shows base salary, annual incentive, equity awards (restricted stock, performance 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 NEOs, 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

YEARSALARY  STOCK
AWARDS (a)
OPTION
AWARDS (a)
NON-EQUITY
INCENTIVE  PLAN
COMPENSATION (b)
CHANGEIN
PENSION
VALUEAND
NONQUALIFIED
DEFERRED
COMPENSATION
EARNINGS (c)
ALL OTHER
COMPENSATION
(d)
TOTAL

Phebe N. Novakovic

Chairman and

Chief Executive Officer


2018 

2017 

2016 


$

1,585,000

1,585,000

1,585,000


$

7,000,052   

6,999,332   

7,079,144   


$

6,999,708 

7,000,390 

7,077,746 


$

4,727,000     

5,300,000     

5,150,000     



$           —     

300,661     

155,239     



$408,494     

316,046     

310,948     



$20,720,254

21,501,429

21,358,077


Jason W. Aiken

Senior Vice President and

Chief Financial Officer


2018 

2017 

2016 


$

830,000

755,000

701,250


$

1,650,364   

1,625,701   

1,490,275   


$

1,649,508 

1,624,228 

1,489,540 


$

1,275,000     

1,386,000     

1,200,000     



$           —     

85,192     

38,464     



$  66,158     

65,619     

139,984     



$ 5,471,030

5,541,740

5,059,513


John P. Casey

Executive Vice President,

Marine Systems


2018 

2017 

2016 


$

795,000

773,750

747,500


$

1,610,057   

1,610,364   

1,642,427   


$

1,609,715 

1,609,342 

1,642,472 


$

1,344,000     

1,404,000     

1,400,000     



$           —     

447,894     

242,463     



$  62,389     

63,650     

64,724     



$ 5,421,161

5,909,000

5,739,586


Mark C. Roualet

Executive Vice President,

Combat Systems


2018 

2017 

2016 


$

795,000

773,750

747,500


$

1,610,057   

1,610,364   

1,619,332   


$

1,609,715 

1,609,342 

1,620,593 


$

1,288,000     

1,404,000     

1,400,000     



$           —     

330,396     

168,004     



$  78,162     

83,926     

69,278     



$ 5,380,934

5,811,778

5,624,707


S. Daniel Johnson

Executive Vice President,

Information Technology and

Mission Systems


2018 

2017 

2016 


$

795,000

766,250

713,750


$

1,560,792   

1,560,519   

1,457,671   


$

1,559,036 

1,559,391 

1,457,274 


$

1,000,000     

1,378,000     

1,250,000     



$           —     

—     

—     



$  73,001     

52,508     

54,297     



$ 4,987,829

5,316,668

4,932,992


(a)

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,Compensation – Stock Compensation. 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 NEO. 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, 2018, included in our Annual Report on Form10-K filed with the SEC on February 13, 2019. Stock Awards include awards of restricted stock and performance stock units (PSUs). The grant date value of 2018 PSUs for each NEO, which assumes a 150 percent maximum payout, is $5,250,039 for Ms. Novakovic; $1,237,773 for Mr. Aiken; $1,207,543 for Mr. Casey; $1,207,543 for Mr. Roualet; and $1,170,594 for Mr. Johnson.

(b)

Payments are reported for the fiscal year in which the related services were rendered, although the actual payments are made in the succeeding year.

(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 benefits. The value doesbenefits for each of the NEOs and do not reflect a current cash cost to General Dynamicsthe company or, necessarily, the pension benefit that an executive would receive, since that is determined by a numberreceive. Pension benefits for NE0s were frozen as of factors, including length of service, age at retirementDecember 31, 2013. Negative changes in pension value were excluded from this column for the NEOs as follows: for Ms. Novakovic, $(140,339) for 2018; for Mr. Aiken, $(65,402) for 2018; for Mr. Casey, $(155,951) for 2018; and longevity.for Mr. Roualet, $(167,921) for 2018. Mr. Johnson, who retired from the company on December 31, 2018, was not eligible to participate in the company’s pension plans.

 

SUMMARY COMPENSATION TABLE

  NAMEAND

46     General Dynamics 2019 Proxy Statement


Executive Compensation

  PRINCIPAL

  POSITION

YEARSALARY  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


2016 

2015 

2014 


 

 

$

1,585,000

1,583,750

1,560,000


$

— 

4,850,000 

4,250,000 


$

7,079,144   

6,856,781   

6,460,752   


$

7,077,746 

6,855,267 

6,464,027 


$

5,150,000


$

155,239

394,888


$

310,948

278,306

258,417


$

21,358,077

20,424,104

19,388,084


Jason W. Aiken

Senior Vice President and Chief Financial Officer


2016 

2015 

2014 


$

701,250

662,500

625,000


$


900,000 

600,000 


$

1,490,275   

1,344,547   

1,249,888   


$

1,489,540 

1,345,267 

1,249,895 


$

1,200,000


$

38,464

106,112


$

139,984

58,305

1,281,747


$

5,059,513

4,310,619

5,112,642


John P. Casey

Executive Vice President, Marine Systems


2016 

2015 

2014 


$

747,500

716,250

685,000


$

— 

1,020,000 

900,000 


$

1,642,427   

1,299,410   

1,249,888   


$

1,642,472 

1,300,360 

1,253,914 


$

1,400,000


$

242,463

720,069


$

64,724

58,204

59,862


$

5,739,586

4,394,224

4,868,733


Mark C. Roualet

Executive Vice President, Combat Systems


2016 

2015 

2014 


$

747,500

713,750

678,750


$

— 

995,000 

900,000 


$

1,619,332   

1,299,410   

1,047,568   


$

1,620,593 

1,300,360 

1,048,370 


$

1,400,000


$

168,004

490,084


$

69,278

67,230

353,422


$

5,624,707

4,375,750

4,518,194


S. Daniel Johnson

Executive Vice President, Information Systems and Technology


2016 

2015 


$

713,750

680,000


$

— 

850,000 


$

1,457,671   

1,236,491   


$

1,457,274 

1,235,342 


$

1,250,000


$

 —


$

54,297

44,752


$

4,932,992

4,046,585


(d)

All Other Compensation for 2018 includes the following items:

(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 2016 performance were made under the General Dynamics Corporation Executive Annual Incentive Plan and are shown in theNon-Equity Incentive Plan Compensation column.

   

 

ALL OTHER COMPENSATION

 

 

  NAME

  

REIMBURSEMENT
OF TAXES 
(1)

   

RETIREMENT PLAN
CONTRIBUTIONS AND
ALLOCATIONS 
(2)

   

TERM LIFE INSURANCE
PAYMENTS

   

PERQUISITES (3)  

 

  Ms. Novakovic

 

 

   

 

 

$1,773

 

 

 

 

 

   

 

 

$48,200

 

 

 

 

 

   

 

 

$24,793

 

 

 

 

 

   

 

 

$333,728

 

 

 

 

 

  Mr. Aiken

 

 

   

 

 

$3,337

 

 

 

 

 

   

 

 

$31,900

 

 

 

 

 

   

 

 

$  4,471

 

 

 

 

 

   

 

 

$  26,450

 

 

 

 

 

  Mr. Casey

 

 

   

 

 

$2,857

 

 

 

 

 

   

 

 

$32,100

 

 

 

 

 

   

 

 

$12,764

 

 

 

 

 

   

 

 

$  14,668

 

 

 

 

 

  Mr. Roualet

 

 

   

 

 

$3,590

 

 

 

 

 

   

 

 

$32,100

 

 

 

 

 

   

 

 

$  8,811

 

 

 

 

 

   

 

 

$  33,661

 

 

 

 

 

  Mr. Johnson

 

 

   

 

 

 

$1,794

 

 

 

 

 

 

 

   

 

 

 

$32,100

 

 

 

 

 

 

 

   

 

 

 

$18,555

 

 

 

 

 

 

 

   

 

 

 

$  20,552

 

 

 

 

 

 

 

(1)

Reflects amounts reimbursed for the payment of taxes associated with a company-provided dining room benefit. All employees at our corporate headquarters receive this dining room benefit and associated tax reimbursement.

(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 NEOs in 2018, which for one or more NEOs is in the aggregate equal to or greater than $10,000, were as follows: financial planning and tax preparation services, home security systems, spousal meals and travel, 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 for a specific NEO were as follows: Ms. Novakovic — $258,503 related to personal travel on company aircraft, and $50,608 related to a home security system for Ms. Novakovic. The aggregate incremental cost to General Dynamics for Ms. Novakovic’s personal travel aboard aircraft owned by the company (products of subsidiary Gulfstream Aerospace), as required by the Board to help ensure Ms. Novakovic’s security and accessibility, is calculated based on the following variable operating costs to the company: fuel costs, trip-related maintenance expenses, landing fees, trip-related hangar and parking fees,on-board catering expenses and crew expenses. No additional direct operating cost is incurred if a family member accompanies an executive on a flight. The aggregate incremental cost to the company for the provision of home security systems represents the amounts paid by the company to third parties for the installation, servicing and monitoring of the systems.

(b)

The amounts reported in the Stock Awards and the Option Awards columns reflect aggregate grant date fair value computed in accordance with FASB 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 recognized by the named executive officer. Assumptions used in the calculation of these amounts are included in Note O to our audited financial statements for the fiscal year ended December 31, 2016, included in our Annual Report on Form10-K filed with the SEC on February 6, 2017. Stock Awards include awards of restricted stock and performance restricted stock units (PRSUs). The maximum grant date value of 2016 PRSUs for each named executive officer, which assumes a 150 percent maximum payout, is $5,309,290 for Ms. Novakovic; $1,117,638 for Mr. Aiken; $1,231,752 for Mr. Casey; $1,214,499 for Mr. Roualet; and $1,093,185 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 benefits for each of the named executive officers and do not reflect a current cash cost to the company or, necessarily, the pension benefit that an executive would receive. Pension benefits for named executive officers were frozen as of December 31, 2013. Negative changes in pension value were excluded from this column for the named executive officers as follows: for Ms. Novakovic, $(40,533) for 2015; for Mr. Aiken, $(24,600) for 2015; for Mr. Casey, $(30,414) for 2015; and for Mr. Roualet, $(51,485) for 2015. Mr. Johnson is not eligible to participate in the company’s pension plans.

General Dynamics 2017 Proxy Statement     49

General Dynamics 2019 Proxy Statement     47


Executive Compensation


 

(d)

All Other Compensation for 2016 includes the following items:

   

 

ALL OTHER COMPENSATION

 

 

  NAME

 

  

REIMBURSEMENT
OF TAXES
(1)

 

   

RETIREMENT PLAN
CONTRIBUTIONS AND
ALLOCATIONS 
(2)

 

   

TERM LIFE INSURANCE
PAYMENTS

 

   

PERQUISITES (3) 

 

 

 

  Ms. Novakovic

 

  

 

$

 

 

1,894

 

 

 

 

  

 

$

 

 

43,625

 

 

 

 

  

 

$

 

 

16,253

 

 

 

 

  

 

$

 

 

249,176

 

 

 

 

 

  Mr. Aiken

 

  

 

$

 

 

11,779

 

 

 

 

  

 

$

 

 

25,425

 

 

 

 

  

 

$

 

 

4,471

 

 

 

 

  

 

$

 

 

98,309

 

 

 

 

 

  Mr. Casey

 

  

 

$

 

 

3,200

 

 

 

 

  

 

$

 

 

26,425

 

 

 

 

  

 

$

 

 

12,764

 

 

 

 

  

 

$

 

 

22,335

 

 

 

 

 

  Mr. Roualet

 

  

 

$

 

 

3,339

 

 

 

 

  

 

$

 

 

26,425

 

 

 

 

  

 

$

 

 

8,811

 

 

 

 

  

 

$

 

 

30,703

 

 

 

 

 

  Mr. Johnson

 

  

 

$

 

 

174

 

 

 

 

  

 

$

 

 

21,865

 

 

 

 

  

 

$

 

 

18,555

 

 

 

 

  

 

$

 

 

13,703

 

 

 

 

2018 EQUITY-BASED AWARDS

(1)

Reflects amounts reimbursed for the payment of taxes associated with a company-provided dining room benefit. All employees at our corporate headquarters receive this dining room benefit and associated tax reimbursement. For Mr. Aiken, the amount also reflects reimbursement for the payment of taxes of $8,252 in connection with his 2014 relocation.

(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 2016, 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 – $118,299 related to personal travel on company aircraft, and $106,649 related to a home security system installed at Ms. Novakovic’s personal residence; and Mr. Aiken – $57,889 related to relocation costs incurred by the company in 2016 for Mr. Aiken’s relocation to the company’s headquarters in 2014. The aggregate incremental cost to General Dynamics for Ms. Novakovic’s personal travel aboard aircraft owned by the company (products of subsidiary Gulfstream Aerospace Corporation), as required by the Board to help ensure Ms. Novakovic’s security and accessibility, is calculated based on the following variable operating costs to the company: fuel costs, trip-related maintenance expenses, landing fees, trip-related hangar and parking fees,on-board catering expenses and crew expenses. No additional direct operating cost is incurred if a family member accompanies an executive on a flight. The aggregate incremental cost to the company for the provision of home security systems represents the amounts paid by the company to third parties for the installation, servicing and monitoring of the systems. The aggregate incremental cost to the company for relocation represents moving expenses, temporary housing and closing and related costs for the purchase of a home.

50     General Dynamics 2017 Proxy Statement


Executive Compensation


2016 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 2016 for the named executive officers. The table includes the grant date of each equity award, the number of shares of restricted stock, PRSUs

General Dynamics’ long-term compensation for senior executives, including the NEOs, consists of equity awards in the form of restricted stock, PSUs and stock options. The following table provides information on the equity awards in 2018 for the NEOs. The table includes the grant date of each equity award, the number of shares of restricted stock, PSUs 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 PSUs and set the exercise price for stock options.

GRANTSOF PLAN-BASED AWARDSIN FISCAL YEAR 2018

 

 

  NAME

 

 

GRANT
DATE

 

  

DATEOF
COMPENSATION
COMMITTEE
ACTION

 

  

ESTIMATED POSSIBLE PAYOUTS  UNDER

NON-EQUITY INCENTIVE  PLAN AWARDS (A)

   

 

 

 

ESTIMATED FUTURE PAYOUTS UNDER

EQUITY INCENTIVE PLAN AWARDS (B)

   

ALL OTHER
STOCK
AWARDS:
NUMBER OF
SHARESOF
STOCKOR
UNITS

(C)

 

   

ALL OTHER
OPTION
AWARDS:
NUMBEROF
SECURITIES
UNDERLYING
OPTIONS

 

   

EXERCISE
OR BASE
PRICEOF
OPTION
AWARDS

(D)

 

   

GRANT DATE
FAIR VALUE
OF STOCK
AND OPTION
AWARDS

(E)

 

 
 

THRESHOLD

 

   

TARGET

 

   

MAXIMUM

 

   

THRESHOLD

 

   

TARGET

 

   

MAXIMUM

 

 
  Ms. Novakovic                0    $2,694,500    $5,389,000               
  3/7/18   3/6/18         0    15,630    23,445    15,630           $7,000,052 
  3/7/18   3/6/18                         186,460   $223.93    6,999,708 
  Mr. Aiken                0    $   850,000    $1,700,000               
  3/7/18   3/6/18         0    3,685    5,527    3,685           $1,650,364 
  3/7/18   3/6/18                         43,940   $223.93    1,649,508 
  Mr. Casey                0    $   800,000    $1,600,000               
  3/7/18   3/6/18         0    3,595    5,392    3,595           $1,610,057 
  3/7/18   3/6/18                         42,880   $223.93    1,609,715 
  Mr. Roualet                0    $   800,000    $1,600,000               
  3/7/18   3/6/18         0    3,595    5,392    3,595           $1,610,057 
  3/7/18   3/6/18                         42,880   $223.93    1,609,715 
  Mr. Johnson                0    $   800,000    $1,600,000               
  3/7/18   3/6/18         0    3,485    5,227    3,485           $1,560,792 
   3/7/18   3/6/18                                  41,530   $223.93    1,559,036 
(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 theNon-Equity Incentive Plan Awards column.

(b)

These amounts relate to PSUs granted in 2018. Each PSU represents the right to receive a share of Common Stock upon release of the PSU. The exact number of PSUs that may be earned is determined based upon a performance metric set by the Compensation Committee, which for 2018 grants is the company’s ROIC over the three-year period from 2018-2020, and can range from 0 to 150 percent of the PSUs originally awarded. Dividend equivalents accrue on PSUs during the performance period and are subject to the same vesting conditions based upon performance. For PSUs granted in 2018, the PSUs 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 PSUs, the grant notdate fair value is calculated based upon the closing price, to value the restricted stock and PRSUs and set the exercise price for stock options.

GRANTSOF PLAN-BASED AWARDSIN FISCAL YEAR 2016 

  NAME

 

 

GRANT
DATE

 

  

DATEOF
COMPENSATION
COMMITTEE
ACTION

 

  

ESTIMATED POSSIBLE PAYOUTS UNDER

NON-EQUITY INCENTIVE PLAN AWARDS (A)

   

 

 

 

 

 

ESTIMATED FUTURE PAYOUTS UNDER
EQUITY INCENTIVE PLAN AWARDS (B)

   

ALL OTHER
STOCK
AWARDS:
NUMBER OF
SHARESOF
STOCKOR
UNITS

(C)

 

   

ALL OTHER
OPTION
AWARDS:
NUMBEROF
SECURITIES
UNDERLYING
OPTIONS

 

   

EXERCISE
OR BASE
PRICEOF
OPTION
AWARDS

(D)

 

   

GRANT DATE
FAIR VALUE
OF STOCK
AND OPTION
AWARDS

(E)

 

 
   

THRESHOLD

 

   

TARGET

 

   

MAXIMUM

 

   

THRESHOLD

 

   

TARGET

 

   

MAXIMUM

 

         
  Ms. Novakovic                0   $2,694,500   $5,389,000               
  3/2/16   3/1/16         0    26,055    39,082    26,055           $7,079,144 
  

 

3/2/16

 

 

 

  

 

3/1/16

 

 

 

        

 

 

 

 

   

 

 

 

 

   

 

 

 

 

   

 

 

 

 

   

 

320,260

 

 

 

  $

 

135.85

 

 

 

   

 

7,077,746

 

 

 

  Mr. Aiken                0   $710,000   $1,420,000               
  3/2/16   3/1/16         0    5,485    8,227    5,485           $1,490,275 
  

 

3/2/16

 

 

 

  

 

3/1/16

 

 

 

        

 

 

 

 

   

 

 

 

 

   

 

 

 

 

   

 

 

 

 

   

 

67,400

 

 

 

  $

 

135.85

 

 

 

   

 

1,489,540

 

 

 

  Mr. Casey                0   $755,000   $1,510,000               
  3/2/16   3/1/16         0    6,045    9,067    6,045           $1,642,427 
  

 

3/2/16

 

 

 

  

 

3/1/16

 

 

 

        

 

 

 

 

   

 

 

 

 

   

 

 

 

 

   

 

 

 

 

   

 

74,320

 

 

 

  $

 

135.85

 

 

 

   

 

1,642,472

 

 

 

  Mr. Roualet                0   $755,000   $1,510,000               
  3/2/16   3/1/16         0    5,960    8,940    5,960           $1,619,332 
  

 

3/2/16

 

 

 

  

 

3/1/16

 

 

 

        

 

 

 

 

   

 

 

 

 

   

 

 

 

 

   

 

 

 

 

   

 

73,330

 

 

 

  $

 

135.85

 

 

 

   

 

1,620,593

 

 

 

  Mr. Johnson                0   $725,000   $1,450,000               
  3/2/16   3/1/16         0    5,365    8,047    5,365           $1,457,671 
   

 

3/2/16

 

 

 

  

 

3/1/16

 

 

 

                 

 

 

 

 

   

 

 

 

 

   

 

 

 

 

   

 

 

 

 

   

 

65,940

 

 

 

  $

 

135.85

 

 

 

   

 

1,457,274

 

 

 

(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.target payout amount.

(b)

These amounts relate to PRSUs granted in 2016. 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 2016 grants is the company’s return on invested capital over the three-year period from 2016-2018, 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 2016, 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 approximately four 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 date fair value is calculated based upon the target payout amount.

General Dynamics 2017 Proxy Statement     51


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 2016. 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 in 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 2016 
   

 

OPTION AWARDS

 

       

STOCK AWARDS

 

 

  NAME

 

  

NUMBER OF
SHARES
ACQUIRED ON
EXERCISE

 

   

VALUE REALIZED
ON EXERCISE

 

       

NUMBER OF
SHARES
ACQUIRED ON
VESTING

 

   

VALUE REALIZED
ON VESTING

 

 

  Ms. Novakovic

 

   

 

                97,120

 

 

 

  $

 

6,815,882

 

 

 

     

 

                12,130

 

 

 

  $

 

1,643,130

 

 

 

  Mr. Aiken

 

   

 

11,945

 

 

 

  $

 

814,530

 

 

 

     

 

2,000

 

 

 

  $

 

270,920

 

 

 

  Mr. Casey

 

   

 

127,385

 

 

 

  $

 

12,172,583

 

 

 

     

 

5,390

 

 

 

  $

 

730,129

 

 

 

  Mr. Roualet

 

   

 

79,680

 

 

 

  $

 

6,977,199

 

 

 

     

 

3,640

 

 

 

  $

 

493,074

 

 

 

  Mr. Johnson

 

   

 

34,650

 

 

 

  $

 

1,230,430

 

 

 

        

 

3,520

 

 

 

  $

 

476,819

 

 

 

52     General Dynamics 2017 Proxy Statement


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, 2016. 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, 2016.

OUTSTANDING EQUITY AWARDSAT 2016 FISCAL YEAR-END 
   OPTION AWARDS   STOCK AWARDS 
  NAME  NUMBEROF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
EXERCISABLE
   NUMBEROF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
UNEXERCISABLE (a)
   OPTION
EXERCISE
PRICE
   OPTION
EXPIRATION
DATE
   

NUMBER
OF SHARES

OF STOCK

OR UNITS
THAT
HAVE NOT

VESTED (b)

   

MARKET VALUE
OF SHARESOF
STOCKOR

UNITS THAT
HAVE NOT
VESTED

   EQUITY INCENTIVE
PLAN AWARDS:
NUMBEROF
UNEARNED
SHARES, UNITS
OR OTHER RIGHTS
THAT HAVE NOT
VESTED (C)
   EQUITY INCENTIVE
PLAN AWARDS:
MARKETOR
PAYOUT VALUEOF
UNEARNED
SHARES, UNITS
OR OTHER RIGHTS  
THAT HAVE
NOT VESTED
 

  Ms. Novakovic

           256,463   $44,280,902    52,394    $9,046,348   
       320,260    $135.85    3/1/2026         
       248,830    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         
   89,720        71.01    3/6/2019         
  Mr. Aiken           31,878    $5,504,055    10,655   $1,839,692   
       67,400    $135.85    3/1/2026         
       48,830    136.78    3/3/2025         
   90,180        112.40    3/4/2021         
   28,890        67.70    3/5/2020         
   21,500        71.01    3/6/2019         

  Mr. Casey

           50,201    $8,667,705    11,052    $1,908,238   
       74,320    $135.85    3/1/2026         
       47,200    136.78    3/3/2025         
   90,470        112.40    3/4/2021         
   69,895        67.70    3/5/2020         
  Mr. Roualet           48,430    $8,361,924    10,966    $1,893,390   
       73,330    $135.85    3/1/2026         
       47,200    136.78    3/3/2025         
   75,640        112.40    3/4/2021         
   68,650        70.08    3/19/2020         
   59,460        67.70    3/5/2020         

  Mr. Johnson

           24,436    $4,219,120    10,124    $1,748,010   
       65,940    $135.85    3/1/2026         
        44,840    136.78    3/3/2025                     

OPTION EXERCISESAND STOCK VESTED

The following table shows the stock options exercised by the NEOs and restricted stock released to them during 2018. 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 2018 
   

 

OPTION AWARDS

 

       

STOCK AWARDS

 

 

  NAME

  

NUMBER OF
SHARES
ACQUIRED ON
EXERCISE

   

VALUE REALIZED
ON EXERCISE

   ��   

NUMBER OF
SHARES
ACQUIRED ON
VESTING

   

VALUE REALIZED
ON VESTING

 

  Ms. Novakovic

 

   

 

54,220  

 

 

 

   

 

$8,496,140

 

 

 

     

 

127,717  

 

 

 

   

 

 

$26,669,365

 

 

 

 

 

  Mr. Aiken

 

   

 

28,890  

 

 

 

   

 

$4,553,616

 

 

 

     

 

24,811  

 

 

 

   

 

$  5,182,508

 

 

 

  Mr. Casey

 

   

 

45,000  

 

 

 

   

 

$3,610,433

 

 

 

     

 

24,550  

 

 

 

   

 

$  5,124,063

 

 

 

  Mr. Roualet

 

   

 

3,585  

 

 

 

   

 

$   562,813

 

 

 

     

 

21,795  

 

 

 

   

 

$  4,567,580

 

 

 

  Mr. Johnson

 

   

 

77,810  

 

 

 

   

 

$4,938,375

 

 

 

        

 

13,654  

 

 

 

   

 

$  2,915,172

 

 

 

48     General Dynamics 2019 Proxy Statement


Executive Compensation

OUTSTANDING EQUITY AWARDS

The following table provides information on outstanding stock option and stock awards held by the NEOs as of December 31, 2018. The table shows the number of stock options that an NEO 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 and PSUs that are still subject to the restriction period or the performance period (i.e., have not vested). For restricted stock and PSUs, the market value is based on the closing price of the company’s Common Stock on December 31, 2018.

OUTSTANDING EQUITY AWARDSAT 2018 FISCAL YEAR-END

 

   OPTION AWARDS (a)  STOCK AWARDS

  NAME

 

  

NUMBEROF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
EXERCISABLE

 

  

NUMBEROF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
UNEXERCISABLE (a)

 

  

OPTION
EXERCISE
PRICE

 

  

OPTION
EXPIRATION
DATE

 

  

NUMBER
OF SHARES
OF STOCK
OR UNITS
THAT
HAVE NOT
VESTED (b
)

 

  

MARKET VALUE
OF SHARESOF
STOCKOR
UNITS THAT
HAVE NOT
VESTED

 

  

EQUITY INCENTIVE
PLAN AWARDS:
NUMBEROF
UNEARNED
SHARES, UNITS
OR OTHER RIGHTS
THAT HAVE NOT
VESTED (c)

 

  

EQUITY INCENTIVE
PLAN AWARDS:
MARKETOR
PAYOUT VALUE OF
UNEARNED
SHARES, UNITS
OR OTHER RIGHTS  

THAT HAVE
NOT VESTED

 

  Ms. Novakovic

                85,005    $13,363,636     62,089    $9,761,012 
        186,460    $223.93     3/6/2028            
        211,620    191.71     2/28/2027            
    160,130    160,130    135.85     3/1/2026            
    248,830        136.78     3/3/2025            
    466,380        112.40     3/4/2021            
    

 

733,000

 

 

    

 

 

 

    

 

67.70

 

 

 

    

 

3/5/2020

 

 

            
  Mr. Aiken                18,325    $2,880,873     13,881    $2,182,232 
        43,940    $223.93     3/6/2028            
        49,100    191.71     2/28/2027            
    33,700    33,700    135.85     3/1/2026            
    48,830        136.78     3/3/2025            
    

 

90,180

 

 

    

 

 

 

    

 

112.40

 

 

 

    

 

3/4/2021

 

 

            

  Mr. Casey

                18,590    $2,922,534     14,337    $2,253,920 
        42,880    $223.93    3/6/2028            
        48,650    191.71    2/28/2027            
    37,160    37,160    135.85    3/1/2026            
    47,200        136.78    3/3/2025            
    

 

45,470

 

 

    

 

 

 

    

 

112.40

 

 

    

 

3/4/2021

 

 

            
  Mr. Roualet                18,505    $2,909,171     14,248    $2,239,928 
        42,880    $223.93     3/6/2028            
        48,650    191.71     2/28/2027            
    36,665    36,665    135.85     3/1/2026            
    47,200        136.78     3/3/2025            
    75,640        112.40     3/4/2021            
    

 

65,065

 

 

    

 

 

 

    

 

70.08

 

 

 

    

 

3/19/2020

 

 

            

  Mr. Johnson

                17,440    $2,741,742     13,376    $2,102,841 
        41,530    $223.93     3/6/2028            
        47,140    191.71     2/28/2027            
     

 

 

 

    

 

32,970

 

 

    

 

135.85

 

 

    

 

3/1/2026

 

 

                        
(a)

Of the 186,460 stock options held by Ms. Novakovic with an exercise price of $223.93, 93,230 will become exercisable on March 7, 2020, and 93,230 will become exercisable on March 7, 2021. Of the 211,620 stock options held by Ms. Novakovic with an exercise price of $191.71, 105,810 became exercisable on March 1, 2019, and 105,810 will become exercisable on March 1, 2020. Of the 320,260 stock options held by Ms. Novakovic with an exercise price of $135.85, 160,130 will become exercisable on March 2, 2018, and 160,130 will become exercisable on March 2, 2019. Of the 248,830 stock options held by Ms. Novakovic with an exercise price of $136.78, 124,415 became exercisable on March 4, 2017, and 124,415 will become exercisable on March 4, 2018.

