DEF 14A 1 d494330ddef14a.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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Check the appropriate box:

 

☐  Preliminary Proxy Statement

 

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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)

 

 

 

(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)

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Table of Contents

LOGO

March 22, 2018

Dear Fellow Shareholder:

We are pleased to send you the 2018 General Dynamics Proxy Statement. We remain committed to sound corporate governance and to a strong link between executive pay and company performance in our executive compensation program. The details of our governance and executive compensation programs are contained in this Proxy Statement and referenced documents.

Our shareholder engagement program continued in 2017 and remains a key focus for our company to ensure we are aware of your top priorities. Over the past year, we have spoken with shareholders about a number of critical topics, including our company strategy, executive compensation program and corporate governance practices. We continue to be encouraged by the positive shareholder feedback regarding our corporate governance and executive compensation programs. We value the input we receive from our shareholders.

Our Board continues to reflect a diverse and well-qualified group of business leaders, aerospace and defense industry experts and financial and strategic advisors. To ensure that our Board represents diverse skills and experiences, we have added several new directors through a thoughtful and deliberate process over the past several years. Ward Nye, who is nominated for election to the Board at the Annual Meeting, will bring extensive knowledge of manufacturing and industrial operations, as well as providing additional public company governance perspective to the Board.

Two of our longer-serving directors will be retiring from the Board in May pursuant to our Director Retirement Policy. We are grateful to Mr. Chabraja for his wise counsel and 24 years of service on the Board, including 13 years as our Chairman. Mr. Keane joined our Board in 2004 and we appreciate the sound guidance he has provided over the years.

Our company enjoyed outstanding operating performance in 2017. Revenue, operating earnings, operating margin, return on sales and earnings per share all increased from 2016. Free cash flow and return on invested capital, two key metrics for our executive compensation program, also increased, with free cash flow representing 119 percent of earnings from continuing operations. Our backlog increased nearly $1 billion from 2016, supporting our long-term growth expectations.

On behalf of the Board of Directors, I invite you to attend the 2018 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


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LOGO

 

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

Important Notice Regarding the Availability of Proxy Materials

for the Shareholder Meeting to Be Held on May 2, 2018

The Proxy Statement and 2017 Annual Report are Available at

www.generaldynamics.com/2018proxy

You are invited to our Annual Meeting of Shareholders of General Dynamics Corporation, a Delaware corporation, on Wednesday, May 2, 2018, at 9 a.m. local time at the General Dynamics Corporation headquarters located at 2941 Fairview Park Drive, Falls Church, Virginia. Proposals to be considered at the Annual Meeting include:

 

 

the election of 10 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 2018 (proposal 2);

 

 

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

 

 

a shareholder proposal as described in this Proxy Statement, provided it is presented properly at the meeting (proposal 4); 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 and 3.

 

The Board of Directors unanimously recommends that you vote AGAINST proposal 4.

 

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

 

The Board of Directors set the close of business on March 8, 2018, as the record date for determining the shareholders entitled to receive notice of, and to vote at, the Annual Meeting. It is important that your shares be represented and voted at the meeting. Please complete, sign and return a proxy card, or use the telephone or Internet voting systems.

A copy of the 2017 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 22, 2018

 

General Dynamics 2018 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

    5  

Election of the Board of Directors of the Company

    6  

Governance of the Company

    12  

Our Commitment to Strong Corporate Governance

    12  

Our Culture of Ethics

    12  

Board Leadership Structure

    13  

Director Independence

    14  

Board Meetings, Business Unit Visits and Attendance

    15  

Executive Sessions of the Board

    15  

Board Committees

    15  

Risk Oversight

    17  

Director Orientation and Continuing Education

    18  

Board and Committee Performance Self-Assessments

    18  

Communications with the Board

    18  

Related Person Transactions Policy

    19  

Director Compensation

    20  

Advisory Vote on the Selection of Independent Auditors

    22  

Audit Committee Report

    23  

Advisory Vote to Approve Executive Compensation

    24  

Compensation Discussion and Analysis

    25  

Executive Summary

    26  

Executive Compensation Goals and Objectives

    29  

The Compensation Process

    30  

Components of Executive Compensation and Alignment with Company Performance

    33  

Other Considerations

    39  

Executive Compensation

    42  

Compensation Committee Report

    53  

Security Ownership of Management

    54  

Security Ownership of Certain Beneficial Owners

    55  

Equity Compensation Plan Information

    55  

Shareholder Proposal – Special Shareholder Meetings

    56  

Information Regarding the Annual Meeting and Voting

    58  

Other Information

    61  

Appendix A –  Use of Non-GAAP Financial Measures

    A-1  

 

General Dynamics 2018 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 2, 2018, at 9 a.m. local time, or at any adjournment or postponement of the meeting. This Proxy Statement and the accompanying Notice of Annual Meeting of Shareholders and proxy card are being distributed on or about March 22, 2018, 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 6 through 11 for more    
information on the nominees

 

 

Proposal 2:
Advisory Vote on the Selection of Independent Auditors

 

   FOR    See page 22 for details

 

Proposal 3:
Advisory Vote to Approve Executive Compensation

 

   FOR    See page 24 for details

 

Proposal 4:

Shareholder Proposal – Special Shareholder Meetings

 

 

   AGAINST    See pages 56 and 57 for details

 

ANNUAL MEETING INFORMATION

 

 

Date

 

  

Wednesday, May 2, 2018

 

 

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 58.

