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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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,
Phebe N. Novakovic
Chairman and Chief Executive Officer
2941 Fairview Park Drive, Suite 100
Falls Church, Virginia 22042
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Important Notice Regarding the Availability of Proxy Materials
for the Shareholder Meeting to Be Held on May 3, 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,
Gregory S. Gallopoulos
Secretary
Falls Church, Virginia
March 23, 201721, 2019
General Dynamics 20172019 Proxy Statement
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Components of Executive Compensation and Alignment with Company Performance | 36 | |||
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Appendix B – | 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).
This summary highlights selected information that is provided in more detail throughout this Proxy Statement. This summary does not contain all of the information you should consider before voting. You should read the full Proxy Statement before casting your vote.
VOTING MATTERSAND BOARD RECOMMENDATIONS
At this year’s Annual Meeting, we are asking our shareholders to vote on the following matters:
PROPOSAL | BOARD
| ADDITIONAL INFORMATION | ||
Proposal 1:
| FOR each nominee |
See pages
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Proposal 2:
| FOR | See page | ||
Proposal 3:
| FOR | See page | ||
Proposal 4:
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Approval of
| FOR | See pages | ||
Proposal 5: Shareholder Proposal – Independent Board Chairman | AGAINST | See pages 62 through details |
ANNUAL MEETING INFORMATION
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Date
| Wednesday, May
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Time
| 9 a.m. local time
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Location
| 2941 Fairview Park Drive, Falls Church, Virginia
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How to Vote
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• By Internet
| Access www.ProxyVote.com.
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• By Telephone | Call1-800-690-6903 if you are a registered holder. If you are a beneficial holder, call the phone number listed on your voter instruction form.
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• By Mail
| Sign and date each proxy card received and return each card using the prepaid postage envelope.
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• In Person
| Attend the Annual Meeting and vote by ballot.
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Additional information about the Annual Meeting and voting can be found beginning on page 71.
General Dynamics 2017 Proxy Statement 165.
Proxy Summary
20172019 BOARDOF DIRECTORS NOMINEES
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DIRECTOR NOMINEES
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NOMINEE | DIRECTOR SINCE | INDEPENDENT | PRIMARY OCCUPATION | |||||
James S. Crown*
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1987
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Yes
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Chairman and CEO, Henry Crown and Company
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Rudy F. deLeon
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2014
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Yes
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Senior Fellow, Center for American Progress
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Cecil D. Haney
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2019
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Yes
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Retired Admiral, U.S. Navy
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Lester L. Lyles
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2003
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Yes
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Retired General, U.S. Air Force
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1
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Mark M. Malcolm
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2015
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Yes
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Former President and CEO, Tower International
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1
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Phebe N. Novakovic
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2012
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Chairman and CEO, General Dynamics
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1
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C. Howard Nye
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2018
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Yes
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Chairman, President and CEO, Martin Marietta Materials
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1
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William A. Osborn
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2009
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Yes
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Former Chairman and CEO, Northern Trust Corporation
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Catherine B. Reynolds
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2017
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Yes
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Chairman and CEO, EduCap
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Laura J. Schumacher
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2014
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Yes
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Vice Chairman, External Affairs and Chief Legal Counsel, AbbVie
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Peter A. Wall
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2016
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Yes
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Retired General, British Army
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* | Lead Director |
EXTENSIVE GOVERNANCE EXPERIENCE | STRONG INDUSTRY EXPERIENCE | |
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BALANCED DIRECTOR TENURE | STRONG BOARD DIVERSITY | |
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.
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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 |
2 General Dynamics 20172019 Proxy Statement 3
Proxy Summary
CORPORATE GOVERNANCE HIGHLIGHTS
Highlights of our governance practices include:
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| • 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
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• Weprohibit hedgingand pledging of our Common Stock by directors and executive officers. | P. | |||||||
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• Anindependent Lead Director with a robust set of responsibilities is elected annually by the Board and provides additional independent oversight of senior management and board matters.
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• 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. | |||||||
• 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.
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Bylaws* | ||||||||
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• Our directors are restricted in the number of other boards on which they may serve toprevent overboarding.
| Corporate Governance Guidelines* | |||||||
• Our updated
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| • Ourethics program includes strong Codes of Ethics for all employees globally, with specific codes for our directors and financial |
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| Standards of Business Ethics and Conduct** | |||||||
• Disclosure of ourcorporate political contributions and ourtrade association dues describes the process and oversight we employ in each area.
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• We have a strong corporate commitment to respect the dignity,human rights and autonomy of others.
| Corporate Sustainability Report** | |||||||
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• Our shareholders have the ability to nominate director candidates and have those nominees included in our proxy statement, subject to meeting the requirements in our Bylaws, a shareholder right known asproxy access. | Bylaws* | |||||||
• Wedo not have a shareholder rights plan, or poison | ||||||||
• Our shareholders have the right to request aspecial meeting of shareholders. •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
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.
General Dynamics 2019 Proxy Statement 5
Proxy Summary
OUR SHAREHOLDER ENGAGEMENT PROGRAM
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.
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Revenue | $36.2 billion | Increased 16.9% over 2017; all five segments expanded | ||
Earnings from Continuing Operations | $3.4 billion | Increased 15.3% over 2017 | ||
Diluted EPS from Continuing Operations | $11.22 | Double-digit year-over-year growth – up 17.4% | ||
Operating Margin | 12.3% | Continued to generate industry-leading operating margin | ||
Cash | $3.1 billion | Good cash flow; supports ongoing investment in the business | ||
Return on Invested Capital* | 15.2% | Generated strong return while investing in the continued growth of our company | ||
Quarterly Dividends | $0.93 per share | 21st consecutive year with a dividend increase | ||
Order Backlog | $67.9 billion | Increased 7.4% over 2017 |
* | See Appendix |
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.