Of the 67,400 stock options held by Mr. Aiken with an exercise price of $135.85, 33,700 will becomethe remaining 160,130 stock options became exercisable on March 2, 2018, and 33,7002019.

Of the 43,940 stock options held by Mr. Aiken with an exercise price of $223.93, 21,970 will become exercisable on March 7, 2020, and 21,970 will become exercisable on March 7, 2021. Of the 49,100 stock options held by Mr. Aiken with an exercise price of $191.71, 24,550 became 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, the remaining 33,700 stock options became exercisable on March 2, 2019.

Of the 42,880 stock options held by Mr. Casey with an exercise price of $223.93, 21,440 will become exercisable on March 7, 2020, and 21,440 will become exercisable on March 7, 2021. Of the 48,650 stock options held by Mr. Casey with an exercise price of $191.71, 24,325 became 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, the remaining 37,160 stock options became exercisable on March 2, 2019.

Of the 42,880 stock options held by Mr. Roualet with an exercise price of $223.93, 21,440 will become exercisable on March 7, 2020, and 21,440 will become exercisable on March 7, 2021. Of the 48,650 stock options held by Mr. Roualet with an exercise price of $191.71, 24,325 became 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, the remaining 36,665 stock options became exercisable on March 2, 2019.

General Dynamics 2019 Proxy Statement     49


Executive Compensation

Of the 41,530 stock options held by Mr. Johnson with an exercise price of $223.93, 20,765 will become exercisable on March 7, 2020, and 20,765 will become exercisable on March 7, 2021. Of the 47,140 stock options held by Mr. Johnson with an exercise price of $191.71, 23,570 became exercisable on March 1, 2019, and 23,570 will become exercisable on March 1, 2020. Of the 32,970 stock options held by Mr. Johnson with an exercise price of $135.85, the remaining 32,970 stock options became 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, 2017, and 24,415 will become exercisable on March 4, 2018.

Of the 74,320 stock options held by Mr. Casey with an exercise price of $135.85, 37,160 will become 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, 2017, and 23,600 will become exercisable on March 4, 2018.

Of the 73,330 stock options held by Mr. Roualet with an exercise price of $135.85, 36,665 will become 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, 2017, and 23,600 will become exercisable on March 4, 2018.

Of the 65,940 stock options held by Mr. Johnson with an exercise price of $135.85, 32,970 will become exercisable on 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 will become exercisable on March 4, 2017, and 22,420 will become exercisable on March 4, 2018.

 

(b)

General DynamicsFor awards made prior to 2017, Proxy Statement     53shares of restricted stock were released to participants on the first day of January on which the New York Stock Exchange is open for business of the fourth calendar year following the calendar year in which the grant date occurs. Beginning with awards of restricted stock in 2017, shares release to participants on the first day on which the New York Stock Exchange is open for business after the third anniversary of the day of grant. PSUs that are earned release following certification by the Compensation Committee of the applicable performance result.


Executive Compensation

Of the 85,005 restricted shares held by Ms. Novakovic, 25,065 restricted shares were released on January 2, 2019, with a market value of $3,901,117; 26,055 restricted shares will be released on January 2, 2020; 18,255 restricted shares will be released on March 2, 2020; 15,630 restricted shares will be released on March 8, 2021.

Of the 18,325 restricted shares held by Mr. Aiken, 4,915 restricted shares were released on January 2, 2019, with a market value of $764,971; 5,485 restricted shares will be released on January 2, 2020; 4,240 restricted shares will be released on March 2, 2020; 3,685 restricted shares will be released on March 8, 2021.

Of the 18,590 restricted shares held by Mr. Casey, 4,750 restricted shares were released on January 2, 2019, with a market value of $739,290; 6,045 restricted shares will be released on January 2, 2020; 4,200 restricted shares will be released on March 2, 2020; 3,595 restricted shares will be released on March 8, 2021

Of the 18,505 restricted shares held by Mr. Roualet, 4,750 restricted shares were released on January 2, 2019, with market value of $739,290; 5,960 restricted shares will be released on January 2, 2020; 4,200 restricted shares will be released on March 2, 2020; 3,595 restricted shares will be released on March 8, 2021.

Of the 17,440 restricted shares held by Mr. Johnson, 4,520 restricted shares were released on January 2, 2019, with a market value of $703,493; 5,365 restricted shares will be released on January 2, 2020; 4,070 restricted shares will be released on March 2, 2020; 3,485 restricted shares will be released on March 8, 2021.

 


(c)

(b)

Restricted stock and PRSUsRepresents PSUs that have been earned are released to participants on the first day of January on which the New York Stock Exchange is open for business of the fourth calendar year following the calendar year in which the grant date occurs. The number of PRSUs actually released will depend upon dividend equivalents that are paid as additional units during the vesting period.

Of the 256,463 restricted sharesfirst quarter of 2019 or, units held by Ms. Novakovic, 47,860 restricted shares were released on January 3, 2017, with a market valuesubject to satisfaction of $8,398,951; 28,740 restricted shares will be released on January 2, 2018; 25,065 restricted shares will be released on January 2, 2019; 26,055 will be released on January 2, 2020; 70,492 PRSUs were released on January 3, 2017, with a market value of $12,370,641;the performance condition and 58,251 PRSUs will be released on January 2, 2018.

Of the 31,878 restricted shares or units held by Mr. Aiken, 1,880 restricted shares were released on January 3, 2017, with a market value of $329,921; 5,560 restricted shares will be released on January 2, 2018; 4,915 restricted shares will be released on January 2, 2019; 5,485 restricted shares will be released on January 2, 2020; 2,769 PRSUs were released on January 3, 2017, with a market value of $485,932; and 11,269 PRSUs will be released on January 2, 2018.

Of the 50,201 restricted shares or units held by Mr. Casey, 9,130 restricted shares were released on January 3, 2017, with a market value of $1,602,224; 5,560 restricted shares will be released on January 2, 2018; 4,750 restricted shares will be released on January 2, 2019; 6,045 restricted shares will be released on January 2, 2020; 13,447 PRSUs were released on January 3, 2017, with a market value of $2,359,814; and 11,269 PRSUs will be released on January 2, 2018.

Of the 48,430 restricted shares or units held by Mr. Roualet, 9,550 restricted shares were released on January 3, 2017, with a market value of $1,675,930; 4,660 restricted shares will be released on January 2, 2018; 4,750 restricted shares will be released on January 2, 2019; 5,960 restricted shares will be released on January 2, 2020; 14,065 PRSUs were released on January 3, 2017, with a market value of $2,468,267; and 9,445 PRSUs will be released on January 2, 2018.

Of the 24,436 restricted shares or units held by Mr. Johnson, 3,290 restricted shares were released on January 3, 2017, with a market value of $577,362; 2,120 restricted shares will be released on January 2, 2018; 4,520 restricted shares will be released on January 2, 2019; 5,365 restricted shares will be released on January 2, 2020; 4,845 PRSUs were released on January 3, 2017, with a market value of $850,249; and 4,296 PRSUs will be released on January 2, 2018.

(c)

Represents PRSUs that, subject to satisfaction of the performance condition and committeeCompensation Committee determination, may release during the first quarter of 2018 or the first quarter of 2019.

For Ms. Novakovic, 25,945 PRSUs may release during the first quarter of 2018 and 26,449 PRSUs may release during the first quarter of 2019.2020 or 2021.

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


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.

For Ms. Novakovic, 27,399 PSUs will release during the first quarter of 2019; 18,832 may release during the first quarter of 2020; and 15,858 may release during the first quarter of 2021.

For Mr. Aiken, 5,768 PSUs will release during the first quarter of 2019; 4,374 may release during the first quarter of 2020; and 3,739 may release during the first quarter of 2021.

For Mr. Casey, 6,357 PSUs will release during the first quarter of 2019; 4,333 may release during the first quarter of 2020; and 3,647 may release during the first quarter of 2021.

For Mr. Roualet, 6,268 PSUs will release during the first quarter of 2019; 4,333 may release during the first quarter of 2020; and 3,647 may release during the first quarter of 2021.

For Mr. Johnson, 5,642 PSUs will release during the first quarter of 2019; 2,799 may release during the first quarter of 2020; and 1,178 may release during the first quarter of 2021 (Mr. Johnson’s 2017 and 2018 PSU grants have been prorated due to his retirement).

50     General Dynamics 2019 Proxy Statement


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 NEOs other than Mr. Johnson participate in each of the retirement programs indicated next to their name in the table below. Mr. Johnson, who retired from the company on December 31, 2018, was 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 NEOs.

The table shows the actuarial present value as of December 31, 2018, of the pension benefits earned for each NEO over the course of the officer’s career. All retirement plans in the table operate in exactly the same manner for the NEOs 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 2018

 

 

  NAME

 

  

PLAN NAME

 

  

NUMBER OF
YEARS  CREDITED
SERVICE

 

  

  PRESENT VALUE OF  
ACCUMULATED
BENEFIT (a)

 

  

PAYMENTS DURING
    LAST FISCAL  YEAR    

 

 

  Ms. Novakovic (b)

  Salaried Retirement Plan  13  $   393,491   None 
  

Supplemental Retirement Plan

 

 

  13

 

 

  $1,994,485

 

 

  

  Mr. Aiken (c)

  Salaried Retirement Plan  11  $   186,304   None 
  

Supplemental Retirement Plan

 

 

  11

 

 

  $   194,382

 

 

  

  Mr. Casey (d)

  Salaried Retirement Plan  32  $1,236,042   None 
  

Supplemental Retirement Plan

 

 

  32

 

 

  $2,926,126

 

 

  

  Mr. Roualet (e)

  Salaried Retirement Plan  29  $   927,336   None 
  

Supplemental Retirement Plan

 

 

  29

 

 

  $1,540,274

 

 

  

 

  Mr. Johnson

 

  

 

 

  

 

 

  

 

             —

 

  

 

 

 

 

 

 

 

 

(a)

The Present Value of Accumulated Benefit under each plan has been calculated as of December 31, 2016,2018, using the company’s FASB ASC Topic 715,Compensation – Retirement Benefits, assumptions as of the pension benefits earned for each named executive officer over the courseyear-end 2018. For a discussion of the officer’s career. All retirement plansthis calculation, see Note Q to our consolidated financial statements contained in the table operate in exactly the same mannerour Annual Report on Form10-K for the named executive officers as for all other plan participants. A description ofyear ended December 31, 2018, filed with the material terms and conditions of each of these plans and agreements follows the table.SEC on February 13, 2019.

(b)

PENSION BENEFITSFOR FISCAL YEAR 2016
  NAME  PLAN NAME  NUMBER OF
YEARS CREDITED
SERVICE
    PRESENT VALUE OF  
ACCUMULATED
BENEFIT (a)
   PAYMENTS DURING
    LAST FISCAL YEAR    

  Ms. Novakovic (b)

  Salaried Retirement Plan  13  $367,073   None
  Supplemental Retirement Plan  13  $1,860,581   

  Mr. Aiken (c)

  Salaried Retirement Plan  11  $176,619   None
  Supplemental Retirement Plan  11  $184,277   

  Mr. Casey (d)

  Salaried Retirement Plan  32  $1,149,375   None
  Supplemental Retirement Plan  32  $2,720,850   

  Mr. Roualet (e)

  Salaried Retirement Plan  29  $866,300   None
  Supplemental Retirement Plan  29  $1,438,835   

  Mr. Johnson

          
(a)

The Present Value of Accumulated Benefit under each plan has been calculated as of December 31, 2016, using the company’s FASB ASC Topic 715,Compensation – Retirement Benefits, assumptions as ofyear-end 2016. For a discussion of this calculation, see Note P to our consolidated financial statements contained in our Annual Report on Form10-K for the year ended December 31, 2016, filed with the SEC on February 6, 2017.

(b)

Ms. Novakovic’s total service is 16Ms. Novakovic’s total service is 18 years and credited service is 13 years.

(c)

Mr. Aiken’s total service is 17 years and credited service is 11 years.

(d)

Mr. Casey’s total service is 40 years and credited service is 32 years.

(e)

Mr. Roualet’s total service is 37 years and credited service is 29 years.

(c)

Mr. Aiken’s total service is 15 years and credited service is 11 years.

(d)

Mr. Casey’s total service is 38 years and credited service is 32 years.

(e)

Mr. Roualet’s total service is 35 years and credited service is 29 years.

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 $265,000 for 2016, and does not pay annual benefits beyond a predetermined benefit limit, which for 2016 was $210,000.

Beginning January 1, 2014, pension accruals stopped for employees at our corporate headquarters, including the participating named executive officers.

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 NEOs, 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 $275,000 for 2018, and does not pay annual benefits beyond a predetermined benefit limit, which was $220,000 for 2018.

Beginning January 1, 2014, pension accruals stopped for employees at our corporate headquarters, including the participating NEOs. 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

General Dynamics 2019 Proxy Statement     51


Executive Compensation

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 NEOs had reached the normal retirement age as of December 31, 2018.

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, 2018. A participant who is eligible for early retirement is entitled to receive the following:

(1)

for benefits based on credited service earned prior to January 1, 2007, if a participant retires between age 55 and 62, his or her age 65 benefit is reduced by 2.5 percent for each full year that he or she retires prior to age 62. If the participant retires between age 62 and 65, he or she will receive 100 percent of his or her age 65 benefit.

(2)

for benefits based on 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, 2016.

General Dynamics 2017 Proxy Statement     55


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, 2016. A participant who is eligible for early retirement is entitledand subsequently retires between age 55 and 65 will have his or her age 65 benefit reduced by 4.8 percent for each full year that he or she retires prior to receive the following:age 65.

Supplemental Retirement Plan.The General Dynamics Corporation Supplemental Retirement Plan is a nonqualified defined-benefit plan that provides retirement benefits to eligible employees whose salaries exceed the Internal Revenue Code compensation limit or whose annual benefits would exceed the Internal Revenue Code benefit limit. All the NEOs other than Mr. Johnson participate in the Supplemental Retirement Plan.

Beginning January 1, 2014, Supplemental Retirement Plan pension accruals stopped for employees at our corporate headquarters, including the NEOs who participate in the plan. The Supplemental Retirement Plan provides benefits equal to the difference between (1) the amount that would have been provided under the Salaried Retirement Plan if the annual compensation limit and annual benefit limit did not apply, and (2) the benefit actually paid under the Salaried Retirement Plan. A participant’s pensionable earnings and forms of payment are the same under the Supplemental Retirement Plan as the Salaried Retirement Plan.

NONQUALIFIED DEFINED-CONTRIBUTION DEFERRED COMPENSATION

As part of General Dynamics’ overall retirement program, the NEOs and other key employees are eligible to participate in a nonqualified defined-contribution plan. The following table illustrates the amounts due each executive as of December 31, 2018. In addition, the table shows contributions made by both the NEOs and General Dynamics in 2018 along with the earnings on each executive’s total account.

 

(1)

for benefits based on credited service earned prior to January 1, 2007, if a participant retires between age 55 and 62, his or her age 65 benefit is reduced by 2.5 percent for each full year that he or she retires prior to age 62. If the participant retires between age 62 and 65, he or she will receive 100 percent of his or her age 65 benefit.
NONQUALIFIED DEFERRED COMPENSATIONFOR FISCAL YEAR 2018 
  NAME  

 

EXECUTIVE

  CONTRIBUTIONS  

IN LAST

FISCAL YEAR

   

 

REGISTRANT
CONTRIBUTIONS
IN LAST

  FISCAL  YEAR (a)  

   AGGREGATE
EARNINGS IN  LAST
FISCAL YEAR (b)
  

AGGREGATE
 WITHDRAWALS

DISTRIBUTIONS

  AGGREGATE
BALANCEAT
LAST FISCAL
      YEAR END (c)    
 

 

  Ms. Novakovic

 

  

 

 

 

 

$158,500    

 

 

 

 

  

 

 

 

 

$31,700    

 

 

 

 

  

 

 

 

 

$(114,545

 

 

)     

 

 

 

—  

 

  

 

 

 

 

$1,896,573      

 

 

 

 

 

  Mr. Aiken

 

  

 

 

 

 

$  15,400    

 

 

 

 

  

 

 

 

 

$15,400    

 

 

 

 

  

 

 

 

 

$  (16,843

 

 

)     

 

 

 

—  

 

  

 

 

 

 

$   183,717      

 

 

 

 

 

  Mr. Casey

 

  

 

 

 

 

$  78,000    

 

 

 

 

  

 

 

 

 

$15,600    

 

 

 

 

  

 

 

 

 

$    16,260

 

 

 

 

 

 

—  

 

  

 

 

 

 

$   992,500      

 

 

 

 

 

  Mr. Roualet

 

  

 

 

 

 

$  78,000    

 

 

 

 

  

 

 

 

 

$15,600    

 

 

 

 

  

 

 

 

 

$(250,915

 

 

)     

 

 

 

—  

 

  

 

 

 

 

$   934,739      

 

 

 

 

 

  Mr. Johnson

 

  

 

 

 

 

$  78,000    

 

 

 

 

  

 

 

 

 

$15,600    

 

 

 

 

  

 

 

 

 

$(101,357

 

 

)     

 

 

 

—  

 

  

 

 

 

 

$3,519,777      

 

 

 

 

(a)

The registrant contributions of $31,700, $15,400, $15,600, $15,600 and $15,600, for Ms. Novakovic and Messrs. Aiken, Casey, Roualet and Johnson, respectively, are included in the All Other Compensation column of the Summary Compensation Table.

(b)

No amounts shown in the Aggregate Earnings in Last Fiscal Year column are reported as compensation in the Summary Compensation Table.

(c)

Certain amounts in the Aggregate Balance at Last Fiscal Year End column were previously reported in the Summary Compensation Table in the Salary column (in the case of executive contributions) or in the All Other Compensation column (in the case of registrant contributions) for the NEOs. The amounts previously reported as executive and registrant contributions were as follows: (i) Ms. Novakovic, $806,000 and $196,650; (ii) Mr. Aiken, $47,400 and $47,400; (iii) Mr. Casey, $326,500 and $72,325; (iv) Mr. Roualet, $241,000 and $51,700; and (v) Mr. Johnson, $183,019 and $36,603.

(2)

for benefits based on credited service earned on or after January 1, 2007, a participant who is eligible for early retirement and subsequently retires between age 55 and 65 will have his or her age 65 benefit reduced by 4.8 percent for each full year that he or she retires prior to age 65.

Supplemental Retirement Plan.The General Dynamics Corporation Supplemental Retirement Plan is a nonqualified defined-benefit plan that provides retirement benefits to eligible employees whose salaries exceed the Internal Revenue Code compensation limit or whose annual benefits would exceed the Internal Revenue Code benefit limit. All the named executive officers other than Mr. Johnson participate in the Supplemental Retirement Plan.

Beginning January 1, 2014, Supplemental Retirement Plan pension accruals stopped for employees at our corporate headquarters, including the named executive officers who participate in the plan. The Supplemental Retirement Plan provides benefits equal to the difference between (1) the amount that would have been provided under the Salaried Retirement Plan if the annual compensation limit and annual benefit limit did not apply, and (2) the benefit actually paid under the Salaried Retirement Plan. A participant’s pensionable earnings and forms of payment are the same under the Supplemental Retirement Plan as the Salaried Retirement Plan.

NONQUALIFIED DEFINED-CONTRIBUTION DEFERRED COMPENSATION

As part of General Dynamics’ overall retirement program, the named executive officers and other key employees are eligible to participate in a nonqualified defined-contribution plan. The following table illustrates the amounts due each executive as of December 31, 2016. In addition, the table shows contributions made by both the named executive officers and General Dynamics in 2016 along with the earnings on each executive’s total account.

NONQUALIFIED DEFERRED COMPENSATIONFOR FISCAL YEAR 2016 
  NAME  

EXECUTIVE

  CONTRIBUTIONS   

IN LAST

FISCAL YEAR

   

REGISTRANT

CONTRIBUTIONS

IN LAST

  FISCAL YEAR (a)  

   

AGGREGATE

EARNINGS IN LAST
  FISCAL YEAR (b)  

   

AGGREGATE

 WITHDRAWALS

DISTRIBUTIONS

  

AGGREGATE

BALANCE AT

LAST FISCAL

      YEAR  END (c)    

 

  Ms. Novakovic

  $158,500   $31,700   $143,111   —    $1,494,573   

  Mr. Aiken

  $13,500   $13,500   $9,825   —    $112,447   

  Mr. Casey

  $72,500   $14,500   $29,100   —    $754,240   

  Mr. Roualet

  $72,500   $14,500   $177,558   —    $832,381   

  Mr. Johnson

  $69,577   $13,915   $132,499   —    $2,810,607   
(a)

The registrant contributions of $31,700, $13,500, $14,500, $14,500 and $13,915, for Ms. Novakovic and Messrs. Aiken, Casey, Roualet and Johnson, respectively, are included in the All Other Compensation column of the Summary Compensation Table.

(b)

No amounts shown in the Aggregate Earnings in Last Fiscal Year column are reported as compensation in the Summary Compensation Table.

(c)

Certain amounts in the Aggregate Balance at Last Fiscal Year End column were previously reported in the Summary Compensation Table in the Salary column (in the case of executive contributions) or in the All Other Compensation column (in the case of company contributions) for the named executive officers. The amounts previously reported as executive and registrant contributions were as follows: (i) Ms. Novakovic, $489,000 and $132,250; (ii) Mr. Aiken, $19,700 and $19,700; (iii) Mr. Casey, $178,500 and $42,725; (iv) Mr. Roualet, $93,000 and $22,100; and (v) Mr. Johnson, $40,942 and $8,188.

General Dynamics Corporation Supplemental Savings Plan.The Supplemental Savings Plan is a nonqualifieddefined-contribution plan that provides key employees, including the named executive officers,NEOs, the opportunity to defer a portion of their salary without

52     General Dynamics 2019 Proxy Statement


Executive Compensation

regard to the limitations imposed by the Internal Revenue Code on the 401(k) Plan and receive employer matching contributions on a portion of the contributions.

Effective January 1, 2014, for those who elect to participate in the Supplemental Savings Plan, a participant may contribute between 1 percent and 10 percent of the participant’s base salary to the plan. The company will match the participant’s contributions for the first 2 percent of the participant’s base salary on adollar-for-dollar basis. Investment performance mirrors the performance of the funds that are available to participants under the 401(k) Plan.

56     General Dynamics 2017 Proxy Statement


Executive Compensation


Supplemental Savings Plan participants, including the named executive officers,NEOs, do not receive any earnings on their Supplemental Savings Plan accounts that are not otherwise paid to all other 401(k) Plan participants with a balance in the same investment fund. Participants receivelump-sum payments six months after their separation from service for balances (including earnings) accumulated on or after January 1, 2005. For balances accumulated prior to January 1, 2005, payment is made as soon as possible after termination and participants will receive alump-sum payment unless they have previously elected to receive a deferredlump-sum payment or annual installment payments.

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 electelected to receive the deferred compensation in either a lump sum or in annual installments over a period of up to ten years.sum.

POTENTIAL PAYMENTSUPON TERMINATIONOR CHANGEIN CONTROL

The following are estimated payments and benefits that would be provided to the named executive officersNEOs in the event of termination of the executive’s employment assuming a termination date of December 31, 2016.As2018. On December 31, 2018, Mr. Johnson retired from the company. The payments and benefits provided to Mr. Johnson in connection with his retirement reflect standard benefits discussed below, in 2016 we amended our severance protection agreements to eliminate excise tax gross-up provisions.on pages 42 and 43.

We have calculated these amounts for different termination scenarios based on our existing benefit plans and the General Dynamics Corporation equity compensation plan currently in effect (the Equity Compensation Plan). The actual amounts of the payments and costs of the benefits, however, can only be determined at the time of an executive’s separation from General Dynamics and, depending on the payment or benefit, may extend over several years.

For each termination and change in control scenario discussed below, the named executive officerNEO would also be entitled to:

 

 (1)

the pension benefits described in the Pension Benefits for Fiscal Year 20162018 table, on page 55 of this Proxy Statement, for those named executive officersNEOs who are eligible to receive benefits; and

 

 (2)

the amounts listed in the Nonqualified Deferred Compensation for Fiscal Year 2016 table on page 56 of this Proxy Statement.2018 table.

The estimated totals presented in the table on the next page do not include these pension benefit and nonqualified deferred compensation amounts, nor do the totals include items that are provided to all employees, such as payment of accrued vacation.

Change in Control Agreements Double Trigger.For a change in control situation, we have change in control agreements (also referred to as severance protection agreements) with key employees, including each of the named executive officers.NEOs. We have estimated the payments and benefits the named executive officersNEOs could receive under our existing benefit plans, change in control agreements and the equity compensation plans. Our calculations assume the executive was terminated on December 31, 2016,2018, and that this date was within 24 months following a change in control, thereby satisfying the “double-trigger” requirement under the change in control agreements. The actual amounts of the payments and costs of the benefits, however, can only be determined at the time of an executive’s separation from General Dynamics and depending on the payment or benefit may extend over several years. As discussed on page 41 of this Proxy Statement under “CompensationCompensation Discussion and Analysis – Potential Severance and Change in Control Benefits”Benefits the change in control agreements contain a “double-trigger” mechanism that is triggered only under certain circumstances.

In 2016, we amended any severance protections agreements that contained a provision for the reimbursement of taxes that may be imposed under the change in control excise tax provisions of Section 280G and Section 4999 of the Internal Revenue Code, including the Our severance protection agreement with Ms. Novakovic. The amended severance protectionagreements do not provide for excise taxgross-ups. Rather, the agreements provide that, in the event change in control benefits would trigger an excise tax under Section 280G and Section 4999, then the value of the benefits will be either (1) delivered in full or (2) subject to a cutback, whichever provides the executive officer the greatest benefit on anafter-tax basis (with the excise tax being the responsibility of the executive to pay).

