DEF 14A 1 d225052ddef14a.htm DEF 14A DEF 14A
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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

Filed by the registrant ☒

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☒     Definitive Proxy Statement

 

☐     Definitive Additional Materials

 

☐     Soliciting Material

      Pursuant to Section 240.14a-12

 

General Dynamics Corporation

 

 

(Name of Registrant as Specified in Its Charter)

 

 

 

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Table of Contents

LOGO

 

March 23, 2017

Dear Fellow Shareholder:

We are pleased to present you with the 2017 General Dynamics Proxy Statement. We remain steadfast in our commitment to sound corporate governance practices and maintaining 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 throughout this Proxy Statement and referenced documents.

Shareholder engagement remains a key focus for our company to ensure we are aware of your top priorities. Over the past year, we have spoken with shareholders about a number of critical topics, including company strategy, changes to our executive compensation program and our corporate governance practices. Overall, we continue to be encouraged that our shareholders view favorably our executive compensation and corporate governance programs.

Our Board continues to reflect a diverse and extremely well-qualified group of business leaders, aerospace and defense industry experts, and strategic advisors. The addition of Peter Wall, who joined our Board in August 2016, further strengthens the Board’s expertise in global security issues and understanding of key customer concerns. Catherine Reynolds, who is nominated for election to the Board at the Annual Meeting, will bring to the Board additional financial and business expertise 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 improvement 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.

On behalf of the Board of Directors, I invite you to attend the 2017 Annual Meeting of Shareholders and, even if you are not able to attend, encourage you to vote by proxy. The accompanying Proxy Statement contains information about the matters on which you are asked to vote. I urge you to read the materials carefully and vote in accordance with the Board of Directors’ recommendations. Your vote is very important.

Sincerely,

 

LOGO

Phebe N. Novakovic

Chairman and Chief Executive Officer

2941 Fairview Park Drive, Suite 100

Falls Church, Virginia 22042


Table of Contents

LOGO

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

Important Notice Regarding the Availability of Proxy Materials

for the Shareholder Meeting to Be Held on May 3, 2017

The Proxy Statement and 2016 Annual Report are Available at

www.generaldynamics.com/2017proxy

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

 

 

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

 

 

an advisory vote on the frequency of future advisory votes on executive compensation (proposal 4);

 

 

the approval of the General Dynamics Corporation Amended and Restated 2012 Equity Compensation Plan (proposal 5); and

 

 

the transaction of all other business that properly comes before the meeting or any adjournment or postponement of the meeting.

The Board of Directors unanimously recommends that you vote FOR proposals 1, 2, 3 and 5.

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

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, 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 2016 Annual Report accompanies this Notice and Proxy Statement and is available on the website listed above.

By Order of the Board of Directors,

 

LOGO

Gregory S. Gallopoulos

Secretary

Falls Church, Virginia

March 23, 2017

 

General Dynamics 2017 Proxy Statement


Table of Contents

LOGO

 

Table of Contents

 

Proxy Summary

    1  

Voting Matters and Board Recommendations

    1  

A Commitment to Sound Corporate Governance

    2  

Shareholder Engagement

    4  

Performance and Executive Compensation Highlights

    4  

Election of the Board of Directors of the Company

    5  

Governance of the Company

    13  

Our Commitment to Strong Corporate Governance

    13  

Our Culture of Ethics

    13  

Board Leadership Structure

    14  

Director Independence

    15  

Board Meetings, Business Unit Visits and Attendance

    16  

Executive Sessions of the Board

    16  

Board Committees

    16  

Risk Oversight

    18  

Director Orientation and Continuing Education

    19  

Board and Committee Performance Self-Assessments

    19  

Communications with the Board

    19  

Related Person Transactions Policy

    20  

Director Compensation

    21  

Advisory Vote on the Selection of Independent Auditors

    23  

Audit Committee Report

    24  

Advisory Vote to Approve Executive Compensation

    25  

Advisory Vote on the Frequency of Future Executive Compensation Advisory Votes

    25  

Compensation Discussion and Analysis

    26  

Executive Summary

    27  

Executive Compensation Goals and Objectives

    35  

Components of Executive Compensation

    35  

The Compensation Process

    42  

Other Considerations

    47  

Executive Compensation

    49  

Compensation Committee Report

    60  

Security Ownership of Management

    61  

Security Ownership of Certain Beneficial Owners

    62  

Equity Compensation Plan Information

    62  

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

    63  

Information Regarding the Annual Meeting and Voting

    71  

Other Information

    74  

Appendix A –  General Dynamics Corporation Amended and Restated 2012 Equity Compensation Plan

    A-1  

Appendix B –  Use of Non-GAAP Financial Measures

    B-1  

 

General Dynamics 2017 Proxy Statement


Table of Contents

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

Proxy Summary

This summary highlights selected information that is provided in more detail throughout this Proxy Statement. This summary does not contain all of the information you should consider before voting. You should read the full Proxy Statement before casting your vote.

VOTING MATTERS AND BOARD RECOMMENDATIONS

At this year’s Annual Meeting, we are asking our shareholders to vote on the following matters:

 

  PROPOSAL   

 

BOARD

RECOMMENDATION

 

  

ADDITIONAL

INFORMATION

 

Proposal 1:

Election of Directors

 

   FOR each nominee   

 

See pages 5 through 12 for more
information on the nominees

 

 

Proposal 2:

Advisory Vote on the Selection of Independent Auditors

 

   FOR    See page 23 for details

 

Proposal 3:

Advisory Vote to Approve Executive Compensation

 

   FOR    See page 25 for details

 

Proposal 4:

Advisory Vote on the Frequency of Future Executive Compensation Advisory Votes

 

   EVERY YEAR    See page 25 for details

 

Proposal 5:

Approval of the General Dynamics Corporation Amended and

Restated 2012 Equity Compensation Plan

 

   FOR    See pages 63 through 70 for details

 

ANNUAL MEETING INFORMATION

 

 

Date

 

  

Wednesday, May 3, 2017

 

 

Time

 

  

9 a.m. local time

 

 

Location

 

  

2941 Fairview Park Drive, Falls Church, Virginia

 

 

How to Vote

 

    

 

  By Internet

 

  

Access www.ProxyVote.com.

 

 

  By Telephone

  

 

Call 1-800-690-6903 if you are a registered holder. If you are a beneficial holder, call the phone number listed on your voter instruction form.

 

 

  By Mail

 

  

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

 

 

  In Person

 

  

Attend the Annual Meeting and vote by ballot.

 

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

 

General Dynamics 2017 Proxy Statement     1


Table of Contents

Proxy Summary

 


 

2017 BOARD OF DIRECTORS NOMINEES

 

 

DIRECTOR NOMINEES

 

Nominee

    Director  

  Since  

    Independent      Primary Occupation

 

Nicholas D. Chabraja

 

 

 

1994

 

    

 

Former Chairman and CEO, General Dynamics

 

 

James S. Crown*

 

 

 

1987

 

 

 

Yes

 

  

 

President of Henry Crown and Company

 

 

Rudy F. deLeon

 

 

 

2014

 

 

 

Yes

 

  

 

Senior Fellow, Center for American Progress

 

 

John M. Keane

 

 

 

2004

 

 

 

Yes

 

  

 

Retired General, U.S. Army

 

 

Lester L. Lyles

 

 

 

2003

 

 

 

Yes

 

  

 

Retired General, U.S. Air Force

 

 

Mark M. Malcolm

 

 

 

2015

 

 

 

Yes

 

  

 

Former President and CEO, Tower International

 

 

Phebe N. Novakovic

 

 

 

2012

 

    

 

Chairman and CEO, General Dynamics

 

 

William A. Osborn

 

 

 

2009

 

 

 

Yes

 

  

 

Former Chairman and CEO, Northern Trust Corporation

 

 

Catherine B. Reynolds

 

 

 

 

 

 

Yes

 

  

 

Chairman and CEO, EduCap

 

 

Laura J. Schumacher

 

 

 

2014

 

 

 

Yes

 

  

 

EVP, External Affairs and General Counsel, AbbVie

 

 

Peter A. Wall

 

 

 

2016

 

 

 

Yes

 

  

 

Retired General, British Army

 

*

Lead Director

 

Balanced Director Tenure

(Current Directors)

  

Strong Director Engagement

(2016 Attendance)

 

LOGO

A COMMITMENT TO SOUND CORPORATE GOVERNANCE

Our Board of Directors believes that a commitment to good corporate governance enhances shareholder value. Sound corporate governance starts with a strong value system, and the value system starts in the boardroom. The General Dynamics ethos – our distinguishing moral nature – is rooted in five overarching values.

 

THE GENERAL DYNAMICS ETHOS

 

Honesty

 

 

 

We tell the truth to ourselves and to others. Honesty breeds transparency.

 

 

Trust

 

 

 

We trust each other to do the right thing.

 

 

Humanity

 

 

 

We are compassionate and empathetic. We respect the dignity, rights and autonomy of others.

 

 

Alignment

 

 

 

We are united in our commitment to our values.

 

 

Value Creation

 

 

 

We create value by doing the right thing for our shareholders, our customers, our employees and our communities.

 

 

2     General Dynamics 2017 Proxy Statement


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Proxy Summary

 


 

Highlights of our governance practices include:

 

    

Governance Practice

         For more information
 

Stock Ownership

 

   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 8 times the annual retainer.

 

    P. 47
 

   We prohibit hedging and pledging of our Common Stock by directors and executive officers.

          P. 47
 

Board Structure

and Governance

 

 

   9 of our 11 director nominees are independent. All of our standing Board committees are chaired by independent directors. Our Audit, Compensation and Nominating and Corporate Governance Committees are 100 percent independent.

 

    P. 15
 

   An independent Lead Director with a robust set of responsibilities is elected annually by the Board and provides additional independent oversight of senior management and board matters.

 

    P. 14
 

   Our directors are elected annually based on a majority voting standard for uncontested elections. We have a resignation policy if a director fails to receive a majority of votes cast.

 

    P. 73
 

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

 

    P. 16
 

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

 

    P. 16
 

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

 

    Corporate Governance Guidelines*
 

   Our related person transactions policy ensures appropriate Board review of related person transactions.

 

    P. 20
 

   Annual Board and committee self-assessments monitor the performance and effectiveness of the Board and its committees.

 

    P. 19
 

   Diligent Board oversight of risk is a cornerstone of the company’s risk management program.

 

          P. 18
 

Corporate

Responsibility

 

 

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

    Standards of Business Ethics and
Conduct**

Codes of Ethics**

 

 

   A Corporate Sustainability Report discusses our ethos, our commitment to our stakeholders and communities and our commitment to diversity and inclusion.

 

    Corporate Sustainability Report**
 

   Disclosure of our corporate political contributions and our trade association dues describes the process and oversight we employ in each area.

 

    www.gd.com/AdditionalDisclosure
 

   We have a strong corporate commitment to respect the dignity, human rights and autonomy of others.

 

          Corporate Sustainability Report**

Shareholder
Rights

 

 

   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 as proxy access.

    Bylaws*
 

   We do not have a shareholder rights plan, or poison pill; any future rights plan must be submitted to shareholders.

    Corporate Governance Guidelines*
 

   Our shareholders have the right to request a special meeting of shareholders.

          Bylaws*
  *

Our Corporate Governance Guidelines and Bylaws are available on our website at www.gd.com/CorporateGovernance.

 
  **

Our Standards of Business Ethics and Conduct, Codes of Ethics and Corporate Sustainability Report are available on our website at www.gd.com/Responsibility.

 

 

General Dynamics 2017 Proxy Statement     3


Table of Contents

Proxy Summary

 


 

SHAREHOLDER ENGAGEMENT

Our Board is Committed to Robust Shareholder Engagement.  Our shareholder engagement program allows us 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 percent of our outstanding common stock. In addition, in 2015 the Board formed an ad hoc group of directors, anchored by the chairman and the independent Lead Director, to liaise with significant shareholders. Our Board remains committed to soliciting and understanding shareholder views and responding as appropriate.

PERFORMANCE AND EXECUTIVE COMPENSATION HIGHLIGHTS

Creating Sustainable Long-Term Shareholder Value.  In 2016, we continued 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.

 

 

2016 Financial Highlights

 

  Earnings from Continuing Operations

  $3.1 billion   Highest in company history

  Operating Margin

  13.7%   Highest in company history

  Free Cash Flow from Operations*

  $1.8 billion   Exceeded company expectations

  Return on Invested Capital*

  18.1%   70 basis points higher than 2015

  Quarterly Dividends

  $0.76 per share   19th consecutive year with a dividend increase

  Order Backlog

  $59.8 billion   Robust backlog provides stability well into the future
  * See Appendix B for a discussion of these non-GAAP measures and reconciliation to their most directly comparable GAAP measures.  

A Consistent Focus on Aligning Compensation with Performance.  Our compensation philosophy at General Dynamics is to align executive compensation with company, business group and individual performance, and to provide the incentives necessary to attract, motivate and retain the executives that help drive the company’s success. We have received positive shareholder feedback about our executive compensation program, and received a greater than 90% vote in favor of our executive compensation program at last year’s annual meeting. Our program’s pay-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 tax gross-ups and established a target bonus program for our named executive officers which provides for a cap on bonuses paid to named executive officers. In early 2017, we established market-based long-term incentive (LTI) guidelines for our named executive officers.

 

4     General Dynamics 2017 Proxy Statement


Table of Contents

 


ELECTION OF THE BOARD OF DIRECTORS OF THE COMPANY

(PROPOSAL 1)

Director Nominations.  General Dynamics’ directors are elected at each annual meeting of shareholders and hold office for one-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 skill 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.

 

 

LOGO

 

General Dynamics 2017 Proxy Statement     5


Table of Contents

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 for re-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 would ensure the Board maintains an appropriate mix. Such skills include those highlighted in the following table. Each nominee possesses additional skills and experience that are not highlighted among those listed below.

 

 

DIRECTOR NOMINEES SKILLS, KNOWLEDGE AND EXPERIENCE MATRIX

     Aerospace
and Defense
Industry
   Corporate
Governance
and Public
Company
Board
   Finance or
Accounting
   Government
Relations and
Regulatory
   Global
Business and
Strategy
   Operations and
Manufacturing

Nicholas D. Chabraja

                 

James S. Crown

                 

Rudy F. deLeon

                 

John M. Keane

                 

Lester L. Lyles

                 

Mark M. Malcolm

                 

Phebe N. Novakovic

                 

William A. Osborn

                 

Catherine B. Reynolds

                 

Laura J. Schumacher

                 

Peter A. Wall

                 

Why is this important

for General Dynamics?