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 | Corporate | Finance or | Government | Global | Operations and | |||||||
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James S. Crown | ✓ | ✓ | ✓ | |||||||||
Rudy F. deLeon | ✓ | ✓ | ✓ | ✓ | ||||||||
| ✓ | ✓ | ||||||||||
| ✓ | ✓ | ||||||||||
Lester L. Lyles | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ||||||
Mark M. Malcolm | ✓ |
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| ✓ |
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| ✓ | ✓ | ||||||||||
| ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ||||||
C. Howard Nye | ✓ | ✓ | ✓ | ✓ | ✓ | |||||||
| ✓ | ✓ | ✓ | ✓ | ||||||||
Catherine B. Reynolds | ✓ | ✓ | ✓ | ✓ | ||||||||
Laura J. Schumacher | ✓ | ✓ | ✓ | ✓ | ||||||||
Peter A. Wall | ✓ | ✓ | ✓ | ✓ | ||||||||
Why is this important for General Dynamics? | Supports oversight of the company’s business performance and strategic development in our industry | Ensures the background and knowledge necessary to provide effective oversight and governance | Enables in-depth | 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, |
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.
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JAMES S. CROWN | • • •
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 | |
JAMES S. CROWN
LEAD DIRECTOR C Audit Compensation Nominating and Corporate Governance (Chair)
DIRECTORSINCEMAY1987 AGE: |
General Dynamics 2017 Proxy Statement 7
Election of Directors
RUDY F.DELEON | • • • •
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. | |
COMMITTEES:
DIRECTORSINCESEPTEMBER2014 AGE: |
• Retired
Key Attributes/Skills/Expertise:Prior to retiring from the U.S. Nominated and | ||
COMMITTEES:
DIRECTOR SINCE AGE: |
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. | |
COMMITTEES: Audit Nominating and Corporate Governance
DIRECTOR SINCEDECEMBER2003 AGE: | ||
MARK M. MALCOLM | • • • •
Key Attributes/Skills/Expertise: Mr. Malcolm’s senior executive positions at Tower International and Ford provide him with critical knowledge of the management, financial and operational requirements of a large company. In these positions, Mr. Malcolm gained extensive experience in dealing with accounting principles and financial reporting, evaluating financial results and the financial reporting process of a public company. Mr. Malcolm brings to the Board a broad knowledge of the complex business issues facing a public company in areas such as risk management, global supply chain management and corporate governance. Based on his experience, the Board has determined that Mr. Malcolm is an Audit Committee Financial Expert. | |
COMMITTEES:
DIRECTORSINCEAUGUST 2015
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General Dynamics 2017 Proxy Statement 9
Election of Directors65
PHEBE N. NOVAKOVIC | • •
Key Attributes/Skills/Expertise:Ms. Novakovic’s service as a senior officer of General Dynamics since 2002 makes her a valuable and trusted | |
C None
DIRECTORSINCEMAY2012 AGE: |
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. | |
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, • Mr. Osborn currently serves as a director of Abbott Laboratories and Caterpillar, Inc.
Key Attributes/Skills/Expertise:Mr. Osborn’s prior service as a senior executive of Northern Trust Corporation, including as chairman and chief executive officer, and president, provides him with extensive knowledge of the complex financial, operational and governance issues of a large public company. He brings to our Board a well-developed awareness of financial strategy, asset management and risk management and a strong understanding of public company governance. The Board has determined that Mr. Osborn’s extensive experience with accounting principles, financial reporting and evaluation of financial results qualifies him as an Audit Committee Financial Expert. | |
COMMITTEES: Audit Compensation (Chair) Finance and Benefit Plans
DIRECTOR SINCEDECEMBER2009 AGE: |
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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. The Board has determined that Ms. | |
COMMITTEES:
Finance and Benefit Plans
AGE: |
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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. • Executive Vice President, General Counsel and Secretary of Abbott Laboratories, 2007 to 2012
Key Attributes/Skills/Expertise:Ms. Schumacher’s positions as chief legal officer of two large public companies provide her with extensive experience with respect to risk management and a deep knowledge of the types of legal and regulatory risks facing public companies. Her experience as a senior executive in the healthcare industry has provided her with a keen awareness of strategic considerations and challenges associated with a complex, highly-regulated industry. Additionally, through her key role in the strategic consideration and execution of the separation of Abbvie from Abbott Laboratories, Ms. Schumacher brings an important understanding of and insight into corporate governance matters and complex corporate transactions. | |
COMMITTEES: Compensation Nominating and Corporate Governance
DIRECTOR SINCE FEBRUARY2014 AGE: |
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.
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COMMITTEES: Finance and Benefit Plans Nominating and Corporate Governance
DIRECTOR SINCEAUGUST2016 AGE: | ||
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.
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OUR COMMITMENTTO STRONG CORPORATE GOVERNANCE
The General Dynamics Board of Directors believes that a commitment to good corporate governance enhances shareholder value. To that end, General Dynamics is committed to employing strong corporate governance practices to promote a culture of ethics and integrity that defines how we do business. At the core, we are in business to earn a fair return for our shareholders.
On the recommendation of the Nominating and Corporate Governance Committee, the Board has adopted the General Dynamics Corporate Governance Guidelines to provide a framework for effective governance of the Board and the company. The guidelines establish policies and practices with respect to Board operations and responsibilities, including board structure and composition, director independence, executive and director compensation, succession planning and the receipt of concerns and complaints by the Board. The Board regularly reviews these guidelines and updates them periodically in response to changing regulatory requirements, feedback from shareholders on governance matters and evolving best practices in corporate governance.