 

General Dynamics 20172019 Proxy Statement     5753


Executive Compensation

 


 

POTENTIAL PAYMENTSUPON TERMINATIONOR CHANGEIN CONTROLPOTENTIAL PAYMENTSUPON TERMINATIONOR CHANGEIN CONTROL 

POTENTIAL PAYMENTSUPON TERMINATIONOR CHANGEIN CONTROL

 
SCENARIOAND PAYMENT TYPE   MS.  NOVAKOVIC      MR.  AIKEN         MR.  CASEY        MR.  ROUALET      MR.  JOHNSON      MS. NOVAKOVIC      MR. AIKEN      MR. CASEY     MR. ROUALET  
Termination For Cause or Voluntary Resignation Termination For Cause or Voluntary Resignation              Termination For Cause or Voluntary Resignation

 

         

Retiree Life Insurance Benefit (a)

  $433,328   $   $245,145   $244,154   $—     

 

 

 

 

$      424,558

 

 

 

 

  

 

 

 

 

$              —

 

 

 

 

  

 

 

 

 

$     245,868

 

 

 

 

  

 

 

 

 

$     250,841  

 

 

 

 

Retiree Medical and Dental Benefit (b)

   67,740        81,899    130,024    —     

 

 

 

 

         32,596

 

 

 

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

48,949

 

 

 

 

  

 

 

 

 

98,351  

 

 

 

 

Stock Options

                   —     

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

—  

 

 

 

 

Restricted Stock

                   —     

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

—  

 

 

 

 

PRSUs

                   —   

PSUs

  

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

—  

 

 

 

 

Total

  $501,068   $   $327,044   $374,178   $—     

 

 

 

 

$      457,154

 

 

 

 

  

 

 

 

 

$              —

 

 

 

 

  

 

 

 

 

$      294,817

 

 

 

 

  

 

 

 

 

$      349,192  

 

 

 

 

Death (c)                Death (c)

 

         

Life Insurance Benefit

  $3,170,000   $1,420,000   $1,510,000   $1,510,000   $1,450,000      

 

$   3,170,000

 

 

 

   

 

$  1,700,000

 

 

 

   

 

$   1,600,000

 

 

 

   

 

$   1,600,000  

 

 

 

Stock Options (d) (e)

   20,709,859    4,231,654    4,427,940    4,391,498    4,034,861   

Restricted Stock (d) (f)

   22,007,312    3,071,696    4,391,571    3,316,497    2,637,532   

PRSUs (d) (g)

   14,566,517    2,851,842    2,864,900    2,544,972    1,593,914   

Stock Options (d)

  

 

 

 

 

3,420,377

 

 

 

 

  

 

 

 

 

719,832

 

 

 

 

  

 

 

 

 

793,738

 

 

 

 

  

 

 

 

 

783,164  

 

 

 

 

Restricted Stock (d)

  

 

 

 

 

13,363,636

 

 

 

 

  

 

 

 

 

2,880,873

 

 

 

 

  

 

 

 

 

2,922,534

 

 

 

 

  

 

 

 

 

2,909,171  

 

 

 

 

PSUs (d) (e)

  

 

 

 

 

7,112,076

 

 

 

 

  

 

 

 

 

1,560,938

 

 

 

 

  

 

 

 

 

1,644,364

 

 

 

 

  

 

 

 

 

1,630,373  

 

 

 

 

Total

  $60,453,688   $11,575,192   $13,194,411   $11,762,967   $9,716,307     

 

 

 

 

$    27,066,089

 

 

 

 

  

 

 

 

 

$ 6,861,643

 

 

 

 

  

 

 

 

 

$ 6,960,636

 

 

 

 

  

 

 

 

 

$ 6,922,708  

 

 

 

 

Retirement, Termination without Cause or Disability (c) Retirement, Termination without Cause or Disability (c)             

Retirement, Termination without Cause or Disability (c)

 

         

Retiree Life Insurance Benefit (a)

  $433,328   $   $245,145   $244,154   $—      

 

$       424,558

 

 

 

   

 

$              —

 

 

 

   

 

$       245,868

 

 

 

   

 

$       250,841  

 

 

 

Retiree Medical and Dental Benefit (b)

   67,740        81,899    130,024    —     

 

 

 

 

32,596

 

 

 

 

  

 

 

 

 

              —

 

 

 

 

  

 

 

 

 

48,949

 

 

 

 

  

 

 

 

 

98,351  

 

 

 

 

Stock Options (h) (e)

   14,288,823    2,859,300    2,875,205    2,299,548    2,674,809   

Restricted Stock (h) (f)

   21,701,455    3,008,410    4,323,855    3,249,530    2,576,506   

PRSUs (g) (h)

   14,566,517    2,851,842    2,864,900    2,544,972    1,593,914   

Stock Options (g) (h)

  

 

 

 

 

3,402,010

 

 

 

 

  

 

 

 

 

715,967

 

 

 

 

  

 

 

 

 

789,475

 

 

 

 

  

 

 

 

 

778,959  

 

 

 

 

Restricted Stock (f) (h)

  

 

 

 

 

12,541,140

 

 

 

 

  

 

 

 

 

2,690,622

 

 

 

 

  

 

 

 

 

2,732,996

 

 

 

 

  

 

 

 

 

2,720,064  

 

 

 

 

PSUs (e) (h)

  

 

 

 

 

7,112,076

 

 

 

 

  

 

 

 

 

1,560,938

 

 

 

 

  

 

 

 

 

1,644,364

 

 

 

 

  

 

 

 

 

1,630,373  

 

 

 

 

Total

  $51,057,863   $8,719,552   $10,391,004   $8,468,228   $6,845,229     

 

 

 

 

$  23,512,380

 

 

 

 

  

 

 

 

 

$     4,967,527

 

 

 

 

  

 

 

 

 

$     5,461,652

 

 

 

 

  

 

 

 

 

$     5,478,588  

 

 

 

 

Change in Control, with Qualifying Termination               

Change in Control, with Qualifying Termination

 

         

Annual Incentive (i)

  $4,850,000   $900,000   $1,020,000   $995,000   $850,000      $    5,300,000    $    1,386,000    $    1,404,000    $    1,404,000   

Severance (j)

   19,240,650    4,813,900    5,307,250    5,232,500    4,709,250      20,586,150    6,685,640    6,589,960    6,589,960   

Life, medical, dental and long-term disability benefits (k)

   59,845    61,138    77,601    78,880    85,654      

 

83,279

 

 

 

   

 

71,429

 

 

 

   

 

83,067

 

 

 

   

 

84,701  

 

 

 

Retiree life, medical and dental benefits (l)

   411,542        238,454    310,026    —      

 

375,023

 

 

 

   

 

 

 

 

   

 

236,818

 

 

 

   

 

273,740  

 

 

 

Outplacement services (m)

   15,000    15,000    15,000    15,000    15,000      10,000    10,000    10,000    10,000   

Financial counseling and tax planning services (n)

   30,000    30,000    30,000    30,000    30,000      30,000    30,000    30,000    30,000   

Supplemental retirement benefit (o)

   121,235    68,033    71,654    71,097    —      

 

135,102

 

 

 

   

 

85,743

 

 

 

   

 

88,282

 

 

 

   

 

88,282  

 

 

 

Stock Options (p)

   20,716,790    4,233,014    4,429,255    4,392,813    4,036,111      

 

3,420,377

 

 

 

   

 

719,832

 

 

 

   

 

793,738

 

 

 

   

 

783,164  

 

 

 

Restricted Stock (p)

   22,052,135    3,080,254    4,400,240    3,323,705    2,640,835      

 

13,363,636

 

 

 

   

 

2,880,873

 

 

 

   

 

2,922,534

 

 

 

   

 

2,909,171  

 

 

 

PRSUs (p)

   19,104,286    3,785,574    3,854,238    3,524,378    2,490,092   

PSUs (p)

   

 

9,760,854

 

 

 

   

 

2,181,918

 

 

 

   

 

2,253,605

 

 

 

   

 

2,239,614  

 

 

 

Total

  $86,601,483   $16,986,913   $19,443,692   $17,973,399   $14,856,942      

 

$  53,064,421

 

 

 

   

 

$  14,051,435

 

 

 

   

 

$  14,412,004

 

 

 

   

 

$  14,412,632  

 

 

 

 

(a)

Assumes the executive elects the maximum oftwo-times-pay coverage at retirement. The estimated cost is calculated using the assumptions made for financial reporting purposes for valuing post-retirement life insurance at December 31, 2016.2018. The life insurance benefit is further described on page 40 of this Proxy Statement under “CompensationCompensation Discussion and Analysis – Other Retiree Benefits.

(b)

The estimated cost for this coverage is based on the difference between the COBRA rate that the executive would pay and the higher expense we must recognize for financial reporting purposes. We provide retiree medical and dental coverage only until an executive reaches age 65.

(c)

In situations where an executive has completed a full calendar year of service to the company, for certain termination scenarios not involving a change in control, the executive may remain eligible for an annual incentive for performance during the year, though whether a bonus is paid in the future, and the amount, if any, would be subject to Compensation Committee approval. No future bonus payment is guaranteed, and the amount of any bonus would be determined as described in the Compensation Discussion and Analysis section. The named executive officerNEO may also be eligible for $2 million of proceeds under accidental death and dismemberment insurance, depending upon the circumstances.

(d)

Under the terms of the Equity Compensation Plan, unvested stock options held by the executive would be treated as if the executive remained employed with General Dynamics throughout the option term. The options would be exercisable by the executive’s estate in accordance with the terms of the original option grant. Restricted stock held by the executive would be transferred to the estate and released at the end of the restriction period. PRSUs granted in 2014 held by

 

5854     General Dynamics 20172019 Proxy Statement


Executive Compensation


 

 

the executive would be transferred to the estate and released immediately. PRSUsgrant. PSUs granted in 2015 and 2016 would be evaluated for achievement relative to goals and if earned, a pro rata amount (determined as set forth in the respective award agreements) will vest and be released within two andone-half months following the respective scheduleddeath vesting date. For the 2015 and 2016 grants, theThe unvested stock options vest immediately and the restricted stock held by the executive would be transferred to the estate and released at the time of death.

(e)

The present value of the unvested options reflected in the table represents the difference between the closing share price of $172.66$157.21 on December 31, 2016,2018, and the option grant price, multiplied by the number of retained unvested options. The value of the restricted stock represents the number of restricted shares held on December 31, 2018, multiplied by the closing share price of $157.21 on December 31, 2018.

(e)

The value of the prorated PSUs represents the number of earned units as of December 31, 2018, multiplied by the closing share price of $157.21 on December 31, 2018.

(f)

The present value of the restricted stock represents the number of restricted shares held on December 31, 2018, multiplied by the closing share price of $157.21 on December 31, 2018, and applying a discount rate factor to account for the restriction periods.

(g)

The present value of the unvested stock options reflected in the table represents the difference between the closing share price of $157.21 on December 31, 2018, and the option grant price, multiplied by the number of retained unvested options, and applying a discount factor to account for the option exercise dates. In the case of death, the present value of the unvested options for shares granted in 2015 and 2016 does not apply a discount factor to account for the option exercise dates due to immediate vesting.

(f)

The present value of the restricted stock represents the number of restricted shares held on December 31, 2016, multiplied by the closing share price of $172.66 on the same date, and applying a discount factor to account for the restriction periods.

(g)

The present value of the PRSUs represents the number of earned units as of December 31, 2016, multiplied by the closing share price of $172.66 on the same date.

(h)

Under the terms of the Equity Compensation Plan, most participants qualify for retirement treatment after reaching age 55 with at least five years of continuous service with the company. For participants who are elected officers of the company and who have reached age 55, the plan provides for retirement treatment with the consent of the company’s chief executive officer or, in the case of the chief executive officer, the Compensation Committee. For purposes of this Proxy Statement, we assume that any required consents for retirement treatment have been obtained. Since Ms. Novakovic and Messrs. Casey Roualet and JohnsonRoualet are eligible to retire, they would forfeit a portion of their unvested stock option awards based on days of service during the three-year period beginning on January 1 of the year of grant.grant for options granted before 2017 and as of the grant date for options granted after 2017. The retained options would be exercisable in accordance with the terms of the original grant. The restricted stock award will pro rata vest at the end of the original restriction period if retirement occurs prior toone-year from grant. The restricted stock award would be released at the end of the original restriction period.period if retirement occurs on or afterone-year from grant. The PRSUsPSUs would be prorated (as set forth in the respective award agreements) and will be released within two and one halfone-half months following their respective scheduled vesting date, if earned based on the applicable performance goals. Because Mr. Aiken was not eligible to retire at December 31, 2016,2018, the equity values in these scenarios would apply only in the case of disability.

(i)

Any annual incentive amount paid in a change in control situation would be determined in accordance with the terms of the applicable change in control agreement. Since we assume that a change in control and triggering event had occurred on December 31, 2016,2018, the change in control scenarios identify the March 2016 annual incentive2018 bonus amounts.

(j)

Calculated in accordance with the applicable change in control agreement. For the named executive officers,NEOs, this amount equals 2.99 times their annual salary and annual incentive.

(k)

Represents an additional 36 months of life, medical, dental and long-term disability benefits. These costs reflect an amount equal to three times the 20162018 annual employer premiums for these benefits.

(l)

The costs of Ms. Novakovic’s, Mr.Messrs. Casey’s and Mr. Roualet’s retiree benefits are reduced in this scenario because the 36 months of continued active coverage described in noteNote (k) defers the commencement date of this coverage.

(m)

Represents the estimated outplacement services costs, obtained from an outplacement vendor, for 12 months for a senior executive.

(n)

Represents financial counseling and tax planning services for 36 months following the termination date, at a total cost not to exceed $30,000 for each named executive officer.NEO.

(o)

Represents a supplemental retirement benefit payable in cash equal to company contributions to each defined-contribution plan in which the executive participates.

(p)

Our Equity Compensation Plan and the applicable award agreements contain a “double-trigger” mechanism for all participants, including the named executive officers.NEOs. This mechanism provides that if, within two years following a change in control, a participant’s employment is terminated by the company for any reason other than for Cause (as defined in the plan) or by the executive for Good Reason (as defined in the plan), then all outstanding awards that have not vested will immediately vest and become exercisable and all restrictions on awards will immediately lapse.

 

General Dynamics 20172019 Proxy Statement     5955


Executive Compensation

 

PAY RATIO RESULTS

The chief executive officer pay ratio figures below are a reasonable estimate calculated in a manner consistent with Item 402(u) of RegulationS-K under the Exchange Act.

Due to the acquisition of CSRA and divestitures within GDIT in 2018, there has been a change in our employee population that we reasonably believe would result in a significant change in our pay ratio disclosure. Therefore, we havere-identified the median employee for 2018 using the same methodology we employed in 2017:

We determined that as of December 3, 2018 (our Determination Date), our total number of U.S. employees was approximately 93,000 and our total number ofnon-U.S. employees was approximately 14,000. We excluded from this employee population a total of 5,251 employees from: Mexico (2,451), Spain (859), Germany (531), Singapore (305), United Arab Emirates (247), Saudi Arabia (197), Italy (118), Estonia (74), Brazil (72), Colombia (70), Argentina (47), Netherlands (35), Russian Federation (30), France (28), Philippines (28), Bermuda (27), Israel (26), Malaysia (25), India (20), New Zealand (17), Jamaica (14), Guyana (6), Bahamas (4), Barbados (4), Czech Republic (3), Indonesia (3), Malta (3), Chile (1), Ecuador (1), Ethiopia (1), Peru (1), Portugal (1), Trinidad (1) and Turkey (1) as the total number of employees from thesenon-U.S. jurisdictions was less than 5 percent of our total employee population.


To determine our median employee pay, we chose base salary as our consistently applied compensation measure. We then calculated an annual base salary for each employee, annualizing pay for those employees who commenced work during 2018 and any employees who were on leave for a portion of 2018. For hourly employees, we used a reasonable estimate of hours worked to determine annual base pay. We used a clustered sampling methodology to identify the median base salary within this employee population.

Total annual compensation for the median employee was valued at $86,432 and total annual compensation for the chief executive officer was valued at $20,720,254, resulting in a ratio of median employee total annual compensation to chief executive officer total annual compensation of 1:240. Total annual compensation for the median employee and the chief executive officer is calculated according to the disclosure requirements of the Summary Compensation Table and includes base salary, annual incentive, equity awards, change in pension values and other compensation such as perquisites and company-paid healthcare benefits.

56     General Dynamics 2019 Proxy Statement


The following Compensation 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 or the Exchange Act, and shall not otherwise be deemed filed under such acts.

COMPENSATION COMMITTEE REPORT

The Compensation Committee of the Board of Directors has furnished the following report.

The following sixfour directors serve on the Compensation Committee: William A. Osborn (Chair), Mary T. Barra, James S. Crown, Rudy F. deLeon William P. Fricks and Laura J. Schumacher.

None of these directors is an officer or employee of General Dynamics. They all meet the independence requirements of the New York Stock Exchange.

The Compensation Committee is governed by a written charter approved by the Board. In accordance with that charter, the Compensation Committee is responsible for evaluating the performance of the chief executive officer and other General Dynamics officers as well as reviewing and approving their compensation. The Committee also establishes and monitors company-wide compensation programs and policies, including the incentive compensation plans. The Committee’s processes and procedures for the consideration and determination of executive compensation are explained in greater detail in the Compensation Discussion and Analysis section of this Proxy Statement.

The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis. Based on this review and discussion, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement in accordance with Item 407(e) of RegulationS-K.

This report is submitted by the Compensation Committee.

William A. Osborn (Chair)

Mary T. Barra

James S. Crown

Rudy F. deLeon

William P. Fricks

Laura J. Schumacher

February 28, 2017March 5, 2019

 

60     General Dynamics 20172019 Proxy Statement     57


 


SECURITYOWNERSHIPOF MANAGEMENT

The following table provides information as of March 6, 2017,7, 2019, on the beneficial ownership of Common Stock by (1) each of our directors and nominees for director, (2) each of the named executive officersNEOs and (3) all of our directors and executive officers as a group. The following table also shows Common Stock held by these individuals through company-sponsored benefits programs. Except as otherwise noted, the persons listed below have the sole voting and investment power for all shares held by them, except for such power that may be shared with a spouse.

 

NAMEOF BENEFICIAL OWNER

  

 

COMMON STOCK BENEFICIALLY OWNED (a)

   

 

COMMON STOCK
EQUIVALENTS

BENEFICIALLY OWNED
(c)

 

   

TOTAL COMMON

STOCKAND

EQUIVALENTS

 

   

 

COMMON STOCK BENEFICIALLY OWNED(a)

  

COMMON STOCK
EQUIVALENTS

BENEFICIALLY  OWNED
(
b
)

 

   

        TOTAL COMMON         
        STOCKAND        
        EQUIVALENTS        

 

 

SHARES OWNED (b)

 

   

PERCENTAGE OF

CLASS

 

   

SHARES OWNED

 

   

OPTIONS EXERCISABLE
WITHIN 60 DAYS

 

   

PERCENTAGE OF

CLASS

 

 

Directors and Nominees

        

Directors and Nominees

 

Mary T. Barra

   28,746   

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

   28,746 

Nicholas D. Chabraja

   660,165   

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

   660,165 

James S. Crown (d)

   16,039,599   

 

 

 

 

5.3

 

 

 

   2,938    16,042,537 

James S. Crown (c)

   15,611,526    18,225    

 

5.4

 

 

 3,048    15,632,799 

Rudy F. deLeon

   3,253   

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

   3,253    3,033    6,925    

 

 

    

 

 

 

 

  

 

 

0

 

 

 

 

 

   9,958 

William P. Fricks

   56,085   

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

   56,085 

John M. Keane

   32,580   

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

   32,580 

Cecil D. Haney

   445    

 

 

0

 

 

 

 

 

   

 

 

    

 

 

 

 

  

 

 

0

 

 

 

 

 

   445 

Lester L. Lyles

   32,207   

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

   32,207    8,179    18,225    

 

 

    

 

 

 

 

  

 

 

0

 

 

 

 

 

   26,404 

Mark M. Malcolm

   1,120   

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

   1,120    4,900    5,565    

 

 

    

 

 

 

 

  

 

 

0

 

 

 

 

 

   10,465 

Phebe N. Novakovic

   1,725,998   

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

   1,725,998    
450,929
 
   1,874,280    

 

 

    

 

 

 

 

  

 

 

0

 

 

 

 

 

   
2,325,209
 

C. Howard Nye

   981    0    

 

 

    

 

 

 

 

  

 

 

0

 

 

 

 

 

   981 

William A. Osborn

  

 

 

 

42,605

 

 

  

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

42,605

 

 

   30,685    18,225    

 

 

    

 

 

 

 

  

 

 

0

 

 

 

 

 

   48,910 

Catherine B. Reynolds

  

 

 

 

0

 

 

  

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

0

 

 

   1,726    0    

 

 

    

 

 

 

 

  

 

 

0

 

 

 

 

 

   1,726 

Laura J. Schumacher

  

 

 

 

9,113

 

 

  

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

9,113

 

 

   4,825    11,325    

 

 

    

 

 

 

 

  

 

 

0

 

 

 

 

 

   16,150 

Peter A. Wall

  

 

 

 

590

 

 

  

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

590

 

 

   1,822    1,795    

 

 

    

 

 

 

 

  

 

 

0

 

 

 

 

 

   3,617 

Other NEOs

Other NEOs

 

Jason W. Aiken

   73,593    230,960    

 

 

    

 

 

 

 

  

 

 

0

 

 

 

 

 

   304,553 
        

Other Named Executive Officers

 

Jason W. Aiken

  

 

 

 

205,057

 

 

  

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

205,057

 

 

John P. Casey

  

 

 

 

247,035

 

 

  

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

247,035

 

 

   102,663    191,315    

 

 

    

 

 

 

 

  

 

 

0

 

 

 

 

 

   293,978 

Mark C. Roualet

  

 

 

 

323,721

 

 

  

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

323,721

 

 

   128,167    285,560    

 

 

    

 

 

 

 

  

 

 

0

 

 

 

 

 

   413,727 

S. Daniel Johnson

  

 

 

 

87,418

 

 

  

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

87,418

 

 

S. Daniel Johnson (d)

   66,363    56,540    

 

 

    

 

 

 

 

  

 

 

0

 

 

 

 

 

   122,903 
                 

Directors and Executive Officers as a Group

Directors and Executive Officers as a Group

 

Directors and Executive Officers as a Group

 

(24 individuals)

   20,623,691    

 

6.7

 

 

   2,938    20,626,629 

(25 individuals)

   16,965,025    3,709,080    7.1 3,048    20,677,153 
*

Less than 1 percent.

(a)

Includes shares in the 401(k) Plan votedheld by the executive officers and shares of Common Stock subject to resale restrictions, for which restrictions have not expired.

(b)

Includes shares subject to options that are either currently exercisable or exercisable within 60 days of March 6, 2017, as follows: (i) Ms. Novakovic – 1,378,015 shares; Mr. Aiken – 164,985 shares; Mr. Casey – 149,015 shares; Mr. Roualet – 227,350 shares; and Mr. Johnson – 22,420 shares; (ii) other directors of the company – 136,555 shares; and (iii) other executive officers of the company – 775,770 shares.

(c)

Reflects phantom stock units that were received on December 1, 1999, upon termination of benefits under the former retirement plan for directors and additional phantom stock units resulting from the reinvestment of dividend equivalents on the phantom stock units.

(d)(c)

Based solely on information provided on behalf of Mr. Crown. Of the 16,042,53715,611,526 shares of Common Stock shown as beneficially owned by Mr. Crown, (i) he disclaims beneficial ownership as to 15,945,14815,528,880 shares, except to the extent of his beneficial interest in entities that own these shares; and (ii) a total of 504,800501,892 shares held indirectly by entities in which Mr. Crown holds interests are pledged as collateral for bank borrowings (and for which Mr. Crown disclaims beneficial ownership).

(d)

Information for Mr. Johnson is as of December 31, 2018, when he retired from the company.

 

58     General Dynamics 20172019 Proxy Statement     61


 


SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERS

Except as otherwise noted, the following table provides information as of March 6, 2017,7, 2019, with respect to the number of shares of Common Stock owned by each person known by General Dynamics to be the beneficial owner of more than 5 percent of our Common Stock.

 

  

 

COMMON STOCK BENEFICIALLY OWNED (a)

 

 

COMMON STOCK BENEFICIALLY OWNED (a)

 

NAMEOF BENEFICIAL OWNER

  

SHARES OWNED

 

   

PERCENTAGE OF CLASS

 

 

 

       SHARES OWNED

 

 

       PERCENTAGE OF  CLASS       

 

Longview Asset Management, LLC (b)

222 North LaSalle Street

Chicago, Illinois 60601

   

 

33,387,811

 

 

 

   

 

11.0

 

%     

 

 

 

32,898,410

 

 

 

 

11.4

 

%

 

Evercore Trust Company, N.A. (c)

55 East 52nd Street, 36th Floor

New York, New York 10055

   

 

22,134,047

 

 

 

   

 

7.3

 

 

Capital Research Global Investors (c)

333 South Hope Street
Los Angeles, California 90071

 

 

22,446,969

 

 

 

 

7.8

 

%

 

The Vanguard Group (d)

100 Vanguard Blvd.

Malvern, Pennsylvania 19355

   

 

18,905,640

 

 

 

   

 

6.2

 

 

 

 

21,561,226

 

 

 

 

7.5

 

%

 

Capital Research Global Investors (e)

333 South Hope Street

Los Angeles, California 90071

   

 

16,086,509

 

 

 

   

 

5.3

 

 

Newport Trust Company (e)

570 Lexington Avenue, Suite 1903
New York, New York 10022

 

 

20,709,927

 

 

 

 

7.2

 

%

 

BlackRock, Inc. (f)

55 East 52nd Street

New York, New York 10055

   

 

15,509,208

 

 

 

   

 

5.1

 

 

 

 

17,225,288

 

 

 

 

6.0

 

%

 

(a)

Share information for The Vanguard Group, Capital Research Global Investors and BlackRock, Inc. is as of December 31, 2016.2018.

(b)

This information is based solely on information provided by Longview Asset Management, LLC (Longview). Longview manages investment portfolios for clients who own Common Stock, which include accounts of clients related to Mr. Crown. Pursuant to its investment advisory agreements, Longview has voting and dispositive power over the Common Stock held in its clients’ accounts and is deemed to beneficially own 33,387,81132,898,410 shares of Common Stock, including the 15,945,14815,528,880 shares included in Mr. Crown’s beneficial ownership amount for which he disclaims beneficial ownership. Clients of Longview disclaim that they are a group for purposes of Section 13(d) of the Exchange Act, and disclaim that any one of them is the beneficial owner of shares owned by any other person or entity.

(c)

Evercore Trust Company, N.A. (Evercore) is the independent fiduciary and investment manager for the assets of the General Dynamics Stock Fund under the General Dynamics Corporation 401(k) Plan Master Trust. Evercore has shared voting power over the shares held in the General Dynamics Stock Fund. ShareThis information for Evercore is based solely on information providedcontained in a Schedule 13G filed by Capital Research Global Investors with the SEC on behalf of Evercore.February 14, 2019.

(d)

This information is based solely on information contained in a Schedule 13G filed by The Vanguard Group with the SEC on February 13, 2017.11, 2019.

(e)

ThisNewport Trust Company (Newport) is the independent fiduciary and investment manager for the assets of the General Dynamics Stock Fund under the General Dynamics Corporation 401(k) Plan Master Trust. Newport has shared voting power over the shares held in the General Dynamics Stock Fund. Share information for Newport is based solely on information contained in a Schedule 13G filed by Capital Research Global Investors with the SECprovided on February 13, 2017.behalf of Newport.

(f)

This information is based solely on information contained in a Schedule 13G filed by BlackRock, Inc. with the SEC on January 24, 2017.February 4, 2019.

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information as of December 31, 2016,2018, regarding Common Stock that may be issued under our equity compensation plans.

 

  (A)   (B)   (C)  (A) (B) (C)

PLANCATEGORY

  

NUMBER OF SECURITIES TO BE

ISSUEDUPONTHEEXERCISE

OFOUTSTANDINGOPTIONS,

WARRANTSANDRIGHTS

 

   

WEIGHTED-AVERAGE

EXERCISEPRICEOF

OUTSTANDING OPTIONS,

WARRANTS AND RIGHTS

 

   

NUMBEROFSECURITIESREMAINING

AVAILABLEFORFUTUREISSUANCE

UNDER EQUITY COMPENSATION PLANS

(EXCLUDING SECURITIES REFLECTED IN

COLUMN (A))

 

  

NUMBER OF SECURITIES TO BE
ISSUEDUPONTHEEXERCISE
OFOUTSTANDINGOPTIONS,
WARRANTSANDRIGHTS

 

 

WEIGHTED-AVERAGE
EXERCISEPRICEOF
OUTSTANDING OPTIONS,
WARRANTS AND RIGHTS

 

 

NUMBER OF SECURITIES REMAINING
AVAILABLEFORFUTUREISSUANCE
UNDER EQUITY COMPENSATION PLANS
(EXCLUDING SECURITIES REFLECTED IN
COLUMN (A))

 

Equity compensation plans approved by shareholders

  

 

 

 

 

10,934,621

 

 

 

 

  

 

 

 

 

$108.23

 

 

 

 

  

 

 

 

 

7,729,290

 

 

 

 

 11,594,984 (a)

 

 

 $143.43  (b)

 

 

 27,499,790

 

 

Equity compensation plans not approved by shareholders

  

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 — 

 

 

 —  

 

 

            —

Total

  

 

 

 

 

10,934,621

 

 

 

 

  

 

 

 

 

$108.23

 

 

 

 

  

 

 

 

 

7,729,290

 

 

 

 

 11,594,984 

 

 

 $143.43  

 

 

 27,499,790

 

 

(a)

Includes 10,765,195 stock options, 38,354 shares issuable upon vesting of restricted stock units (including dividend equivalents thereon) (RSUs), and 763,302 shares issuable upon vesting of PSUs (assuming achievement at the maximum payout and including dividend equivalents thereon); and 28,133 shares of the company’s Common Stock issuable upon vesting of restricted stock units subject to terms and conditions in equity compensation plans assumed by the company in connection with the acquisition of CSRA Inc. in 2018 (Converted CSRA RSUs). No additional awards or grants may be made under those CSRA plans.