   Supports
oversight of
the company’s
business
performance
and strategic
development
in our  core
industry
   Ensures the
background and
knowledge
necessary to
provide effective
oversight and
governance
   Enables

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

   Critical for an
understanding
of the complex
regulatory and
governmental
environment
involving  our
business
   Important for
oversight of a
complex
organization
with operations
worldwide
  

Necessary in overseeing a complex, global manufacturing company

 

6     General Dynamics 2017 Proxy Statement


Table of Contents

Election of Directors

 


 

2017 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.

 

     
NICHOLAS D. CHABRAJA  

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

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

 

Key Attributes/Skills/Expertise: Mr. Chabraja’s 15 years of service as a senior executive officer and 12-year tenure as chairman and chief executive officer of our company make him an experienced and trusted advisor. He has in-depth knowledge of all aspects of General Dynamics and a deep understanding and appreciation of our customers, business operations and approach to risk management. His service at General Dynamics combined with his service on other public company boards provides him with a valuable perspective on finance, governance and management matters that face large public companies.

 

LOGO

 

COMMITTEES:

Finance and Benefit Plans

 

DIRECTOR SINCE MARCH 1994

AGE: 74

 
     
JAMES S. CROWN  

•    Lead Director since May 2010

•    President of Henry Crown and Company since 2002; Vice President of Henry Crown and Company, 1985 to 2002

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

 

Key Attributes/Skills/Expertise: As the longest-serving member of our Board and a significant shareholder, Mr. Crown has an abundance of knowledge regarding General Dynamics and our history. As president of Henry Crown and Company, a private investment firm with diversified interests, Mr. Crown has broad experience in business management and capital deployment strategies. His many years of service as a director of our company and two other large public companies provide him with a deep understanding of the roles and responsibilities of a board of a public company.

 

LOGO

 

LEAD DIRECTOR

 

COMMITTEES:

Audit

Compensation

Nominating and Corporate Governance

 

DIRECTOR SINCE MAY 1987

AGE: 63

 

 

General Dynamics 2017 Proxy Statement     7


Table of Contents

Election of Directors

 


 

     
RUDY F. DELEON  

•    Senior Fellow with the Center for American Progress since 2007

•    Senior Vice President of The Boeing Company, 2001 to 2006

•    Deputy Secretary of Defense, 2000 to 2001; Undersecretary of Defense for Personnel and Readiness, 1997 to 2000

•    Undersecretary of the U.S. Air Force, 1994 to 1997

 

Key Attributes/Skills/Expertise: Mr. deLeon’s experience as the second-highest ranking civilian official in the U.S. Department of Defense and as a foreign policy and military advisor give him a keen understanding of the complexities of the U.S. military and the defense industry. His experience in government, combined with his leadership at The Boeing Company as a senior vice president leading all U.S. federal, state and local government liaison operations, provide him with a deep understanding of the aerospace and defense industry, enabling him to serve General Dynamics with valuable perspectives on the business.

 

LOGO

 

COMMITTEES:

Compensation

Finance and Benefit Plans

 

DIRECTOR SINCE SEPTEMBER 2014

AGE: 64

 
     
JOHN M. KEANE  

•    Retired General, U.S. Army; Vice Chief of Staff of the Army, 1999 to 2003

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

•    President of GSI, LLC (consulting) since 2004

•    Senior Partner of SCP Partners (private equity), 2009 to 2012

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

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

 

Key Attributes/Skills/Expertise: Prior to retiring from the U.S. Army at the rank of General, Mr. Keane served as Vice Chief of Staff of the Army. As a senior officer, Mr. Keane managed significant operating budgets and addressed complex operational and strategic issues. Mr. Keane’s astute appreciation for the complexities of the U.S. military and the defense industry, combined with his demonstrated leadership and strategic skills, make him a valuable advisor to our aerospace and defense businesses. Mr. Keane has gained a strong understanding of public company governance and operations through his service on three public company boards.

 

LOGO

 

COMMITTEES:

Finance and Benefit Plans

Nominating and Corporate Governance

 

DIRECTOR SINCE FEBRUARY 2004

AGE: 74

 

 

8     General Dynamics 2017 Proxy Statement


Table of Contents

Election of Directors

 


 

     
LESTER L. LYLES  

•     Retired General, U.S. Air Force; Commander, Air Force Materiel Command, 2000 to 2003; Vice Chief of Staff of the Air Force, 1999 to 2000

      Chairman of the Board of United States Automobile Association since November 2012 and Vice Chairman, 2008 to 2012

      Mr. Lyles currently serves as a director of KBR, Inc. He served as a director of Precision Castparts Corp., a former public company, within the past five years.

 

Key Attributes/Skills/Expertise: Prior to retiring from the U.S. Air Force at the rank of General, Mr. Lyles served as Commander of the Air Force Materiel Command and Vice Chief of Staff of the U.S. Air Force. In these positions, Mr. Lyles managed significant operating budgets and addressed complex operational issues. The broad knowledge of the U.S. military and the defense industry he attained through these experiences, combined with his engineering and aerospace educational background, enable Mr. Lyles to provide critical strategic and business advice to our aerospace and defense businesses. In addition, Mr. Lyles has gained a thorough understanding of challenges that face public companies through his service on public company boards.

 

LOGO

 

COMMITTEES:

Audit

Nominating and Corporate Governance

 

DIRECTOR SINCE DECEMBER 2003

AGE: 70

 
     
MARK M. MALCOLM  

      President and Chief Executive Officer of Tower International, Inc., 2007 to 2016

     Senior Advisor, Cerberus Capital Management, 2006 to 2007

      Executive Vice President and Controller of Ford Motor Credit, 2004 to 2005; Director of Finance and Strategy, Global Purchasing, of Ford Motor Company, 2002 to 2004

      Mr. Malcolm currently serves as a director of Tower International, Inc.

 

Key Attributes/Skills/Expertise: Mr. Malcolm’s senior executive positions at Tower International and Ford provide him with critical knowledge of the management, financial and operational requirements of a large company. In these positions, Mr. Malcolm gained extensive experience in dealing with accounting principles and financial reporting, evaluating financial results and the financial reporting process of a public company. Mr. Malcolm brings to the Board a broad knowledge of the complex business issues facing a public company in areas such as risk management, global supply chain management and corporate governance. Based on his experience, the Board has determined that Mr. Malcolm is an Audit Committee Financial Expert.

 

LOGO

 

COMMITTEES:

Audit

Finance and Benefit Plans

 

DIRECTOR SINCE AUGUST 2015

AGE: 63

 

 

General Dynamics 2017 Proxy Statement     9


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Election of Directors

 


 

     
PHEBE N. NOVAKOVIC  

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

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

 

Key Attributes/Skills/Expertise: Ms. Novakovic’s service as a senior officer of General Dynamics since 2002 makes her a valuable and trusted advisor. Through her roles as chairman and chief executive officer, president and chief operating officer, and executive vice president, Marine Systems, she has developed a deep understanding of the company’s business operations, growth opportunities, risks and challenges. As senior vice president, planning and development, she gained a strong understanding of our core customers and the global marketplace in which we operate. Ms. Novakovic’s current service as a public company director provides her with a valuable perspective on corporate governance matters and the roles and responsibilities of a public company board.

 

LOGO

 

COMMITTEES:

None

 

DIRECTOR SINCE MAY 2012

AGE: 59

 
     
WILLIAM A. OSBORN  

•    Chairman of Northern Trust Corporation, 1995 to 2009; Chief Executive Officer of Northern Trust Corporation, 1995 through 2007 and President of Northern Trust Corporation and The Northern Trust Company , 2003 to 2006

•    Mr. Osborn currently serves as a director of Abbott Laboratories and Caterpillar, Inc.

 

Key Attributes/Skills/Expertise: Mr. Osborn’s prior service as a senior executive of Northern Trust Corporation, including as chairman and chief executive officer, and president, provides him with extensive knowledge of the complex financial, operational and governance issues of a large public company. He brings to our Board a well-developed awareness of financial strategy, asset management and risk management and a strong understanding of public company governance. The Board has determined that Mr. Osborn’s extensive experience with accounting principles, financial reporting and evaluation of financial results qualifies him as an Audit Committee Financial Expert.

 

LOGO

 

COMMITTEES:

Audit

Compensation

Finance and Benefit Plans

 

DIRECTOR SINCE DECEMBER 2009

AGE: 69

 

 

10     General Dynamics 2017 Proxy Statement


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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. Reynolds’ sound business experience and financial background, including her innovative development of the first asset-backed securitization structure for consumer education loans, enables her to provide valuable financial and business advice to the company. Ms. Reynolds is a certified public accountant and has served on the audit and compensation committees of a public company. Through her senior executive and board positions with EduCap and Servus Financial, she has developed critical knowledge of the financial and risk management challenges that companies face. Ms. Reynolds also has gained valuable insight into public company governance and operations through her prior and current service on public company boards.

 

Ms. Reynolds was identified as a director nominee by the chairman and chief executive officer.

 

LOGO

 

COMMITTEES:

N/A

 

NEW DIRECTOR NOMINEE

AGE: 59

 
     
LAURA J. SCHUMACHER  

•    Executive Vice President, External Affairs and General Counsel of Abbvie Inc. since January 2013

•    Executive Vice President, General Counsel and Secretary of Abbott Laboratories, 2007 to 2012

 

Key Attributes/Skills/Expertise: Ms. Schumacher’s positions as chief legal officer of two large public companies provide her with extensive experience with respect to risk management and a deep knowledge of the types of legal and regulatory risks facing public companies. Her experience as a senior executive in the healthcare industry has provided her with a keen awareness of strategic considerations and challenges associated with a complex, highly-regulated industry. Additionally, through her key role in the strategic consideration and execution of the separation of Abbvie from Abbott Laboratories, Ms. Schumacher brings an important understanding of and insight into corporate governance matters and complex corporate transactions.

 

LOGO

 

COMMITTEES:

Compensation

Nominating and Corporate Governance

 

DIRECTOR SINCE FEBRUARY 2014

AGE: 53

 

 

General Dynamics 2017 Proxy Statement     11


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Election of Directors

 


 

     
PETER A. WALL  

•    Retired General, British Army; Chief of the General Staff, 2010 to 2014; Commander in Chief, Land Command, 2009 to 2010

•    Director of Operations, United Kingdom Ministry of Defence, 2007 to 2009

•    Director, Amicus (strategic leadership advisory firm) since 2014

 

Key Attributes/Skills/Expertise: Mr. Wall had a distinguished career in the British Army before retiring at the rank of General in 2014. He also served as Director of Operations for the United Kingdom Ministry of Defence. As Chief of the General Staff of the British Army, Mr. Wall managed significant operating budgets and led the British Army through significant transformation to ensure its relevance for the future. Mr. Wall’s service in the United Kingdom Ministry of Defence and British Army give him an in-depth understanding and appreciation of the complexities of the U.K. military and the defense industry. Mr. Wall brings to the Board important insight into the operational requirements of our customers, as well as a deep understanding of global security issues.

 

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

 

 

LOGO

 

COMMITTEES:

Nominating and Corporate Governance

 

DIRECTOR SINCE AUGUST 2016

AGE: 61

 
 
 
   

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 BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR ALL DIRECTOR NOMINEES LISTED ABOVE.

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 a two-thirds vote of the directors then in office. In February 2017, the committee recommended and in March 2017 the Board unanimously requested that Messrs. Chabraja and Keane each be nominated to stand for re-election. The Board took this action in recognition of the continued valuable counsel and insight that each of these directors provides to the Board.

Nominees to the Board Submitted by Shareholders. The committee will consider director nominees recommended by shareholders in the same manner as it considers and evaluates potential directors identified by the company. Additionally, our bylaws permit a shareholder or a group of up to 20 shareholders who have owned 3 percent or more of our outstanding shares of capital stock continuously for 3 years to submit director nominees for inclusion in our proxy statement if the shareholder(s) and the nominee(s) satisfy the requirements specified in our bylaws (a process known as proxy access). The requirements for director nominations, including requirements for proxy access, can be found in Article II, Section 10 of our Amended and Restated Bylaws available on our website at www.gd.com/CorporateGovernance, or in print upon request.

 

12     General Dynamics 2017 Proxy Statement


Table of Contents

 


GOVERNANCE OF THE COMPANY

OUR COMMITMENT TO 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.

OUR CULTURE OF ETHICS

As part of our commitment to strong corporate governance practices, we maintain an active and robust ethics program. Our ethics program is rooted in our ethos – our distinguishing moral nature. Our ethos is defined by five values:

 

THE GENERAL DYNAMICS ETHOS

Honesty

   We tell the truth to ourselves and to others. Honesty breeds transparency.

Trust

   We trust each other to do the right thing.

Humanity

   We are compassionate and empathetic. We respect the dignity, rights and autonomy of others.

Alignment

   We are united in our commitment to our values.

Value Creation

   We create value by doing the right thing for our shareholders, our customers, our employees and our communities.

As a community of people dedicated to our ethos, we stand against those who betray others, trod upon others’ rights or disrespect the rule of law. Each of us has an obligation to behave according to our values. In that way, we can ensure that we continue to be good stewards of the investments in us by our shareholders, customers, employees and communities, now and in the future.

We have a Standards of Business Ethics and Conduct Handbook that applies to all employees. This handbook, known as the Blue Book, has been updated and improved as we have grown and changed over the years. Our ethics program also includes periodic training on ethics and compliance topics for all employees and a 24-hour ethics helpline, which employees can access via telephone or online to communicate any business-related ethics concerns.

 

General Dynamics 2017 Proxy Statement     13


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Governance of the Company

 


 

We have adopted ethics codes specifically applicable to our Board of Directors and our financial professionals. The Code of Conduct for Members of the Board of Directors embodies our Board’s commitment to manage our business in accordance with the highest standards of ethical conduct. The Code of Ethics for Financial Professionals, which supplements the Blue Book, applies to our chief executive officer, chief financial officer, controller and persons performing similar financial functions.

Any amendments to or waivers from the Standards of Business Ethics and Conduct, Code of Ethics for Financial Professionals or Code of Conduct for Members of the Board of Directors on behalf of any of our executive officers, financial professionals or directors will be disclosed on our website. The current Standards of Business Ethics and Conduct are available on our website at www.gd.com/Responsibility.

BOARD LEADERSHIP STRUCTURE

Our Board comprises independent, accomplished and experienced directors who provide advice and oversight to further the interests of our company and our shareholders. Our Board believes that its organizational structure provides a framework for it to provide independent leadership and engagement while ensuring appropriate insight into the operations and strategic issues of the company.