The Board believes that its commitment to good governance is demonstrated by key corporate governance practices, including:
✓ | a majority voting standard for the election of directors coupled with a director resignation policy; |
✓ | an independent Lead Director; |
✓ | a market-leading executive stock ownership policy; |
✓ | a policy prohibiting hedging and pledging by directors and officers; |
✓ | an executive compensation recoupment (clawback) policy; |
✓ | disclosure of corporate political contributions and trade association dues; |
✓ | shareholders’ right to call a special meeting; and |
✓ | shareholders’ ability to nominate director candidates and have those nominees included in the company’s proxy statement. |
These and other practices are highlighted on page 3.4.
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:
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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.
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Governance of the Company
We have adopted ethics codes specifically applicable to our Board of Directors and our financial professionals. The Code of Conduct for Members of the Board of Directors embodies our Board’s commitment to manage our business in accordance with the highest standards of ethical conduct. The Code of Ethics for Financial Professionals, which supplements the Blue Book, applies to our chief executive officer, chief financial officer, controller and persons performing similar financial functions.
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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.
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. |
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Governance of the Company
Independence Standards.Our Board of Directors assesses the independence of our directors and examines the nature and extent of any relationships between General Dynamics and our directors, their families and their affiliates. Our Board has established an objective that at leasttwo-thirds of the directors be independent directors.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) | has not received, nor has an immediate family member who has received, during the immediately preceding fiscal year, more than $120,000 in direct compensation from General Dynamics, other than director and committee fees and pension or other forms of deferred compensation; | |||
(3) | is not, nor has an immediate family member who is, currently employed as an executive officer of another company where any executive officer of General Dynamics currently serves on that company’s compensation committee; | |||
(4) | is not a current partner of, or employee of, a present internal or external auditor of General Dynamics; | |||
(5) | does not have an immediate family member who is a current partner of, or an employee assigned to work personally on General Dynamics’ audit by, a present internal or external auditor of General Dynamics; | |||
(6) | except as otherwise provided in (7) below, is not a current executive officer or an employee, nor has an immediate family member who is a current executive officer, of a company that made payments to, or received payments from, General Dynamics for property or services in an amount that, in the immediately preceding fiscal year, exceeded the greater of $1 million or 2 percent of the consolidated gross revenues of that company; and | |||
(7) | is not an executive officer of a charitable organization that, in the immediately preceding fiscal year, received contributions from General Dynamics in an amount that exceeded the greater of $1 million or 2 percent of the consolidated gross revenues of that organization. |
Independence Determinations.In March of each year and at other times during the year for director nominations or appointments occurring outside of the annual meeting,the Board of Directors considers whether each director and nominee to the Board meets the definition of an “independent director” in accordance with the rules of the New York Stock Exchange and the Director Independence Guidelines. The Board has determined that Ms. Barra, Ms. Reynolds, Ms. Schumacher and Messrs. Crown, deLeon, Fricks, Keane,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.
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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
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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.
Our Board holds executive sessions of thenon-management directors following all regularly scheduled Board meetings. Thenon-management directors may also meet without management present at other times as requested by anynon-management director. The independent Lead Director serves as chair at the executive sessions.
The Board of Directors has established the following four standing committees to assist in executing its duties: Audit, Compensation, Finance and Benefit Plans, and Nominating and Corporate Governance. The primary responsibilities of each of the committees are described below, together with the current membership and number of meetings held in 2016.2018. 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 | |||||||||
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Rudy F. deLeon
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Lester L. Lyles
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Laura J. Schumacher
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Peter A. Wall |
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Governance of the Company
Committee Responsibilities.Following are descriptions of the primary areas of responsibility for each of the four committees.
AUDIT COMMITTEE | NUMBEROF MEETINGSIN |
Provides oversight for accounting, financial reporting, internal control, auditing and regulatory compliance activities
Selects and oversees the independent auditor
Approves audit andnon-audit services provided by the independent auditor
Reviews the scope of the audit to be conducted by the independent auditor
Reviews our audited consolidated financial statements with management and the independent auditor
Evaluates the performance, responsibilities, budget and staffing of the internal audit function
Evaluates the scope of the internal audit plan
Monitors management’s implementation of the policies, practices and programs of the company with respect to business ethics and conduct, and environmental matters
• 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 |
Evaluates the performance of the chief executive officer and other officers and reviews and approves their compensation
Recommends to the Board the level and form of compensation and benefits for directors
Reviews and approves incentive compensation and equity-based compensation plans
Reviews and monitors succession plans for the chief executive officer and other officers
Has authority to retain and terminate external advisors in connection with the discharge of its duties
Has sole authority to approve compensation consultant fees (to be funded by the company) and the terms of the consultant’s retention
FINANCEAND BENEFIT PLANS COMMITTEE | NUMBEROF MEETINGSIN |
Oversees the management of the company’s finance policies to ensure the policies are in keeping with the company’s overall business objectives
With respect to employee benefit plans that name the company or one of its subsidiaries as the investment fiduciary (and for which the company or one of its subsidiaries has not appointed the management investment committee as investment fiduciary):
provides strategic oversight of the management of the assets
reviews and approves investment policy recommendations made by management
reviews and approves the retention of third parties for administration and management services related to trust assets
• Oversees the management of the company’s finance policies to ensure the policies are in keeping with the company’s overall business objectives • With respect to employee benefit plans that name the company or one of its subsidiaries as the investment fiduciary (and for which the company or one of its subsidiaries has not appointed the management investment committee as investment fiduciary): ¡ provides strategic oversight of the management of the assets ¡ reviews and approves investment policy recommendations made by management ¡ reviews and approves the retention of third parties for administration and management services related to trust assets |
NOMINATINGAND CORPORATE GOVERNANCE COMMITTEE | NUMBEROF MEETINGSIN |
Evaluates Board and management effectiveness
Advises the Board on the appropriate size, composition, structure and operations of the Board and its committees
Reviews and recommends to the Board committee assignments for directors
Advises the Board on corporate governance matters and monitors developments, trends and best practices in corporate governance
Recommends to the Board corporate governance guidelines that comply with legal and regulatory requirements
Identifies qualified individuals to serve as directors and recommends director nominees
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Governance of the Company
General Dynamics has aOur comprehensive risk management program is conducted by senior management and overseen by the Board of Directors. In particular, the Board oversees management’s identification and prioritization of risks.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.