(b)

RSUs, PSUs and Converted CSRA RSUs do not have an exercise price and, therefore, are not taken into consideration in calculating the weighted average exercise price.

 

62     General Dynamics 20172019 Proxy Statement     59


 


APPROVALOFTHE

GENERAL DYNAMICS CUORPORATIONNITED AKMENDEDANDINGDOM RSESTATED

2012 EQUITYHARE CSOMPENSATIONAVE PLAN

(PROPOSAL 5)4)

We currently have in place a Share Save Plan (the Prior U.K. Plan) approved by our shareholders in May 2009. The Prior U.K. Plan expires in March 2019. As a result, in February 2019, the Compensation Committee recommended, and the Board of Directors approved, the amended and restated General Dynamics Corporation 2012 Equity CompensationUnited Kingdom Share Save Plan (the 20122019 U.K. Plan), provides on terms substantially similar to the company with a critical meansPrior U.K. Plan and recommended submission of attracting, retaining and motivating executives, keythe 2019 U.K. Plan to shareholders for their approval. The purpose of the 2019 U.K. Plan is to continue to provide our employees andnon-employee directors throughin the issuance of equity compensation awards. Equity compensation awards provide participants with incentivesUnited Kingdom the opportunity to enhance the long-term growth and profitability ofacquire an ownership position in General Dynamics and more closely align management’stheir interests with the interests of our shareholders.

If the shareholders consistent withapprove the fundamental philosophy of our compensation program. This alignment with shareholders is further enhanced by our rigorous stock ownership guidelines for executives. We strongly believe that equity compensation awards2019 U.K. Plan, no new options will be granted under the 2012 Plan are an essential part of our executive compensation program, and that our executive compensation program, together with our emphasis on executive stock ownership, contributes to the superior performance of our company.

In May 2012, shareholders originally approved the adoption of the 2012Prior U.K. Plan. The 2012 Plan has not been amended since it received shareholder approval. The 2012 Plan is the only currently active equity compensation plan at the company. We have prudently and responsibly used shares availableAny options previously granted under the 2012Prior U.K. Plan and, as of March 6, 2017, there were 5,197,476 shares remaining available for issuance under the 2012 Plan. On March 1, 2017, the Board of Directors approved, subject to shareholder approval at the 2017 Annual Meeting, an amendment and restatement of the 2012 Plan, and the amended and restated 2012 Plan is now being submitted to shareholders to request approval of the following changes:

Request to Add to Share Reserve.To avoid exhausting the reserve of remaining shares of Common Stock available for issuance under the 2012 Plan and to ensure a sufficient number of shares of Common Stock remains available for issuance for the company’s future equity compensation needs, we propose to increase the existing share reserve under the 2012 Plan by 24,000,000 shares of Common Stock. If shareholders approve the increase in the share reserve, a total of 42,250,000 shares would be authorized under the amended and restated 2012 Plan, of which 29,197,476 would be available for future issuance. The size of the share request is based on an analysis of historical equity compensation usage at both the company and its peer companies. The size of the request and the historic usage of shares are well with industry norms. The Compensation Committee has taken several actions in recent years to manage dilution levels. As detailed on page 48 of this Proxy Statement, as a result of these efforts, dilution and the one- and three-year burn rates have steadily decreased since 2013. We expect future dilution and grant rate levels to remain within industry norms.

Extension of the Term of the 2012 Plan.We propose to extend the term of the 2012 Plan to May 3, 2027 (the tenth anniversary of the 2017 Annual Meeting).

Adoption of an Annual Cap on Equity Awards toNon-Employee Directors.We propose to implement an annual grant date fair value limit of $400,000on the annual value of equity awards granted tonon-employee directors under the 2012 Plan. This limit is below both the median and average limits at Fortune 500 companies who have included director-specific annual dollar-based limits in their equity compensation plans.

Re-Approval of the Section 162(m) Performance Goals and Annual Grant Limitations.We propose there-approval of the material terms of the performance goals (including the annual per participant grant limitations) under the 2012 Plan for purposes of preserving the ability to grant awards to Section 162(m) covered executives under the 2012 Plan that are intended to qualify as performance-based compensation that is deductible under Section 162(m) of the Internal Revenue Code. Under Section 162(m) of the Internal Revenue Code, we must seek shareholder approval of the performance goals (including the annual per participant grant limitations) under the 2012 Plan every five years in order to preserve eligibility to qualify for the performance-based compensation exception under Section 162(m) of the Internal Revenue Code.

We are not seeking to make any other material changes to the 2012 Plan that would require shareholder approval. The Board of Directors has also adopted other modifications to the 2012 Plan, as amended and restated, which do not require shareholder approval, to reflect best market practices. These modifications include:

Compensation Recoupment Policy.An express compensation recoupment, or clawback, provision that provides that a participant’s rights with respect to awards are subject to any right that the company has under its existing compensation recoupment policy or under any applicable securities regulation or exchange listing rule.

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Two-Year Minimum Vesting Period for Stock Options and Stock Appreciation Rights.An increase in the minimum vesting period for stock options and stock appreciation rights from one year to two years.

If the requisite shareholder approval of the amended and restated 2012 Plan is not obtained, the amended and restated 2012 Plan will not take effect to the extent shareholder approval is required, but the company may continue to grant awards under the 2012 Plan in accordance with the current terms and conditions of the 2012 Plan, including the terms and conditions approved by the Board on March 1, 2017, that do not require shareholder approval.

KEY COMPENSATION GOVERNANCE FEATURES

Importantly, the amended and restated 2012 Plan will continue to contain the following important compensation governance features that were included prior to its amendment and restatement:

No repricing of stock options or stock appreciation rights.Repricing of stock options and stock appreciation rights is prohibited unless shareholder approval is obtained.

No discounted stock options or stock appreciation rights.Stock options and stock appreciation rights must be granted with an exercise price that is not less than 100 percent of the fair market value on the date of grant.

No reloads of options or stock appreciation rights.The ability to automatically receive a grant of additional options or stock appreciation rights in connection with any exercise of the original stock options or stock appreciation rights (so-called “stock option reloading”) is not permitted.

No liberal share recycling.The reuse of shares to satisfy the exercise price or tax withholding requirements of an award is not permitted.

Minimum vesting periods for awards.Subject to limited exceptions, awards of restricted stock and participation units have a minimum vesting period of three years and awards of stock options and stock appreciation rights have a minimum vesting period of two years.

Double-trigger change in control provisions.A “double-trigger” change in control mechanism is activated only when (1) a change in control is consummated and (2) a participant’s employment is terminated by the company or its successor without cause or by the participant for good reason within two years following the change in control.

CONTINUED CLOSE MONITORINGOF DILUTIONAND BURN RATE

The Compensation Committee remains focused on using equity to compensate executives in a manner that links executive and shareholder interests while focusing on the overall dilutive effect of equity compensation. As displayed in the table below, dilution and grant rate levels have steadily decreased since 2013. The Compensation Committee achieves this balance by (1) maintaining terms and conditions of equity awards that have the result of reducing dilution levels and (2) actively managing reasonable levels of equity dilution and annual share usage (burn rate or grant rate) when granting equity awards.

Since 2014, the Compensation Committee has taken the following actions to enhance the role of equity compensation as a longer-term valuation creation tool and to manage dilution levels.

  Compensation Committee Actions Taken

Resulting Reduction in Dilution Levels

Increased exercise period on options from a term of7-years to10-years

Option value increases result in fewer options granted to each participant

Decreased leverage on performance shares from 2 times target to 1.5 times target

In the event of strong company performance, payout can only result in 50% higher share usage

64     General Dynamics 2017 Proxy Statement


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The table below shows the dilution and one- and three-year burn 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

Additional information regarding the company’s calculation of dilution rate and burn rate is available on page 48 of this Proxy Statement.

As of March 6, 2017, there were:

5,197,476 shares remaining available for issuance under the 2012 Plan, of which 1,722,663 may be issued as full value awards;

12,102,349 options outstanding in aggregate under the General Dynamics Corporation 2009 Equity Compensation Plan (the 2009 Plan) and the 2012 Plan with a weighted-average exercise price of $121.91 and a weighted-average remaining term of 6.3 years; and

1,983,171 full value awards outstanding and unvested in aggregate under all equity compensation plans of the company.

Since approval of the 2012 Plan at the 2012 Annual Meeting, no further grants were made under the 2009 Plan, but awards under the 2009 Plan remain outstanding and will, among other things, continue to vest and/or becomebe exercisable in accordance with their original terms and conditions.

The 2019 U.K. Plan is being submitted to shareholders for approval. Your Board of Directors believes it is in the best interests of General Dynamics and its shareholders to approve the 2019 U.K. Plan.

SUMMARYOFTHE PLAN

The principal features of the amended and restated 20122019 U.K. Plan are summarized below. ThisThe summary doesmay not contain all the information that may beis important to you. The summary is qualified in its entirety by reference to the complete text of the amended and restated 20122019 U.K. Plan which is set forth inas Appendix AB to this Proxy Statement.

Plan Administration.  Subject to the terms of the 2012The 2019 U.K. Plan the Compensation Committee has the authority to interpret and administer the 2012 Plan. The Compensation Committee has the authority to, among other things, determine which individuals will participate in the 2012 Plan and to establish the amounts, types and terms of awards under the 2012 Plan.

Eligibility.  Any officer or employee of the company or any of its subsidiaries and any member of the Board of Directors who is not an employee of the company or any of its subsidiaries (anon-employee director) is eligible for selectionadministered by the Compensation CommitteeCommittee.

Eligibility.  Participation in the 2019 U.K. Plan may be extended to receive an award underour eligible employees in the 2012 Plan. AwardsUnited Kingdom. There are approximately 1,450 employees eligible tonon-employee directors must be approved by the Board participate in this plan. Currently, this plan does not benefit any NEO or other executive officer or director of Directors. As of the date of this Proxy Statement, there are 27 officers and approximately 99,000 employees (excluding officers) of the company and its subsidiaries and there are 11non-employee directors of the company.General Dynamics.

Shares Subject to the Plan.The 20122019 U.K. Plan provides that an aggregate maximum of 42,250,000450,000 shares of Common Stock will be available for issuance in connection with awards under the 2012plan.

Benefits.  Under the 2019 U.K. Plan, a participant is invited to invest a designated amount in a savings account each month and forreceive a correspondingtax-free bonus payment. The bonus payment is set at the paymentoutset of dividend equivalents that are settled in shares of Common Stock. From that aggregate maximum, (1) the maximum number of shares available for grants of incentive stock options (ISOs) under the 2012 Plan is 42,250,000 shares of Common Stock, (2) the maximum aggregate number of shares available for grants ofnon-statutory stock options (NSOs) and stock appreciation rights (SARs) under the plan is 42,250,000 shares of Common Stock, and (3) the maximum aggregate number of shares available for grants of restricted stock, Common Stock awards, participation units and performance-based awards (other than performance-based awards that are ISOs, NSOs and SARs), and shares paid in settlement of dividend equivalents pursuanta participant’s savings contract. The participant may be granted an option to the plan is 8,000,000 shares of Common Stock. If any award under the 2012 Plan or the 2009 Plan expires, is forfeited or cancelled, or terminates for any reason without the issuance of shares (including, without limitation, upon cash settlement), the shares relating to the award will again be available for issuance pursuant to awards under the 2012 Plan. However, if shares are tendered or withheld in payment of all or part of the exercise price of an award or in satisfaction of tax withholding obligations with respect to an award, the shares will not be available again for issuance pursuant to awards under the 2012 Plan. With respect to any SAR granted under the plan, thepurchase a specified number of shares of Common Stock counted against the share limits described above shall be either the full number of shares subject to the SAR, if it is settled in shares, or zero shares, if it is settled in cash.

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Award Types.  The 2012 Plan permits grants of unrestricted shares of Common Stock (Common Stock awards), NSOs, SARs, restricted stock, participation units, cash awards, performance-based awards or any combination thereof, to officers, employees andnon-employee directors and grants of ISOs to officers and employees.

Common Stock Awards.  The Compensation Committee may grant Common Stock awards under the 2012 Plan on such terms and conditions, not inconsistent with the plan, as the Compensation Committee may determine. In addition, anon-employee director may elect to have all or part of his or her annual retainer paid in Common Stock under the 2012 Plan upon such terms and conditions as the Compensation Committee may establish from time to time.

Stock Options and SARs.  The 2012 Plan provides for the grant of (1) ISOs, which are stock options that are designated by the Compensation Committee as incentive stock options and which meet the applicable requirements for incentive stock options pursuant to Section 422 of the Internal Revenue Code, (2) NSOs, which are stock options that do not qualify as ISOs or that are designated as NSOs notwithstanding that they may otherwise qualify as ISOs, and (3) SARs, which are rights to receiveat an amount of cash or shares of Common Stock with a fair market value equal to the increase in the fair market value of a specified number of shares between the date on which the SAR is granted and the date on which it is exercised. References in this summary to “stock options” will mean both ISOs and NSOs, unless otherwise specified.

Pursuant to the terms of the 2012 Plan, the Compensation Committee determines the terms and conditions, not inconsistent with the 2012 Plan, of any award of stock options or SARs. The 2012 Plan provides that awards of stock options and SARs are subject to the following restrictions: (1) the exercise price per share for stock options or SARs may not be less than 10080 percent of the fair market value of a share of Common Stock on the grant date (with fair market value determined by taking the averageas of the highest and lowest quoted selling price per sharelater of Common Stock on the national securities exchangedate on which the Common Stockparticipant is principally tradedinvited to participate in the 2019 U.K. Plan, or the date on the grant date), (2) stock options and SARs may not have a term of more than 10 years, (3) no stock option or SAR may entitlewhich the participant to receive an automatic grant of additional stock options or SARs in connection with any exerciseis notified of the original stock option or SAR, (4) except in connection with a corporate transaction involving the company, shareholder approval is required to reprice any stock options or SARs after their grant date or to exchange them for cash, other awards, or stock options or SARs with lower exercise prices, and (5) stock options and SARs generally may not vest sooner than two years from the original grant date, except in certain circumstances following a change in control or where the Compensation Committee provides for a shorter vesting period in connection with a corporate divestiture or acquisition or in other special circumstances as determined by the Compensation Committee.price. In addition,practice, the exercise price of shares purchased upon the exercise of any stock option may be paid in cash, Common Stock or both, by cashless exercise or in any other manner as may be permitted by the Compensation Committee.

Restricted Stock.  The 2012 Plan provides for the grant of restricted stock, which is Common Stock that may not be sold, transferred, pledged, assigned or otherwise alienated except upon the passage of time, or upon satisfaction of performance goals or other conditions. Pursuant to the terms of the 2012 Plan, the Compensation Committee determines the terms and conditions, not inconsistent with the plan, of any award of restricted stock. The 2012 Plan provides that (1) a participant holding restricted stock may vote the shares awarded and will be entitled to the payment of dividends and other distributions on the shares from the date the award is made, subject to such restrictions or conditions as the Compensation Committee may determine, except that no dividend shall be paid in respect of performance-based awards prior to the vesting of such awards; and (2) restricted stock awards generally have a minimum vesting period of three years (other than shares of restricted stock granted as an adjustment pursuant to a performance-based formula), except in certain circumstances following a change in control or where the Compensation Committee provides for a shorter vesting period in connection with a corporate divestiture or acquisition or in other special circumstances as determined by the Compensation Committee.

Participation Units.  The 2012 Plan provides for the grant of participation units, which are awards of unfunded obligations of the company that have a value derived from or related to the value of Common Stock, including for example, phantom stock units or restricted stock units, and are payable in cash, Common Stock or any combination thereof. Pursuant to the terms of the 2012 Plan, the Compensation Committee determines the terms and conditions, not inconsistent with the 2012 Plan and in compliance with Section 409A of the Internal Revenue Code and the rules and regulations thereunder, of any award of participation units. The 2012 Plan provides that participation unit awards generally may not vest sooner than three years from the original grant date (other than participation units granted as an adjustment to a performance-based formula), except in certain circumstances following a change in control or where the Compensation Committee provides for a shorter vesting period in connection with a corporate divestiture or acquisition or in other special circumstances as determined by the Compensation Committee. A participant holding participation units

66     General Dynamics 2017 Proxy Statement


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will not be entitled to any rights as a shareholder until shares are delivered upon settlement of the participation units, but a participant may be entitled to contractual dividend equivalents, subject to such restrictions or conditions as the Compensation Committee may determine, except that no dividend equivalents shall be paid in respect of performance-based awards prior to the vesting of such awards.

Cash Awards.  The 2012 Plan provides for the grant of cash awards (referred to in the 2012 Plan as Other Awards), which are awards payable in cash. Pursuant to the terms of the 2012 Plan, the Compensation Committee determines the terms and conditions, not inconsistent with the 2012 Plan and in compliance with Section 409A of the Internal Revenue Code, of any cash awards.

AnnualNon-Employee Director Award Limitation.  The 2012 Plan provides that the aggregate grant date fair value of all awards (excluding the issuance of shares of Common Stock as a result of a voluntary election to receive Common Stock in lieu of cash retainers) granted under the plan to individualnon-employee directors in any calendar year will not exceed $400,000.

Performance-Based Awards.  The Compensation Committee may grant performance-based awards under the 2012 Plan. Performance-based awards are awards of Common Stock, stock options, SARs, restricted stock, participation units, cash awards, or any combination thereof, payment of which is contingent upon the attainment of one or more performance goals. A performance goal (1) may relate to the performance of the participant, the company or any of its subsidiaries, any business group, any business unit or other subdivision of the company or any of its subsidiaries, or any combination of the foregoing, as the Compensation Committee may deem appropriate and (2) may be expressed as an amount, as an increase or decrease over a specified period, as a relative comparison to the performance of a group of comparator companies or a published or special index, or any other external measure of the selected performance criteria, as the Compensation Committee, in its sole discretion, deems appropriate.

For performance-based awards granted to Section 162(m) covered executives of the company that are intended to meet the requirements of qualified performance-based compensation under Section 162(m) of the Internal Revenue Code, performance goals shall be determined by reference to one or more of the following criteria selected by the Compensation Committee in its sole discretion (as determined in accordance with generally accepted accounting principles, as applicable): (1) market price of Common Stock, (2) earnings per share of Common Stock, (3) net income or profit (before or after taxes), (4) return on total stockholders’ equity, (5) return of stockholders’ equity, (6) return on invested capital, (7) cash flow, (8) cumulative return on net assets employed, (9) earnings before interest and taxes, (10) earnings before interest, taxes, depreciation and amortization, (11) earnings from continuing operations, (12) sales or revenues, (13) return on assets, capital or investment, (14) market share, (15) cost reduction goals, (16) budget comparisons, (17) implementation or completion of specified projects or processes, (18) the formation of joint ventures, research or development collaborations, or the completion of other transactions, and/or (19) any combination of any of the foregoing. For all performance-based awards granted under the 2012 Plan that are not intended to meet the requirements of qualified performance-based compensation under Section 162(m) of the Internal Revenue Code, performance goals may be based on one or more of the foregoing criteria or any other criteria that the Compensation Committee deems appropriate.

The Compensation Committee will establish performance goals within 90 days after the beginning of the performance period for a performance-based award and in any case before 25has historically been set at 85 percent of the performance period has elapsed. The Compensation Committee may provide at the time it establishes a performance goal that the measurement of the performance goal shall exclude the impact of unusual,non-recurring or extraordinary items, charges for restructurings, discontinued operations, the cumulative effect of changes in accounting treatment and any other items, each determined in accordance with generally accepted accounting principles (to the extent applicable) and as identified in the company’s audited financial statements, including the notes thereto.

The 2012 Plan provides that the minimum vesting period for any performance-based award will not be less than the minimum vesting period for the form of award in which the performance-based award is granted.

The maximum number of shares of Common Stock (or in the case of a cash award, the maximum dollar amount) that may be subject to awards intended to meet the requirements of qualified performance-based compensation under Section 162(m) of the Internal Revenue Code granted under the 2012 Plan to any individual participant in any calendar year is: (1) 1,000,000 shares of Common Stock pursuant to a Common Stock award, (2) 1,000,000 shares of Common Stock pursuant to a stock option or SAR, (3) 200,000 shares of Common Stock for restricted stock awards, (4) participation units with a value equal to 200,000 shares of Common Stock, and (5) $5,000,000 for cash awards.

Amendment and Termination.  The Compensation Committee may at any time suspend the operation of, terminate or amend the 2012 Plan or any award, provided that no suspension, termination or amendment may adversely impair the rights of any participant

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Equity Compensation Plan


under any outstanding award without such participant’s consent, except that the Compensation Committee may take such actions as it deems appropriate to ensure that the 2012 Plan and any awards comply with any tax, securities or other applicable law.

Adjustments and Reorganizations.  The maximum number of shares of Common Stock available for issuance under the 2012 Plan and the individual and aggregate limits described above will be equitably adjusted upon certain events affecting the capitalization of the company such as a recapitalization or stock split. In the event of an increase or decrease in the number of issued shares of Common Stock without receipt or payment of consideration by the company, the Compensation Committee may adjust the number of shares subject to each outstanding award and the exercise price per share of each such award. Upon the occurrence of certain extraordinary corporate transactions, such as a dissolution, sale or merger of the company, the Compensation Committee has discretion to make certain adjustments, cancel, or provide for the exchange of outstanding awards.

Transferability.  Except as provided by the Compensation Committee, an award under the 2012 Plan is not transferrable other than by the participant’s last will and testament or by applicable laws of descent and distribution.

Effect of a Change in Control.The change in control provision in the 2012 Plan contains a “double-trigger” mechanism that is activated only when (1) a change in control is consummated and (2) a participant’s employment is terminated by the company or its successor without cause or by the participant for good reason within two years following the change in control. If both of these triggers are satisfied then all of the participant’s outstanding awards under the 2012 Plan will immediately vest and become exercisable and all restrictions on the awards will lapse.

Company Recoupment of Awards.  The 2012 Plan provides that a participant’s rights with respect to any Award under the plan is subject to (1) any right that the company may have under its compensation recoupment policy or other agreement with a participant and (2) any right or obligation that the company may have under Section 10D of the Exchange Act and any applicable rules and regulations of the SEC.

SUMMARYOF FEDERAL INCOME TAX CONSEQUENCESOF AWARDS

The following is a brief summary of the United States federal income tax consequences of the issuance and exercise of awards under the 2012 Plan to the company and to the participants. This summary is not intended to be exhaustive and, among other things, does not describe state, local or foreign tax consequences.

Cash Awards and Common Stock Awards.A participant generally will not recognize income at the time a cash award or a Common Stock award subject to vesting conditions is granted to the participant. When cash is paid to the participant pursuant to a cash award or shares vest pursuant to a Common Stock award, the participant generally will recognize ordinary income equal to the amount of cash paid or the fair market value of the shares that vest. When a Common Stock award that is not subject to vesting conditions is granted to the participant, the participant generally will recognize ordinary income at the time of grant in an amount equal to the fair market value of the shares subject to the award. The amount of ordinary income recognized by the participant generally is subject to payroll taxes. The company generally is entitled to a tax deduction at the same time and in the same amount as the participant recognizes ordinary income.

Restricted Stock Awards and Participation Units.A participant generally will not recognize income at the time a restricted stock award is granted. When the restrictions lapse with regard to any installment of restricted stock, the participant generally will recognize ordinary income in an amount equal to the fair market value of the shares with respect to which the restrictions lapse, unless the participant elects to recognize ordinary income in the year the award is granted in an amount equal to the fair market value of the restricted stock awarded at the time of grant, determined without regard to the restrictions. The participant generally will recognize ordinary income at the time of payment of a dividend with respect to restricted stock (unless the participant has elected to recognize ordinary income in the year the restricted stock award is granted in an amount equal to the fair market value of the restricted stock awarded, in which case, any such dividend may be treated as dividend income) in an amount equal to the dividend paid, in the case of a cash dividend, or the fair market value of the shares delivered, in the case of a stock dividend. A participant generally will not recognize income at the time an award of participation units is granted or at the time that the participant is credited with a dividend equivalent with respect to such award. The participant generally will recognize ordinary income at the time the participation units or dividend equivalents are paid, in an amount equal to the cash paid or to be paid or the fair market value of the shares delivered or to be delivered. The amount of ordinary income recognized by the participant generally is subject to payroll taxes. The company generally is entitled to a deduction at the same time and in the same amount as the participant recognizes ordinary income.

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Performance-Based Awards.A participant generally will not recognize income at the time of grant of a performance-based award. The participant generally will recognize ordinary income at the time the performance-based award is paid in an amount equal to the dollar amount, or the fair market value of the shares of Common Stock, paid or delivered. The amount of ordinary income recognized by the participant generally is subject to payroll taxes. The company generally is entitled to a deduction at the same time and in the same amount as the participant recognizes ordinary income.

NSOs and SARs.A participant who is granted an NSO or SAR generally does not recognize income at the time of grant, but will recognize ordinary income upon exercise of the NSO or SAR in an amount equal to the excess of the aggregate fair market value of the shares subject to the award on the exercise date over the aggregate exercise price of such shares. The amount of ordinary income recognized by the participant generally is subject to payroll taxes. The company generally is entitled to a deduction at the same time and in the same amount as the participant recognizes ordinary income.

ISOs.A participant who is awarded an ISO generally does not recognize taxable income at the time of award or upon exercise of the ISO, but the excess of the fair market value of the shares acquired on the exercise date over the exercise price is included in the participant’s income for alternative minimum tax purposes. Thevalue. We may grant of an ISO generally does not entitle the company to a deduction. A participant who acquires shares by exercise of an ISO generally recognizes income on a saleoptions that can be exercised three or other disposition of those shares in an amount equal to the difference between the amount received on the sale or disposition of the shares and the exercise price previously paid by the participant. If the participant holds the shares issuable upon exercise of an ISO for the later of twofive years after the ISO grant date and one year from the date of the grant. The participant may exercise income onhis or her options but can only purchase the saleCommon Stock with the proceeds of such shares generally will be taxed tohis or her savings account (including thetax-free bonus). Alternatively, the participant at long-term capital gain rates. In such case,may elect to take the company generally is not entitledproceeds of his or her savings contract in cash or choose to a deduction. If the participant sells the shares issuable upon exercise of an ISO prior to the end of the applicable holding periods, the participant generally will recognize ordinary income in the year of the sale equal to the excess, if any, of the lesser of (1) the fair market value of the shares on the date of exercise and (2) the amount received for the shares over the exercise price previously paid by the participant. The balance of the gain or the loss, if any, generally will be a long-term or short-term capital gain or loss, depending on how long the shares were held by the participant prior to the sale. The amount of ordinary income recognized by the participant in this circumstance generally is subject to payroll taxes. The company generally is entitled to a deduction at the same time and in the same amount as the participant recognizes ordinary income.

Certain Other Tax Issues and Related Matters.In addition to the matters described above, (1) any entitlement to a tax deduction on theonly part of the company is subject to applicable federal tax rules (including, without limitation, Section 162(m) ofoption and receive the Internal Revenue Code regarding the $1,000,000 limitation on deductible compensation), (2) the exercise of an ISO may have implicationsrest in the computation of alternative minimum taxable income, (3) certain awardscash. Benefits under the 20122019 U.K. Plan may be subject to the requirements of Section 409A of the Internal Revenue Code (regarding nonqualified deferred compensation), and (4) if the exercisability or vesting of any option is accelerated because of a change in control, such option (or a portion thereof), either alone or together with certain other payments, may constitute parachute payments under Section 280G of the Internal Revenue Code, which excess amounts may be subject to excise taxes and deduction limitations. Officers and directors of the company subject to Section 16(b) of the Exchange Act may be subject to special tax rules regarding the income tax consequences concerning their options. The 2012 Plan is not subject to any of the requirements of the Employee Retirement Income Security Act of 1974, as amended. The 2012 Plan is not, nor is it intended to be, qualified under Section 401(a) of the Internal Revenue Code.