Chairman – Strong and Effective Leadership. Our Board elects a Chairman from among the directors and determines whether to separate or combine the roles of Chairman and Chief Executive Officer based on what it believes best serves the needs of the company and its shareholders at any particular time. The Board believes that Ms. Novakovic’s deep understanding of the company’s business, day-to-day operations, growth opportunities, challenges and risk management practices gained through several leadership positions enable her to provide strong and effective leadership to the Board and to ensure the Board is informed of important issues facing the company. The Board also believes that having a combined role promotes a cohesive, strong and consistent vision and strategy for the company.

Independent Lead Director – Additional Independent Oversight. The Board has created the position of a Lead Director, elected annually by the Board from among the independent directors. Mr. Crown currently serves as Lead Director. The Board believes the Lead Director position provides additional independent oversight of senior management and board matters. The selection of a Lead Director facilitates communication among the directors or between any of them and the chairman. Directors frequently communicate among themselves and directly with the chairman. The Lead Director’s authority and responsibilities are as follows:

 

LEAD DIRECTOR AUTHORITY AND RESPONSIBILITIES

(1)

  acts as chair at Board meetings when the chairman is not present, including meetings of the non-management directors;

(2)

  has the authority to call meetings of the non-management directors;

(3)

  coordinates activities of the non-management directors and serves as a liaison between the chairman and the non-management directors;

(4)

  works with the chairman to develop and agree to meeting schedules and agendas, and agree to the nature of the information that will be provided to directors in advance of meetings;

(5)

  is available for consultation and communication with significant shareholders, when appropriate; and

(6)

  performs such other duties as the Board may determine from time to time.

 

14     General Dynamics 2017 Proxy Statement


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Governance of the Company

 


 

 

DIRECTOR INDEPENDENCE

Independence Standards. Our Board of Directors assesses the independence of our directors and examines the nature and extent of any relationships between General Dynamics and our directors, their families and their affiliates. Our Board has established an objective that at least two-thirds of the directors be independent directors. For a director to be considered independent, the Board must determine that a director does not have any direct or indirect material relationship with General Dynamics. Our Board has established director independence guidelines (the Director Independence Guidelines) as part of the Corporate Governance Guidelines to assist in determining director independence in accordance with the rules of the New York Stock Exchange.

 

AN INDEPENDENT DIRECTOR UNDER OUR DIRECTOR INDEPENDENCE GUIDELINES:
(1)    is not a current employee, nor has an immediate family member who is a current executive officer, of General Dynamics;
(2)    has not received, nor has an immediate family member who has received, during the immediately preceding fiscal year, more than $120,000 in direct compensation from General Dynamics, other than director and committee fees and pension or other forms of deferred compensation;
(3)    is not, nor has an immediate family member who is, currently employed as an executive officer of another company where any executive officer of General Dynamics currently serves on that company’s compensation committee;
(4)    is not a current partner of, or employee of, a present internal or external auditor of General Dynamics;
(5)    does not have an immediate family member who is a current partner of, or an employee assigned to work personally on General Dynamics’ audit by, a present internal or external auditor of General Dynamics;
(6)    except as otherwise provided in (7) below, is not a current executive officer or an employee, nor has an immediate family member who is a current executive officer, of a company that made payments to, or received payments from, General Dynamics for property or services in an amount that, in the immediately preceding fiscal year, exceeded the greater of $1 million or 2 percent of the consolidated gross revenues of that company; and
(7)    is not an executive officer of a charitable organization that, in the immediately preceding fiscal year, received contributions from General Dynamics in an amount that exceeded the greater of $1 million or 2 percent of the consolidated gross revenues of that organization.

Independence Determinations. In March of each year and at other times during the year for director nominations or appointments occurring outside of the annual meeting, the Board of Directors considers whether each director and nominee to the Board meets the definition of an “independent director” in accordance with the rules of the New York Stock Exchange and the Director Independence Guidelines. The Board has determined that Ms. Barra, Ms. Reynolds, Ms. Schumacher and Messrs. Crown, deLeon, Fricks, Keane, Lyles, Malcolm, Osborn and Wall each qualifies as an independent director. The Board had previously determined that James Mattis, who resigned from the Board in January 2017, qualified as an independent director. The Board has also determined that Mr. Chabraja and Ms. Novakovic are not independent directors. To make these independence determinations, the Board reviewed all relationships between General Dynamics and the directors or nominees and affirmatively determined that none of the individuals qualifying as independent has a material business, financial or other type of relationship with General Dynamics, other than as a director or shareholder of the company. Specifically, the Board considered the relationships listed below and the related person transactions listed on page 20 of this Proxy Statement and found them to be immaterial. For each of the relationships that the Board considered for 2014, 2015 and 2016, 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 2016 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 other non-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 2016 payments fell below the greater of $1 million or 2 percent of the consolidated gross revenues of the organizations. None of the 2016 charitable contributions to these organizations exceeded $110,000.

 

General Dynamics 2017 Proxy Statement     15


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Governance of the Company

 


 

 

 

Messrs. Crown, Keane and Osborn serve as directors of companies, and Ms. Barra and Ms. Schumacher are executive officers of companies to which General Dynamics has sold products and services, or from which General Dynamics has purchased products and services, in the ordinary course of business. None of the directors had any material interest in, or received any compensation in connection with, these ordinary-course business relationships. Each of the payments made or received by General Dynamics fell below the greater of $1 million or 2 percent of the other company’s revenues.

 

 

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.

BOARD MEETINGS, BUSINESS UNIT VISITS AND ATTENDANCE

During 2016, the Board of Directors held eight meetings. This included a three-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% percent of the meetings of the Board and committees on which they served in 2016, with 9 of our current 12 directors attending 100 percent of the Board and committee meetings. We encourage directors to attend each annual meeting of shareholders, and in 2016 all of our directors attended the annual meeting.

EXECUTIVE SESSIONS OF THE BOARD

Our Board holds executive sessions of the non-management directors following all regularly scheduled Board meetings. The non-management directors may also meet without management present at other times as requested by any non-management director. The independent Lead Director serves as chair at the executive sessions.

BOARD COMMITTEES

The Board of Directors has established the following four standing committees to assist in executing its duties: Audit, Compensation, Finance and Benefit Plans, and Nominating and Corporate Governance. The primary responsibilities of each of the committees are described below, together with the current membership and number of meetings held in 2016. Currently, three of the four Board committees are composed 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.

 

    

AUDIT

COMMITTEE

 

COMPENSATION

COMMITTEE

 

FINANCE AND

BENEFIT PLANS

COMMITTEE

 

NOMINATING AND  

CORPORATE  

GOVERNANCE  

COMMITTEE  

 

  Mary T. Barra

 

   

 

LOGO

 

 

 

LOGO

 

 

 

  Nicholas D. Chabraja

 

     

 

 

LOGO

 

 

 

  James S. Crown  LOGO

 

 

 

LOGO

 

 

 

LOGO

 

   

 

LOGO

 

 

  Rudy F. deLeon

 

   

 

 

LOGO

 

 

 

LOGO

 

 

 

  William P. Fricks  LOGO

 

 

 

LOGO

 

 

 

LOGO

 

   

 

  John M. Keane

 

     

 

LOGO

 

 

 

LOGO

 

 

  Lester L. Lyles

 

 

 

LOGO

     

 

LOGO

 

  Mark M. Malcolm  LOGO

 

 

 

LOGO

 

   

 

LOGO

 

 

 

  William A. Osborn  LOGO

 

 

 

LOGO

 

 

 

LOGO

 

 

 

LOGO

 

 

 

  Laura J. Schumacher

 

   

 

LOGO

 

   

 

LOGO

 

 

  Peter A. Wall

 

             

 

LOGO

 

LOGO  Lead Director

   LOGO  Chairperson    LOGO  Member    LOGO   Audit Committee Financial Expert

 

16     General Dynamics 2017 Proxy Statement


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Committee Responsibilities. Following are descriptions of the primary areas of responsibility for each of the four committees.

 

  AUDIT COMMITTEE    NUMBER OF MEETINGS IN 2016: 8

 

   

Provides oversight for accounting, financial reporting, internal control, auditing and regulatory compliance activities

 

   

Selects and oversees the independent auditor

 

   

Approves audit and non-audit services provided by the independent auditor

 

   

Reviews the scope of the audit to be conducted by the independent auditor

 

   

Reviews our audited consolidated financial statements with management and the independent auditor

 

   

Evaluates the performance, responsibilities, budget and staffing of the internal audit function

 

   

Evaluates the scope of the internal audit plan

 

   

Monitors management’s implementation of the policies, practices and programs of the company with respect to business ethics and conduct, and environmental matters

 

  COMPENSATION COMMITTEE    NUMBER OF MEETINGS IN 2016: 4

 

   

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

 

  FINANCE AND BENEFIT PLANS COMMITTEE    NUMBER OF MEETINGS IN 2016: 3

 

   

Oversees the management of the company’s finance policies to ensure the policies are in keeping with the company’s overall business objectives

 

   

With respect to employee benefit plans that name the company or one of its subsidiaries as the investment fiduciary (and for which the company or one of its subsidiaries has not appointed the management investment committee as investment fiduciary):

 

   

provides strategic oversight of the management of the assets

 

   

reviews and approves investment policy recommendations made by management

 

   

reviews and approves the retention of third parties for administration and management services related to trust assets

 

  NOMINATING AND CORPORATE GOVERNANCE COMMITTEE    NUMBER OF MEETINGS IN 2016: 3

 

   

Evaluates Board and management effectiveness

 

   

Advises the Board on the appropriate size, composition, structure and operations of the Board and its committees

 

   

Reviews and recommends to the Board committee assignments for directors

 

   

Advises the Board on corporate governance matters and monitors developments, trends and best practices in corporate governance

 

   

Recommends to the Board corporate governance guidelines that comply with legal and regulatory requirements

 

   

Identifies qualified individuals to serve as directors and recommends director nominees

 

General Dynamics 2017 Proxy Statement     17


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RISK OVERSIGHT

General Dynamics has a comprehensive risk management program conducted by senior management and overseen by the Board of Directors. In particular, the Board oversees management’s identification and prioritization of risks. We believe that our risk management processes are well supported by the current board leadership structure.

How We Manage Risk. The following summarizes the key elements of the Board’s, senior management’s and external advisors’ roles in our risk management program.

 

 

The Board oversees risk management, focusing on the most significant risks facing the company, including strategic, operational, financial, legal and reputational risks.

 

 

Each Board committee is integral to risk management and reports specific risk-management matters as necessary to the full Board.

 

 

Senior management is responsible for day-to-day risk management and conducts a thorough assessment through internal management processes and controls.

 

 

The chief executive officer and senior management team provide to the Board a dedicated and comprehensive briefing of material risks at least twice per year, and the Board is briefed throughout the year as needed on specific risks facing the company.

 

 

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 annual three-day Board meeting in early February. At this meeting, senior management reports on opportunities and risks in the markets in which the company conducts business. Additionally, each business unit president and each business group executive vice president presents the unit’s and group’s respective operating plan and strategic initiatives for the year, including notable business opportunities and risks. The Board reviews, adjusts where appropriate, and approves the business unit and business group goals and adopts our company operating plan for the year. These plans and related risks are monitored throughout the year as part of periodic financial and performance reports given to the Board by the chief financial officer and executive vice presidents of each business group. The Board also receives briefings from senior management concerning a variety of matters and related risks to the company, including defense budget and acquisition matters and specific customer or program developments.

In addition, each of the Board committees considers risk as it relates to its particular areas of responsibility.

 

 

Audit Committee.  The Audit Committee has responsibility for oversight of the company’s policies and practices concerning overall risk assessment and risk management. The committee reviews and takes appropriate action with respect to the company’s annual and quarterly financial statements, the internal audit program, the ethics program and internal controls over financial reporting. To facilitate these risk oversight responsibilities, the committee receives regular briefings from members of senior management on accounting matters; the internal audit plan; internal control over financial reporting matters; significant litigation and other legal matters; ethics program matters; and environmental matters. The committee also holds regular executive sessions with internal audit and regular executive sessions with the partners of the KPMG LLP audit team.

 

 

Compensation Committee.  The Compensation Committee oversees our executive compensation program to ensure that the program creates incentives for strong operational performance and for the long-term benefit of the company and its shareholders without encouraging excessive risk-taking. The committee receives briefings from the chairman and chief executive officer, human resources senior management and outside consultants and advisors on compensation matters.

 

 

Finance and Benefit Plans Committee.  The Finance and Benefit Plans Committee oversees the management of the company’s finance policies and the assets of the company’s defined benefit plans for employees. The committee oversees market risk exposure with respect to its assets within the company’s defined benefit plans and related to the capital structure of the company, including borrowing, liquidity, allocation of capital and funding of benefit plans. To assess risks in these areas, the committee receives regular briefings from our senior management or external advisors on finance policies, pension plan liabilities and funding, and asset performance.

 

18     General Dynamics 2017 Proxy Statement


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Nominating and Corporate Governance Committee.  The Nominating and Corporate Governance Committee oversees risks related to the company’s governance structure and processes and risks arising from related person transactions. The committee receives briefings from the senior vice president, general counsel and secretary.

The Role of External Advisors in Risk Management.  The company’s external advisors support the risk management program in a number of ways. Specifically, external advisors support the program by: (1) auditing our financial statements; (2) reviewing and suggesting updates and improvements of our risk management processes and procedures; (3) assisting in the implementation of Board and senior management responsibilities regarding risk management; and (4) supporting and assisting with public disclosure regarding risk management and company risks.

Succession Planning and Risk Management.  The Board considers senior management succession planning a core part of the company’s risk management program. At least annually, the Board reviews with the chief executive officer succession planning for senior leadership positions, and the timing and development required to ensure continuity of leadership over the short term and long term.

DIRECTOR ORIENTATION AND CONTINUING EDUCATION

Within six months of election to the Board, each new director receives an orientation that consists of a series of in-person briefings provided by corporate officers on our business operations; significant financial, accounting and risk-management matters; corporate governance; ethics; and key policies and practices. The new director receives briefings on the responsibilities, duties and activities of the committees on which the director will initially serve. The new director is also provided the opportunity to visit business units within each of the four business groups and receive briefings from the respective group executive vice president and members of the business unit management team.

In addition, to 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 a three-day meeting with our senior management to review and approve the operating plan of each of our business units and business groups and the company as a whole. Directors also visit our business units periodically. These visits allow the directors to interact with the business unit management teams and employees and gain a firsthand view of our operations.