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Governance of the Company
Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee oversees risks related to the company’s governance structure and processes and risks arising from related person transactions. The committee receives briefings from the senior vice president, general counsel and secretary.
The Role of External Advisors in Risk Management. The company’s external advisors support the risk management program in a number of ways. Specifically, external advisors support the program by: (1) auditing our financial statements; (2) reviewing and suggesting updates and improvements 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.
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
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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.
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Governance of the Company
RELATED PERSON TRANSACTIONS POLICY
Our Board of Directors has adopted a written policy on the review and approval of related person transactions. Related persons covered by the policy are:
(1) | executive officers, directors and director nominees; | |
(2) | any person who is known to be a beneficial owner of more than 5 percent of our voting securities; | |
(3) | any immediate family member of any of the foregoing persons; or | |
(4) | any entity in which any of the foregoing persons has or will have a direct or indirect material interest. |
A related person transaction is defined by this policy as a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which: General Dynamics will be a participant; the amount involved exceeds $120,000; and any related person will have a direct or indirect material interest. The following interests and transactions are not subject to the policy:
(1) | director compensation that has been approved by the Board; | |
(2) | a transaction where the rates or charges are determined by competitive bid; or | |
(3) | a compensatory arrangement solely related to employment with General Dynamics (or a subsidiary) that has been approved by the Compensation Committee, or recommended by the Compensation Committee to the Board. |
The Nominating and Corporate Governance Committee is responsible for reviewing, approving and, where applicable, ratifying related person transactions. If a member of the committee has an interest in a related person transaction, then he or she will not be part of the review process.
In considering the appropriate action to be taken regarding a related person transaction, the committee or the Board will consider the best interests of General Dynamics and whether the transaction is fair to the company, is on terms that would be obtainable in anarm’s-length transaction or is pursuant to a company discount program for which the related person is eligible, serves a compelling business reason and any other factors it deems relevant. As a condition to approving or ratifying any related person transaction, the committee or the Board may impose whatever conditions and standards it deems appropriate, including periodic monitoring of ongoing transactions.
The following transactions with a related person were determined to pose no actual conflict of interest and were reviewed and approved by the committee or the Board pursuant to our related person transactions policy:
Based upon Schedule 13G filings made with the SEC,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
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 | $ | |
Lead Director Retainer | $25,000 | |
Committee Chair Annual Retainer | $10,000 | |
Attendance Fees | $3,000 for each meeting of the Board of Directors; | |
Annual Equity Award | Approximately | |
Per Diem Fee forNon-Employee Directors Performing Specific Projects for the Company | $10,000 |
As part of the Compensation Committee’s annual review in early 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.”
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 2018 | DIRECTOR 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 | $ | 34,870 | $ | 29,564 | $ | 29,396 | $ | 1,858 | $ | 95,688 |
$
|
182,000
|
|
$
|
75,017
|
|
$
|
74,705
|
|
$
|
2,140
|
|
$
|
333,862
|
|
(a) | Ms. |
(b) | The amounts reported in the Stock Awards column reflect the aggregate grant date fair value computed in accordance with |
(c) | The amounts reported in the Option Awards column reflect the aggregate grant date fair value computed in accordance with |
(d) | 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) |
|
(f) | Mr. |
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.
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.
James S. Crown Lester L. Lyles |
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:
26 General Dynamics 20172019 Proxy Statement 27
Compensation Discussion and Analysis
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 | Executive Vice President, Information |
*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.
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
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:
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
Dividend History | ||||
| ||||
|
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. | |||
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. | |||
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. | |||
†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
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*
long-standing pay-for-performance philosophy.
|
|
General Dynamics 2017 Proxy Statement 29
Compensation Discussion and Analysis
COMPONENTSOF COMPENSATIONAND ALIGNMENTWITH COMPANY PERFORMANCE
We pay each NEO through three primary forms of compensation: base salary, an annual incentive and a long-term incentive. The annual and long-term incentives are variable depending on achieving specific performance objectives.
Structural Alignment of Pay with Performance. We demonstrate our commitment to aligning compensation with company performance through the following key elements of the program:
Executive compensation is linked strongly to the financial and operational performance of the business. Over 90 percent of the CEO’s total compensation is at risk, while over 85 percent of the other NEOs’ compensation is at risk. A significant amount of the compensation at risk is delivered through equity: performance restricted stock units (PRSUs), restricted stock and stock options.
In order to emphasize a culture of ownership and strengthen management’s alignment with long-term shareholder interests, the Committee requires one of the strictest set of stock ownership guidelines in our industry for the NEOs. Our CEO is required to hold General Dynamics stock with a value equal to 15 times base salary. Other NEOs are required to hold 10 times base salary.
*Fixed compensation represents base salary, and variable compensation represents annual incentive and equity awards.