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Equity Compensation Plan


GRANTSAND AWARDSUNDERTHE 2012 PLAN

As of March 6, 2017, the following outstanding awards have been granted under the 2012 Plan to each of the executive officers named below, all current executive officers as a group, allnon-employee directors as a group, and all other employees, respectively:

  Name

 

  

NUMBER OF

SHARES
UNDERLYING
OPTIONS/SARS

 

   

WEIGHTED
AVERAGE

EXERCISE
PRICEOF
OPTIONS/SARS

 

   

 

NUMBEROF
SHARES
UNDERLYING
RESTRICTED STOCK
AWARDS/STOCK
UNIT AWARDS*

 

 

Phebe N. Novakovic

   1,980,090   $111.19    227,475 

Jason W. Aiken

   284,400   $131.30    46,455 

John P. Casey

   295,585   $129.96    47,170 

Mark C. Roualet

   372,930   $115.53    44,266 

S. Daniel Johnson

   157,920   $152.79    34,626 

All Executive Officers as a Group

(13 people)

   4,300,995   $119.12    568,187 

AllNon-Employee Directors as a Group

(11 people)

   159,430   $122.00    18,900 

All Other Employees

   6,693,406   $130.76    1,396,084 

*

Includes performance restricted stock units (PRSUs) at target payout. The exact number of PRSUs that may be earned is determined by performance metrics set by the Compensation Committee.

Future Benefits.No awards have been granted, and no shares have been issued,depend on the basis of the proposed 24,000,000 share increase under the 2012 Plan. Future grants under the 2012 Plan will be made at the discretion of the Compensation Committeeparticipant’s election to participate and accordingly, are not yet determinable. In addition, the value of the awards granted under the 2012 Plan will depend on a number of factors, including the fair market value of the Common Stock onat various future dates and the exercise decisions made by the participants. Consequently,dates. As a result, it is not possible at this time to determine thefuture benefits that mightwill be received by participants receiving discretionary grantsparticipants.

Amendment and Termination.  The Compensation Committee may amend the 2019 U.K. Plan. The 2019 U.K. Plan will terminate on the 10th anniversary of the date of adoption, or earlier by resolution of the Compensation Committee.

Tax Consequences of Awards.  Under U.K. law, no income tax is due upon receipt of an option to purchase Common Stock under the 20122019 U.K. Plan. Further, no income tax is due upon the exercise of the option by a participant unless the option is exercised within three years of its date of grant for reasons other than the death, injury, disability, layoff or retirement of the participant. If any

60     General Dynamics 2019 Proxy Statement


UK Share Save Plan in the future.

As of March 6, 2017, the closing price

income tax liability does arise, it will be based on the New Yorkfair market value of the shares less the exercise price. If a participant exercises an option to purchase Common Stock Exchange ofand then sells the Common Stock, was $190.94 per share.capital gains tax may be due on the proceeds of the sale. Under U.K. law, however, a certain amount of capital gains are excludable from taxable income each year. The bonus payments aretax-free, but early termination of the savings contract will lead to the savings being either subject to tax or interest or there will be no return on the savings. Under U.K. law, we will be able to deduct the costs of establishing the 2019 U.K. Plan.

 

YOUR BOARDOF DIRECTORSUNANIMOUSLYRECOMMENDSAVOTE

FOR

THISPROPOSAL.

 

70     General Dynamics 2019 Proxy Statement     61


SHAREHOLDER PROPOSAL – INDEPENDENT BOARD CHAIRMAN

(PROPOSAL 5)

We have been advised by John Chevedden, 2215 Nelson Ave., No. 205, Redondo Beach, California 92078, owner of at least 100 shares of Common Stock, that he intends to present the following shareholder proposal at the Annual Meeting. We are not responsible for the accuracy or content of the proposal and supporting statement, presented below, as received from the proponent. Our reasons for opposing the proposal are also presented below.

PROPOSALAND SUPPORTING STATEMENT

Proposal 5 – Independent Board Chairman

Shareholders request our Board of Directors to adopt as policy, and amend our governing documents as necessary, to require henceforth that the Chair of the Board of Directors, whenever possible, to be an independent member of the Board. The Board would have the discretion to phase in this policy for the next Chief Executive Officer transition, implemented so it does not violate any existing agreement.

If the Board determines that a Chairman, who was independent when selected is no longer independent, the Board shall select a new Chairman who satisfies the requirements of the policy within a reasonable amount of time. Compliance with this policy is waived if no independent director is available and willing to serve as Chairman. This proposal requests that all the necessary steps be taken to accomplish the above.

Caterpillar is an example of a company changing course and naming an independent board chairman. Caterpillar had opposed a shareholder proposal for an independent board chairman at its annual meeting. Wells Fargo also changed course and named an independent board chairman.

It is especially important to have an independent board chairman when our Lead Director lacks independence. James Crown was Lead Director in spite of31-years long-tenure. Long-tenure can impair the independence of a director no matter how well qualified. Independence is anall-important qualification for a Lead Director.

Mr. Crown also had an oversized influence since he chaired our nomination committee and was on our executive pay and audit committees. The shareholder approval of General Dynamic’s executive pay dropped precipitously from 97% in 2017 to 68% in 2018 – apparently not helped by Mr. Crown’s oversight as a member of the executive pay committee.

Plus we had 2 directors who came from the same military culture that emphasizes following orders. Retired military could be consultants instead of directors.

Meanwhile there are challenges that face our company that need to be managed well and prevented from reoccurring that could be helped by having an independent chairman to run the Board of Directors and address the above director issues while our CEO focuses onday-to-day challenges like these:

Complaint over alleged misclassification and underpayment of call center employees – General Dynamics Information Technology Inc.

July 2018

Criticisms over alleged role in controversial U.S. family separation policy

June 2018

Elimination ofchange-of-control excise taxgross-up in severance agreement of Phebe Novakovic – Chairman and CEO

October 2016

An independent Chairman is best positioned to build up the oversight capabilities of our directors while our CEO addresses the challengingday-to-day issues facing the company. The roles of Chairman of the Board and CEO are fundamentally different and should not be held by the same person. There should be a clear division of responsibilities between these positions to insure a balance of power and authority on the Board.

Please vote yes:

Independent Board Chairman – Proposal 5

62     General Dynamics 2019 Proxy Statement


Shareholder Proposal

 

STATEMENTBYYOUR BOARDOF DIRECTORS AGAINSTTHE SHAREHOLDER PROPOSAL

Your Board of Directors unanimously recommends a vote AGAINST this proposal. The Board believes that our shareholders’ interests are best served when we retain the ability to select the appropriate person to serve in the chairman’s role and that our current leadership structure is effective in its independent oversight of General Dynamics. Additionally, instead of confining discussion to the actual topic of board leadership structure, the proponent resorts to baseless, irrelevant and impertinent invective that redefines the proposal as a vote on ancillary points and not the core governance topic. This calumny should be rejected with a vote against the proposal.

Our Robust Lead Independent Director Role Provides Meaningful Independent Leadership and Oversight at the Board Level. Among the several shareholder protections in the company’s corporate governance structure is a robust and clearly defined independent Lead Director role. Elected annually, the independent Lead Director’s authority and responsibilities include the following:

Acts as chair at board meetings when the chairman is not present, including meetings of thenon-management directors;


Has the authority to call meetings of thenon-management directors;

Coordinates activities of thenon-management directors and serves as a liaison between the chairman and thenon-management directors;

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; and

Is available for consultation and communication with significant shareholders, when appropriate.

Our current independent Lead Director, James Crown, performs each of the substantive responsibilities outlined above as well as the following additional duties:

Meets regularly with our chief executive officer to delve deeply into matters of interest to the Board, to provide feedback on past Board meetings and to seek specific information for future Board meetings;

Consults regularly with Board members, particularly thenon-management directors, to ensure strong communication among each Board member; and

Leads, as chairman of the Nominating and Corporate Governance Committee, the Board’s annual self-evaluation process.

Our Current Approach Allows the Board to Select the Most Appropriate Leadership Structure and Leaders for General Dynamics. The current policy on election of the Board’s chairman, consistent with the company’s Bylaws, is simple – the Board elects the best person to lead the Board in its mission to represent the interests of shareholders.

While our current chairman is also the chief executive officer, that arrangement is simply a reflection of the Board’s view that Phebe Novakovic is the right person for those roles currently, and that the company and its shareholders would not be well served by splitting the roles at this time.

General Dynamics’ Corporate Governance Guidelines provide that the Board will adopt a leadership structure that best serves the company’s needs at any particular time, and that such arrangement could involve either the separate or combined roles of chairman and chief executive officer.

Accordingly, as part of the selection process each year the Board considers whether the roles should be separated and whether the company and its shareholders are best served by the individual(s) serving the role(s).

Our Strong Corporate Governance Practices Ensure Management Accountability and Provide Effective Independent Oversight of General Dynamics. In addition to the strong role and significant responsibilities of our independent Lead Director, the Board has in place many other mechanisms to ensure management accountability and a balanced governance structure:

The Board’s four standing committees are each chaired by independent directors and are 100% independent.

The Board’snon-management directors meet in executive session without management present at every Board meeting.

General Dynamics 2019 Proxy Statement     63


Shareholder Proposal

All directors, except the current chief executive officer, meet the independence requirements of the New York Stock Exchange Listing Standards and the company’s Corporate Governance Guidelines.

The full Board and each committee have authority to retain their own independent outside legal, financial or other advisors, as the members deem necessary.

The full Board participates in performance management and assessment of both senior management and itself.

Our shareholders enjoy strong shareholder rights, including the right to request a special meeting of shareholders and proxy access (the ability to nominate director candidates, and have those nominees included in our proxy statement).

The Corporate Governance Concerns Raised by the Proponent are Unfounded and Do Not Accurately Reflect the Company’s Leadership and Governance Practices.

First, the proponent asserts that our independent Lead Director “lacks independence” because of his substantial tenure on the Board. Mr. Crown is independent under all applicable independence standards and has continuously received very strong support from shareholders in his annual election to the Board. Additionally, Mr. Crown’s tenure and experience enable him to bring valuable and independent views to the boardroom, where he provides thoughtful leadership for both fellow directors and senior management.

Second, for the second year in a row the proponent suggests that he takes objection to anyone with a military background serving as a director. Directors with prior military service provide our Board with an unparalleled understanding of the requirements and priorities of several of the company’s key customers. With the U.S. Government representing on average 60 percent of our revenues over the past several years, intimacy with our customer’s priorities and demands is critical. Our directors with prior military service play an irreplaceable role in advising our businesses on how to ensure that our products and services remain effective and responsive to our customers in supporting national security and defense programs. Furthermore, these directors are actively engaged in the Board’s deliberations and each exercises his own independent judgment in fulfilling fiduciary duties and maximizing shareholder value.

Additionally, the proponent invokes three entirely irrelevant topics labeled as company challenges. A proposal concerning Board leadership structure should not be an avenue for debating unrelated issues. There is no demonstrable or intuitive link between the items listed by the proponent and the Board’s leadership structure. Two of the items invoked by the proponent, without a full discussion of the issues concerned, are misleading and, in the case of the call center business, relates to a business that is no longer owned by the company. The third item, regarding the company’s elimination of excise taxgross-up payments, is unquestionably favorable to shareholders and cannot logically be criticized as evidencing a problem with the Board’s governance.

Conclusion: Our Current Structure of a Combined Chief Executive Officer and Chairman with a Strong Lead Independent Director Enhance Your Board’s Ability to Govern the Company in Shareholders’ Best Interests.

Your Board believes that the decision of who should serve in the roles of chairman and chief executive officer, and whether these roles should be combined, is the responsibility of the Board. This decision is not appropriately addressed with a“one-size-fits-all” approach that assumes a single leadership structure works at all times.

Your Board regularly evaluates the corporate governance structures in place at our company, including the roles of chairman and chief executive officer.

While the Board has in the past and may again in the future determine that the interests of the company would be best served by separating the roles of chairman and chief executive officer, the Board believes that, on balance, a combined role works best at this time.

Your Board will continue to evaluate these structures to determine the appropriate board leadership structure for the company. This model best serves our dynamic and successful company.

YOUR BOARDOF DIRECTORSUNANIMOUSLYRECOMMENDSAVOTE

AGAINSTTHISSHAREHOLDERPROPOSAL.

64     General Dynamics 2019 Proxy Statement


INFORMATION REGARDINGTHE ANNUAL MEETINGAND VOTING

All shareholders of record at the close of business on March 6, 2017,7, 2019, are entitled to vote their shares of Common Stock at the Annual Meeting. On the record date, General Dynamics had 303,370,701288,769,918 shares of Common Stock issued and outstanding.

Following are questions and answers about the annual meeting and voting.

ANNUAL MEETING ATTENDANCE

Will I need to provide documentation to attend the Annual Meeting?Yes. All shareholders will need an admission ticket and personal photo identification for admission. You may print your own admission ticket and you must bring it to the meeting. Tickets can be printed by accessing Shareholder Meeting Registration at www.ProxyVote.com and following the instructions provided. If you are unable to print your tickets, please call Broadridge Financial Solutions, Inc. (Broadridge) at1-855-449-0994844-318-0137 toll-free or925-331-6070 international toll for assistance.

How many shares must be present to hold the Annual Meeting?A quorum of shares must be present to hold the Annual Meeting. A quorum is the presence, in person or by proxy, of holders of a majority of the issued and outstanding shares of Common Stock as of the record date. If you submit a properly completed proxy in accordance with one of the voting procedures described below or appear at the Annual Meeting to vote in person, your shares of Common Stock will be considered present. For purposes of determining whether a quorum exists, abstentions and brokernon-votes (as described below) will be counted as present. Once a quorum is present, voting on specific proposals may proceed. In the absence of a quorum, the Annual Meeting may be adjourned.

How are proxy materials being distributed for the Annual Meeting?As permitted by the rules of the Securities and Exchange Commission (SEC),SEC, we are providing the proxy materials for our 20172019 Annual Meeting via the Internet to most of our shareholders. Use of the Internet will expedite receipt of the 20172019 proxy materials by many of our shareholders and help to keep mailing costs for our Annual Meeting as low as possible. For shareholders who are participants in our 401(k) plans we are required generally to deliver proxy materials in hard copy. On March 23,21, we initiated delivery of proxy materials to our shareholders of record in one of two ways: (1) a notice containing instructions on how to access proxy materials via the Internet or (2) a printed copy of those materials. If you received a notice in lieu of a printed copy of the proxy materials, you will not automatically receive a printed copy of the proxy materials in the mail. Instead, the notice provides instructions on how to access the proxy materials on the Internet and how to vote online or by telephone. If you received such a notice and would also like to receive a printed copy of the proxy materials, the notice includes instructions on how you may request a printed copy.

VOTING

Who is entitled to vote at the Annual Meeting? You must be a shareholder of record on the record date, which is March 6, 2017,7, 2019, to vote your shares at the Annual Meeting.

How do I vote my shares?How you vote your shares will depend on whether you are a shareholder of record or a beneficial owner of your shares.

Shareholders of record.Each shareholder of record is entitled to one vote on all matters presented at the Annual Meeting for each share of Common Stock held. You are considered a shareholder of record if your shares are registered directly in your name with our transfer agent, Computershare Trust Company, N.A., as of the record date. If you are a shareholder of record, Broadridge provides proxy materials to you on our behalf. If your shares are registered in different names or held in more than one account, you may receive more than one proxy card or set of voting instructions. In that case, you will need to vote separately for each set of shares in accordance with the following voting procedures.

Shareholders of record may cast their vote in one of the following ways:

 

YOU MAY CAST YOUR VOTE:

  By Internet:

  

access www.ProxyVote.com and follow the instructions

  By Telephone:

  

call1-800-690-6903 and follow the instructions

  By Mail:

  

sign and date each proxy card received and return each card using the prepaid postage envelope

  In Person:

  

attend the Annual Meeting and vote by ballot

 

General Dynamics 20172019 Proxy Statement     7165


Annual Meeting Information


The telephone and Internet voting systems are available 24 hours a day. They will close at 11:59 p.m. eastern time on May 2, 2017.Please note the voting deadline differs for participants in our 401(k) plans, as described below.All shares represented by properly executed, completed and unrevoked proxies that are received on time will be voted at the Annual Meeting in accordance with the specifications made in the proxy card.

IF YOU RETURN A SIGNED PROXY CARD BUT DO NOT SPECIFICALLY DIRECT THE VOTING

OF SHARES, YOUR PROXY WILL BE VOTED AS FOLLOWS:

FOR the election of directors as described in this Proxy Statement

FOR the selection, on an advisory basis, of KPMG LLP as the independent auditors of the company

FOR the approval, on an advisory basis, of the compensation of the named executive officers

On an advisory basis, to hold future executive compensation advisory votesEVERY YEAR

FORthe approval of the General Dynamics Corporation Amended and Restated 2012 Equity Compensation Plan

IN ACCORDANCE WITH the judgment of the proxy holders for other matters that properly come before the Annual Meeting

Beneficial Owners.If your shares are held by a bank, broker or other holder of record (sometimes referred to as holding shares in “street name”), the bank, broker or other holder is the shareholder of record and you are the beneficial owner of those shares. Your bank, broker or other holder of record will forward the proxy materials to you. As the beneficial owner, you have the right to direct the voting of your shares by following the voting instructions provided with these proxy materials. Please refer to the proxy materials forwarded by your bank, broker or other holder of record to see which voting options are available to you.

401(k) Plan Participants.Fidelity Management Trust Company (Fidelity), as trustee, is the holder of record of the shares of Common Stock held in our 401(k) plans – the General Dynamics Corporation 401(k) Plan and the General Dynamics Corporation 401(k) Plan for Represented Employees. If you are a participant in one of these plans and in the fund that invests in shares of Common Stock, you are the beneficial owner of the shares of Common Stock credited to your plan account. As beneficial owner and named fiduciary, you have the right to instruct Fidelity, as plan trustee, how to vote your shares. If you do not provide Fidelity with timely voting instructions then, consistent with the terms of the plans, Evercore Trust Company, N.A. (Evercore), will direct Fidelity, in Evercore’s discretion, how to vote the shares. Evercore serves as the independent fiduciary and investment manager for the General Dynamics Stock Fund of the 401(k) plans.

Broadridge provides proxy materials to participants in these plans on behalf of Fidelity. If you are a plan participant and also a shareholder of record, Broadridge may combine the shares registered directly in your name and the shares credited to your 401(k) plan account onto one proxy card. If Broadridge does not combine your shares, you will receive more than one set of proxy materials. In that case, you will need to submit a vote for each set of shares. The vote you submit via proxy card or the telephone or Internet voting systems will serve as your voting instructions to Fidelity.To allow sufficient time for Fidelity to vote your 401(k) plan shares, your vote, or anyre-vote, must be received by 9 a.m. eastern time on May 1, 2017.

Can I change or revoke my proxy vote? A shareholder of record may change or revoke a proxy at any time before it is voted at the Annual Meeting by:

A PROXY MAY BE REVOKED BY:

Sending written notice of revocation to our Corporate Secretary

Submitting another proxy card that is dated later than the original proxy card

Re-voting by using the telephone or Internet voting systems, or

Attending the Annual Meeting and voting by ballot (attendance at the Annual Meeting alone will not act to revoke a prior proxy).

Our Corporate Secretary must receive notice of revocation, or a subsequent proxy card, before the vote at the Annual Meeting for a revocation to be valid. Except as described above for participants in our 401(k) plans, are-vote by the telephone or Internet voting systems must occur before 11:59 p.m. eastern time on May 2, 2017. If you are a beneficial owner, you must revoke your proxy through the appropriate bank, broker or other holder of record.

72     General Dynamics 2017 Proxy Statement


Annual Meeting Information

 

The telephone and Internet voting systems are available 24 hours a day. They will close at 11:59 p.m. eastern time on April 30, 2019.Please note the voting deadline differs for participants in our 401(k) plans, as described below. All shares represented by properly executed, completed and unrevoked proxies that are received on time will be voted at the Annual Meeting in accordance with the specifications made in the proxy card.

IF YOU RETURN A SIGNED PROXY CARD BUT DO NOT SPECIFICALLY DIRECT THE VOTING
OF SHARES, YOUR PROXY WILL BE VOTED AS FOLLOWS:
FOR the election of directors as described in this Proxy Statement
FOR the selection, on an advisory basis, of KPMG LLP as the independent auditors of the company
FOR the approval, on an advisory basis, of the compensation of the named executive officers
FOR the approval of the General Dynamics United Kingdom Share Save Plan
AGAINST the shareholder proposal
IN ACCORDANCE WITH the judgment of the proxy holders for other matters that properly come before the Annual Meeting

Beneficial Owners.If your shares are held by a bank, broker or other holder of record (sometimes referred to as holding shares in “street name”), the bank, broker or other holder is the shareholder of record and you are the beneficial owner of those shares. Your bank, broker or other holder of record will forward the proxy materials to you. As the beneficial owner, you have the right to direct the voting of your shares by following the voting instructions provided with these proxy materials. Please refer to the proxy materials forwarded by your bank, broker or other holder of record to see which voting options are available to you.

401(k) Plan Participants.Fidelity Management Trust Company (Fidelity), as trustee, is the holder of record of the shares of Common Stock held in our 401(k) plans – the General Dynamics Corporation 401(k) Plan and the General Dynamics Corporation 401(k) Plan for Represented Employees. If you are a participant in one of these plans and in the fund that invests in shares of Common Stock, you are the beneficial owner of the shares of Common Stock credited to your plan account. As beneficial owner and named fiduciary, you have the right to instruct Fidelity, as plan trustee, how to vote your shares. If you do not provide Fidelity with timely voting instructions then, consistent with the terms of the plans, Newport Trust Company (Newport), will direct Fidelity, in Newport’s discretion, how to vote the shares. Newport serves as the independent fiduciary and investment manager for the General Dynamics Stock Fund of the 401(k) plans.

Broadridge provides proxy materials to participants in these plans on behalf of Fidelity. If you are a plan participant and also a shareholder of record, Broadridge may combine the shares registered directly in your name and the shares credited to your 401(k) plan account onto one proxy card. If Broadridge does not combine your shares, you will receive more than one set of proxy materials. In that case, you will need to submit a vote for each set of shares. The vote you submit via proxy card or the telephone or Internet voting systems will serve as your voting instructions to Fidelity.To allow sufficient time for Fidelity to vote your 401(k) plan shares, your vote, or anyre-vote, must be received by 9:00 a.m. eastern time on April 29, 2019.

Can I change or revoke my proxy vote? A shareholder of record may change or revoke a proxy at any time before it is voted at the Annual Meeting by:

A PROXY MAY BE REVOKED BY:

Sending written notice of revocation to our Corporate Secretary

Submitting another proxy card that is dated later than the original proxy card

Re-voting by using the telephone or Internet voting systems, or

Attending the Annual Meeting and voting by ballot (attendance at the Annual Meeting alone will not act to revoke a prior proxy).

Our Corporate Secretary must receive notice of revocation, or a subsequent proxy card, before the vote at the Annual Meeting for a revocation to be valid. Except as described above for participants in our 401(k) plans, are-vote by the telephone or Internet voting systems must occur before 11:59 p.m. eastern time on April 30, 2019. If you are a beneficial owner, you must revoke your proxy through the appropriate bank, broker or other holder of record.

66     General Dynamics 2019 Proxy Statement


Annual Meeting Information

 

VOTE REQUIRED

What is a brokernon-vote? A brokernon-vote occurs when a bank, broker or other holder of record holding shares for a beneficial owner does not vote on a particular proposal because that holder does not have discretionary voting power for the proposal and has not received voting instructions from the beneficial owner. Banks, brokers and other holders of record have discretionary authority to vote shares without instructions from beneficial owners only on matters considered “routine” by the New York Stock Exchange, such as the advisory vote on the selection of the independent auditors. Onnon-routine matters, such as the election of directors, and executive compensation matters, approval of an equity compensation plan and the shareholder proposal, these banks, brokers and other holders of record do not have discretion to vote uninstructed shares and thus are not “entitled to vote” on such proposals, resulting in a brokernon-vote for those shares. We encourage all shareholders that hold shares through a bank, broker or other holder of record to provide voting instructions to those holders to ensure that their shares are voted at the Annual Meeting.

What is the vote required for each proposal, and what is the effect of an abstention or brokernon-vote on the voting?

 

VOTE REQUIREMENTS ANDAND

THETHE EFFECT OFOF ABSTENTIONS OROR BROKER NON-VOTES

 

   PROPOSAL VOTING STANDARD 

EFFECTOF ABSTENTIONSAND

BROKERNON-VOTES

   Proposal 1:

Election of the Board of

   Directors of the Company

 

Directors will be elected by a majority of the votes cast and entitled to vote at the Annual Meeting. A “majority of the votes cast” means the number of votes cast “for” a director’s election exceeds the number of votes cast “against” that director’s election. You may vote for, vote against or abstain from voting for any or all nominees.

 

Abstentions and brokernon-votes will not be counted as a vote cast “for” or “against” a director’s election.

   Proposal 2:

Advisory Vote on the

   Selection of Independent

   Auditors

 

This proposal requires an affirmative vote of a majority of shares present in person or represented by proxy and entitled to vote at the Annual Meeting to be approved. You may vote for, vote against or abstain from voting on this matter.

 

Abstentions will have the effect of a vote against this proposal. Brokernon-votes do not occur for this proposal because banks, brokers and other holders of record have authority under the New York Stock Exchange rules to vote in their discretion on the selection of independent auditors.

   Proposal 3:

Advisory Vote to Approve

   Executive Compensation

 

This proposal requires an affirmative vote of a majority of shares present in person or represented by proxy and entitled to vote at the Annual Meeting to be approved. You may vote for, vote against or abstain from voting on this matter.

 

Abstentions will have the effect of a vote against the proposal. Brokernon-votes will have no effect on the proposal.

   Proposal 4:

   Advisory Vote on the

   Frequency of Future

   Executive Compensation

   Advisory Votes

For this proposal, you may choose to express a preference for holding future advisory votes on executive compensation every year, every two years or every three years. For any particular frequency to be approved, it must receive an affirmative vote of a majority of shares present in person or represented by proxy and entitled to vote at the Annual Meeting. You may choose instead to abstain from voting on this matter.

Abstentions will have the effect of a vote against each choice. Brokernon-votes will have no effect on this proposal.

   Proposal 5:

Approval of the General

   Dynamics CorporationUnited Kingdom

   Amended and Restated

   2012 Equity Compensation

Share Save Plan

 

This proposal requires an affirmative vote of a majority of shares present in person or represented by proxy and entitled to vote at the Annual Meeting to be approved. You may vote for, vote against or abstain from voting on this matter.

 

Abstentions will have the effect of a vote against the proposal. Brokernon-votes will have no effect on the proposal.

Proposal 5:

Shareholder Proposal

This proposal requires an affirmative vote of a majority of shares present in person or represented by proxy and entitled to vote at the Annual Meeting to be approved. You may vote for, vote against or abstain from voting on this matter.

Abstentions will have the effect of a vote against the proposal. Brokernon-votes will have no effect on the proposal.

Who will count the votes? Representatives of American Election Services, LLC, will tabulate the vote at the Annual Meeting.

Who is soliciting votes for the Annual Meeting? The Board of Directors is soliciting proxies from shareholders. Directors, officers and other employees of General Dynamics may solicit proxies from our shareholders by mail,e-mail, telephone, facsimile or in person. In addition, Innisfree M&A Incorporated (Innisfree), 501 Madison Avenue, New York, New York, is soliciting brokerage firms, dealers, banks, voting trustees and their nominees.

General Dynamics 2017 Proxy Statement     73


Annual Meeting Information


We will pay Innisfree approximately $15,000 for soliciting proxies for the Annual Meeting and will reimburse brokerage firms, dealers, banks, voting trustees, their nominees and other record holders for theirout-of-pocket expenses in forwarding proxy materials to the beneficial owners of Common Stock. We will not provide compensation, other than their usual compensation, to our directors, officers and other employees who solicit proxies.

General Dynamics 2019 Proxy Statement     67


OTHER INFORMATION

ADDITIONAL SHAREHOLDER MATTERS

If any other matters properly come before the Annual Meeting, the individuals named in the proxy card will have discretionary authority to vote the shares they represent on those matters, except to the extent their discretion may be limited under Rule14a-4(c) of the Exchange Act.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires our officers and directors, as well as anyone who is a beneficial owner of more than 10 percent of a registered class of our stock, to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC and the New York Stock Exchange, and to furnish us with copies of these forms. To our knowledge, based solely on a review of the copies of Forms 3, 4 and 5 submitted to us, all of our executive officers and directors complied with all filing requirements imposed by Section 16(a) of the Exchange Act during 2016.2018.