BOARD AND COMMITTEE PERFORMANCE SELF-ASSESSMENTS

Each year, the directors undertake a self-assessment for the Board and each committee on which they serve that elicits feedback on the performance and effectiveness of the Board and its committees. As part of this self-assessment, the directors are asked to consider the Board’s role, relations with management, composition and meetings. Each committee is asked to consider its role and the responsibilities articulated in the committee charter, the composition of the committee and the committee meetings. The self-assessment responses and comments are compiled by the Corporate Secretary and presented to the Nominating and Corporate Governance Committee for initial review. The responses and comments are presented to each committee and the full Board.

COMMUNICATIONS WITH THE BOARD

Any shareholder or other interested party who has a concern or question about the conduct of General Dynamics may communicate directly with our non-management directors, the Chairman or the full Board. Communications may be confidential or anonymous. Communications should be submitted in writing to the chair of the Nominating and Corporate Governance Committee in care of the Corporate Secretary, General Dynamics Corporation, 2941 Fairview Park Drive, Suite 100, Falls Church, Virginia 22042. The Corporate Secretary will receive and process all written communications and will refer all substantive communications to the chair of the Nominating and Corporate Governance Committee in accordance with guidelines approved by the independent members of the Board. The chair of the Nominating and Corporate Governance Committee will review and, if necessary, investigate and address all such communications and will report the status of these communications to the non-management directors as a group or the full Board on a quarterly basis.

Our employees and other interested parties may also communicate concerns or complaints about our accounting, internal control over financial reporting or auditing matters directly to the Audit Committee. Communications may be confidential or anonymous and can be submitted in writing or reported by telephone. Written communications should be submitted to the chair of the Audit Committee in care of our ethics officer at the address in the preceding paragraph or at the address in the Standards of Business Ethics and Conduct Handbook provided to all employees. Our employees can call a toll-free helpline number or access the helpline online, each of which is provided to all employees. The ethics officer will review, investigate and address any concerns or complaints unless the Audit Committee instructs otherwise. The ethics officer will report the status of all concerns and complaints to the Audit Committee. The Audit Committee may also direct that matters be presented to the full Board and may direct special treatment of any concern or complaint addressed to it, including the retention of outside advisors or counsel.

 

General Dynamics 2017 Proxy Statement     19


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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 an arm’s-length transaction or is pursuant to a company discount program for which the related person is eligible, serves a compelling business reason and any other factors it deems relevant. As a condition to approving or ratifying any related person transaction, the committee or the Board may impose whatever conditions and standards it deems appropriate, including periodic monitoring of ongoing transactions.

The following transactions with a related person were determined to pose no actual conflict of interest and were reviewed and approved by the committee or the Board pursuant to our related person transactions policy:

 

 

Based upon Schedule 13G filings made with the SEC, BlackRock, Inc., a global provider of investment, advisory and risk management solutions, has reported beneficial ownership of more than 5 percent of our outstanding common stock. An affiliate of BlackRock provides investment management services for certain of our defined benefit plans. The agreements with BlackRock were negotiated in arm’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 2016 totaling approximately $1.1 million. In accordance with the related person transactions policy, the Nominating and Corporate Governance Committee reviewed and approved the services for 2016 and approved the continuation of the services in 2017.

 

 

Henry Crown and Company and one of its affiliated entities made payments of approximately $178,000 to the company in 2016 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. The purchases from Gulfstream and Jet Aviation were in the ordinary course of business and on arm’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.

 

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Governance of the Company

 


 

DIRECTOR COMPENSATION

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

2016 Compensation.  Director compensation for 2016 was:

 

COMPENSATION ELEMENT    AMOUNT

Annual Retainer

   $70,000

Lead Director Retainer

   $25,000

Committee Chair Annual Retainer

   $10,000

Attendance Fees

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

Annual Equity Award

   Approximately $142,000 on the date of award

Per Diem Fee for Non-Employee Directors Performing Specific Projects for the Company

   $10,000

As part of the Compensation Committee’s annual review in early 2016 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 which showed General Dynamics slightly above the median for equity compensation and slightly below the median for cash compensation. Following this review, the Compensation Committee recommended no changes to director compensation.

Non-management directors have the option of receiving all or part of their annual retainers in the form of Common Stock. The annual retainer, additional committee chair retainer (if any) and attendance fees paid to each director during 2016 are reflected in the Fees Earned or Paid in Cash column of the Director Compensation for Fiscal Year 2016 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 2016 table.

2017 Compensation.  In early 2017, 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. Based on this review, the committee increased the annual retainer 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.

 

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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 for non-management directors. Pursuant to these guidelines, each non-management director is expected to own shares of our Common Stock having a value equal to at least 8 times the then-current annual retainer. Non-management directors are subject to the same holding requirements as our named executive officers and are expected to retain shares upon the vesting of restricted stock or exercise of options until the ownership guidelines are met. Management directors are subject to the ownership requirements discussed under “Compensation Discussion and Analysis – Stock Ownership Guidelines.”

DIRECTOR COMPENSATION TABLE

The table below provides total compensation for 2016 for each of General Dynamics’ non-management directors serving during the year. The number of shares of restricted stock and stock options awarded to the directors annually are the same for each director.

 

DIRECTOR COMPENSATION FOR FISCAL YEAR 2016  
  NAME   

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  

James S. Crown

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

Rudy F. deLeon

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

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  

Lester L. Lyles

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

Mark M. Malcolm

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

James N. Mattis (e)

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

William A. Osborn

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

Laura J. Schumacher

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

Peter A. Wall (f)

   $ 34,870      $ 29,564      $ 29,396      $ 1,858      $ 95,688  
(a)

Ms. Barra, Ms. Schumacher and Messrs. Crown, Fricks and Keane elected to receive 100 percent of their annual retainer in Common Stock. As a result, they each received 470 shares of Common Stock with a grant date fair value of approximately $70,000. Mr. deLeon elected to receive 50 percent of his annual retainer in Common Stock. As a result, Mr. deLeon received 234 shares of Common Stock with a grant date fair value of approximately $35,000.

(b)

The amounts reported in the Stock Awards column reflect the aggregate grant date fair value computed in accordance with Financial Accounting Standards Board (FASB) ASC Topic 718, Compensation — Stock Compensation. Assumptions used in the calculation of these amounts are included in Note O to our audited financial statements for the fiscal year ended December 31, 2016, included in our Annual Report on Form 10-K filed with the SEC on February 6, 2017. Restricted stock awards outstanding as of December 31, 2016, for each director were as follows: 2,480 for Ms. Barra and Messrs. Chabraja, Crown, Fricks, Keane, Lyles and Osborn; 1,860 for Mr. Mattis; 1,580 for Ms. Schumacher; 1,040 for Mr. deLeon; 730 for Mr. Malcolm; and 200 for Mr. Wall.

(c)

The amounts reported in the Option Awards column reflect the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. Assumptions used in the calculation of these amounts are included in Note O to our audited financial statements for the fiscal year ended December 31, 2016, included in our Annual Report on Form 10-K filed with the SEC on February 6, 2017. Option awards outstanding as of December 31, 2016, for each director were as follows: 26,950 for Ms. Barra; 26,880 for Messrs. Chabraja, Crown, Fricks, Keane and Lyles; 21,670 for Mr. Osborn; 12,690 for Mr. Mattis; 10,190 for Ms. Schumacher; 5,790 for Mr. deLeon; 4,430 for Mr. Malcolm; and 1,320 for Mr. Wall.

(d)

Amounts reflect payments by General Dynamics for accidental death and dismemberment (AD&D) insurance.

(e)

Mr. Mattis resigned from the Board in January 2017.

(f)

Mr. Wall joined the Board in August 2016.

 

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ADVISORY VOTE ON THE SELECTION OF 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. 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 2017 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 and Non-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 2016 and 2015, and fees billed for other services rendered by KPMG during those years.

 

      2016      2015  

Audit Fees (a)

   $ 18,333,000      $ 17,900,000  

Audit-related Fees (b)

     4,731,000        3,036,000  

Tax Fees (c)

     1,063,000        1,250,000  

All Other Fees (d)

     51,000        70,000  

Total Fees

   $ 24,178,000      $ 22,256,000  

 

(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 on Pre-Approval. The company and the Audit Committee are committed to ensuring the independence of the external auditors, both in fact and in appearance. Therefore, in accordance with the applicable rules of the Securities and Exchange Commission, the Audit Committee has established policies and procedures for pre-approval of all audit and permitted non-audit services provided by the independent auditors. The Audit Committee determines annually whether to approve all audit and permitted non-audit services proposed to be performed by the independent auditors (including an estimate of fees). If other audit or permitted non-audit services not included in the pre-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 grant pre-approvals to its chair or a subcommittee as it deems appropriate, subject to a reporting obligation to the Audit Committee. All audit and permitted non-audit services listed above were pre-approved.

 

YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL.

 

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The following Audit Committee Report shall not be deemed incorporated by reference by any general statement incorporating by reference this Proxy Statement or any portion hereof into any filing under the Securities Act of 1933, as amended (Securities Act) or the Securities Exchange Act of 1934, as amended (Exchange Act), and shall not otherwise be deemed filed under such acts.

AUDIT COMMITTEE REPORT

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

The following five directors serve on the Audit Committee: William P. Fricks (Chair), James S. Crown, Lester L. Lyles, Mark M. Malcolm and William A. Osborn.

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 Rule 10A-3 of the Exchange Act. The Board has determined that Mr. Fricks, Mr. Malcolm and Mr. Osborn each qualifies as an “audit committee financial expert” as defined by the Securities and Exchange Commission (SEC) in Item 407(d) of Regulation S-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.

The Audit Committee has reviewed and discussed with management and the company’s independent auditors for 2016, KPMG LLP, an independent registered public accounting firm, the company’s audited consolidated financial statements as of December 31, 2016, 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, including KPMG’s related report and attestation.

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 of non-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 Form 10-K as of and for the year ended December 31, 2016, for filing with the SEC.

This report is submitted by the Audit Committee.

 

William P. Fricks (Chair)

James S. Crown

Lester L. Lyles

  

Mark M. Malcolm

William A. Osborn

February 4, 2017

 

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ADVISORY VOTE TO 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 Regulation S-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 BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL.

ADVISORY VOTE ON THE FREQUENCY OF 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 seek non-binding advisory votes regarding the compensation of our named executive officers as disclosed in future proxy statements, similar to Proposal 3 in this 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 BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE

IN FAVOR OF HOLDING FUTURE ADVISORY COMPENSATION VOTES EVERY YEAR.

 

General Dynamics 2017 Proxy Statement     25


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COMPENSATION DISCUSSION AND ANALYSIS

In the Compensation Discussion and Analysis, we describe the details of our named executive officer executive compensation program.

The section is organized as follows:

Table of Contents

 

Executive Summary

    27  

Business Overview

    27  

Company Performance Highlights

    28  

Components of Compensation and Alignment with Company Performance

    30  

Continued Changes to Compensation Program in Response to Shareholder Feedback

    31  

2016 Variable Compensation Drivers and Outcomes

    32  

2016 Shareholder Outreach and Say on Pay Result and Program Updates

    33  

Strong, Independent Compensation Governance and Practices

    34  

Executive Compensation Goals and Objectives

    35  

Components of Executive Compensation

    35  

Variable and Performance-Based Compensation

    36  

Annual Incentive Compensation

    37  

Long-Term Incentive Compensation

    37  

Fixed Compensation and Benefits

    39  

Potential Severance and Change in Control Benefits

    41  

The Compensation Process

    42  

Setting Compensation Levels and Evaluating Performance

    42  

Peer Group and Benchmarking to the Market

    43  

NEO Performance Metrics and Targets for 2016

    44  

Role of the Independent Compensation Consultant

    46  

Other Considerations

    47  

Stock Ownership Guidelines and Holding Requirements

    47  

Anti-Hedging and Anti-Pledging Policies

    47  

Clawback Policy

    47  

Monitoring Dilution and Annual Equity Usage

    48  

Compensation and Risk Management

    48  

Tax Considerations

    48  

Executive Compensation Tables

    49  

 

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Compensation Discussion and Analysis

 


 

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

 

        Name                        Title

Phebe N. Novakovic

   Chairman and Chief Executive Officer

Jason W. Aiken

   Senior Vice President and Chief Financial Officer

John P. Casey

   Executive Vice President, Marine Systems

Mark C. Roualet

   Executive Vice President, Combat Systems

S. Daniel Johnson

   Executive Vice President, Information Systems and Technology

 

EXECUTIVE SUMMARY

BUSINESS OVERVIEW

General Dynamics is a global aerospace and defense company that offers a broad portfolio of products and services in:

 

 

Business aviation;

 

 

Combat vehicles, weapons systems and munitions;

 

 

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

 

 

Shipbuilding and ship repair.

We operate through four business groups, with each group led by an executive vice president:

 

GENERAL DYNAMICS

Aerospace

   Combat Systems

Information Systems and Technology

   Marine Systems

Our management team delivers shareholder returns through disciplined execution on backlog, efficient cash-flow conversion and prudent capital deployment. We manage costs, undertake continuous improvement initiatives, and collaborate across our businesses to achieve our goals of maximizing earnings and cash and creating value for our shareholders. Management’s focus on these principles is reflected in the goals set forth in the company’s incentive plans because we believe successful execution in these areas directly translates to shareholder value creation. Thus, company-wide and business group performance measures are the key metrics the Compensation Committee (the Committee) considers when making executive compensation decisions for the NEOs.

 

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Compensation Discussion and Analysis

 


 

COMPANY PERFORMANCE HIGHLIGHTS

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

 

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Compensation Discussion and Analysis

 


 

Dividend Payment History*

 

 

LOGO

 

    Earnings from Continuing Operations                   Operating Margin

 

 

LOGO

 

 

 

LOGO

 

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

 

 

LOGO

 

 

 

LOGO

 

*

Dividends are paid quarterly.

**

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

 

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Compensation Discussion and Analysis

 


 

COMPONENTS OF COMPENSATION AND ALIGNMENT WITH COMPANY PERFORMANCE

We pay each NEO through three primary forms of compensation: base salary, an annual incentive and a long-term incentive. The annual and long-term incentives are variable depending on achieving specific performance objectives.

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

 

 

Executive compensation is linked strongly to the financial and operational performance of the business. Over 90 percent of the CEO’s total compensation is at risk, while over 85 percent of the other NEOs’ compensation is at risk. A significant amount of the compensation at risk is delivered through equity: performance restricted stock units (PRSUs), restricted stock and stock options.