30 General Dynamics 2017 Proxy Statement
Compensation Discussion and Analysis
CONTINUED CHANGESTO COMPENSATION PROGRAMIN RESPONSETO SHAREHOLDER FEEDBACK
In 2016 and 2017, we continued to make changes to our compensation program to better align with market best practices and respond to feedback from our shareholders. We believe these changes to the way we pay our NEOs provides for increased alignment and transparency between senior management and our shareholders.
First, we eliminated all remaining legacy excise taxgross-ups. We also implemented a target bonus structure for 2016 and instituted long-term incentive guidelines for equity awards granted in March 2017 for our NEOs. These changes demonstrate our commitment to continuous assessment of our compensation program, our responsiveness to shareholders’ feedback and our focus on ensuring we meet the needs of our business and provide strong value creation for our shareholders.
The following table summarizes the key components of each NEO’s compensation and how we have made changes in our approach in the past several years:
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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.
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.
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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.
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✓ |
100% independent Compensation Committee
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✓ |
Independent compensation consultant reporting to the Compensation Committee
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✓ |
Director and management engagement with shareholders
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✓ |
Market-leading stock ownership requirements (15x salary for the CEO and 10x salary for the other
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✓ | Incentive compensation based on
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✓ |
The value of
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✓ | 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
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✓ |
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34 General Dynamics 20172019 Proxy Statement 31
Compensation Discussion and Analysis
SHAREHOLDERE |
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 | Changes Made in Response
|
The objective
Starting with 2019 equity awards, annual grants reflect 50 percent PSUs, 30 percent stock options and 20 percent shares of restricted stock.
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
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 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*
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Market (in millions) | Revenue (in millions) | Employee Population | Peer of Peers | |||||
3M Company**
| $ 110,949
| $ 32,765
| 93,516
| ✓
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Accenture plc**
| $ 108,331
| $ 39,574
| 469,000
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The Boeing Company
| $ 183,143
| $ 101,127
| 153,000
| ✓
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Caterpillar Inc.**
| $ 74,985
| $ 54,722
| 104,000
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✓ | ||||
Cisco Systems, Inc.**
| $ 200,202
| $ 49,330
| 74,200
| ✓
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Deere & Company**
| $ 42,783
| $ 37,318
| 74,413
| ✓
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Eaton Corporation plc**
| $ 29,757
| $ 21,609
| 99,000
| ✓
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Emerson Electric Co.**
| $ 48,128
| $ 17,408
| 87,500
| ✓
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Honeywell International Inc.
| $ 97,807
| $ 41,802
| 114,000
| ✓
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Johnson Controls International plc**
| $ 27,398
| $ 31,559
| 122,000
| ✓
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Lockheed Martin Corporation
| $ 74,474
| $ 53,762
| 105,000
| ✓
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Northrop Grumman Corporation
| $ 42,520
| $ 30,095
| 85,000
| ✓
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Raytheon Company
| $ 43,640
| $ 27,058
| 67,000
| ✓
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Textron Inc.
| $ 11,091
| $ 13,972
| 35,000
| ✓
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United Technologies Corporation
| $ 91,933
| $ 66,501
| 240,200
| ✓
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General Dynamics
| $ 46,558
| $ 36,193
| 105,600
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General Dynamics (Percentile Rank)
| 40%
| 48%
| 65%
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* | 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
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Each NEO receives a mix of fixed and variable components of compensation. The following charts summarize the various forms of compensation.
*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.
The 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
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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
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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.
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NAMEAND TITLE
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2017 BASE
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2018 BASE
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% INCREASE*
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Ms. Novakovic Chairman and Chief Executive Officer
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$ 1,585,000
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$ 1,585,000
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0
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%
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Mr. Aiken Senior Vice President and Chief Financial Officer
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$ 770,000
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$ 850,000
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10.4
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%
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Mr. Casey Executive Vice President, Marine Systems
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$ 780,000
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$ 800,000
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2.6
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%
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Mr. Roualet Executive Vice President, Combat Systems
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$ 780,000
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$ 800,000
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2.6
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%
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Mr. Johnson Executive Vice President, Information Technology and Mission Systems
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$ 780,000
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$ 800,000
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2.6
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%
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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.
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
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2018 BASE
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TARGET
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MAXIMUM
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TARGET
|
MAXIMUM
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ANNUAL
| ||||||
Ms. Novakovic
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$ 1,585,000
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170%
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340%
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$ 2,694,500
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$5,389,000
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$4,727,000
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Mr. Aiken
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$ 850,000
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100%
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200%
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$ 850,000
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$1,700,000
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$1,275,000
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Mr. Casey
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$ 800,000
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100%
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200%
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$ 800,000
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$1,600,000
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$1,344,000
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Mr. Roualet
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$ 800,000
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100%
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200%
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$ 800,000
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$1,600,000
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$1,288,000
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Mr. Johnson
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$ 800,000
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100%
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200%
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$ 800,000
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$1,600,000
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$1,000,000
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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
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Beginning in 2019
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|
|
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
|
• | The performance target is set to be challenging, yet achievable. |
• |
|
• | Additionally, the Committee and management believe that the target reflects the multi-year operating plan for the company and
|
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.
The ROIC calculation for purposes of PRSU performance does not include accumulated other comprehensive income (AOCI), goodwill write-offs in the year of the event ornon-economic accounting changes.