SHAREHOLDER PROPOSALSAND DIRECTOR NOMINEESFOR 20182020 ANNUAL MEETINGOF SHAREHOLDERS

If you wish to submit a proposal for inclusion in our proxy materials to be distributed in connection with the 20182020 annual meeting, your written proposal must comply with the rules of the SEC and be received by us no later than November 23, 2017.22, 2019. The proposal should be sent to the Corporate Secretary, General Dynamics Corporation, 2941 Fairview Park Drive, Suite 100, Falls Church, Virginia 22042.

If you intend to present a proposal at the 20182020 annual meeting that is not to be included in our proxy materials, including director nominations, you must comply with the various requirements established in our Bylaws. Among other things, the Bylaws require that a shareholder submit a written notice to our Corporate Secretary at the address in the preceding paragraph no earlier than January 3, 2018,2, 2020, and no later than February 2, 2018.1, 2020.

In addition, 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 three years to submit director nominees for inclusion in our proxy statement if the shareholder(s) and nominee(s) satisfy the requirements specified in our Bylaws. These requirements can be found in Article II, Section 10 of our Bylaws, and include the requirement that the applicable notice be received by the company no earlier than October 24, 2017,23, 2019, and no later than November 23, 2017.22, 2019.

ANNUAL REPORTON FORM10-K

The Annual Report, which includes our Form10-K and accompanies this Proxy Statement, is not considered a part of the proxy solicitation material. We will furnish to any shareholder, without charge, a copy of our 20162018 Annual Report, as filed with the SEC. A request for the report can be made verbally or in writing to Investor Relations, General Dynamics Corporation, 2941 Fairview Park Drive, Suite 100, Falls Church, Virginia 22042, (703)876-3000 or through our website. The Form10-K and other public filings are also available through the SEC’s website at www.sec.gov and on our website at www.gd.com/SECFilings.

DELIVERYOF DOCUMENTSTO SHAREHOLDERS SHARINGAN ADDRESS

We will deliver only one Annual Report and Proxy Statement to shareholders who share a single address unless we have received contrary instructions from any shareholder at the address. In that case, we will deliver promptly a separate copy of the Annual Report and Proxy Statement. For future deliveries, shareholders who share a single address can request a separate copy of our Annual Report and Proxy Statement. Similarly, if multiple copies of the Annual Report and Proxy Statement are being delivered to a single address, shareholders can request a single copy of the Annual Report and Proxy Statement for future deliveries. To make a request, please call703-876-3000 or write to the Corporate Secretary, General Dynamics Corporation, 2941 Fairview Park Drive, Suite 100, Falls Church, Virginia 22042.

 

7468     General Dynamics 20172019 Proxy Statement



APPENDIX A

GENERAL DYNAMICS CORPORATION AMENDED AND RESTATED

USEOF NON2012 EQUITY COMPENSATION PLAN

(as amended and restated on March 1, 2017)

1.

Purpose of the Plan.

The purpose of the Plan is to provide the Company with an effective means of attracting, retaining and motivating directors, officers and key employees, and to provide them with incentives to enhance the growth and profitability of the Company.

2.

Effective Date and Duration of the Plan.

The Plan was originally adopted by the Board on March 7, 2012, subject to approval by the stockholders of the Parent, which occurred on May 2, 2012. The amended and restated version of the Plan was adopted by the Board on March 1, 2017, subject to approval by the stockholders of the Parent at the Parent’s 2017 Annual Meeting of Shareholders. The Plan becomes effective upon the first date that the stockholders of the Parent approve the Plan in a manner that satisfies the requirements of the DGCL and the rules of the New York Stock Exchange. Awards may be made pursuant to the Plan through and including the 10 year anniversary of the date of the latest stockholder approval of the Plan, including without limitation any stockholder approval of any amendment to the Plan to increase the share award capacity hereunder.

3.

Definitions; Rules of Construction.

(a)

Defined terms. The terms defined in this Section shall have the following meanings for purposes of this Plan:

(i)

Award shall mean a grant under the Plan in any form permitted hereunder.

(ii)

Award Agreement shall mean a written or electronic agreement, in a form determined by the Committee from time to time, entered into by each Participant and the Company, evidencing the grant of an Award under the Plan. The Committee may provide for the use of electronic, Internet or other non-paper Award Agreements, and the use of electronic, Internet or other non-paper means for the acceptance thereof and actions thereunder by a Participant.

(iii)

Beneficial Owner shall have the meaning used in Rule 13d-3 promulgated under the Exchange Act. “Beneficial Ownership” shall have a correlative meaning.

(iv)

Board shall mean the Board of Directors of the Parent.

(v)

Cause for the termination of the Participant’s employment with the Company will be deemed to exist if the Participant has been convicted of a felony or if the Company determines in good faith that the Participant has (A) intentionally and continually failed to perform in all material respects the Participant’s reasonably assigned duties with the Company (other than a failure resulting from the Participant’s incapacity due to physical or mental disability or illness) or (B) intentionally engaged in conduct which is demonstrably and materially injurious to the Company; provided, however, that if the Participant has entered into an individual employment agreement or severance protection agreement between the Participant and the Company, and the agreement defines the term “Cause,” then Cause shall have the meaning assigned to such term in such agreement.

(vi)

Change in Control shall have the meaning set forth in Section 16 of the Plan.

(vii)

Code shall mean the Internal Revenue Code of 1986, as amended from time to time, including any regulations promulgated thereunder.

(viii)

Committee shall mean the Compensation Committee of the Board and any successor committee thereto.

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(ix)

Common Stock shall mean the common stock of the Parent.

(x)

Common Stock Award shall mean an Award of unrestricted Common Stock.

(xi)

Company shall mean collectively the Parent and its Subsidiaries.

(xii)

Covered Award shall mean an Award made to a Covered Employee that is intended to meet the requirements of “qualified performance-based compensation” under Section 162(m) of the Code.

(xiii)

Covered Employee shall mean a Participant who is an executive officer of the Parent or any Subsidiary within the meaning of Rule 3b-7 promulgated under the Exchange Act.

(xiv)

DGCL shall mean the Delaware General Corporation Law, as in effect from time to time.

(xv)

Dividend Equivalent shall mean an amount, payable either in shares of Common Stock or in cash, that is equal to the cash dividend that would be paid on each share of Common Stock underlying an Award if the share were duly issued and outstanding on the record date for the dividend.

(xvi)

Exchange Act shall mean the Securities Exchange Act of 1934, as amended from time to time, including any regulations promulgated thereunder.

(xvii)

Excluded Person shall have the meaning set forth in Section 16 of the Plan.

(xviii)

Fair Market Value shall mean, as of the date of determination, (A) the average of the highest and lowest quoted selling price per share of Common Stock on the national securities exchange or such other market on which such stock is principally traded, as determined by the Committee, or (B) if the shares of Common Stock are not listed or admitted to trading on any such exchange or market, the average of the highest and lowest selling price as reported by an over-the-counter market; provided that if no sales occur as of the date of determination, then the date of determination shall be the last day on which a sale was reported; further provided that if the shares of Common Stock are not then listed on a national securities exchange or market or traded in an over-the-counter market, such value shall be determined by the Committee in good faith. In no event shall the Fair Market Value of any share of Common Stock be less than the par value per share of Common Stock.

(xix)

Good Reason shall mean either (A) a material reduction in the Participant’s base salary (other than a reduction that applies across the board to similarly-situated employees) or (B) the imposition of a requirement that the Participant be based at any place outside a 50-mile radius from the Participant’s principal place of employment immediately prior to a Change in Control; provided, that, in each case, the Participant shall not have Good Reason to terminate service unless the Participant provides the Company with written notice of the occurrence of the action constituting Good Reason within 30 days following the occurrence of such action, the Participant provides the Company with a minimum of 30 days following delivery of the written notice to cure such action, and the Participant terminates service within 90 days following the occurrence of such action. Notwithstanding the foregoing, if the Participant has entered into an individual employment agreement or severance protection agreement with the Company, and the agreement defines the term “Good Reason,” then Good Reason shall have the meaning assigned to such term in such agreement.

(xx)

Grant Date shall mean the date designated by the Committee and specified in the Award Agreement as the date the Award is granted.

(xxi)

Incumbent Board shall have the meaning set forth in Section 16 of the Plan.

(xxii)

ISO shall mean any Option, or portion thereof, awarded to a Participant pursuant to the Plan which is designated by the Committee as an incentive stock option and also meets the applicable requirements of an incentive stock option pursuant to Section 422 of the Code.

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(xxiii)

Non-Control Transaction shall have the meaning set forth in Section 16 of the Plan.

(xxiv)

Non-Employee Director shall mean a member of the Board who is not an employee of the Company.

(xxv)

Non-Statutory Stock Option shall mean any Option awarded under the Plan that does not qualify as an ISO or that is designated as a Non-Statutory Stock Option notwithstanding that it may otherwise qualify as an ISO.

(xxvi)

Option shall mean an Award in the form of an option to purchase Common Stock granted pursuant to the Plan.

(xxvii)

Other Award shall mean an Award payable only in cash.

(xxviii)

Parent shall mean General Dynamics Corporation (and any successor thereto).

(xxix)

Participant shall mean any individual who has an outstanding Award pursuant to the Plan.

(xxx)

Participation Unit shall mean an Award that has a value derived from or related to the value of Common Stock, including but not limited to a phantom stock unit or restricted stock unit, that is payable in cash or Common Stock, or any combination thereof, as specified in the Award Agreement.

(xxxi)

Performance-Based Award shall mean an Award granted under Section 7 of the Plan, the payment of which is conditioned upon the attainment of one or more Performance Goals.

(xxxii)

Performance Goal shall mean a measure of performance established by the Committee, based on one or more of the criteria set forth in Section 7, that must be met during the Performance Period under a Performance-Based Award.

(xxxiii)

Performance Period shall mean, with respect to any Performance-Based Award, the period over which the attainment of the applicable Performance Goal is measured. Performance Periods may be overlapping.

(xxxiv)

Person for purposes of Section 16 only shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) of the Exchange Act, and will include any “group” as such term is used in such sections.

(xxxv)

Plan shall mean the General Dynamics Corporation Amended and Restated 2012 Equity Compensation Plan as set forth herein and as may be amended or amended and restated from time to time.

(xxxvi)

Purchase Price shall mean the price per share (A) for which a share of Common Stock may be purchased pursuant to an Option or (B) by reference to which the amount of any payment pursuant to a Stock Appreciation Right is determined, in each case as established by the Committee, provided that such price will not be less than one hundred percent (100%) of the Fair Market Value of a share of Common Stock on the Grant Date.

(xxxvii)

Restricted Stock shall mean an Award consisting of shares of Common Stock granted to a Participant pursuant to the Plan that may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated except upon passage of time, or upon satisfaction of Performance Goals or other conditions, or a combination thereof, in every case pursuant to such terms and conditions as may be determined by the Committee in its sole discretion.

(xxxviii)

Securities Act shall mean the Securities Act of 1933, as amended from time to time, including any regulations promulgated thereunder.

(xxxix)

Stock Appreciation Right shall mean an Award in the form of a right to receive an amount of cash, or shares of Common Stock with a Fair Market Value, equal to the increase in the Fair Market Value of a specified number of shares of Common Stock between the Grant Date of the right and the date on which it is exercised.

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(xl)

Subject Person shall have the meaning set forth in Section 16 of the Plan.

(xli)

Subsidiary shall mean any “subsidiary” of the Parent within the meaning of Rule 405 under the Securities Act.

(xlii)

Surviving Corporation shall have the meaning set forth in Section 16 of the Plan.

(xliii)

13G Filer shall have the meaning set forth in Section 16 of the Plan.

(b)

Construction. Unless otherwise expressly provided or the context otherwise requires, the terms defined in this Plan include the plural and the singular, and pronouns of either gender or neuter shall include, as appropriate, the other pronoun forms.

4.

Eligibility.

Any officer or employee of the Company is eligible for selection by the Committee for an Award under this Plan. Awards to Non-Employee Directors may be granted pursuant to Section 13 of the Plan.

5.Awards.

The Committee shall determine the amounts and types of the Awards and the terms and conditions of such Awards, consistent with the terms of this Plan. Awards may be made in Common Stock Awards, Options, Stock Appreciation Rights, Restricted Stock, Participation Units, Other Awards, Performance-Based Awards or in any combination thereof. If any Award is settled in cash that is to be paid on a deferred basis, the Participant may be entitled at the Committee’s discretion and on terms and conditions as the Committee may determine, to be paid interest on the unpaid amount.

6.Common Stock Available for Awards Pursuant to the Plan.

(a)

Shares Available. Subject to adjustment pursuant to Section 15 of the Plan, the maximum aggregate number of shares of Common Stock available for issuance pursuant to Awards (including Common Stock Awards, Options, Stock Appreciation Rights, Restricted Stock, Participation Units and Performance-Based Awards) under the Plan and for the payment of Dividend Equivalents that are settled in shares of Common Stock is 42,250,000. From that aggregate limit:

(i)

no more than 42,250,000 shares may be issued in the form of ISOs;

(ii)

no more than an aggregate of 42,250,000 shares may be issued in the form of Non-Statutory Stock Options and Stock Appreciation Rights; and

(iii)

no more than an aggregate of 8,000,000 shares may be issued in the form of Restricted Stock, Common Stock Awards, Participation Units, and Performance-Based Awards (excluding Performance-Based Awards that are Options or Stock Appreciation Rights and Other Awards that are by definition only payable in cash) and paid in settlement of Dividend Equivalents.

The shares of Common Stock issued pursuant to the Plan may come from authorized and unissued shares, treasury shares or shares purchased by the Company in the open market.

(b)Share Counting Rules.

(i)

Share Recycling. The following categories of shares of Common Stock shall again be available for grant pursuant to Awards under the Plan, in addition to the shares described in Section 6(a): (A) shares related to Awards that expire, are forfeited or cancelled or terminate for any reason without the issuance of shares (including, without limitation, upon cash settlement), and (B) shares related to awards granted under the General Dynamics Corporation 2009 Equity Compensation Plan that expire, are forfeited or cancelled or terminate for any reason without the issuance of shares (including, without limitation, upon cash settlement).

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For purposes of clarity, (x) shares of Common Stock that are tendered or withheld in payment of all or part of the Purchase Price of an Option or other exercise price of an Award or in satisfaction of tax withholding obligations in respect of any type of Award shall not be included in or added to the number of shares available for issuance under the Plan, (y) with respect to a Stock Appreciation Right granted hereunder, the number of shares of Common Stock counted against the share limits set forth in Section 6(a) shall be either (A) the full number of shares subject to the Stock Appreciation Right if the Stock Appreciation Right is settled in shares or (B) zero shares if the Stock Appreciation Right is settled in cash, and (z) shares of Common Stock repurchased in the open market using the Purchase Price or other exercise price paid in respect of an Option or other Award shall not be included in or added to the number of shares of Common Stock available for issuance under the Plan.

(ii)

Assumption, Replacement, Conversion and Adjustment. The Committee may grant Awards pursuant to the Plan in connection with the assumption, replacement, conversion or adjustment of outstanding equity-based awards in the context of a corporate acquisition or merger (within the meaning of Section 303A.08 of the New York Stock Exchange Listed Company Manual). Common Stock covered by Awards granted pursuant to this Section 6(b)(ii) shall not count against the number of shares available for issuance pursuant to Section 6(a).

(c)

Annual Non-Employee Director Award Limitation. The aggregate grant date fair value (computed as of the date of grant in accordance with applicable financial accounting rules) of all Awards granted under the Plan to any individual Non-Employee Director in any calendar year of the Company (excluding Awards made pursuant to the issuance of shares of Common Stock as a result of a Non-Employee Director’s voluntary election to receive shares of Common Stock in lieu of all or a portion of cash retainers) shall not exceed $400,000.

7.Performance-Based Awards.

(a)

General. The Committee may grant Performance-Based Awards in the form of Common Stock Awards, Options, Stock Appreciation Rights, Restricted Stock, Participation Units, or Other Awards. The minimum vesting period for any Performance-Based Award shall not be less than the minimum vesting period for the form of Award in which the Performance-Based Award is granted, as set forth herein.

(b)

Performance Goals. A Performance Goal (i) may relate to the performance of the Participant, the Parent, a Subsidiary, any business group, any business unit or other subdivision of the Parent or any Subsidiary, or any combination of the foregoing, as the Committee may deem appropriate, (ii) may be expressed as an amount, as an increase or decrease over a specified period, as a relative comparison to the performance of a group of comparator companies or a published or special index, or any other external measure of the selected performance criteria, as the Committee, in its sole discretion, deems appropriate, and (iii) shall be based on one or more of the following criteria selected by the Committee in its sole discretion (as determined in accordance with generally accepted accounting principles, as applicable):

(A)

market price of Common Stock; earnings per share of Common Stock; net income or profit (before or after taxes); return on total stockholders’ equity; return of stockholders’ equity; return on invested capital; cash flow; cumulative return on net assets employed; earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization; earnings from continuing operations; sales or revenues; return on assets, capital or investment; market share; cost reduction goals; budget comparisons; implementation or completion of specified projects or processes; the formation of joint ventures, research or development collaborations, or the completion of other transactions; and/or any combination of any of the foregoing; and

(B)

with respect to any Award that is not a Covered Award, any other criteria that the Committee deems appropriate.

Within 90 days after the beginning of a Performance Period, and in any case before 25 percent of the Performance Period has elapsed, the Committee shall establish the Performance Goals for such Performance Period. The Committee may provide at the time it establishes the Performance Goal for any Performance Period that the measurement of the

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Performance Goal shall exclude the impact of items that are considered unusual in nature or that occur infrequently pursuant to Accounting Standards Codification Topic 225, charges for restructurings, discontinued operations, the cumulative effect of changes in accounting treatment and any other items, each determined in accordance with generally accepted accounting principles (to the extent applicable) and as identified in the Company’s audited financial statements, including the notes thereto.

(c)

Individual Limits. Notwithstanding any other provision of the Plan, to the extent necessary for a Covered Award to satisfy the requirements of “qualified performance-based compensation” pursuant to Section 162(m) of the Code, the maximum number of shares of Common Stock (or in the case of an Other Award, the maximum dollar amount) that may be subject to Covered Awards granted under the Plan to any individual employee, in any calendar year, shall be:

(i)

1,000,000 shares of Common Stock pursuant to a Common Stock Award;

(ii)

1,000,000 shares of Common Stock pursuant to an Option or Stock Appreciation Right;

(iii)

200,000 shares of Restricted Stock;

(iv)

Participation Units with a value equal to 200,000 shares of Common Stock; and

(v)

$5,000,000 of Other Awards.

The limitations set forth in this Section 7(c) shall be subject to adjustment as provided in Section 15, but only to the extent such adjustment would not prevent a Covered Award from meeting the requirements of “qualified performance-based compensation” pursuant to Section 162(m) of the Code.

(d)

Effect of a Termination of Employment or Service. The consequences with respect to a Performance-Based Award of the termination of employment, or service as a Non-Employee Director, of the Participant holding the Performance-Based Award shall be determined by the Committee in its sole discretion and set forth in the applicable Award Agreement.

(e)

Dividends and Dividend Equivalents. The Committee may provide in its discretion that a Performance-Based Award shall accrue dividends or Dividend Equivalents, as applicable, provided such dividends or Dividend Equivalents shall be subject to the same terms and conditions as, and shall in no event be paid prior to the vesting of, the Performance-Based Award to which they relate.

8.

Common Stock Awards. The Committee may grant Common Stock Awards on such terms and conditions, not inconsistent with this Plan, as the Committee may determine.

9.Restricted Stock Awards.

(a)

General. The Committee may grant Restricted Stock, on such terms and conditions, not inconsistent with this Plan, as the Committee may determine.

(b)

Terms and Conditions. Restricted Stock Awards shall have a minimum vesting period of three years (other than shares of Restricted Stock granted as an adjustment pursuant to a performance-based formula), provided that Restricted Stock may vest earlier in accordance with Section 16 and the Committee may provide for a shorter vesting period (i) in connection with any corporate divestiture or acquisition affecting a Participant’s employment with, or provision of services to, the Company, (ii) in the case of any special agreement, award, or situation with respect to any individual Participant, or (iii) in connection with such other events or circumstances as the Committee may determine from time to time. Subject to the restrictions set forth in this Section 9, each Participant who receives Restricted Stock shall have all rights as a stockholder with respect to such shares, including the right to vote the shares and receive dividends and other distributions thereon, except as may be provided in the applicable Award Agreement. Restricted Stock shares may be held by the Company until all restrictions lapse and shall be subject to a legend describing applicable restrictions as provided by the Committee from time to time.

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(c)

Effect of a Termination of Employment or Service. The consequences with respect to an Award of Restricted Stock of the termination of employment, or service as a Non-Employee Director, of the Participant holding the Restricted Stock shall be determined by the Committee in its sole discretion and set forth in the applicable Award Agreement.

10.

Option and Stock Appreciation Right Awards. The Committee may grant Options and Stock Appreciation Rights on such terms and conditions, not inconsistent with the Plan, as the Committee may determine, subject to the following provisions:

(a)

Type of Options. The Committee may grant Options in the form of ISOs, Non-Statutory Stock Options, or any combination thereof. Each Option Award Agreement shall identify whether the Options are intended to be ISOs or Non-Statutory Stock Options. If an Award is not designated as either ISOs or Non-Statutory Stock Options, then such Award shall be deemed to be Non-Statutory Stock Options.

(b)

ISO Limitations. For ISOs granted under the Plan, the aggregate Fair Market Value (determined as of the Grant Date) of the number of shares with respect to which ISOs are exercisable for the first time by any Participant during any calendar year under all plans of the Company shall not exceed $100,000, or such other maximum amount then applicable under Section 422 of the Code. Any Option or a portion thereof that is designated as an ISO that for any reason fails to meet the requirements of an ISO shall be treated hereunder as a Non-Statutory Stock Option. No ISO may be granted to an individual who, at the time of the proposed grant, owns (or is deemed to own under the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of common stock of the Company unless (i) the exercise price of such ISO is at least one hundred ten percent (110%) of the Fair Market Value of a share of Common Stock at the time such ISO is granted and (ii) such ISO is not exercisable after the expiration of five years from the date it is granted.

(c)

Terms and Conditions. The Committee shall determine all terms and conditions of the Options and Stock Appreciation Rights, provided that the following terms and conditions shall apply to all Options and Stock Appreciation Rights:

(i)

Options and Stock Appreciation Rights shall have a minimum vesting period of two years, provided that Options and Stock Appreciation Rights may vest earlier in accordance with Section 16 and the Committee may provide for a shorter vesting period (A) in connection with any corporate divestiture or acquisition affecting a Participant’s employment with, or provision of services to, the Company, (B) in the case of any special agreement, award, or situation with respect to any individual Participant, or (C) in connection with such other events or circumstances as the Committee may determine from time to time.

(ii)

The term during which an Option or Stock Appreciation Right may be exercised shall not exceed ten years from the Grant Date.

(iii)

The Purchase Price of an Option or Stock Appreciation Right shall in no event be less than one hundred percent (100%) of the Fair Market Value of a share of Common Stock on the Grant Date.

(iv)

The consequences with respect to an Award of Options or Stock Appreciation Rights of the termination of employment, or service as a Non-Employee Director, of the Participant holding the Options or Stock Appreciation Rights shall be determined by the Committee in its sole discretion and set forth in the applicable Award Agreement.

(v)

Options and Stock Appreciation Rights shall not contain any provision entitling a Participant to the automatic grant of additional Options or Stock Appreciation Rights in connection with any exercise of the original Options or Stock Appreciation Rights.

(vi)

Except in connection with a corporate transaction involving the Company (including, without limitation, any stock dividend, stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, or exchange of shares), the terms of outstanding Options and Stock Appreciation Rights may not be amended to reduce the Purchase Price of outstanding Options or Stock Appreciation Rights or cancel, exchange, buyout, replace or surrender outstanding Options or Stock

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Appreciation Rights in exchange for cash, other Awards or Options or Stock Appreciation Rights with a Purchase Price that is less than the exercise price of the original Options or Stock Appreciation Rights without approval of the Parent’s shareholders.

(vii)

Exercise and Settlement. During the lifetime of the Participant, an Option or Stock Appreciation Right may be exercised only by the Participant or his or her personal representative.

(A)

Options. The Purchase Price of shares purchased upon the exercise of any Option shall be paid (i) in full in cash (including check or wire transfer), (ii) in whole or in part (in combination with cash) in full shares of unrestricted Common Stock owned by the Participant and valued at their Fair Market Value on the date of exercise, (iii) by cashless exercise in any manner as may be permitted by the Committee from time to time, or (iv) such other method as may be permitted by the Committee from time to time.

(B)

Stock Appreciation Rights. Upon the exercise of a Stock Appreciation Right, the Participant shall be entitled to a number of shares of Common Stock with a Fair Market Value, or an amount in cash, equal to the difference between the aggregate Fair Market Value of the shares of Common Stock underlying the Stock Appreciation Right on the Grant Date and the aggregate Fair Market Value of such shares on the date of exercise.

11.

Participation Units.

(a)

General. The Committee may grant Participation Units, on such terms and conditions, not inconsistent with the Plan and in compliance with Section 409A of the Code, as the Committee may determine in its discretion and set forth in the applicable Award Agreement.

(b)

Terms and Conditions. Participation Units shall have a minimum vesting period of three years (other than Participation Units granted as an adjustment pursuant to a performance-based formula), provided that Participation Units may vest earlier in accordance with Section 16 and the Committee may provide for a shorter vesting period (i) in connection with any corporate divestiture or acquisition affecting a Participant’s employment with, or provision of services to, the Company, (ii) in the case of any special agreement, award, or situation with respect to any individual Participant, or (iii) in connection with such other events or circumstances as the Committee may determine from time to time.

12.

Other Awards. The Committee may grant Other Awards on such terms and conditions, not inconsistent with the Plan and in compliance with Section 409A of the Code, as the Committee may determine in its discretion, provided that an Other Award shall be payable only in cash.

13.Awards to Non-Employee Directors.

(a)

Awards. Awards to Non-Employee Directors may be made at the recommendation of the Committee, subject to final approval of the Board, in such amounts as the Committee shall determine in Common Stock Awards, Non-Statutory Stock Options, Stock Appreciation Rights, Restricted Stock, Participation Units, Performance-Based Awards or any combination thereof.

(b)

Retainers and Fees. Upon terms and conditions as may be established by the Committee from time to time, each Non-Employee Director may elect to have all or part of his or her annual retainer paid in Common Stock under the Plan.

14.

Plan Administration.

(a)

Committee. The Plan shall be administered by the Committee. The Committee shall have the authority in its sole discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or as it deems necessary or advisable in administration of the Plan, including without limitation, (i) the authority to grant Awards; (ii) to determine the individuals

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to whom and the time or times at which Awards shall be granted; (iii) to determine the type and number of Awards to be granted, the number of shares of Common Stock to which an Award may relate and the terms, conditions, restrictions and performance criteria relating to any Award; (iv) to determine whether, to what extent, and under what circumstances and the manner in which an Award may be settled, cancelled, forfeited, exchanged or surrendered; (v) to construe and interpret the Plan and any Award Agreement; (vi) to prescribe, amend, and rescind rules and regulations relating to the Plan, including but not limited to, rules and regulations relating to leaves of absence and changes from an employee to a service provider or consultant; (vii) to determine whether an Award Agreement would be appropriate with respect to any Award, and if so, to determine the form of such Award Agreement; (viii) to determine whether an Award will be credited with Dividend Equivalents and the terms and conditions of any such Dividend Equivalents; and (ix) to make all other determinations deemed necessary or advisable for the administration and implementation of the Plan. For purposes of clarity, the Committee may exercise its discretion in a non-uniform manner among Participants. The determination of the Committee on these matters shall be final and conclusive and binding on the Company and all Participants. Any authority, power or right of the Committee pursuant to the Plan may also be exercised by the Board.