 

 

In order to emphasize a culture of ownership and strengthen management’s alignment with long-term shareholder interests, the Committee requires one of the strictest set of stock ownership guidelines in our industry for the NEOs. Our CEO is required to hold General Dynamics stock with a value equal to 15 times base salary. Other NEOs are required to hold 10 times base salary.

 

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

 

 

LOGO

  

 

 

LOGO

*Fixed compensation represents base salary, and variable compensation represents annual incentive and equity awards.

 

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CONTINUED CHANGES TO COMPENSATION PROGRAM IN RESPONSE TO 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 tax gross-ups. We also implemented a target bonus structure for 2016 and instituted long-term incentive guidelines for equity awards granted in March 2017 for our NEOs. These changes demonstrate our commitment to continuous assessment of our compensation program, our responsiveness to shareholders’ feedback and our focus on ensuring we meet the needs of our business and provide strong value creation for our shareholders.

The following table summarizes the key components of each NEO’s compensation and how we have made changes in our approach in the past several years:

 

 

Key Components of Pay

  

 

2015 Benchmark

  

 

2016 Benchmark

 

 

2017 Benchmark

   

Base

Salary

  

•    Cash

   Not to exceed the market median of our peer group  

Annual

Incentive

  

•    Cash

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

Long-

Term

Incentive

  

•    PRSUs

•    Restricted Stock

•    Stock Options

  

Targeted at peer median;

Indexed to total cash compensation

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

Employing a Disciplined, Structured Approach to Compensation.  NEO compensation is based on clear, measurable goals related to company and business group performance. In March 2016, Ms. Novakovic proposed, and the Committee reviewed and approved, scorecards for each of the NEOs to ensure a continued focus on structure and discipline around performance management and compensation. Details of each NEO’s scorecard are included beginning on page 44 of this CD&A. Annual bonuses are tied directly to these measurable objectives.

Linking Pay Levels to the Market and General Dynamics Performance.  Each component of our NEO compensation is targeted to the median of a core group of aerospace, defense and industrial companies with whom we compete for business and executive talent. To the extent compensation exceeds targeted levels, it is directly attributable to performance which increases shareholder value and exceeds measurable, clearly defined performance goals. Conversely, total compensation can be substantially less than target for performance that does not meet company or business group goals, and can include no annual bonus.

 

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2016 VARIABLE COMPENSATION DRIVERS AND OUTCOMES

Both annual and long-term incentives are based on measurable and objective performance metrics. The following summarizes company-wide performance targets against actual 2016 performance for certain key financial metrics. Detailed business group performance targets and achievements along with NEO scorecards are described in detail in The Compensation Process section on page 42 of this CD&A.

 

     

Financial Performance

Metrics

 

  

2016 Target  

 

  

2016 Actual  

 

  

2016
Achievement
  

 

  

2015 Actual  

 

Earnings from Continuing

Operations

 

   $2.89 billion      $3.06 billion      Exceeded      $2.97 billion  

Free Cash Flow from

Operations

 

   $1.49 billion      $1.81 billion      Exceeded      $1.93 billion  

Return on Invested Capital

 

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

Setting Challenging Targets Based on Market Conditions.  Annual incentive compensation targets were set in early 2016 based on backlog, anticipated order activity, and expected market conditions. They were in line with guidance provided to the market by company management. Our operating metric targets were set based on our assessment of our backlog and the market conditions for our company.

The following explains each financial metric:

 

 

Earnings from Continuing Operations.  The earnings target for 2016 was $2.89 billion, relative to a 2015 actual of $2.97 billion. Actual results for 2016 were $3.06 billion. The 2016 target, set early in 2016, was based on management’s assessment of backlog, expected order activity and market conditions which resulted in modest anticipated top line and operating earnings growth but lower net earnings due to a higher effective tax rate. Management’s focus on operational efficiency and cost reduction initiatives resulted in stronger than forecasted earnings.

 

 

Free Cash Flow from Operations.  The free cash flow from operations target for 2016 was $1.49 billion, relative to a 2015 actual of $1.93 billion. The decline in expected free cash flow in 2016 relative to the free cash flow result in 2015 was due to the continued utilization of a significant customer deposit received in 2014 by our Combat Systems group, and an increase in operating working capital at our Gulfstream business unit. Actual results for 2016 were $1.81 billion, which exceeded our expectations.

 

 

Return on Invested Capital.  The three-year ROIC target applicable for PRSUs granted in 2016 is 15.3 percent. The three-year ROIC target applicable for PRSUs granted in 2015 is 14.1 percent. These three-year targets represented the company’s expectation of average ROIC performance over the 2015–2017 and 2016–2018 performance periods. The actual result for 2016 was 18.1 percent and was among the strongest in our peer group. The PRSUs granted in 2015 remain subject to ROIC performance for the third year of the performance period, and the PRSUs granted in 2016 remain subject to ROIC performance for the second and third years of the performance period.

 

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2016 SHAREHOLDER OUTREACH AND SAY ON PAY RESULT AND PROGRAM UPDATES

Every year we engage with holders of at least 65 percent of our outstanding Common Stock to understand shareholder views on our executive compensation program. Following changes to our executive compensation program resulting in part from shareholder engagement, our shareholders have expressed very strong support for our program and the results it is driving. At our 2016 annual shareholder meeting, investors strongly supported our executive compensation program with over 90 percent of shares voted in favor of our Say on Pay proposal.

The Committee and company management continually seek to improve the executive compensation program and have made several enhancements to the program in recent years. With the support of management and the independent compensation consultant, each change was based on the Committee’s review of emerging corporate governance practices, feedback from shareholders, and an effort to more closely align executive compensation with company performance.

New in 2016.  The program updates described in the following table were approved by the Committee and were in place for compensation granted in 2016.

 

Executive Compensation

Program Changes in 2016

        Description/Rationale     

 

Eliminated legacy excise tax gross-ups

    

 

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

 

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

 

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

 

 

 

Implemented target bonuses as a percent of base salary

    

 

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

 

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

 

 

 

Adopted LTI grant guidelines for NEOs

    

 

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

 

•    This change allows the Committee to consider multiple factors in making equity grants to ensure a strong linkage between pay and performance while balancing other factors such as individual assessments, business performance and market benchmarks

 

 

 

Aligned restricted stock vesting with other equity vehicles

      

 

•    To match our other equity vehicles (stock options and PRSUs) restricted stock granted in 2017 will vest three years after the date of grant

 

•    This change aligns the vesting schedule of all equity vehicles

 

   

 

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STRONG, INDEPENDENT COMPENSATION GOVERNANCE AND PRACTICES

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

 

    Leading Compensation Governance Practices    

      

 

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

 

 

      

 

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

 

 

      

 

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

 

 

      

 

Thoughtfully selected peer group consisting of other aerospace and defense firms, with annual Committee review of the group

 

 

      

 

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

 

 

      

 

Market-leading stock ownership requirements of 15 times base salary for the CEO and 10 times for the other NEOs

 

 

      

 

No employment agreements with NEOs

 

 

      

 

Directors and management engagement with shareholders

 

 

      

 

100 percent independent Compensation Committee

 

 

      

 

Independent compensation consultant reporting to the Compensation Committee

 

 

      

 

Double-trigger change in control arrangements

 

 

      

 

Clawback policy

 

 

      

 

Anti-hedging policy

 

 

      

 

Anti-pledging policy

 

 

      

 

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

 

   

 

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EXECUTIVE COMPENSATION GOALS AND OBJECTIVES

 

The objective of the executive compensation program is to incentivize NEOs to achieve strong operational performance and to align the interests of each NEO with our shareholders. The majority of compensation is equity-based, vests over several years 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.

 

 

COMPONENTS OF EXECUTIVE COMPENSATION

 

Each NEO receives a mix of fixed and variable components of compensation. The following charts summarize the various forms of compensation and demonstrate that over 90 percent of the CEO’s compensation and over 85 percent of other NEO compensation is variable and tied to company performance.

 

 

LOGO

 

CEO Compensation Mix

 

 

      

Other NEO Compensation Mix

 

LOGO      LOGO

 

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VARIABLE AND PERFORMANCE-BASED COMPENSATION

 

         Variable Incentive Compensation

 

Annual Incentive

      
     Cash
           
           
    
 
Long-Term Incentive         

Performance Restricted Stock Units

(25%)

    
        

Restricted Stock

(25%)

    
        

Stock Options

(50%)

The Committee has carefully considered the value drivers of the company and each business group when structuring incentive compensation and has determined to use the following factors and metrics to set compensation for the reasons summarized in the table below. Some of the metrics for the business group executive vice presidents are different, as described below.

 

 

 Component of Compensation 

   Setting Target 
Amounts
   Factors Determining 
Value
  

 

 Objectives 

Annual

Incentive

 

•    Cash

 

Percentage of

Base Salary Benchmarked to

Peer Group

Median

  Earnings from Continuing Operations   

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

      Free Cash Flow from Operations   

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

      Business Group Performance and Individual Performance   

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

      Stock Price   

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

Long-Term

Incentive

 

•    PRSUs

•    Restricted Stock

•    Stock Options

 

Targeted to Peer Group Median;

Indexed to Total Cash Compensation

  Return on Invested Capital   

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

            Indexed to Total Cash Compensation   

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

 

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ANNUAL INCENTIVE COMPENSATION

NEOs are eligible for an annual cash incentive based on the company’s prior-year performance and, for NEOs other than the CEO and CFO, that of their business groups. The incentive is designed to place at risk a significant portion of each NEO’s annual compensation. The incentive is based on performance against specific, measurable goals established at the beginning of the year and approved by the Committee as well as the Committee’s assessment of each NEO’s individual performance during the year. The goals are designed to be difficult but achievable through solid execution. The Committee believes the chosen incentive metrics are good indicators of the company’s overall performance and lead to the creation of long-term value for our shareholders. Each year the committee evaluates each NEO’s performance against a pre-established scorecard and makes a determination on the amount of the annual incentive that may range from no incentive for performance that falls short of expectations or up to two times the target amount for performance that exceeds the goals.

LONG-TERM INCENTIVE COMPENSATION

In 2016 we based long-term incentive grants for each NEO on two factors:

 

 

Each NEO’s actual total cash compensation for the most recently completed performance year, and

 

 

The peer group median of long-term incentive awards as a percent of total cash compensation (TCC).

We award long-term incentive compensation in three forms of equity: performance restricted stock units (25 percent of award value), restricted stock (25 percent of award value) and stock options (50 percent of award value). Each of these forms of equity aligns the NEOs with the company’s shareholders and provides retention incentives through multi-year, performance-based vesting periods.

Setting Long-term Grant Amounts:

2017.  Starting with equity 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

 

 

LOGO

 

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Performance Restricted Stock Units

Performance Restricted Stock Units (PRSUs) are a form of equity compensation tied to the achievement of specific performance goals and linked to the long-term performance of the company. This element of executive compensation closely connects executives to the company’s financial and stock performance over the long term. PRSUs at General Dynamics are structured as follows:

PRSU Award = Total LTI Grant x 25%

PRSU grants are calculated by multiplying the overall target LTI economic value determined as noted above by the weighting assigned to the PRSU component (25 percent) and dividing the result by the value of a single share of General Dynamics Common Stock.

Target Setting:

 

 

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

 

 

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

 

 

The performance target is set to be challenging, yet achievable.

For the 2016-2018 performance period the ROIC target was established at 15.3 percent which was higher than the target set for grants made in prior years. Consistent with prior years, this target reflects the multi-year operating plan for the company and takes into account management’s assessment of future backlog, earnings and capital deployment. The Committee believes this target is challenging but achievable through continued strong operating performance.

Plan Operation:

 

 

After the three-year performance period, the number of PRSUs will be adjusted upward or downward subject to a +/-2.5 percent collar adjustment around the ROIC target to reflect rigorous alignment with company performance. The adjustment provides for the following payouts:

 

ROIC Performance    PRSU Payout After 3 Years from Grant Date
2.5% or more above target    150% of target PRSUs
At target    100% of target PRSUs
2.5% below target    50% of target PRSUs
More than 2.5% below target    0% of target PRSUs

 

 

The ROIC calculation for purposes of PRSU performance does not include accumulated other comprehensive income (AOCI), goodwill write-offs in the year of the event or non-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%

 

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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 COMPENSATION AND 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.

 

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Company-Sponsored Retirement Plans

We provide retirement plans to our eligible employees, including the eligible NEOs, through a combination of qualified and non- 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 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, a tax-qualified defined contribution retirement plan. Each NEO is eligible to make before-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 on before-tax contributions up to the first 3 percent of a participant’s eligible pay and (2) 50 percent on before-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 on before-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 to one-half the executive’s base salary until the executive reaches age 65. For early retirees who elect coverage in excess of one-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.

 

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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 SEVERANCE AND CHANGE IN 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.

 

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THE COMPENSATION PROCESS

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

 

 

Align executive compensation with shareholder value creation

 

 

Ensure retention and growth for executives in a competitive environment

 

 

Compensate executives subject to clear and challenging performance metrics

Program objectives are achieved through the use of both short-term and long-term incentives. The company currently targets the median pay of our peers as further discussed in detail below. In addition, through the annual incentive plan, the NEOs are rewarded for achieving annual company and business group goals.

SETTING COMPENSATION LEVELS AND EVALUATING PERFORMANCE

Setting compensation for senior executives is a 16-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 a three-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.

 

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PEER GROUP AND BENCHMARKING TO THE MARKET

Each year, the Committee, with support from an independent compensation consultant, peer group proxy data and survey data provided by Aon Hewitt, identifies a core group of companies that are, in comparison to General Dynamics:

 

 

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.

 

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 of December 31, 2016.

 

General Dynamics 2017 Proxy Statement     43


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Compensation Discussion and Analysis

 


 

NEO PERFORMANCE METRICS AND TARGETS FOR 2016

The following scorecards demonstrate each NEO’s goals and objectives for the year and performance against those goals and objectives. There is a scorecard for the CEO, CFO and each other NEO who leads one of the General Dynamics business groups.