Restricted Stock
Restricted stock awards are designed to attract and retain executives by providing them with some of the benefits associated with stock ownership during the restriction period, while incentivizing them to remain with General Dynamics. The Committee has determined that the use of cliff vesting (the entire grant vests at once as opposed to ratably over time) on our restricted stock ensures that executives are focused on long-term value creation while supporting the company’s need to attract and retain executives during all market conditions. Awards granted in 2016 vest after approximately four years. Restricted stock awards granted in March 2017 will vest three years from the grant date. This change increased the alignment across all of our equity vehicles which also vest in three years and mirrors the vesting schedule utilized by most of our peers.
Restricted Stock Award = Total LTI Grant x 25%
38 General Dynamics 2017 Proxy Statement
Compensation Discussion and Analysis
Restricted stock grants are calculated by multiplying the overall target LTI economic value determined as noted above by the weighting assigned to the restricted stock component (25 percent) and dividing the result by the value of a single share of General Dynamics Common Stock. During the restriction period, executives may not sell, transfer, pledge, assign, or otherwise convey their restricted shares. Executives are eligible, however, to vote their shares and receive dividend payments and other distributions on our Common Stock when declared by the Board of Directors. Restricted stock awards are service-based, meaning that executives who voluntarily resign or are terminated for cause prior to the end of the holding period forfeit their restricted stock unless otherwise determined by the Committee.
Stock Options
The Committee grants stock options to align executive interests with shareholder interests for many years into the future. They serve as both a retention tool and a value driver. Stock options give our NEOs the right to buy a share of our Common Stock in the future at a predetermined exercise price, which is established as the average of the high and low sales price of our Common Stock on the date of award. In 2016, the exercise price for granted options was $135.85 for each stock option. Stock options vest after three years, with 50 percent of the grant exercisable after two years and 50 percent exercisable after three years. Our outstanding options granted since 2015 expire 10 years after the grant date.
Stock Options Award = Total LTI Grant x 50%
Stock option grants are calculated by multiplying the overall target LTI economic value determined as noted above by the weighting assigned to the stock options component (50 percent) and dividing the result by the value of a single option, determined under the Black-Scholes methodology applying the same assumptions used for recognizing option expense in our audited financial statements. These assumptions are set out in Note O to our financial statements contained in our Annual Report. The Black-Scholes formula is based on a set of key variables and assumptions and is an accepted model for valuing stock options under FASB ASC Topic 718.
As with restricted stock and PRSU awards, NEOs who voluntarily resign or are terminated for cause immediately forfeit all options that have not vested unless otherwise determined by the Committee. Our equity compensation plan prohibits the repricing of stock options without the approval of shareholders.
FIXED COMPENSATIONAND BENEFITS
Base Salary
We pay executives an annual salary in cash that is strictly tied to the peer group median (50th percentile) for salaries of executives in comparable positions at our peer group companies based on survey data. Salaries are reviewed annually, and increases, when they occur, are driven by changes in the market. We believe that organizations that perform well over the long term, like General Dynamics, make an effort to pay salaries at or near the market median and create opportunities for executives to earn above median compensation through annual and long-term incentives that are awarded based on performance relative to challenging and clear performance goals. The goal of our base salary is to provide a competitive, fixed rate of cash compensation.
Benefits
General Dynamics-provided benefits are an important tool used to attract and retain outstanding executives. Benefit levels are reviewed periodically to ensure they are cost-effective and competitive and support the overall needs of our employees. The company makes available medical, dental, life insurance and disability coverage to all of the NEOs. NEOs can select the level of coverage appropriate for their circumstances. The company also provides NEOs group life insurance coverage worth two times base salary and 50 percent long-term disability coverage.
General Dynamics 2017 Proxy Statement 39
Compensation Discussion and Analysis
Company-Sponsored Retirement Plans
We provide retirement plans to our eligible employees, including the eligible NEOs, through a combination of qualified andnon- qualified plans. Following is a description of the retirement plans in which the NEOs participate:
Defined-Benefit Retirement Plan. Each NEO other than Mr. Johnson participates in a company-sponsored defined-benefit plan called the General Dynamics Salaried Retirement Plan.Beginning January 1, 2014, pension accruals under this plan stoppedfor employees at our corporate headquarters, including the participating named executive officers.
The benefit under the plan is payable as a life annuity. The Salaried Retirement Plan is a funded, tax-qualified, noncontributory defined-benefit pension plan. It was amended effective January 1, 2007, to exclude any employee initially hired after that date. The benefit formula under the Salaried Retirement Plan for employees hired before December 31, 2006, is 1.0 percent times a participant’s highest final average pay multiplied by years of service earned on and after January 1, 2007, plus 1.333 percent times a participant’s highest final average pay frozen as of December 31, 2010, multiplied by years of service earned prior to January 1, 2007. Final average pay for purposes of calculating retirement benefits includes a NEO’s base salary and cash bonus. The company makes contributions to the Salaried Retirement Plan through payments into a trust fund from which the benefits are paid.
Supplemental Retirement Plan. The amount of cash compensation used to calculate pension benefits for participants in the Salaried Retirement Plan is limited by the Internal Revenue Code ($265,000 in 2016). To provide a benefit calculated on compensation in excess of this compensation limit, the company provides eligible executives coverage under the General Dynamics Corporation Supplemental Retirement Plan. Benefits under the Supplemental Retirement Plan are general unsecured obligations of General Dynamics. Each NEO, other than Mr. Johnson, participates in the Supplemental Retirement Plan.Beginning January 1, 2014, pension accruals under this plan stopped for employees at our corporate headquarters including the participating named executive officers.
Anteon International Corporation Supplemental Retirement Savings Plan. Mr. Johnson has an account balance under the frozen Anteon International Corporation Supplemental Retirement Savings Plan. Under the plan, certain eligible employees of Anteon could defer receipt of all or a portion of their annual cash compensation prior to the plan being frozen in 2007. Upon his retirement or other separation from the company, Mr. Johnson may elect to receive the deferred compensation in either a lump sum or in annual installments over a period of up to ten years.