(b)

Delegation. Except to the extent prohibited by applicable law, including Section 157(c) of the DGCL, the applicable rules of the national securities exchange or such other market on which the Common Stock is principally traded or Section 162(m) of the Code with respect to Covered Awards, the Committee has the authority to delegate any of its powers under the Plan (including, without limitation, its power to administer claims and appeals) to one or more members of the Committee or one or more officers of the Parent. Any delegation shall include the same sole discretionary and final authority that the Committee has hereunder, and any decisions, actions or interpretations made by any delegate shall have the same ultimate binding effect as if made by the Committee. Any such allocation or delegation may be limited or revoked by the Committee at any time.

(i)

Except as otherwise provided by the Committee, and to the extent permitted pursuant to applicable law, the applicable rules of the national securities exchange or such other market on which Common Stock is principally traded and the Committee charter, the chairperson of the Committee may make Awards on behalf of the Committee to any Participant, except that the chairperson of the Committee may not (A) make an Award to a Participant who is subject to the reporting requirements of Section 16(a) of the Exchange Act or (B) make a Covered Award to a Covered Employee.

15.

Adjustments Upon Certain Changes. Subject to any action by the shareholders of the Parent required by law, applicable tax rules or the rules of any exchange on which shares of Common Stock are listed for trading:

(a)

Shares Available for Grants. In the event of any change in the number of shares of Common Stock outstanding by reason of any stock dividend or split, recapitalization, merger, consolidation, combination or exchange of shares or similar corporate change, the maximum aggregate number of shares of Common Stock available for grant pursuant to Awards under the Plan as set forth in Section 6 and the maximum number of shares of Common Stock with respect to which the Committee may grant Covered Awards to any individual Covered Employee in any calendar year as set forth in Section 7(c) shall be appropriately adjusted by the Committee. In the event of any change in the number of shares of Common Stock outstanding by reason of any other event or transaction, the Committee may, to the extent deemed appropriate by the Committee, make such adjustments in the number and class of shares of Common Stock with respect to which Awards may be granted.

(b)

Increase or Decrease in Issued Shares Without Consideration. In the event of any increase or decrease in the number of issued shares of Common Stock resulting from a subdivision or consolidation of shares of Common Stock or the payment of a stock dividend (but only on the shares of Common Stock), or any other increase or decrease in the number of such shares affected without receipt or payment of consideration by the Company, the Committee shall, to the extent deemed appropriate by the Committee, adjust the number of shares of Common Stock subject to each outstanding Award and the Purchase Price or exercise price per share of Common Stock of each such Award.

(c)

Certain Mergers. In the event of any merger, consolidation or similar transaction as a result of which the holders of shares of Common Stock receive consideration consisting exclusively of securities of the surviving corporation in such transaction, the Committee may, to the extent deemed appropriate by the Committee, adjust each Award outstanding

General Dynamics 2017 Proxy Statement     A-9



on the date of such merger or consolidation so that it pertains and applies to the securities which a holder of the number of shares of Common Stock subject to such Award would have received in such merger or consolidation.

(d)

Certain Other Transactions. In the event of (i) a dissolution or liquidation of the Parent, (ii) a sale of all or substantially all of the Company’s assets (on a consolidated basis), (iii) a merger, consolidation or similar transaction involving the Parent in which the holders of shares of Common Stock receive securities and/or other property, including cash, other than shares of the surviving corporation in such transaction, the Committee shall, in its sole discretion, have the power to:

(A)

cancel, effective immediately prior to the occurrence of such event, each Award (whether or not then exercisable or vested), and, in full consideration of such cancellation, pay to the Participant to whom such Award was granted an amount in cash, for each share of Common Stock subject to such Award equal to the value, as determined by the Committee in its reasonable discretion, of such Award, provided that with respect to any outstanding Option or Stock Appreciation Right such value shall be equal to the excess (if any, or if none, zero) of (i) the value, as determined by the Committee in its reasonable discretion, of the property (including cash) received by the holder of a share of Common Stock as a result of such event over (ii) the Purchase Price of such Option or Stock Appreciation Right; or

(B)

provide for the exchange of each Award (whether or not then exercisable or vested) for an Award with respect to some or all of the property which a holder of the number of shares of Common Stock subject to such Award would have received in such transaction and, incident thereto, make an equitable adjustment as determined by the Committee in its reasonable discretion in the Purchase Price or exercise price of the Award, or the number of shares or amount of property subject to the Award or provide for a payment (in cash or other property) to the Participant to whom such Award was granted in partial consideration for the exchange of the Award.

(e)

Other Changes. In the event of any change in the capitalization of the Parent or corporate change other than those specifically referred to in paragraphs (b), (c) or (d), the Committee may make such adjustments in the number and class of shares subject to Awards outstanding on the date on which such change occurs and in such other terms of such Awards as the Committee may consider appropriate, provided that if any such Award is a Covered Award such adjustments are consistent with the requirements of Section 162(m) of the Code.

(f)

Other Awards. In the event of any transaction or event described in this Section 15, including without limitation any corporate change referred to in paragraph (e) hereof, the Committee may, in its sole discretion, make such adjustments in any Performance Goal and in any other terms of any Other Awards, as the Committee may consider appropriate in respect of such transaction or event, provided that if such Other Award is a Covered Award, such adjustments are consistent with the requirements of Section 162(m) of the Code.

(g)

No Other Rights. Except as expressly provided in the Plan, no Participant shall have any rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any dividend, any increase or decrease in the number of shares of stock of any class or any dissolution, liquidation, merger or consolidation of the Parent or any other corporation. Except as expressly provided in the Plan, no issuance by the Parent of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number of shares or amount of other property subject to, or the terms related to, any Award.

(h)

Savings Clause. No provision of this Section 15 shall be given effect to the extent that such provision would cause any tax to become due under Section 409A of the Code.

16.Change in Control.

(a)

In the event that, within two years following a Change in Control, the Participant’s service with the Company and its affiliates is terminated (i) by the Company or any of its affiliates for any reason other than for Cause or (ii) by the Participant for Good Reason, all outstanding Awards granted to a Participant which have not theretofore vested shall immediately vest and become exercisable and all restrictions on such Awards shall immediately lapse.

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(b)

Except to the extent that it may give rise to a tax under Section 409A of the Code with respect to any Award, the Committee may also accord to any Participant a right to refuse to have any of the actions that the Committee may take otherwise as described in (a) above, whether pursuant to the Award or otherwise, in such circumstances as the Committee may approve.

(c)

Change in Control” means any of the following events:

(i)

An acquisition by any Person of Beneficial Ownership (other than a direct or indirect acquisition from the Parent) of forty percent (40%) or more of the combined voting power of the Parent’s then-outstanding voting securities; provided that, in determining whether a Change in Control has occurred, an acquisition by any of the following Persons will not constitute a Change in Control:

(A)

an employee benefit plan (or a trust forming a part thereof) maintained by the Parent or any Subsidiary of the Parent,

(B)

the Parent or any Subsidiary of the Parent,

(C)

any Person that, pursuant to Rule 13d-1 promulgated under the Act, is permitted to, and actually does, report its Beneficial Ownership of voting securities of the Parent on Schedule 13G (or any successor schedule) (a “13G Filer”); provided that, a Person shall no longer be considered a 13G Filer if it subsequently becomes required to or does report its Beneficial Ownership of voting securities of the Parent on Schedule 13D (or any successor schedule) and for purposes of this Section 16 such Person shall be deemed to have first acquired, on the first date on which such Person does so file a Schedule 13D, Beneficial Ownership of all voting securities of the Parent Beneficially Owned by it on such date, (each of (A), (B), and (C) an “Excluded Person”),

(D)

any Person in connection with a Non-Control Transaction (as hereinafter defined), or

(E)

an underwriter temporarily holding securities of the Parent pursuant to an offering of such securities.

Notwithstanding the foregoing provisions of this Section 16, a Change in Control will not be deemed to occur solely because any Person (a “Subject Person”) acquires Beneficial Ownership of forty percent (40%) or more of the combined voting power of the Parent’s then-outstanding voting securities as a result of the acquisition of voting securities by the Parent which, by reducing the number of voting securities outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person; provided that, if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of voting securities by the Company, then a Change in Control shall be deemed to occur on the date the Subject Person becomes the Beneficial Owner of any additional voting securities which increases the percentage of the then outstanding voting securities Beneficially Owned by the Subject Person.

(ii)

Consummation of:

(A)

a merger, consolidation or reorganization involving the Parent, or any direct or indirect Subsidiary of the Parent, unless:

(i)

the stockholders of the Parent immediately before such merger, consolidation or reorganization will own, directly or indirectly, immediately following such merger, consolidation or reorganization, at least fifty percent (50%) of the combined voting power of the outstanding voting securities of the corporation resulting from such merger, consolidation or reorganization (the “Surviving Corporation”) or any parent thereof in substantially the same proportion as their ownership of the voting securities of the Parent immediately before such merger, consolidation or reorganization;

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(ii)

the individuals who were members of the Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute a majority of the members of the board of directors of the Surviving Corporation (or parent thereof); and

(iii)

no Person (other than an Excluded Person, the Surviving Corporation, any Subsidiary or parent of the Surviving Corporation, or any Person who, immediately prior to such merger, consolidation or reorganization, was the Beneficial Owner of forty percent (40%) or more of the then-outstanding voting securities of the Parent) is the Beneficial Owner of forty percent (40%) or more of the combined voting power of the Surviving Corporation’s outstanding voting securities immediately after the merger, consolidation or reorganization. A transaction described in clauses (i) through (iii) above is referred to herein as a “Non-Control Transaction.”

(B)

a sale or other disposition of all or substantially all of the assets of the Parent to an entity (other than to an entity (i) at least fifty percent (50%) of the combined voting power of the outstanding voting securities of which is owned, directly or indirectly, by stockholders of the Parent in substantially the same proportion as their ownership of the voting securities of the Parent, (ii) a majority of the board of directors of which consists of the individuals who were members of the Board immediately prior to the execution of the agreement providing for such sale or disposition, and (iii) of which no Person (other than an Excluded Person or any Person who, immediately prior to such sale or disposition, was the Beneficial Owner of forty percent (40%) or more of the combined voting power of the then-outstanding voting securities of the Parent) has Beneficial Ownership of forty percent (40%) or more of the combined voting power of the entity’s outstanding voting securities).

(iii)

Individuals who, as of the date of adoption of the Plan, constitute the Board (the “Incumbent Board”), cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the adoption of the Plan whose election, or nomination for election, by Parent stockholders was approved by a vote of at least two-thirds (2/3) of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, unless any such individual’s initial assumption of office occurs as a result of either an actual or threatened election contest (including, but not limited to, a consent solicitation).

(iv)

The stockholders of the Company approve a plan of complete liquidation of the Company.

With respect to Awards that are subject to Section 409A of the Code, the foregoing provisions of this Section 16 shall be interpreted in a manner that is consistent with the U.S. Department of Treasury Regulations promulgated pursuant to Section 409A of the Code so that only such transactions or events that could qualify as a “change in control event” within the meaning of Treasury Regulation § 1.409A-3(i)(5)(i) will be deemed to be a Change in Control for purposes of such Awards.

17.

Nontransferability of Awards.

(a)

Except as provided by the Committee for transfers without consideration, an Award shall not be transferable other than (i) by the Participant’s last will and testament or (ii) by the applicable laws of descent and distribution.

(b)

Any Award transferred pursuant to Section 17(a) shall be subject to all of the same original terms and conditions as provided in the Plan and the applicable Award Agreement. The Participant’s estate will remain liable for any withholding tax that may be imposed by any Federal, state or local tax authority.

18.

Tax Withholding.

In connection with the vesting of Awards or issuance of Common Stock under the Plan, the Parent may require the recipient to remit to the Company an amount sufficient to satisfy any Federal, state or local (including foreign jurisdictions) tax withholding requirements

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prior to the delivery of such Common Stock, or, in the discretion of the Committee, the Parent may withhold from the shares to be delivered shares sufficient to satisfy all or a portion of the minimum statutorily required tax withholding requirements (or such greater amount of shares as may be permitted without causing adverse accounting consequences to the Company under the applicable accounting rules). The Committee may determine the manner in which such tax withholding may be satisfied, and may permit a Participant to deliver unrestricted shares of Common Stock to be used to satisfy minimum statutorily required tax withholding based on the Fair Market Value of any such shares of Common Stock on the date the amount of tax to be withheld is determined. Any cash paid pursuant to the Plan is subject to all applicable tax withholding.

19.

Expenses.

The expenses of administering the Plan shall be borne by the Company.

20.

Termination, Amendment and Changes to Outstanding Awards.

The Committee may at any time suspend the operation of, terminate or amend the Plan or any Award thereunder, provided that no suspension, termination, or amendment shall adversely impair the rights of any Participant pursuant to an outstanding Award without the consent of the Participant. Notwithstanding the foregoing, the Committee may take such actions as it deems appropriate to ensure that the Plan and any Awards may comply with any tax, securities or other applicable law. Nothing herein shall restrict the Committee’s ability to exercise its discretionary authority as provided in the Plan.

21.

Other Actions.

Nothing contained in the Plan shall be deemed to preclude other compensation plans which may be in effect from time to time or be construed to limit the authority of the Company to exercise its corporate rights and powers, including, but not by way of limitation, the right of the Parent (a) to award options to acquire shares of Common Stock otherwise than under the Plan to an employee or other person, firm, corporation, or association, or (b) to award options to acquire shares of Common Stock, or assume the option of, any person in connection with the acquisition, by purchase, lease, merger, consolidation, or otherwise, of the business and assets (in whole or in part) of any person, firm, corporation, or association.

22.

Foreign Jurisdictions.

The Committee may adopt, amend, and terminate such arrangements, not inconsistent with the intent of the Plan, as it may deem necessary or desirable to make available tax or other benefits of the laws of any foreign jurisdiction, to Participants who are subject to such laws and who receive Awards under the Plan.

23.

Applicable Law.

The validity, construction, interpretation, administration and effect of the Plan, and its rules and regulations, and rights relating to the Plan and to Awards granted pursuant to the Plan, shall be governed by the substantive laws of the State of Delaware, without giving effect to its principles of conflict of laws.

24.

Section 409A of the Code.

(a)

To the extent applicable, it is intended that the Plan comply with or be exempt from the requirements of Section 409A of the Code and any related regulations or other guidance promulgated with respect to such Section by the U.S. Department of the Treasury or the Internal Revenue Service. Accordingly, to the maximum extent permitted, the Plan shall be interpreted and administered to be in compliance therewith and if any provision of this Plan or any term or condition of any Award would otherwise frustrate or conflict with this intent, the provision, term or condition will be interpreted and deemed amended so as to avoid this conflict. Any reservation of rights or discretion by the Company or the Committee hereunder affecting the timing of payment of any Award subject to Section 409A of the Code will only be as broad as is permitted by Section 409A of the Code and any regulations thereunder.

(b)

Notwithstanding anything herein or in any Award Agreement to the contrary, to the extent required in order to avoid accelerated taxation and/or tax penalties under Section 409A of the Code, amounts that would otherwise be payable

General Dynamics 2017 Proxy Statement     A-13



and benefits that would otherwise be provided to a Participant during the six-month period immediately following the Participant’s separation from service (within the meaning of Section 409A of the Code) shall instead be paid on the first business day after the date that is six months following the Participant’s separation from service (or death, if earlier).

25.

Miscellaneous.

(a)

Limitation of Participant rights. No Participant shall have any right to an Award or a benefit under the Plan except in accordance with the terms of the Plan, the applicable Award Agreement, and any related documents. Establishment of the Plan and/or receipt of an Award shall not be construed to give any Participant the right to be retained in the service of the Company. No holder of an Option will have any rights to dividends or other rights as a stockholder with respect to the shares subject thereto prior to the purchase of such shares upon exercise of the Option pursuant to the terms thereof. Participation Unit Award holders shall have no rights to dividends or any other rights as a stockholder prior to the acquisition of shares upon the vesting and settlement of such Award pursuant to the terms thereof.

(b)

Limitation of liability. Notwithstanding any provision of the Plan to the contrary, none of the Company, the Board, the Committee or any individual acting as an employee or agent of the Company shall be liable to any Participant, former Participant, or any other person for any claim, loss, liability or expense incurred in connection with the Plan and any Award hereunder.

(c)

Treatment for other compensation purposes. Payments and other benefits received by a Participant pursuant to an Award shall not be deemed part of a Participant’s regular, recurring compensation for purposes of any termination, indemnity or severance pay laws and shall not be included in, nor have any effect on, the determination of benefits under any other employee benefit plan, contract or similar arrangement provided by the Company, unless expressly so provided by such other plan, contract or arrangement.

(d)

Distribution only in compliance with applicable law. Notwithstanding any other provision of the Plan, the Company shall have no liability to deliver any shares of Common Stock under the Plan or make any other distribution of benefits under the Plan unless such delivery or distribution would comply with all applicable laws (including, without limitation, the requirements of the Securities Act), and the applicable requirements of any securities exchange or similar entity.

(e)

Share issuance on a non-certificate basis. To the extent that the Committee provides for the issuance of shares of Common Stock or Restricted Stock, the issuance may be affected on a non-certificated basis, subject to applicable law or the applicable rules of any stock exchange.

(f)

Fractional shares. Any fractional shares underlying an Award shall be rounded down to the nearest whole number (without any payment in respect of any rounding down).

(g)

Termination of Employment. The employment of a Participant with the Company shall be deemed to have terminated for all purposes of the Plan if such person is employed by or provides services to an entity that is a Subsidiary of the Company and such entity ceases to be a Subsidiary of the Company, unless the Committee determines otherwise, including in order to maintain compliance with Section 409A of the Code.

(h)

Company Recoupment of Awards. A Participant’s rights with respect to any Award hereunder shall in all events be subject to (i) any right that the Company may have under any Company compensation recoupment policy or other agreement or arrangement with a Participant, and (ii) any right or obligation that the Company may have regarding the recoupment of “incentive-based compensation” under Section 10D of the Exchange Act and any applicable rules and regulations promulgated thereunder from time to time by the U.S. Securities and Exchange Commission.

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26.

Notices.

All notices to the Parent regarding the Plan shall be in writing, effective as of actual receipt by the Parent, and shall be sent to:

General Dynamics Corporation

2941 Fairview Park Drive, Suite 100

Falls Church, Virginia 22042

Attention: Corporate Secretary

The Committee may change the address to which notices under the Plan are sent provided such address is communicated to Participants.

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APPENDIX B

USE OFNON-GAAP-GAAP FINANCIAL MEASURESFINANCIAL MEASURES

(DOLLARSINMILLIONS)

This Proxy Statement containsnon-GAAP financial measures, as defined by Regulation G of the Securities and Exchange Commission.SEC.

We emphasize the efficient conversion of net earnings into cash and the deployment of that cash to maximize shareholder returns. As described below, we use free cash flow from operations and ROIC to measure our performance in these areas. While we believe these metrics provide useful information, they are not defined operating measures under U.S. generally accepted accounting principles (GAAP), and there are limitations associated with their use. Our calculation of these metrics may not be completely comparable to similarly titled measures of other companies due to potential differences in the method of calculation. As a result, the use of these metrics should not be considered in isolation from, or as a substitute for, other GAAP measures.

Free Cash Flow.We define free cash flow from operations as net cash provided by operating activities less capital expenditures. We believe free cash flow from operations is a useful measure for investors because it portrays our ability to generate cash from our businesses for purposes such as repaying maturing debt, funding business acquisitions, repurchasing our common stockCommon Stock and paying dividends. We use free cash flow from operations to assess the quality of our earnings and as a performance measure in evaluating management. The following table reconciles the free cash flow from operations with net cash provided by operating activities:

 

Year Ended December 31

   2016    2015    2014    2013    2018    2017    2016��

Net cash provided by operating activities

  $2,198   $2,607   $3,828   $3,159   $3,148   $3,876   $2,163 

Capital expenditures

   (392   (569   (521   (436   (690   (428   (392

Free cash flow from operations

  $1,806   $2,038   $3,307   $2,723   $2,458   $3,448   $1,771 

Return on Invested Capital.We believe ROIC is a useful measure for investors because it reflects our ability to generate returns from the capital we have deployed in our operations. We use ROIC to evaluate investment decisions and as a performance measure in evaluating management. 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.expense, calculated using the statutory federal income tax rate. Average invested capital is defined as the sum of the average debt and shareholders’ equity for the year. ROIC excludesexcluding accumulated other comprehensive income,loss. ROIC excludes goodwill impairments andnon-economic accounting changes.changes as they are not reflective of company performance. ROIC is calculated as follows:

 

Year Ended December 31

   2016    2015    2014    2013    2018    2017    2016 

Earnings from continuing operations

  $3,062   $2,965   $2,673   $2,486   $3,358   $2,912   $2,679 

After-tax interest expense

   64    64    67    67    295    76    64 

After-tax amortization expense

   57    75    79    93    213    51    57 

Net operating profit after taxes

  $3,183   $3,104   $2,819   $2,646   $3,866   $3,039   $2,800 

Average invested capital

  $17,619   $17,858   $18,673   $18,741   $25,367   $18,099   $17,168 

Return on invested capital

   18.1   17.4   15.1   14.1   15.2   16.8   16.3

In evaluating the company’s ROIC performance for the 2016 – 2018 period, the Compensation Committee excluded the effects of the early 2018 CSRA acquisition since the acquisition was not contemplated at the time the target ROIC was set in 2016. Additionally, the calculation of 2016 ROIC for purposes of the PSU performance evaluation reflects ROIC as reported in the company’s Form10-K for the year ended December 31, 2016, as filed with the SEC on February 6, 2017, which did not include the effects of the company’s adoption of ASC Topic 606,Revenue from Contracts with Customers. Accordingly, the following table shows the calculation of ROIC as used by the Compensation Committee in determining the appropriate ROIC performance over the three-year 2016 – 2018 period.

 

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Appendix A

Year Ended December 31

   2018    2017    2016 

Earnings from continuing operations

  $3,399   $2,912   $3,062 

After-tax interest expense

   104    76    64 

After-tax amortization expense

   64    51    57 

Net operating profit after taxes

  $3,567   $3,039   $3,183 

Average invested capital

  $19,328   $18,099   $17,619 

Return on invested capital

   18.5   16.8   18.1

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APPENDIX B

GENERAL DYNAMICS UNITED KINGDOM

SHARE SAVE PLAN

(as amended and restated on February 9, 2019)

HM Revenue and Customs Reference: SRS 104410

Adopted by the Company on March 4, 2009

Approved by HM Revenue and Customs on August 11, 2009

Renewed by the Company for a further ten year period from March 4, 2019 on February 9, 2019, incorporating, inter alia, (a) amendments that took effect automatically from July 17, 2013 by virtue of section 14 of and Schedule 2 to the Finance Act 2013 and (b) amendments that took effect automatically from April 6, 2014 by virtue of section 51 of and Schedule 8 to the Finance Act 2014

1.

Definitions

In these Rules the following words and expressions shall have, where the context so admits, the following meanings:

“Accounting Period”

an accounting reference period of the Company;

“Act”

the Income Tax (Earnings and Pensions) Act 2003;

“Acquiring Company”

where the conditions of paragraph 38 of Schedule 3 are met, such company as shall be at any time the “acquiring company” as defined in that paragraph;

“Adoption Date”

the date on which the Plan is adopted by a resolution of the Board;

“Announcement Date”

the date on which the results of the Company are announced for any period;

“Application”

an application for an Option in the form as approved by the Committee from time to time;

“Approval Date”

the date upon which HM Revenue and Customs approves the Plan;

“Associated Company”

has the same meaning as in paragraph 47 of Schedule 3;

“Auditors”

the auditors for the time being of the Company (acting as experts and not as arbitrators);

“Board”

the board of directors of the Company or a duly constituted committee thereof at which a quorum is present;

“Bonus Date”

where repayments under the relevant Savings Contract are taken as including the Maximum Bonus, the earliest date on which the Maximum Bonus is payable and in any other case the earliest date on which a bonus is payable under the relevant Savings Contract;

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Appendix B

“Committee”

the Compensation Committee of the Board of Directors of the Company comprising two or more members of the Board of Directors, all of whom shall be“non-employee directors” or the Board of Directors of any Participating Company to which such authority is delegated by the Compensation Committee;

“Company”

General Dynamics Corporation or save for Rules 2, 3, 4, 5 and 10.2;

(i)

the Acquiring Company; or

(ii)

some other company falling withinsub-paragraph (b) orsub-paragraph (c) of paragraph 10 of Schedule 3 over whose shares a New Option has been granted;

“Common Stock”

General Dynamics Corporation Common Stock;

“Control”

has the same meaning as in section 719 of the Act;

“Date of Grant”

the date on which an Option is, was or is to be granted under the Plan, pursuant to Rule 4.1, or on which an Option is or was treated as being granted pursuant to Rule 4.3;

“Dealing Day”

a day on which The New York Stock Exchange is open for the transaction of business;

“Eligible Employee”

any employee or director of any Participating Company who:

    (a)

(i)

in the case of a director, normally devotes more than 25 hours per week to his duties (exclusive of meal breaks);

(ii)

has earnings from his office or employment which meet (or would meet if there were any) the requirements set out in paragraphs 6(2)(c) of Schedule 3;

(iii)

is employed by any Participating Company on the date on which the Committee grants an Option pursuant to Rule 4.1 below;

    (b)

has been nominated by the Committee either individually or as a member of a category of directors or employees for participation in the Plan;

    (c)

is not prohibited from participating by the provisions of Paragraph 8 of Schedule 3 (whether falling within (a) or (b) above);

“Exercise Price”

the amount as determined by the Board and expressed in dollars, which a Participant shall pay to acquire Common Stock on the exercise of an Option being, subject to Rule 4.3 and Rule 8 not less than 80% or other such percentage as is for the time being permitted by statute or other statutory provision of Fair Market Value of Common Stock on the day the Invitation was issued pursuant to Rule 2 if the Exercise Price is specified in the Invitation or, if the Exercise Price is notified to the Eligible Employees after the Invitations are issued but before the Options are granted in accordance with Rule 2.2, on the date the Eligible Employees are so notified;

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Appendix B

“Fair Market Value”

on any day an amount equal to the closing middle market quotation of Common Stock on the New York Stock Exchange for the immediately preceding Dealing Day or if on that day the Shares are not so listed, the market value of Common Stock determined in accordance with the provisions of Part VIII of the Taxation of Chargeable Gains Act 1992 and agreed with HM Revenue and Customs Shares and Assets Valuation on or before that day, in either case determining (if so required for the purposes of any relevant provisions in Schedule 3) the market value of Common Stock that is subject to a Restriction as if it was not subject to any Restriction;

“Group”

the Company and its Subsidiary companies and the phrase “Group Company” shall be construed accordingly;

“Group Employee”

a director or employee of any Group Company;

“ICTA”

means the Income and Corporate Taxes Act 1988;

“Injury or Disability”

the cessation of employment or office by reason of injury or disability provided the Committee are satisfied, on production of such evidence as it may reasonably require:

(i)

that the individual has ceased to exercise and, by reason of injury or disability, is incapable of exercising that office or employment; and

(ii)

that the individual is likely to remain so incapable for the foreseeable future;

“Invitation”

a letter of invitation to participate in the Plan in a form approved by the Committee from time to time;

“Invitation Period”

subject to Rule 10.6 any time following the Approval Date;

“Maximum Bonus”

the bonus payable to the Participant at the maturity of a Savings Contract which matures after seven years;

“New Option”

an option over shares meeting the requirements ofsub-paragraphs 39 (4)(a) to (d) of Schedule 3, granted in consideration for the release of a Subsisting Option within the relevant period specified in paragraph 58(3) of Schedule 3;

“Nominated Savings Authority”

the savings authority or the savings authorities (as the case may be) nominated by the Company for the purposes of the Plan;

“Non-UK Company Reorganisation Arrangement”

has the same meaning as in paragraph 47A of Schedule 3;

“Option”

a right to purchase Common Stock granted or to be granted pursuant to Rules 4.1, 4.2 or 4.3;

“Option Certificate”

an option certificate in a form approved by the Committee from time to time;

“Participant”

a person who has been granted an Option or (where the context admits) his legal personal representative(s);

“Participating Company”

any Group Company nominated by the Committee to participate in the Scheme from time to time;

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Appendix B

“Recognised Exchange”

a recognised stock exchange within the meaning of section 109 of the Finance Act 2007 or a recognised investment exchange within the meaning of the Financial Services and Markets Act 2000;

“this Plan” or “the Plan”

the General Dynamics United Kingdom Share Save Plan constituted and governed by the Rules with, and subject to any amendments thereto properly effected;

“Redundancy”

the cessation of employment or office by reason of redundancy within the meaning of the Employment Rights Act 1996;

“Renewal Date”

March 4, 2019;

“Restriction”

a restriction within the meaning given to that term by paragraph 48(3) of Schedule 3;

“Retirement”

the cessation of employment or office by reason of retirement

“Rules”

the rules of the Plan as the same may be amended from time to time and “Rule” shall be construed accordingly;

“Savings Contract”

a 3 or 5 year contract under a certified contractual savings scheme (within the meaning of section 702 of the Income Tax (Trading and Other Income) Act 2005 entered into by an Eligible Employee with a Nominated Savings Authority;

“Schedule 3”

Schedule 3 to the Act;

“Schedule 3 SAYE Option Scheme”

has the same meaning as in paragraph 1 of Schedule 3;

“Specified Age”

age 65;

“Standard 3 Year Bonus”

the bonus (if any) payable to the Participant under a Savings Contract which matures after three years;

“Standard 5 Year Bonus”

the bonus (if any) payable to the Participant under a Savings Contract which matures after five years;

“Subsidiary”

a company which is under the Control of the Company and which is a subsidiary of the Company within the meaning of section 1159 of the Companies Act 2006;

“Subsisting Option”

an Option which has been granted and which has not lapsed, been surrendered, renounced or been exercised in full.