 

GENERAL DYNAMICS
Aerospace    Combat Systems
 

•       Gulfstream Aerospace

•       Jet Aviation

  

•       European Land Systems

•       Land Systems

•       Ordnance and Tactical Systems

 

Information Systems and Technology    Marine Systems
 

•       Information Technology

•       Mission Systems

  

•       Bath Iron Works

•       Electric Boat

•       NASSCO

 

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 the pre-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


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Compensation Discussion and Analysis

 


 

Chairman and Chief Executive Officer

 

Performance Metric    Weighting   2016 Target    2016 Actual

Earnings from Continuing Operations

   50%   $2,888 million    $3,062 million

Free Cash Flow from Operations

   50%   $1,486 million    $1,806 million

Senior Vice President and Chief Financial Officer

 

Performance Metric    Weighting   2016 Target    2016 Actual

Earnings from Continuing Operations

   45%   $2,888 million    $3,062 million

Free Cash Flow from Operations

   45%   $1,486 million    $1,806 million

Meet / Under-run 2016 Budget

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

Complete Two Continuous Improvement Projects

   5%   Complete Lean Six Sigma
projects
   Exceeded goal

Executive Vice President, Marine Systems

 

Performance Metric    Weighting   2016 Target    2016 Actual

Earnings from Continuing Operations

   45%   $2,888 million    $3,062 million

Free Cash Flow from Continuing Operations

   45%   $1,486 million    $1,806 million

Business Group Financial Metrics

Continuous Improvement Savings

   10%   $75 million    $192 million

Executive Vice President, Combat Systems

 

Performance Metric    Weighting   2016 Target    2016 Actual

Earnings from Continuing Operations

   45%   $2,888 million    $3,062 million

Free Cash Flow from Continuing Operations

   45%   $1,486 million    $1,806 million

Business Group Financial Metrics

Continuous Improvement Savings

   10%   $110 million    $170 million

Executive Vice President, Information Systems and Technology

 

Performance Metric    Weighting   2016 Target    2016 Actual

Earnings from Continuing Operations

   45%   $2,888 million    $3,062 million

Free Cash Flow from Continuing Operations

   45%   $1,486 million    $1,806 million

Business Group Financial Metrics

IS&T Revenue

   10%   $8,995 million    $9,187 million

 

General Dynamics 2017 Proxy Statement     45


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Compensation Discussion and Analysis

 


 

ROLE OF THE 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 an as-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


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Compensation Discussion and Analysis

 


 

OTHER CONSIDERATIONS

STOCK OWNERSHIP GUIDELINES AND HOLDING REQUIREMENTS

Our stock ownership and retention guidelines are the most stringent in our peer group. Stock ownership guidelines strongly align the interests of management with the interests of shareholders because executives become shareholders with a considerable investment in General Dynamics.

Our stock ownership and retention guidelines preclude NEOs from selling shares of common stock until they own shares with a market value of 10 times their base salary and 15 times for the CEO. Shares held outright and shares held through our 401(k) plans are counted for purposes of meeting the ownership guidelines. Stock options (whether vested or not), PRSUs and unvested shares of restricted stock are not counted in the ownership calculation.

 

Stock Ownership Guidelines
CEO    15x Base Salary
NEOs (other than CEO)    10x Base Salary

When exercising options, executives who have not met the ownership guideline may sell shares acquired upon exercise to cover transaction costs and taxes and are expected to hold any remaining shares until the guidelines are met. Similarly, shares received upon vesting of restricted stock and PRSUs may not be sold until the ownership guidelines are met. Once an officer attains his or her required ownership level, the officer must maintain that ownership level until he or she no longer serves as an officer. The stock ownership and retention guidelines are reviewed annually by the Committee.

ANTI-HEDGING AND ANTI-PLEDGING POLICIES

The company has a longstanding policy in place that prohibits all directors and executive officers from hedging company securities. Since 2014, the company has maintained a policy prohibiting all directors and executive officers from pledging company securities that they own directly.

Mr. Crown has the ownership of certain shares attributed to him that arise from the business of Henry Crown and Company, an investment company where Mr. Crown serves as President, and trusts of which Mr. Crown serves as trustee (Attributed Shares). Mr. Crown disclaims beneficial ownership of such shares, except to the extent of his pecuniary interest. The Attributed Shares are distinct from shares Mr. Crown or his spouse own individually, or shares held in trusts for the benefit of his children (Crown Personally Held Shares). The company has reviewed the potential pledging of the Attributed Shares with Mr. Crown, recognizes Mr. Crown’s distinct obligations with respect to Henry Crown and Company and the trusts, and believes such shares may be prudently pledged or held in margin loan accounts. Under the company’s anti-pledging policy, Crown Personally Held Shares are considered company securities that are owned directly by Mr. Crown and, accordingly, may not be and are not held in margin accounts or otherwise pledged as collateral, nor may the economic risk of such shares be pledged.

CLAWBACK POLICY

The company has in place an executive compensation recoupment policy, or “clawback” policy, which applies to senior executive officers of the company (referred to as the covered executive officers), including the NEOs. In the event of a restatement of our financial results due to a covered executive officer engaging in fraud or intentional illegal conduct, the result of which is that any equity or other performance-based compensation paid to that covered executive officer would have been a lower amount had it been calculated based on the restated results, the Committee will have the authority to recover any excess compensation that was awarded to that covered executive officer. In determining the excess compensation, the Committee will take into account its good faith estimate of the value of awarded and actual compensation that may have been affected by the restatement and the events leading to it. This includes all performance-based cash incentives and equity-based grants which may have vested or been exercised during the period in question.

 

General Dynamics 2017 Proxy Statement     47


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Compensation Discussion and Analysis

 


 

MONITORING DILUTION AND ANNUAL EQUITY USAGE

The Committee is focused on using equity to compensate executives in a manner that links executive and shareholder interests while focusing on the overall dilutive effect of that equity. The Committee achieves this balance by managing reasonable levels of equity dilution 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) and non-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) and non-employee directors, divided by shares outstanding.

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

 

       2014        2015        2016  

Actual Dilution

       5.12%          4.80%          4.54%  

1-Yr Grant Rate

       1.67%          0.82%          1.06%  

3-Yr Average Grant Rate

       1.97%          1.63%          1.19%  

COMPENSATION AND RISK MANAGEMENT

With the support of management and the independent compensation consultant, the Committee evaluates the company’s overall risk profile relative to the incentive components of compensation to ensure that NEOs are not overly incentivized to focus on short-term stock performance. The use of long-term equity incentive awards as a significant portion of total direct compensation and robust stock ownership guidelines are structured to ensure management is focused on the long term and not incentivized to take excessive risk.

TAX CONSIDERATIONS

As part of the annual compensation review process, the Committee considers the implications of Section 162(m) of the Internal Revenue Code, which is a provision that precludes the company from taking a tax deduction for individual compensation in excess of $1 million. The Committee also considers the exemptions to the $1 million limit, which are also provided in Section 162(m), including the exemption for “performance-based compensation” as defined in Section 162(m). In May 2016, shareholders approved the General Dynamics Corporation Executive Annual Incentive Plan that supports the deductibility of payments made under the incentive component of total cash compensation. This change affects incentive payments made in 2017 based on 2016 performance.

 

48     General Dynamics 2017 Proxy Statement


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EXECUTIVE COMPENSATION

SUMMARY COMPENSATION

The Summary Compensation Table conforms to requirements of the SEC and shows base salary, cash incentive, equity awards (restricted stock, performance restricted stock units and stock options) and all other compensation, which includes among other things the value of perquisites, 401(k) contributions and tax reimbursements (see footnote (d) to the Summary Compensation Table for a complete listing of categories included in All Other Compensation). The table also includes a column titled Change in Pension Value and Nonqualified Deferred Compensation Earnings. For our eligible named executive officers, this includes only the change in pension value (see footnote (c)), which is an actuarial estimate of the present value of the future cost of pension benefits. The value does not reflect a current cash cost to General Dynamics or, necessarily, the pension benefit that an executive would receive, since that is determined by a number of factors, including length of service, age at retirement and longevity.

 

SUMMARY COMPENSATION TABLE  

  NAME AND

  PRINCIPAL

  POSITION

  YEAR     SALARY       BONUS (a)    

STOCK

AWARDS (b)

   

OPTION

AWARDS (b)

    NON-EQUITY
INCENTIVE  PLAN
COMPENSATION (a)
   

CHANGE IN

PENSION

VALUE AND

NONQUALIFIED

DEFERRED

COMPENSATION

EARNINGS (c)

   

ALL OTHER

COMPENSATION

(d)

    TOTAL  

Phebe N. Novakovic

Chairman and Chief Executive Officer

   

2016 

2015 

2014 

 

 

 

  $

 

1,585,000

1,583,750

1,560,000

 

 

 

  $

 

— 

4,850,000 

4,250,000 

 

 

 

  $

 

7,079,144   

6,856,781   

6,460,752   

 

 

 

  $

 

7,077,746 

6,855,267 

6,464,027 

 

 

 

  $

 

5,150,000

 

 

 

  $

 

155,239

394,888

 

 

 

  $

 

310,948

278,306

258,417

 

 

 

  $

 

21,358,077

20,424,104

19,388,084

 

 

 

Jason W. Aiken

Senior Vice President and Chief Financial Officer

   

2016 

2015 

2014 

 

 

 

  $

 

701,250

662,500

625,000

 

 

 

  $

 


900,000 

600,000 

 

 

 

  $

 

1,490,275   

1,344,547   

1,249,888   

 

 

 

  $

 

1,489,540 

1,345,267 

1,249,895 

 

 

 

  $

 

1,200,000

 

 

 

  $

 

38,464

106,112

 

 

 

  $

 

139,984

58,305

1,281,747

 

 

 

  $

 

5,059,513

4,310,619

5,112,642

 

 

 

John P. Casey

Executive Vice President, Marine Systems

   

2016 

2015 

2014 

 

 

 

  $

 

747,500

716,250

685,000

 

 

 

  $

 

— 

1,020,000 

900,000 

 

 

 

  $

 

1,642,427   

1,299,410   

1,249,888   

 

 

 

  $

 

1,642,472 

1,300,360 

1,253,914 

 

 

 

  $

 

1,400,000

 

 

 

  $

 

242,463

720,069

 

 

 

  $

 

64,724

58,204

59,862

 

 

 

  $

 

5,739,586

4,394,224

4,868,733

 

 

 

Mark C. Roualet

Executive Vice President, Combat Systems

   

2016 

2015 

2014 

 

 

 

  $

 

747,500

713,750

678,750

 

 

 

  $

 

— 

995,000 

900,000 

 

 

 

  $

 

1,619,332   

1,299,410   

1,047,568   

 

 

 

  $

 

1,620,593 

1,300,360 

1,048,370 

 

 

 

  $

 

1,400,000

 

 

 

  $

 

168,004

490,084

 

 

 

  $

 

69,278

67,230

353,422

 

 

 

  $

 

5,624,707

4,375,750

4,518,194

 

 

 

S. Daniel Johnson

Executive Vice President, Information Systems and Technology

   

2016 

2015 

 

 

  $

 

713,750

680,000

 

 

  $

 

— 

850,000 

 

 

  $

 

1,457,671   

1,236,491   

 

 

  $

 

1,457,274 

1,235,342 

 

 

  $

 

1,250,000

 

 

  $

 

 —

 

 

  $

 

54,297

44,752

 

 

  $

 

4,932,992

4,046,585

 

 

(a)

Payments are reported for the fiscal year in which the related services were rendered, although the actual payments are made in the succeeding year. Bonus awards for 2016 performance were made under the General Dynamics Corporation Executive Annual Incentive Plan and are shown in the Non-Equity Incentive Plan Compensation column.

(b)

The amounts reported in the Stock Awards and the Option Awards columns reflect aggregate grant date fair value computed in accordance with FASB ASC Topic 718. These amounts reflect our calculation of the value of these awards at the grant date and do not necessarily correspond to the actual value that may ultimately be recognized by the named executive officer. Assumptions used in the calculation of these amounts are included in Note O to our audited financial statements for the fiscal year ended December 31, 2016, included in our Annual Report on Form 10-K filed with the SEC on February 6, 2017. Stock Awards include awards of restricted stock and performance restricted stock units (PRSUs). The maximum grant date value of 2016 PRSUs for each named executive officer, which assumes a 150 percent maximum payout, is $5,309,290 for Ms. Novakovic; $1,117,638 for Mr. Aiken; $1,231,752 for Mr. Casey; $1,214,499 for Mr. Roualet; and $1,093,185 for Mr. Johnson.

(c)

The values listed in this column represent the change in the present value of accumulated benefits from December 31 of the prior year to December 31 of the respective year calculated for all the pension plans in which the executive participates. The values are an actuarial estimate of the present value of the future cost of pension benefits for each of the named executive officers and do not reflect a current cash cost to the company or, necessarily, the pension benefit that an executive would receive. Pension benefits for named executive officers were frozen as of December 31, 2013. Negative changes in pension value were excluded from this column for the named executive officers as follows: for Ms. Novakovic, $(40,533) for 2015; for Mr. Aiken, $(24,600) for 2015; for Mr. Casey, $(30,414) for 2015; and for Mr. Roualet, $(51,485) for 2015. Mr. Johnson is not eligible to participate in the company’s pension plans.

 

General Dynamics 2017 Proxy Statement     49


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Executive Compensation

 


 

 

(d)

All Other Compensation for 2016 includes the following items:

 

    

 

ALL OTHER COMPENSATION

 

 

  NAME

 

  

REIMBURSEMENT
OF TAXES
(1)

 

    

RETIREMENT PLAN
CONTRIBUTIONS  AND
ALLOCATIONS 
(2)

 

    

TERM LIFE INSURANCE
PAYMENTS

 

    

PERQUISITES (3) 

 

 

 

  Ms. Novakovic

 

  

 

$

 

 

1,894

 

 

 

 

  

 

$

 

 

43,625

 

 

 

 

  

 

$

 

 

16,253

 

 

 

 

  

 

$

 

 

249,176

 

 

 

 

 

  Mr. Aiken

 

  

 

$

 

 

11,779

 

 

 

 

  

 

$

 

 

25,425

 

 

 

 

  

 

$

 

 

4,471

 

 

 

 

  

 

$

 

 

98,309

 

 

 

 

 

  Mr. Casey

 

  

 

$

 

 

3,200

 

 

 

 

  

 

$

 

 

26,425

 

 

 

 

  

 

$

 

 

12,764

 

 

 

 

  

 

$

 

 

22,335

 

 

 

 

 

  Mr. Roualet

 

  

 

$

 

 

3,339

 

 

 

 

  

 

$

 

 

26,425

 

 

 

 

  

 

$

 

 

8,811

 

 

 

 

  

 

$

 

 

30,703

 

 

 

 

 

  Mr. Johnson

 

  

 

$

 

 

174

 

 

 

 

  

 

$

 

 

21,865

 

 

 

 

  

 

$

 

 

18,555

 

 

 

 

  

 

$

 

 

13,703

 

 

 

 

 

(1)

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

(2)

Represents amounts contributed by General Dynamics to the 401(k) Plan and allocations by General Dynamics to the Supplemental Savings Plan.