401(k) Plan. Each NEO is eligible to participate in the General Dynamics Corporation 401(k) Plan, atax-qualified defined contribution retirement plan. Each NEO is eligible to makebefore-tax contributions and receive company matching contributions under the 401(k) Plan. During 2016, for NEOs other than Mr. Johnson, the 401(k) Plan provided for a company-matching contribution of (1) 100 percent onbefore-tax contributions up to the first 3 percent of a participant’s eligible pay and (2) 50 percent onbefore-tax contributions on the next 3 percent of a participant’s eligible pay. Mr. Johnson participates in a version of the 401(k) plan that provides for a company-matching contribution of 50 percent onbefore-tax contributions up to the first 6 percent of his eligible pay. Our matching contributions during 2016 for the NEOs are included in footnote (d) to the All Other Compensation column of the Summary Compensation Table on page 49 of this Proxy Statement.
Supplemental Savings Plan. The company provides a Supplemental Savings Plan to key employees, including each NEO. The purpose of the Supplemental Savings Plan is to allow key executives to defer salary and receive matching contributions on compensation in excess of the compensation limit imposed by the Internal Revenue Service on earnings used to calculate 401(k) contributions. Matching contributions during 2016 for the NEOs are included in footnote (d) to the All Other Compensation column of the Summary Compensation Table on page 49 of this Proxy Statement.
Other Retiree Benefits. Eligible key executives throughout the company, including the NEOs, can purchase group term life insurance prior to retiring of up to two times their base pay. For executives who retire early (prior to age 65), we pay for insurance coverage equal toone-half the executive’s base salary until the executive reaches age 65. For early retirees who elect coverage in excess ofone-half of base pay they will pay monthly premiums for the additional coverage. For executives retiring at or after age 65, we pay for insurance coverage up to two times an executive’s base salary. This coverage is ratably reduced over a five-year period following the executive’s retirement, or beginning at age 65 for early retirees, subject to a maximum coverage level of 25 percent of the coverage in effect at the time of retirement.
40 General Dynamics 2017 Proxy Statement
Compensation Discussion and Analysis
Perquisites
We continue to offer only perquisites that the Committee believes are reasonable yet competitive. The company provides perquisites to key executive officers, including the NEOs, for purposes of recruiting, retention and security.
We provide perquisites to ensure the security and accessibility of our executives and to facilitate the transaction of business. As a reasonableness test, we compare these perquisites to generally accepted corporate practices.
The perquisites provided to our NEOs in 2016 were: financial planning and tax preparation services, physical examinations, home security systems, personal liability and supplemental accidental death and dismemberment insurance, and the personal use of automobiles owned or leased by the company. In addition, personal use of our aircraft was provided only to our chairman and chief executive officer as required by the Board to help ensure her security and accessibility.
We have provided additional information on perquisites in footnote (d) to the All Other Compensation column of the Summary Compensation Table on page 49 of this Proxy Statement.
POTENTIAL SEVERANCEAND CHANGEIN CONTROL BENEFITS
The company has change in control agreements, also known as severance protection agreements, with each of the NEOs. The company believes that these agreements are an important tool for recruiting and retaining highly qualified executives. The agreements are structured to protect the interests of shareholders by including a “double trigger” mechanism that results in a severance payout only when:
A change of control is consummated, and
The executive’s employment is terminated by the company without cause or by the executive for good reason within 24 months following the change in control.
A “change in control” is defined to include specified stock acquisition, merger or disposition transactions involving General Dynamics. The Committee evaluates and reviews payment and benefit levels under the change in control agreements regularly. These reviews support the view that the agreements are consistent with the practices of our peer group companies. The form of severance protection agreement for NEOs appointed after April 2009 excludes any provision for reimbursement of excise taxes that may become due upon a change in control.
Updated Agreements in 2016. This year, Ms. Novakovic, the only remaining NEO eligible for reimbursement of excise taxes signed a new severance protection agreement which eliminated this provision. All employees with severance protection agreements are no longer eligible for reimbursement on excise taxes after signing new agreements effective this year.
Payments and benefits provided to NEOs pursuant to the change in control agreements are described in the Potential Payments upon Termination or Change in Control section beginning on page 57 of this Proxy Statement.
General Dynamics 2017 Proxy Statement 41
Compensation Discussion and Analysis
The Committee approves and is actively engaged in the development and implementation of the executive compensation program, with the support of the independent compensation consultant and company management. The program is structured to:
Align executive compensation with shareholder value creation
Ensure retention and growth for executives in a competitive environment
Compensate executives subject to clear and challenging performance metrics
Program objectives are achieved through the use of both short-term and long-term incentives. The company currently targets the median pay of our peers as further discussed in detail below. In addition, through the annual incentive plan, the NEOs are rewarded for achieving annual company and business group goals.
SETTING COMPENSATION LEVELSAND EVALUATING PERFORMANCE
Setting compensation for senior executives is a16-month process that begins in the fall of each year when senior management establishes company operating goals for the coming year. The business plans are presented to the chairman and chief executive officer annually in November. The chairman, in consultation with the chief financial officer and the executive vice presidents, establishes the business group operating goals and the company operating plan for the coming year based on those business group plans. The business group plans include challenging but achievable goals that could result in incentive compensation payouts above the peer group median for superior performance or as little as zero if goals are not met. At athree-day Board meeting in the first quarter of each year, the business unit presidents present their plans to the Board of Directors. The Board then reviews, adjusts where appropriate, and approves the business group operating goals and adopts our company operating plan for the year. Throughout the year, the Board reviews and monitors company performance as compared to the operating plan through a series of financial and operating reports given by the chief financial officer and the executive vice presidents.