1.1

In these Rules, except insofar as the context otherwise requires:

(i)

words denoting the singular shall include the plural and vice versa;

(ii)

words importing a gender shall include every gender and references to a person shall include bodies corporate and unincorporated and vice versa;

(iii)

reference to any enactment shall be construed as a reference to that enactment as from time to time amended, modified, extended orre-enacted and shall include any orders, regulations, instruments or othersub-ordinate legislation made under the relevant enactment;

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Appendix B

(iv)

words have the same meanings as in Schedule 3 unless the context otherwise requires; and

(v)

headings and captions are provided for reference only and shall not be considered as part of the Plan.

1.2

This Plan is intended to be a Schedule 3 SAYE Option Scheme for the purposes of the Act and this Plan and any Option granted under it shall be interpreted, operated and administered in a manner that is consistent with that intention and in the case of any conflict between the Rules and the provisions of sections 516 to 519 and Schedule 3 (the “legislation”), the legislation shall prevail so that this Plan may be treated as a Schedule 3 SAYE Option Scheme.

2.

Invitation to apply for Options

2.1

The Committee may during any Invitation Period but not later than the tenth anniversary of the Renewal Date invite every Eligible Employee by issuing an Invitation to apply for the grant of an Option, providing that at the intended Date of Grant the Common Stock satisfies the conditions of paragraphs 18 to 22 inclusive of Schedule 3.

2.2

Each Invitation shall specify:

(i)

the date, being not less than 14 days after the issue of the Invitation, by which an application must be made;

(ii)

whether or not the Eligible Employee may take out a 3 or 5 year Savings Contract;

(iii)

the Exercise Price or that the Exercise Price will be notified to Eligible Employees at a reasonable time prior to the closing date for Applications;

(iv)

whether or not for the purpose of determining the number of shares of Common Stock over which an Option may be exercised, the repayment under the Savings Contract is to be taken:

(a)

as including the Maximum Bonus;

(b)

as including only the Standard 5 Year Bonus or the Standard 3 Year Bonus;

(c)

as not including a bonus;

(v)

the maximum permitted aggregate monthly savings contribution being the lesser of the maximum amount specified in Paragraph 25 of Schedule 3 or such other maximum as may be determined by the Committee, and be permitted by HM Revenue and Customs pursuant to Schedule 3 and by the Nominated Savings Authority;

and the Committee may determine and include in the Invitations details of the maximum value on the date of the issue of the Invitation of shares of Common Stock over which Options may be granted on that occasion and a statement that in the event of excess Applications, each Application may be scaled down in accordance with the Rules.

2.3

Each Invitation shall be accompanied by an Application which shall provide for the applicant to state:

(i)

the monthly savings contribution being a multiple of £1 and not less than £5 which he wishes to make under the related Savings Contract;

(ii)

whether or not he wishes to take out a 3 or 5 year Savings Contract;

(iii)

that his proposed monthly savings contribution, when added to any monthly savings contributions then being made under any other Savings Contract will not exceed the maximum permitted aggregate monthly savings contribution specified in the Invitation;

(iv)

his election as to whether for the purpose of determining the maximum value of shares of Common Stock over which an Option is to be granted, the repayment under the Savings Contract is to be taken as including the Maximum Bonus, the Standard 5 Year Bonus, or the Standard 3 Year Bonus or as not including a bonus,

and shall authorise the Committee to enter on the Savings Contract such monthly savings contributions, not exceeding the maximum stated on the Application, as shall be determined pursuant to Rule 3 below.

2.4

Each Application shall be deemed to be for an Option to acquire such number of shares of Common Stock as can be bought at the Exercise Price with the repayment under the related Savings Contract.

General Dynamics 2019 Proxy Statement     B-5


Appendix B

3.

Scaling Down

3.1

If the Committee receives valid Applications over an aggregate value of Common Stock which exceeds the amount stated pursuant to Rule 2.2 or any limitation determined pursuant to Rule 5, then the following steps shall be carried out successively to the extent necessary to eliminate the excess:

(i)

the excess over £5 of the monthly savings contribution chosen by each applicant shall be reduced pro rata to the extent necessary;

(ii)

each election for a Maximum Bonus to be included in the repayment under the Savings Contract shall be deemed to be an election for the Standard 5 Year Bonus to be included;

(iii)

each election for a Standard 5 Year Bonus or a Standard 3 Year Bonus to be included in the repayment under the Savings Contract shall be deemed to be an election for the bonus to be excluded;

(iv)

applications will be selected by lot, each based on a monthly savings contribution of £5 and the inclusion of no bonus in the repayment under the Savings Contract.

3.2

If after applying the provisions of Rule 3.1(i) to (iii) inclusive the value of Common Stock available is still insufficient to enable an Option based on monthly savings contributions of £5 to be granted to each Eligible Employee who made a valid Application the Committee may, as an alternative to selecting by lot as in (iv) above, determine in its absolute discretion that no Options shall be granted.

3.3

If the Committee so determines the provision in Rule 3.1(i) to (iv) inclusive may be modified or applied in any manner as may be permitted by Schedule 3.

3.4

Each Application shall be deemed to have been modified or withdrawn in accordance with the application of the foregoing provisions and the Committee shall complete each Savings Contract proposal form to reflect any reduction in monthly savings contributions resulting therefrom.

4.

Grant of Options

4.1

Within 30 days of the first day by reference to which the Fair Market Value of the Common Stock is determined (or within 42 days of that day when Rule 3 applies and Options cannot be granted within the 30 day period), the Committee shall grant to each applicant who is still an Eligible Employee an Option over such number of shares of Common Stock as can be purchased on the date of exercise of that Option with the repayment under the relevant Savings Contract.

4.2

If the Company is prevented by statute, order, regulation or government directive from granting Options within any such periods, then the Committee may grant Options within twenty one days of the lifting of such restrictions providing the grant takes place not more than 30 days following the date on which Fair Market Value was determined for the purposes of the Option grant in question or not later than 42 days following the date Fair Market Value was determined if Applications have been scaled down pursuant to Rule 3.1.

4.3

Where the circumstances noted in Rule 7.4 apply New Options may be granted within the terms of paragraph 38(1) Schedule 3 in consideration for the release of Options previously granted under this Plan. Such New Options are deemed to be equivalent to the old Options and to have been granted within the terms of this Plan.

4.4

No Option may be transferred, assigned or charged and any purported transfer, assignment or charge shall be void ab initio. Each Option Certificate shall carry a statement to this effect. For the avoidance of doubt, this Rule 4.4 shall not prevent the Option of a deceased Participant being exercised by his personal representative(s) within the terms of these Rules.

4.5

As soon as possible after Options have been granted the Committee shall issue an Option Certificate specifying the Date of Grant and the Exercise Price. If the shares of Common Stock which are the subject of an Option are subject to any Restriction, the Committee shall as soon as practicable after the Date of Grant notify Participants of that fact and the details of any such Restriction.

5.

Limitations on Grant

5.1

Before Invitations are issued on any occasion, the Committee may determine a limit on the value of shares of Common Stock which are to be available in respect of that issue of Invitations.

B-6     General Dynamics 2019 Proxy Statement


Appendix B

5.2

Further, subject to any adjustment as contemplated by Rule 8, the total number of shares of Common Stock which may be issued and/or delivered under this Plan is (a) 600,000 in respect of theten-year period from the Adoption Date, and (b) 450,000 in respect of theten-year period from the Renewal Date. The Committee may not grant Options which would cause this limit to be exceeded. In determining this limit, no account shall be taken of any Options to the extent they have ceased to be exercisable.

6.

Exercise of Options

6.1

Subject to each of the succeeding sections of this Rule 6 and Rule 9 any Subsisting Option may be exercised by the Participant or, if deceased, by his personal representatives in whole or in part at the time of or at any time following the occurrence of the earliest of the following events:

(i)

the Bonus Date;

(ii)

the death of the Participant;

(iii)

upon the Participant ceasing to be a Group Employee where that cessation was by reason of Injury, Disability, Redundancy,or Retirement or by reason of a relevant transfer within the meaning of the Transfer of Undertakings (Protection of Employment) Regulations 2006;

(iv)

an opportunity to exercise the Option pursuant to Rule 7;

(v)

upon the Participant ceasing to be a Group Employee, where that cessation was by reason only that his employing company which is an associated company of the Company (within the meaning given to that term in paragraph 35(4) of Schedule 3) ceases to be such an associated company by reason of a change of control (as determined in accordance with sections 450 and 451 of the Corporation Tax Act 2010), or that the office or employment relates to a business or part of a business which is transferred to a person who is neither an Associated Company of the Company nor a company of which the Company has Control where the transfer is not a relevant transfer within the meaning of the Transfer of Undertaking (Protection of Employment) Regulations 2006.

6.2

An Option shall lapse and become thereafter incapable of exercise on the earliest of the following events:

(i)

except where the Participant has died, the expiry of six months following the Bonus Date;

(ii)

where the Participant has died within six months following the Bonus Date, the first anniversary of the Bonus Date;

(iii)

where the Participant has died before the Bonus Date, the first anniversary of his death;

(iv)

unless the Participant has died, on the expiry of six months after the Option has become exercisable by virtue of Paragraph (iii) or (v) of Rule 6.1;

(v)

immediately following the Participant ceasing to be a Group Employee save when the Participant ceases to be a Group Employee in the circumstances in Rule 6.1(ii), (iii), (iv) and (v) above, and save when the Participant ceases to be a Group Employee but continues to be an employee or director of any Associated Company or company of which the Company has Control;

(vi)

the expiry of six months after the Option has first become exercisable in accordance with Rule 7;

(vii)

the Participant being adjudicated bankrupt;

(viii)

upon the Participant giving notice, (or under the terms of his Savings Contract being deemed to have given notice), to the Nominated Savings Authority that he intends to stop paying monthly contributions under his Savings Contract prior to the date upon which a right to exercise the Option shall arise;

(ix)

on the winding up other than a voluntary winding up of the Company; and

(x)

six months following a voluntary winding up of the Company.

6.3

If a Participant continues to be employed by a Group Company after the date on which he reaches the Specified Age he may exercise any Subsisting Option which was granted before July 17, 2013 within six months following that date.

6.4

No person shall be treated for the purposes of this Rule 6 as ceasing to be a Group Employee until he is no longer a director or employee of the Company, and Associated Company of the Company or a company of which the Company has Control.

General Dynamics 2019 Proxy Statement     B-7


Appendix B

7.

Take-overs, Reconstructions and Liquidations

7.1

If any person obtains Control of the Company as a result of making:

(i)

a general offer to acquire the whole of the issued share capital of the Company (other than that which is already owned by him) which is unconditional or which is made on a condition such that if it is satisfied the person making the offer will have Control of the Company; or

(ii)

a general offer to acquire all the shares (other than shares which are already owned by him) in the Company which are of the same class as Common Stock subject to a Subsisting Option

then the Committee shall notify all Participants as soon as is practicable of the offer in accordance with Rule 10.4. Any Subsisting Option may be exercised from the date of the receipt of that notification up to the expiry of a period ending six months from the time when the person making the offer has obtained Control of the Company and any condition subject to which the offer is made has been satisfied.

7.2

If under Section 900 of the Companies Act 2006 it is proposed that the Court sanctions a compromise or arrangement applicable to or affecting (i) all of the ordinary share capital of the Company or all of the shares in the Company which are of the same class as Common Stock which may be acquired by exercise of Options, or (ii) all the shares, or all the shares of the same class which are held by a class of shareholders identified otherwise than by reference to their employment or directorships or their participation in a Schedule 3 SAYE Option Scheme, then the Company shall give notice thereof to all Participants at the same time as it sends notices to members of the Company calling the meeting to consider such a compromise or arrangement. Any Subsisting Option may be exercised by a Participant subject to the terms of this Rule before the expiry of six months from the date on which the Court sanctions such compromise or arrangement. Subject to Rule 7.6, at the end of the relevant period an unexercised Option shall lapse. If any person obtains Control of the Company as a result of aNon-UK Company Reorganisation Arrangement which becomes binding on the shareholders covered by it any Subsisting Options may be exercised before the expiry of six months from the date on which suchNon-UK Company Reorganisation Arrangement becomes binding. For the purposes of this Rule 7.2, the reference to the ordinary share capital of the Company does not include any capital already held by the person making the offer or a person connected with that person, and the reference to the shares does not include any shares already held by the person making the offer or a person connected with that person.

7.3

If any person becomes bound or entitled to acquire Common Stock under sections 976 to 981 or 983 to 985 of the Companies Act 2006 (or similar circumstances occur which are acceptable to HM Revenue and Customs) any Subsisting Option may be exercised at any time when that person remains so bound or entitled.

7.4

If as a result of the events specified in Rules 7.1 or 7.2 an Acquiring Company has obtained Control of the Company, or if an Acquiring Company has become bound or entitled as mentioned in Rule 7.3, the Participant may, if the Acquiring Company so agrees, release any Subsisting Option he holds in consideration for the grant of a New Option. A New Option issued in consideration of the release of an Option shall be evidenced by an Option Certificate which shall import the relevant provisions of these Rules. A New Option shall, for all other purposes of this Plan, be treated as having been acquired at the same time as the corresponding released Option. An exchange of Options pursuant to this Rule 7.4 shall not alter the fact that this Plan remains that of the Company as the original scheme organiser.

7.5

If a resolution is passed at a general meeting for the voluntarywinding-up of the Company, an Option shall notwithstanding Rule 6.1(i) be exercisable in whole or in part for a period of six months after which the Option shall to the extent unexercised thereupon lapse.

7.6

An Option whether or not exercisable prior to or as a result of the occurrence of an event specified in Rule 7.1, 7.2, 7.3 or 7.5 shall if an event so specified occurs lapse in accordance with the relevantsub-rule of Rule 7, or if earlier, as determined by Rule 6.2(i) to (x), save that in the case of any Option granted on or after April 6, 2014 which has become exercisable under Rules 6.2(ii) and (iii), such Option shall not lapse in accordance with Rules 7.1, 7.2 or 7.3 but shall lapse only on the expiry of the relevant 12 month period under Rules 6.2(ii) and (iii). Where prior to the date an Option lapses there occurs one or more further events specified in Rules 7.1, 7.2, 7.3 or 7.5 an Option shall lapse on the earlier of the date determined by the preceding part of this Rule 7.6 and the date of lapse relevant to the further event or events.

7.7

For the purpose of this Rule 7 other than Rule 7.4 a person shall be deemed to have obtained Control of a Company if he and others acting in concert with him have together obtained Control of it.

B-8     General Dynamics 2019 Proxy Statement


Appendix B

7.8

The exercise of an Option pursuant to the preceding provisions of this Rule 7 shall be subject to the provisions of Rule 9.

7.9

A New Option shall not be exercisable by virtue of the event pursuant to which it was granted.

7.10

Notwithstanding any provision to the contrary, where this Rule 7 applies or is expected to apply, and in consequences of an event specified in Rule 7.1, 7.2, 7.3 or 7.5, the Common Stock no longer meets, or is not expected to meet, the requirements of paragraphs 17 to 20 and 22 of Part 4 of Schedule 3, the Committee may determine that Options may be exercised within a period of 20 days ending on such specified event (conditional upon and with effect from that event occurring) or a period of 20 days after such event. The Committee shall act fairly and reasonably in exercising its discretion under this Rule.

8.

Variation of Share Capital

8.1

In the event of any variation of the share capital of the Company affecting the Common Stock, including, but without prejudice to the generality of the preceding words, any capitalisation or rights issue or any consolidation,sub-division or reduction of capital by the Company, the number and nominal amount of Common Stock subject to any Option and the Exercise Price may be adjusted by the Committee in such manner as the Auditors confirm in writing to be, in their opinion, fair and reasonable provided that:

(i)

the aggregate amount payable on the exercise of an Option in full is neither materially changed nor increased beyond the expected repayment under the Saving Contract at the Bonus Date;

(ii)

at any time when the Plan remains approved by HM Revenue and Customs no adjustment shall take effect without the prior approval of HM Revenue and Customs;

(iii)

following the adjustment the Common Stock shall continue to satisfy the conditions specified in paragraphs 10 to 14 inclusive of Schedule 3; and

(iv)

the total Fair Market Value of Common Stock subject to any Option is immediately after the adjustment or adjustments substantially the same as what it was immediately before the adjustment or adjustments.

8.2

Such variation shall be deemed to be effective from the record date at which the respective variation applied to other stock of the same class as Common Stock. Any Options exercised within that period shall be treated as exercised with the benefit of the variation confirmed by the Auditors.

8.3

If an adjustment is made pursuant to Rule 8.1 above with the intention that the Plan shall cease to be approved by HM Revenue and Customs, the Company shall immediately notify HM Revenue and Customs.

8.4

The Committee shall take such steps as it considers necessary to notify Participants of any adjustment made under Rule 8.1 and may call in, cancel, endorse, issue or reissue any Option Certificate consequent upon such adjustment.

9.

Manner of Exercise of Options

9.1

No Option may be exercised whilst the Plan is approved by HM Revenue and Customs unless the Common Stock satisfies the conditions specified in paragraphs 18 to 22 inclusive of Schedule 3.

9.2

An Option may only be exercised over as a maximum, the number of shares of Common Stock which may be acquired with the sum obtained by way of payment under the related Savings Contract converted into US dollars at the exchange rate prevailing on the day preceding the date on which the Option is exercised.

9.3

An Option shall be exercised by the Participant, or as the case may be by his personal representatives, delivering notice in writing to the Committee, detailing the number of shares of Common Stock in respect of which he wishes to exercise the Option accompanied by the appropriate payment (which shall not exceed the sum obtained by way of repayment under the related Savings Contract) or authority to the Company to withdraw and apply monies from the Savings Contract to acquire the Common Stock over which the Option is to be exercised and the relevant Option Certificate and shall be effective on the date of its receipt by the Committee. The Group Company which employs the Participant shall meet or procure the meeting of any stamp duty liability on the exercise of an Option.

9.4

Where an Option is exercised, the number of shares of Common Stock specified in the notice of exercise given in accordance with Rule 9.3 shall be transferred to the participant within 30 days of the date of exercise and the Company shall arrange for the delivery of evidence of title thereof. Save for any rights determined by reference to a record date preceding the date of transfer, such Common Stock shall rank pari passu with the other Common Stock of the same class in issue.

General Dynamics 2019 Proxy Statement     B-9


Appendix B

9.5

When an Option is exercised only in part, it shall lapse to the extent of the unexercised balance.

9.6

For the purpose of Rules 9.2 and 9.3 above, any repayment under the Savings Contract shall exclude the repayment of any contribution the due date for payment of which falls after the date on which repayment is made unless provided for in the terms of the Savings Contract.

9.7

For so long as Common Stock is quoted on The New York Stock Exchange, the Company shall apply for Common Stock in respect of which an Option has been exercised to be quoted if it were not so quoted already.

9.8

Where Common Stock is listed or dealt in or any Recognised Exchange no Option may be exercised in contravention of any securities transactions rules of the Recognised Exchange as may from time to time be in force.

10.

Administration and Amendment

10.1

The Plan shall be administered by the Committee whose decision on all disputes shall be final save where the Rules require the concurrence of the Auditors.

10.2

The Committee may from time to time amend these Rules provided that:

(i)

no amendment to a “key feature” (as defined in paragraph 40B(8) of Schedule 3) shall have effect whilst the Plan is and is intended to remain a Schedule 3 SAYE Option Scheme, and if such status is not to be maintained, this Rule shall not apply; and

(ii)

the Company shall provide such information and make such declarations to HM Revenue and Customs in relation to any amendment to “a “key feature” (as defined in paragraph 40B(8) of Schedule 3) as is required for the purposes of Schedule 3.

10.3

The cost of establishing and operating the Plan shall be borne by the Group Companies in such proportions as the Board shall determine.

10.4

Any notice or other communication under or in connection with the Plan may be given by the Committee either personally or by post, and to the Committee either personally or by post to the Secretary of the Committee; items sent by post shall bepre-paid and shall be deemed to have been received 72 hours after posting.

10.5

The Company shall at all times keep available sufficient Common Stock to satisfy the exercise to the full extent still possible of all Subsisting Options.

10.6

The Plan shall terminate upon the tenth anniversary of the Renewal Date or at any earlier time by the passing of a resolution of the Committee. Termination of the Plan shall be without prejudice to the subsisting rights of Participants.

10.7

The rights and obligations of any individual under terms of his office or employment with any Group Company shall not be affected by his participation in the Plan or any right which he may have to participate therein, and an individual who participates therein shall waive any and all rights to compensation or damages in consequence of the termination of his office or employment for any reason whatsoever insofar as those rights arise or may arise from his ceasing to have rights under or be entitled to exercise any Option under the Plan as a result of such termination.

10.8

Neither the grant of an Option nor any benefit which may accrue to a Participant on the exercise of an Option shall form part of that Participant’s pensionable remuneration for the purposes of any pension scheme or similar arrangement which may be operated by any Group Company.

B-10     General Dynamics 2019 Proxy Statement


 

 

 

 

 

 

 

 

 

LOGO


GENERAL DYNAMICS CORPORATION

2941 FAIRVIEW PARK DRIVE

FALLS CHURCH, VA 22042

VOTE BY INTERNET -www.proxyvote.com

Use the Internet to transmit your voting instructions and for electronic delivery of information up untilinformation. Vote by 11:59 P.M. Eastern Time the day before thecut-off date or meeting date.on April 30, 2019 for shares held directly and by 9:00 A.M. Eastern Time on April 29, 2019 for shares held in a Plan. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form.

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VOTE BY PHONE -1-800-690-6903

Use any touch-tone telephone to transmit your voting instructions up until11:instructions. Vote by 11:59 P.M. Eastern Time the day before thecut-off date or meeting date.on April 30, 2019 for shares held directly and by 9:00 A.M. Eastern Time on April 29, 2019 for shares held in a Plan. Have your proxy card in hand when you call and then follow the instructions.

VOTE BY MAIL

Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Vote Processing, c/o Broadridge,

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TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:

E17891-TBD                         E55370-P17143-Z73849            KEEP THIS PORTION FOR YOUR RECORDS

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DETACH AND RETURN THIS PORTION ONLY

THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.

 

 

GENERAL DYNAMICS CORPORATION

          
 

 

The Board of Directors recommends you vote FOR the following proposal:

           
 

 

1.  Election of Directors

          
 

Nominees:

 For Against Abstain        
 

 

1a.   Nicholas D. Chabraja

1b.   James S. Crown

 

1c.1b.  Rudy F. deLeon

 

1d.   John M. Keane1c.   Cecil D. Haney

 

1e.1d.  Lester L. Lyles

 

1f.1e.   Mark M. Malcolm

 

1g.1f.   Phebe N. Novakovic

1g.  C. Howard Nye

 

1h.  William A. Osborn

 

1i.   Catherine B. Reynolds

 

1j.   Laura J. Schumacher

 

1k.  Peter A. Wall

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

The Board of Directors recommends you vote FOR the following proposals:

 

2.  Advisory Vote on the Selection of Independent Auditors

 

3.  Advisory Vote to approve Executive Compensation

 

The Board4.  Approval of Directors recommends you vote 1 year on the following proposal:

4.     Advisory Vote on the Frequency of Future Executive Compensation Advisory VotesGeneral Dynamics United Kingdom Share Save Plan

 

The Board of Directors recommends you vote FORAGAINST the following proposal:

 

5.  Approval of the General Dynamics Corporation Amended and Restated 2012 Equity Compensation PlanShareholder Proposal to require an Independent Board Chairman

 

NOTE:Such other business as may properly come before the meeting or any adjournment thereof.

 

 

 

 

 

    

 

1 Year

 

 

 

For

 

 

2 Years

 

 

For

 

 

 

Against

 

 

 

3 Years

 

Against

 

 

 

Abstain

 

 

 

Abstain

 

Abstain

 

 
 

Please sign exactly as your name(s) appear(s) hereon. When signing as attorney, executor, administrator, or other fiduciary, please give full title as such.

Joint owners should each sign personally. All holders must sign. If a corporation or partnership, please sign in full corporate or partnership name by authorized officer.

 

    
    
                        
 

Signature [PLEASE SIGN WITHIN BOX]                     Date

 Date  

Signature (Joint Owners)                                                  Date

 Date   

V.1.1


DIRECT DEPOSIT NOTICE

General Dynamics Corporation and Computershare remind you of the opportunity to have your quarterly dividends electronically deposited into your checking or savings account. The main benefit of direct deposit to you is knowing that your dividends are in your account on the payable date.

Telephone inquiries regarding stock, including registration for direct deposit of dividends, should be made to Computershare’s automated Toll-Free Telephone Response Center at1-800-519-3111.

 

 

General Dynamics Corporation encourages you to take advantage of one of the convenient ways by which you can vote these shares for matters to be covered at the 20172019 Annual Meeting of Shareholders. You can vote these shares electronically through the Internet or by telephone, either of which eliminates the need to return the proxy card. If you do not wish to vote through the Internet or by telephone, you can vote by mail by following the instructions on the proxy card on the reverse side.

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting:

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E17892-TBDE55371-P17143-Z73849      

 

 

Proxy — GENERAL DYNAMICS CORPORATION

 

PROXY FOR ANNUAL MEETING OF SHAREHOLDERS, MAY 3, 20171, 2019

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE CORPORATION

 

The undersigned hereby appoints PHEBE N. NOVAKOVIC, JASON W. AIKEN and GREGORY S. GALLOPOULOS, and each of them, as proxy or proxies, with full power of substitution, to vote all shares of common stock, par value $1.00 per share, ofGENERALof GENERAL DYNAMICS CORPORATION, a Delaware corporation, that the undersigned is entitled to vote at the 2017Annual2019 Annual Meeting of Shareholders, and at any adjournment or postponement thereof, upon the matters set forth on the reverse side and upon such other matters as may properly come before the annual meeting, all as more fully described in the Proxy Statement for the 20172019 Annual Meeting of Shareholders.

 

THIS PROXY WHEN PROPERLY EXECUTED AND TIMELY RETURNED WILL BE VOTED IN THE MANNER DIRECTED HEREIN. ON ANY OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING, THIS PROXY WILL BE VOTED AT THE DISCRETION OF THE PROXIES NAMED ABOVE, AS DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT. IF THIS PROXY IS PROPERLY EXECUTED AND TIMELY RETURNED BUT NO DIRECTION IS MADE HEREON, THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2, 3 AND 54, AND FOR EVERY YEAR FORAGAINST PROPOSAL 4.5.

 

If you are a participant in the Company’s 401(k) plans, this proxy card constitutes your instructions to Fidelity, the trustee of the plans, as to the vote of the shares of Company common stock in your plan accounts. If you do not submit valid and timely voting instructions, EvercoreNewport Trust Company, N.A., the independent fiduciary and investment manager for the Company common stock in your plan accounts, will direct the vote of your plan shares in its discretion.

 

PLEASE COMPLETE, SIGN AND DATE YOUR PROXY CARD AND RETURN IT IN THE POSTAGE-PAID ENVELOPE PROVIDEDPROVIDED.

 

 

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