(3)

Noncash items (perquisites) provided to named executive officers in 2016, which for one or more named executive officers is in the aggregate equal to or greater than $10,000, were as follows: financial planning and tax preparation services, home security systems and, solely for the chairman and chief executive officer, personal use of company aircraft. Perquisites that exceeded the greater of $25,000 or 10 percent of the total amount of perquisites were as follows: Ms. Novakovic – $118,299 related to personal travel on company aircraft, and $106,649 related to a home security system installed at Ms. Novakovic’s personal residence; and Mr. Aiken – $57,889 related to relocation costs incurred by the company in 2016 for Mr. Aiken’s relocation to the company’s headquarters in 2014. The aggregate incremental cost to General Dynamics for Ms. Novakovic’s personal travel aboard aircraft owned by the company (products of subsidiary Gulfstream Aerospace Corporation), as required by the Board to help ensure Ms. Novakovic’s security and accessibility, is calculated based on the following variable operating costs to the company: fuel costs, trip-related maintenance expenses, landing fees, trip-related hangar and parking fees, on-board catering expenses and crew expenses. No additional direct operating cost is incurred if a family member accompanies an executive on a flight. The aggregate incremental cost to the company for the provision of home security systems represents the amounts paid by the company to third parties for the installation, servicing and monitoring of the systems. The aggregate incremental cost to the company for relocation represents moving expenses, temporary housing and closing and related costs for the purchase of a home.

 

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Executive Compensation

 


 

2016 EQUITY-BASED AWARDS

General Dynamics’ long-term compensation for senior executives, including the named executive officers, consists of equity awards in the form of restricted stock, PRSUs and stock options. The following table provides information on the equity awards in 2016 for the named executive officers. The table includes the grant date of each equity award, the number of shares of restricted stock, PRSUs and stock options, the exercise price of the stock options, the closing price of our Common Stock on the date of grant and the grant date fair value of the equity awards. As discussed in the Compensation Discussion and Analysis section, we use the average of the high and low stock price of our Common Stock on the date of the grant, not the closing price, to value the restricted stock and PRSUs and set the exercise price for stock options.

 

GRANTS OF PLAN-BASED AWARDS IN FISCAL YEAR 2016  

  NAME

 

 

GRANT
DATE

 

   

DATE OF
COMPENSATION
COMMITTEE
ACTION

 

   

ESTIMATED POSSIBLE PAYOUTS UNDER

NON-EQUITY INCENTIVE PLAN AWARDS (A)

    

 

 

 

 

 

ESTIMATED FUTURE PAYOUTS UNDER
EQUITY INCENTIVE PLAN AWARDS (B)

    

ALL OTHER
STOCK
AWARDS:
NUMBER  OF
SHARES OF
STOCK OR
UNITS

(C)

 

    

ALL OTHER
OPTION
AWARDS:
NUMBER OF
SECURITIES
UNDERLYING
OPTIONS

 

    

EXERCISE
OR BASE
PRICE OF
OPTION
AWARDS

(D)

 

    

GRANT DATE
FAIR VALUE
OF STOCK
AND OPTION
AWARDS

(E)

 

 
     

THRESHOLD

 

    

TARGET

 

    

MAXIMUM

 

    

THRESHOLD

 

    

TARGET

 

    

MAXIMUM

 

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

 

3/2/16

 

 

 

   

 

3/1/16

 

 

 

            

 

 

 

 

    

 

 

 

 

    

 

 

 

 

    

 

 

 

 

    

 

320,260

 

 

 

   $

 

135.85

 

 

 

    

 

7,077,746

 

 

 

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

 

3/2/16

 

 

 

   

 

3/1/16

 

 

 

            

 

 

 

 

    

 

 

 

 

    

 

 

 

 

    

 

 

 

 

    

 

67,400

 

 

 

   $

 

135.85

 

 

 

    

 

1,489,540

 

 

 

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

 

3/2/16

 

 

 

   

 

3/1/16

 

 

 

            

 

 

 

 

    

 

 

 

 

    

 

 

 

 

    

 

 

 

 

    

 

74,320

 

 

 

   $

 

135.85

 

 

 

    

 

1,642,472

 

 

 

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

 

3/2/16

 

 

 

   

 

3/1/16

 

 

 

            

 

 

 

 

    

 

 

 

 

    

 

 

 

 

    

 

 

 

 

    

 

73,330

 

 

 

   $

 

135.85

 

 

 

    

 

1,620,593

 

 

 

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

 

3/2/16

 

 

 

   

 

3/1/16

 

 

 

                              

 

 

 

 

    

 

 

 

 

    

 

 

 

 

    

 

 

 

 

    

 

65,940

 

 

 

   $

 

135.85

 

 

 

    

 

1,457,274

 

 

 

(a)

These amounts represent cash awards that are possible under the company’s annual incentive plan. The value earned can be found in the Summary Compensation Table in the “Non-Equity Incentive Plan Awards” column.

(b)

These amounts relate to PRSUs granted in 2016. Each PRSU represents the right to receive a share of Common Stock upon release of the PRSU. The exact number of PRSUs that may be earned is determined based upon a performance metric set by the Compensation Committee, which for 2016 grants is the company’s return on invested capital over the three-year period from 2016-2018, and can range from 0 to 150 percent of the PRSUs originally awarded. Dividend equivalents accrue on PRSUs during the performance period and are subject to the same vesting conditions based upon performance. For PRSUs granted in 2016, the PRSUs are released to the participant following the three-year performance period, to the extent earned.

(c)

These amounts relate to shares of restricted stock that are released approximately four years after the grant date, subject to continuous service requirements.

(d)

The exercise price for stock options is the average of the high and low stock price of our Common Stock on the date of grant.

(e)

For PRSUs, the grant date fair value is calculated based upon the target payout amount.

 

General Dynamics 2017 Proxy Statement     51


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OPTION EXERCISES AND STOCK VESTED

The following table shows the stock options exercised by the named executive officers and restricted stock released to them during 2016. As explained in the Compensation Discussion and Analysis section, we require officers to retain shares of Common Stock issued to them as compensation, up to pre-determined levels, based on their position in General Dynamics. Once an ownership level is attained, the officer must maintain that minimum ownership level until he or she no longer serves as an officer of General Dynamics. The amounts reported in the Value Realized on Exercise and the Value Realized on Vesting columns in the table below are before-tax amounts.

 

OPTION EXERCISES AND STOCK VESTED IN FISCAL YEAR 2016  
    

 

OPTION AWARDS

 

           

STOCK AWARDS

 

 

  NAME

 

  

NUMBER OF
SHARES
ACQUIRED  ON
EXERCISE

 

    

VALUE REALIZED
ON EXERCISE

 

           

NUMBER OF
SHARES
ACQUIRED  ON
VESTING

 

    

VALUE REALIZED
ON VESTING

 

 

  Ms. Novakovic

 

    

 

                97,120

 

 

 

   $

 

6,815,882

 

 

 

       

 

                12,130

 

 

 

   $

 

1,643,130

 

 

 

  Mr. Aiken

 

    

 

11,945

 

 

 

   $

 

814,530

 

 

 

       

 

2,000

 

 

 

   $

 

270,920

 

 

 

  Mr. Casey

 

    

 

127,385

 

 

 

   $

 

12,172,583

 

 

 

       

 

5,390

 

 

 

   $

 

730,129

 

 

 

  Mr. Roualet

 

    

 

79,680

 

 

 

   $

 

6,977,199

 

 

 

       

 

3,640

 

 

 

   $

 

493,074

 

 

 

  Mr. Johnson

 

    

 

34,650

 

 

 

   $

 

1,230,430

 

 

 

             

 

3,520

 

 

 

   $

 

476,819

 

 

 

 

52     General Dynamics 2017 Proxy Statement


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OUTSTANDING EQUITY AWARDS

The following table provides information on outstanding stock option and stock awards held by the named executive officers as of December 31, 2016. The table shows the number of stock options that a named executive officer holds (both exercisable and unexercisable), the option exercise price and its expiration date. For stock awards, the table includes the number of shares of restricted stock that are still subject to the restriction period (i.e., have not vested). For restricted stock and PRSUs, the market value is based on the closing price of the company’s Common Stock on December 31, 2016.

 

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

NUMBER
OF SHARES

OF STOCK

OR UNITS
THAT
HAVE  NOT

VESTED (b)

    

MARKET VALUE
OF SHARES OF
STOCK OR

UNITS THAT
HAVE NOT
VESTED

     EQUITY INCENTIVE
PLAN AWARDS:
NUMBER OF
UNEARNED
SHARES, UNITS
OR OTHER RIGHTS
THAT HAVE NOT
VESTED (C)
     EQUITY INCENTIVE
PLAN AWARDS:
MARKET OR
PAYOUT VALUE OF
UNEARNED
SHARES, UNITS
OR OTHER RIGHTS  
THAT HAVE
NOT VESTED
 

  Ms. Novakovic

                 256,463      $ 44,280,902        52,394        $9,046,348    
            320,260        $135.85        3/1/2026              
            248,830        136.78        3/3/2025              
     466,380               112.40        3/4/2021              
     733,000               67.70        3/5/2020              
     39,500               67.90        5/1/2019              
     89,720               71.01        3/6/2019              
  Mr. Aiken                  31,878        $5,504,055        10,655      $ 1,839,692    
            67,400        $135.85        3/1/2026              
            48,830        136.78        3/3/2025              
     90,180               112.40        3/4/2021              
     28,890               67.70        3/5/2020              
     21,500               71.01        3/6/2019              

  Mr. Casey

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

  Mr. Johnson

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

Of the 320,260 stock options held by Ms. Novakovic with an exercise price of $135.85, 160,130 will become exercisable on March 2, 2018, and 160,130 will become exercisable on March 2, 2019. Of the 248,830 stock options held by Ms. Novakovic with an exercise price of $136.78, 124,415 became exercisable on March 4, 2017, and 124,415 will become exercisable on March 4, 2018.

Of the 67,400 stock options held by Mr. Aiken with an exercise price of $135.85, 33,700 will become exercisable on March 2, 2018, and 33,700 will become exercisable on March 2, 2019. Of the 48,830 stock options held by Mr. Aiken with an exercise price of $136.78, 24,415 became exercisable on March 4, 2017, and 24,415 will become exercisable on March 4, 2018.

Of the 74,320 stock options held by Mr. Casey with an exercise price of $135.85, 37,160 will become exercisable on March 2, 2018, and 37,160 will become exercisable on March 2, 2019. Of the 47,200 stock options held by Mr. Casey with an exercise price of $136.78, 23,600 became exercisable on March 4, 2017, and 23,600 will become exercisable on March 4, 2018.

Of the 73,330 stock options held by Mr. Roualet with an exercise price of $135.85, 36,665 will become exercisable on March 2, 2018, and 36,665 will become exercisable on March 2, 2019. Of the 47,200 stock options held by Mr. Roualet with an exercise price of $136.78, 23,600 became exercisable on March 4, 2017, and 23,600 will become exercisable on March 4, 2018.

Of the 65,940 stock options held by Mr. Johnson with an exercise price of $135.85, 32,970 will become exercisable on March 2, 2018, and 32,970 will become exercisable on March 2, 2019. Of the 44,840 stock options held by Mr. Johnson with an exercise price of $136.78, 22,420 will become exercisable on March 4, 2017, and 22,420 will become exercisable on March 4, 2018.

 

General Dynamics 2017 Proxy Statement     53


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(b)

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

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

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

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

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

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

 

(c)

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

For Ms. Novakovic, 25,945 PRSUs may release during the first quarter of 2018 and 26,449 PRSUs may release during the first quarter of 2019.

For Mr. Aiken, 5,087 PRSUs may release during the first quarter of 2018 and 5,568 PRSUs may release during the first quarter of 2019.

For Mr. Casey, 4,916 PRSUs may release during the first quarter of 2018 and 6,136 PRSUs may release during the first quarter of 2019.

For Mr. Roualet, 4,916 PRSUs may release during the first quarter of 2018 and 6,050 PRSUs may release during the first quarter of 2019.

For Mr. Johnson, 4,678 PRSUs may release during the first quarter of 2018 and 5,446 PRSUs may release during the first quarter of 2019.

 

54     General Dynamics 2017 Proxy Statement


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COMPANY-SPONSORED RETIREMENT PLANS

General Dynamics offers retirement programs through a combination of qualified and nonqualified Employee Retirement Income Security Act of 1974 plans. The named executive officers other than Mr. Johnson participate in each of the retirement programs indicated next to their name in the table below. Mr. Johnson is not eligible to participate in the company’s pension plans.

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

The table shows the actuarial present value as of December 31, 2016, of the pension benefits earned for each named executive officer over the course of the officer’s career. All retirement plans in the table operate in exactly the same manner for the named executive officers as for all other plan participants. A description of the material terms and conditions of each of these plans and agreements follows the table.

 

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

  Ms. Novakovic (b)

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

  Mr. Aiken (c)

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

  Mr. Casey (d)

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

  Mr. Roualet (e)

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

  Mr. Johnson

               
(a)

The Present Value of Accumulated Benefit under each plan has been calculated as of December 31, 2016, using the company’s FASB ASC Topic 715, Compensation – Retirement Benefits, assumptions as of year-end 2016. For a discussion of this calculation, see Note P to our consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on February 6, 2017.

(b)

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

(c)

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

(d)

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

(e)

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

Salaried Retirement Plan. The General Dynamics Salaried Retirement Plan is a tax-qualified defined-benefit pension plan that provides benefits as a life annuity to retired participants. A participant’s benefit under the Salaried Retirement Plan increases with each year of service. Participants who leave before they are eligible for early retirement are paid a substantially reduced amount. All the named executive officers, other than Mr. Johnson, participate in the Salaried Retirement Plan.

Earnings used to calculate pension benefits (pensionable earnings) include only a participant’s base salary and cash bonus and exclude all other items of income, including equity awards. Under the Internal Revenue Code, the Salaried Retirement Plan does not take into account any earnings over a predetermined compensation limit, which was $265,000 for 2016, and does not pay annual benefits beyond a predetermined benefit limit, which for 2016 was $210,000.