The Committee reviews performance beginning the following February. At that time, the chairman and chief executive officer and the executive vice presidents assess the performance of the business groups and the company compared with the operating plan goals adopted the prior year. The chairman and chief executive officer along with senior management report the results of that assessment to the Board of Directors at a meeting in the first quarter of the year. Following these reports, the chairman and chief executive officer, after consultation with senior management, undertakes an initial discussion with the Committee regarding executive compensation for the year. At this meeting, the chairman and chief executive officer provides the Committee with a performance assessment of each NEO (other than herself) against their scorecard goals. The Committee convenes in early March to review scorecards for the company and approve final executive compensation proposals. The Committee reviews, refines and approves compensation against the goals reflected on the scorecard for the chairman and chief executive officer in executive session at the March meeting.
The Committee bases compensation on the clearly defined and disclosed performance goals described in this Proxy Statement. The Committee’s decisions also reflect factors such as the degree of difficulty of goals, market conditions and exceptional individual achievement.
42 General Dynamics 2017 Proxy Statement
Compensation Discussion and Analysis
PEER GROUPAND BENCHMARKINGTOTHE MARKETThree-Year Average ROIC 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
|
| |
2.5% below target | 50% of target PSUs | |
More than 2.5% below target | 0% of target PSUs
| |
|
|
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
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. Maximum Total Payout ROIC PERFORMANCE (AS SHOWN IN THE (0 — 150%) TSR Modifier 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 General Dynamics 2019 Proxy Statement 41Chairman and Chief Executive OfficerPerformance MetricWeighting2016 Target2016 ActualEarnings from Continuing Operations50%$2,888 million$3,062 millionFree Cash Flow from Operations50%$1,486 million$1,806 millionSenior Vice President and Chief Financial Officer
CHART ABOVE) 200% Relative TSR Performance Payout 75th Percentile and Above 133.3% 50th Percentile 100% 25th Percentile and Below 66.7% 0% Performance MetricWeighting2016 Target2016 ActualEarnings from Continuing Operations45%$2,888 million$3,062 millionFree Cash Flow from Operations45%$1,486 million$1,806 millionMeet /Under-run 2016 Budget5%Operate corporateheadquarters andfinance department belowbudgeted costsExceeded goalComplete Two Continuous Improvement Projects5%Complete Lean Six SigmaprojectsExceeded goalExecutive Vice President, Marine Systems
Compensation Discussion and Analysis
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| ||||||
| ||||||
|
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. 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. 42 General Dynamics 2019 Proxy StatementExecutive Vice President, Combat SystemsPerformance MetricWeighting2016 Target2016 ActualEarnings from Continuing Operations45%$2,888 million$3,062 millionFree Cash Flow from Continuing Operations45%$1,486 million$1,806 millionBusiness Group Financial MetricsContinuous Improvement Savings10%$110 million$170 millionExecutive Vice President, Information Systems and Technology
Compensation Discussion and Analysis
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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
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.
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.
When exercising options, executives who have not met the ownership guideline may sell shares acquired upon exercise to cover transaction costs and taxes and are expected to hold any remaining shares until the guidelines are met. Similarly, shares received upon vesting of restricted stock and PRSUs may not be sold until the ownership guidelines are met. Once an officer attains his or her required ownership level, the officer must maintain that ownership level until he or she no longer serves as an officer. The stock ownership and retention guidelines are reviewed annually by the Committee.
ANTI-HEDGINGAND ANTI-PLEDGING POLICIES
The company has a longstanding policy in place that prohibits all directors and executive officers from hedging company securities. Since 2014, the company has maintained a policy prohibiting all directors and executive officers from pledging company securities that they own directly.
Mr. Crown has the ownership of certain shares attributed to him that arise from the business of Henry Crown and Company, an investment company where Mr. Crown serves as President, and trusts of which Mr. Crown serves as trustee (Attributed Shares). Mr. Crown disclaims beneficial ownership of such shares, except to the extent of his pecuniary interest. The Attributed Shares are distinct from shares Mr. Crown or his spouse own individually, or shares held in trusts for the benefit of his children (Crown Personally Held Shares). The company has reviewed the potential pledging of the Attributed Shares with Mr. Crown, recognizes Mr. Crown’s distinct obligations with respect to Henry Crown and Company and the trusts, and believes such shares may be prudently pledged or held in margin loan accounts. Under the company’s anti-pledging policy, Crown Personally Held Shares are considered company securities that are owned directly by Mr. Crown and, accordingly, may not be and are not held in margin accounts or otherwise pledged as collateral, nor may the economic risk of such shares be pledged.
The company has in place an executive compensation recoupment policy, or “clawback” policy, which applies to senior executive officers of the company (referred to as the covered executive officers), including the NEOs. In the event of a restatement of our financial results due to a covered executive officer engaging in fraud or intentional illegal conduct, the result of which is that any equity or other performance-based compensation paid to that covered executive officer would have been a lower amount had it been calculated based on the restated results, the Committee will have the authority to recover any excess compensation that was awarded to that covered executive officer. In determining the excess compensation, the Committee will take into account its good faith estimate of the value of awarded and actual compensation that may have been affected by the restatement and the events leading to it. This includes all performance-based cash incentives and equity-based grants which may have vested or been exercised during the period in question.
General Dynamics 2017 Proxy Statement 47
Compensation Discussion and Analysis
MONITORING DILUTIONAND ANNUAL EQUITY 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.
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
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.
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.
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
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 | YEAR | SALARY | 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 |