Beginning January 1, 2014, pension accruals stopped for employees at our corporate headquarters, including the participating named executive officers. The Salaried Retirement Plan pays a monthly benefit equal to the product of (1) the benefit percentage times (2) the final average monthly pay times (3) the years of credited service. For credited service earned prior to January 1, 2007, the benefit percentage equals 1.333 percent. For credited service earned on or after January 1, 2007, the benefit percentage equals 1.0 percent. Final average monthly pay is equal to the average of the participant’s highest 60 consecutive months of pensionable earnings out of the participant’s last 120 months of employment. For credited service earned prior to January 1, 2007, the final average monthly pay used in the benefit calculation froze as of December 31, 2010. The normal retirement age under the Salaried Retirement Plan is age 65. The Salaried Retirement Plan benefit is calculated as a single-life monthly annuity beginning at age 65 and has multiple actuarially equivalent payment forms from which participants can choose to take their benefit. A cash lump sum is only available if a participant’s accrued benefit is less than $5,000. None of the eligible named executive officers had reached the normal retirement age as of December 31, 2016.

 

General Dynamics 2017 Proxy Statement     55


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A participant with at least 10 years of service qualifies for early retirement at age 55. Ms. Novakovic and Messrs. Casey and Roualet qualified for early retirement as of December 31, 2016. A participant who is eligible for early retirement is entitled to receive the following:

 

  (1)

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

 

  (2)

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

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

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

NONQUALIFIED DEFINED-CONTRIBUTION DEFERRED COMPENSATION

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

 

NONQUALIFIED DEFERRED COMPENSATION FOR FISCAL YEAR 2016  
  NAME   

EXECUTIVE

  CONTRIBUTIONS   

IN LAST

FISCAL YEAR

    

REGISTRANT

CONTRIBUTIONS

IN LAST

  FISCAL YEAR (a)  

    

AGGREGATE

EARNINGS IN LAST
  FISCAL YEAR (b)  

    

AGGREGATE

 WITHDRAWALS/ 

DISTRIBUTIONS

  

AGGREGATE

BALANCE AT

LAST FISCAL

      YEAR  END (c)    

 

  Ms. Novakovic

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

  Mr. Aiken

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

  Mr. Casey

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

  Mr. Roualet

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

  Mr. Johnson

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

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

(b)

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

(c)

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

General Dynamics Corporation Supplemental Savings Plan. The Supplemental Savings Plan is a nonqualified defined-contribution plan that provides key employees, including the named executive officers, the opportunity to defer a portion of their salary without regard to the limitations imposed by the Internal Revenue Code on the 401(k) Plan and receive employer matching contributions on a portion of the contributions.

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

 

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

Anteon International Corporation Supplemental Retirement Savings Plan. Mr. Johnson has an account balance under the frozen Anteon International Corporation Supplemental Retirement Savings Plan. Under the plan, certain eligible employees of Anteon could defer receipt of all or a portion of their annual cash compensation prior to the plan being frozen in 2007. Upon his retirement or other separation from the company, Mr. Johnson may elect to receive the deferred compensation in either a lump sum or in annual installments over a period of up to ten years.

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

The following are estimated payments and benefits that would be provided to the named executive officers in the event of termination of the executive’s employment assuming a termination date of December 31, 2016. As discussed below, in 2016 we amended our severance protection agreements to eliminate excise tax gross-up provisions.

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

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

 

  (1)

the pension benefits described in the Pension Benefits for Fiscal Year 2016 table on page 55 of this Proxy Statement, for those named executive officers who are eligible to receive benefits; and

 

  (2)

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

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

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

In 2016, we amended any severance protections agreements that contained a provision for the reimbursement of taxes that may be imposed under the change in control excise tax provisions of Section 280G and Section 4999 of the Internal Revenue Code, including the severance protection agreement with Ms. Novakovic. The amended severance protection agreements provide that, in the event change in control benefits would trigger an excise tax under Section 280G and Section 4999, then the value of the benefits will be either (1) delivered in full or (2) subject to a cutback, whichever provides the executive officer the greatest benefit on an after-tax basis (with the excise tax being the responsibility of the executive to pay).

 

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POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL  
  SCENARIO AND PAYMENT TYPE     MS.  NOVAKOVIC         MR.  AIKEN            MR.  CASEY           MR.  ROUALET         MR.  JOHNSON    
  Termination For Cause or Voluntary Resignation                                      

Retiree Life Insurance Benefit (a)

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

Retiree Medical and Dental Benefit (b)

     67,740               81,899        130,024        —    

Stock Options

                                 —    

Restricted Stock

                                 —    

PRSUs

                                 —    

Total

   $ 501,068      $      $ 327,044      $ 374,178      $ —    
  Death (c)                                             

Life Insurance Benefit

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

Stock Options (d) (e)

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

Restricted Stock (d) (f)

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

PRSUs (d) (g)

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

Total

   $ 60,453,688      $ 11,575,192      $ 13,194,411      $ 11,762,967      $ 9,716,307    
  Retirement, Termination without Cause or Disability (c)                                      

Retiree Life Insurance Benefit (a)

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

Retiree Medical and Dental Benefit (b)

     67,740               81,899        130,024        —    

Stock Options (h) (e)

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

Restricted Stock (h) (f)

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

PRSUs (g) (h)

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

Total

   $ 51,057,863      $ 8,719,552      $ 10,391,004      $ 8,468,228      $ 6,845,229    
  Change in Control, with Qualifying Termination                                             

Annual Incentive (i)

   $ 4,850,000      $ 900,000      $ 1,020,000      $ 995,000      $ 850,000    

Severance (j)

     19,240,650        4,813,900        5,307,250        5,232,500        4,709,250    

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

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

Retiree life, medical and dental benefits (l)

     411,542               238,454        310,026        —    

Outplacement services (m)

     15,000        15,000        15,000        15,000        15,000    

Financial counseling and tax planning services (n)

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

Supplemental retirement benefit (o)

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

Stock Options (p)

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

Restricted Stock (p)

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

PRSUs (p)

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

Total

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

 

(a)

Assumes the executive elects the maximum of two-times-pay coverage at retirement. The estimated cost is calculated using the assumptions made for financial reporting purposes for valuing post-retirement life insurance at December 31, 2016. The life insurance benefit is further described on page 40 of this Proxy Statement under “Compensation Discussion and Analysis – Other Retiree Benefits.”

(b)

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

(c)

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

(d)

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

 

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

(e)

The present value of the unvested options reflected in the table represents the difference between the closing share price of $172.66 on December 31, 2016, and the option grant price, multiplied by the number of retained unvested options, and applying a discount factor to account for the option exercise dates. In the case of death, the present value of the unvested options for shares granted in 2015 and 2016 does not apply a discount factor to account for the option exercise dates due to immediate vesting.

(f)

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

(g)

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

(h)

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

(i)

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

(j)

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

(k)

Represents an additional 36 months of life, medical, dental and long-term disability benefits. These costs reflect an amount equal to three times the 2016 annual employer premiums for these benefits.

(l)

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

(m)

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

(n)

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

(o)

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

(p)

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

 

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The following Compensation Committee Report shall not be deemed incorporated by reference by any general statement incorporating by reference this Proxy Statement or any portion hereof into any filing under the Securities Act or the Exchange Act, and shall not otherwise be deemed filed under such acts.

COMPENSATION COMMITTEE REPORT

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

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

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

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

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

This report is submitted by the Compensation Committee.

William A. Osborn (Chair)

Mary T. Barra

James S. Crown

Rudy F. deLeon

William P. Fricks

Laura J. Schumacher

February 28, 2017

 

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SECURITY OWNERSHIP OF MANAGEMENT

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

 

   NAME OF BENEFICIAL OWNER

 

  

 

COMMON STOCK BENEFICIALLY OWNED  (a)

    

 

COMMON STOCK
EQUIVALENTS

BENEFICIALLY OWNED
(c)

 

    

TOTAL COMMON

STOCK AND

EQUIVALENTS

 

 
  

SHARES OWNED (b)

 

    

PERCENTAGE OF

CLASS

 

       

 

Directors and Nominees

           

 

Mary T. Barra

 

     28,746     

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

     28,746  

 

Nicholas D. Chabraja

 

     660,165     

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

     660,165  

 

James S. Crown (d)

 

     16,039,599     

 

 

 

 

5.3

 

 

 

     2,938        16,042,537  

 

Rudy F. deLeon

 

     3,253     

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

     3,253  

 

William P. Fricks

 

     56,085     

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

     56,085  

 

John M. Keane

 

     32,580     

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

     32,580  

 

Lester L. Lyles

 

     32,207     

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

     32,207  

 

Mark M. Malcolm

 

     1,120     

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

     1,120  

 

Phebe N. Novakovic

 

     1,725,998     

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

     1,725,998  

 

William A. Osborn

 

  

 

 

 

42,605

 

 

  

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

42,605

 

 

 

Catherine B. Reynolds

 

  

 

 

 

0

 

 

  

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

0

 

 

 

Laura J. Schumacher

 

  

 

 

 

9,113

 

 

  

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

9,113

 

 

 

Peter A. Wall

 

  

 

 

 

590

 

 

  

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

590

 

 

           

 

Other Named Executive Officers

 

 

 

Jason W. Aiken

 

  

 

 

 

205,057

 

 

  

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

205,057

 

 

 

John P. Casey

 

  

 

 

 

247,035

 

 

  

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

247,035

 

 

 

Mark C. Roualet

 

  

 

 

 

323,721

 

 

  

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

323,721

 

 

 

S. Daniel Johnson

 

  

 

 

 

87,418

 

 

  

 

 

 

 

    

 

 

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

87,418

 

 

           

 

Directors and Executive Officers as a Group

 

 

 

(24 individuals)

 

     20,623,691       

 

6.7

 

 

     2,938        20,626,629  
*

Less than 1 percent.

(a)

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

(b)

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

(c)

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

(d)

Based solely on information provided on behalf of Mr. Crown. Of the 16,042,537 shares of Common Stock shown as beneficially owned by Mr. Crown, (i) he disclaims beneficial ownership as to 15,945,148 shares, except to the extent of his beneficial interest in entities that own these shares; and (ii) a total of 504,800 shares held indirectly by entities in which Mr. Crown holds interests are pledged as collateral for bank borrowings (and for which Mr. Crown disclaims beneficial ownership).

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

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

 

    

 

COMMON STOCK BENEFICIALLY OWNED (a)

 

  NAME OF BENEFICIAL OWNER

 

  

SHARES OWNED

 

    

PERCENTAGE OF CLASS

 

 

Longview Asset Management, LLC (b)

222 North LaSalle Street

Chicago, Illinois 60601

 

    

 

33,387,811

 

 

 

    

 

11.0

 

%     

 

Evercore Trust Company, N.A. (c)

55 East 52nd Street, 36th Floor

New York, New York 10055

 

    

 

22,134,047

 

 

 

    

 

7.3

 

 

The Vanguard Group (d)

100 Vanguard Blvd.

Malvern, Pennsylvania 19355

 

    

 

18,905,640

 

 

 

    

 

6.2

 

 

Capital Research Global Investors (e)

333 South Hope Street

Los Angeles, California 90071

 

    

 

16,086,509

 

 

 

    

 

5.3

 

 

BlackRock, Inc. (f)

55 East 52nd Street

New York, New York 10055

 

    

 

15,509,208

 

 

 

    

 

5.1

 

 

(a)

Share information for The Vanguard Group, Capital Research Global Investors and BlackRock, Inc. is as of December 31, 2016.

(b)

This information is based solely on information provided by Longview Asset Management, LLC (Longview). Longview manages investment portfolios for clients who own Common Stock, which include accounts of clients related to Mr. Crown. Pursuant to its investment advisory agreements, Longview has voting and dispositive power over the Common Stock held in its clients’ accounts and is deemed to beneficially own 33,387,811 shares of Common Stock, including the 15,945,148 shares included in Mr. Crown’s beneficial ownership amount for which he disclaims beneficial ownership. Clients of Longview disclaim that they are a group for purposes of Section 13(d) of the Exchange Act, and disclaim that any one of them is the beneficial owner of shares owned by any other person or entity.

(c)

Evercore Trust Company, N.A. (Evercore) is the independent fiduciary and investment manager for the assets of the General Dynamics Stock Fund under the General Dynamics Corporation 401(k) Plan Master Trust. Evercore has shared voting power over the shares held in the General Dynamics Stock Fund. Share information for Evercore is based solely on information provided on behalf of Evercore.

(d)

This information is based solely on information contained in a Schedule 13G filed by The Vanguard Group with the SEC on February 13, 2017.

(e)

This information is based solely on information contained in a Schedule 13G filed by Capital Research Global Investors with the SEC on February 13, 2017.

(f)

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

EQUITY COMPENSATION PLAN INFORMATION

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

 

     (A)      (B)      (C)  

   PLAN CATEGORY

 

  

NUMBER OF SECURITIES TO  BE

ISSUED UPON THE EXERCISE

OF OUTSTANDING OPTIONS,

WARRANTS AND RIGHTS

 

    

WEIGHTED-AVERAGE

EXERCISE PRICE OF

OUTSTANDING OPTIONS,

WARRANTS AND RIGHTS

 

    

NUMBER OF SECURITIES REMAINING

AVAILABLE FOR FUTURE ISSUANCE

UNDER EQUITY COMPENSATION PLANS

(EXCLUDING SECURITIES REFLECTED IN

COLUMN (A))

 

 

 

Equity compensation plans approved by shareholders

 

  

 

 

 

 

10,934,621

 

 

 

 

  

 

 

 

 

$108.23

 

 

 

 

  

 

 

 

 

7,729,290

 

 

 

 

 

Equity compensation plans not approved by shareholders

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

Total

 

  

 

 

 

 

10,934,621

 

 

 

 

  

 

 

 

 

$108.23

 

 

 

 

  

 

 

 

 

7,729,290

 

 

 

 

 

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APPROVAL OF THE

GENERAL DYNAMICS CORPORATION AMENDED AND RESTATED

2012 EQUITY COMPENSATION PLAN

(PROPOSAL 5)

The General Dynamics Corporation 2012 Equity Compensation Plan (the 2012 Plan), provides the company with a critical means of attracting, retaining and motivating executives, key employees and non-employee directors through the issuance of equity compensation awards. Equity compensation awards provide participants with incentives to enhance the long-term growth and profitability of General Dynamics and align management’s interests with the interests of shareholders, consistent with the fundamental philosophy of our compensation program. This alignment with shareholders is further enhanced by our rigorous stock ownership guidelines for executives. We strongly believe that equity compensation awards under the 2012 Plan are an essential part of our executive compensation program, and that our executive compensation program, together with our emphasis on executive stock ownership, contributes to the superior performance of our company.

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