 

General Dynamics 2018 Proxy Statement     1


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Proxy Summary

 

2018 BOARD OF DIRECTORS NOMINEES

 

DIRECTOR NOMINEES

 

 

 

 Number of 
Other
Public
Company
Boards

   Nominee

 

  Director  

  Since  

 

  Independent  

  

Primary Occupation

 

James S. Crown*

 

  1987

 

  Yes

 

  

President, Henry Crown and Company

 

 

       1

 

 

Rudy F. deLeon

 

 

 

2014

 

 

 

Yes

 

  

 

Senior Fellow, Center for American Progress

 

 

 

Lester L. Lyles

 

 

 

2003

 

 

 

Yes

 

  

 

Retired General, U.S. Air Force

 

 

 

       1

 

 

Mark M. Malcolm

 

 

 

2015

 

 

 

Yes

 

  

 

Former President and CEO, Tower International

 

 

 

       1

 

 

Phebe N. Novakovic

 

 

 

2012

 

    

 

Chairman and CEO, General Dynamics

 

 

 

       1

 

 

C. Howard Nye

 

 

 

 

 

 

Yes

 

  

 

Chairman, President and CEO, Martin Marietta Materials

 

 

 

       1**

 

 

William A. Osborn

 

 

 

2009

 

 

 

Yes

 

  

 

Former Chairman and CEO, Northern Trust Corporation

 

 

 

       2

 

 

Catherine B. Reynolds

 

 

 

2017

 

 

 

Yes

 

  

 

Chairman and CEO, EduCap

 

 

 

       1

 

 

Laura J. Schumacher

 

 

 

2014

 

 

 

Yes

 

  

 

EVP, External Affairs and General Counsel, AbbVie

 

 

 

Peter A. Wall

 

 

 

2016

 

 

 

Yes

 

  

 

Retired General, British Army

 

   
*

Lead Director

**

Mr. Nye also currently serves on the Board of Directors of Cree, Inc. He has announced that he will not be standing for re-election to that board at the 2018 annual meeting of Cree shareholders.

 

Balanced Director Tenure

(Current Directors)

  

Strong Director Engagement

(2017 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.

 

   

 

Years on Board % = Percentage of meetings attended by directors

 

2     General Dynamics 2018 Proxy Statement


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Proxy Summary

 


 

Highlights of our governance practices include:

 

    

Governance Practice

       For more Information  
 

LOGO

 

 

   Market-leading stock ownership requirements for our executive officers require them to hold shares of our Common Stock worth eight to 15 times base salary. Director stock ownership guidelines provide that our directors should hold shares of our Common Stock having a value of at least eight times the annual retainer.

 

             P. 40
 

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

 

      P. 40
 

LOGO               

 

 

   Nine of our 10 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. 14
 

   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. 13
 

   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. 60
 

   Our directors attended on average more than 98 percent of board and committee meetings in 2017 with no director attending less than 85 percent.

 

    P. 15
 

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

 

    P. 15
 

   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.

 

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

 

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

 

     

P. 19

 

P. 18

 

P. 17

 

LOGO

 

 

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

   

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

 

 

   We discuss Corporate Responsibility on our website and in our Corporate Sustainability Report, including our ethos, our commitment to our stakeholders and communities and our commitment to diversity and inclusion.

 

    www.gd.com/Responsibility
 

   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**

LOGO

 

 

 

 

   Our shareholders have the ability to nominate director candidates and have those nominees included in our proxy statement, subject to meeting the requirements in our Bylaws, a shareholder right known as proxy access.

 

   

 

Bylaws*

 

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

 

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

 

     

Corporate Governance Guidelines*

 

Bylaws*

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

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

 

 

General Dynamics 2018 Proxy Statement     3


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Proxy Summary

 

SHAREHOLDER ENGAGEMENT

Our Board is Committed to Robust Shareholder Engagement.  Our shareholder engagement program allows us to discuss corporate governance, executive compensation and corporate responsibility matters with a significant number of shareholders, as well as other items of interest to our shareholders. As part of our ongoing program, in 2017 we reached out to holders representing approximately 65 percent of our outstanding common stock. At the Board level, an ad hoc group of directors, anchored by the chairman and the independent Lead Director, is in place to liaise with significant shareholders. Our Board remains committed to soliciting and understanding shareholder views and responding as appropriate.

OUR SHAREHOLDER ENGAGEMENT PROGRAM

 

 

LOGO

 

 

KEY THEMES DISCUSSED WITH SHAREHOLDERS IN 2017

 

 

Board Refreshment and Composition

 

 

 

Shareholders expressed support for recent additions to the Board, as well as the experience and skill set of incumbent directors

 

 

Risk Management

 

 

 

Shareholders reinforced the importance of a strong and effective risk management program overseen by the Board, including risks associated with cyber security threats, human capital management and key programs

 

 

Executive Compensation

 

 

 

Shareholders expressed strong overall support for our executive compensation program and link between pay and performance

 

 

Corporate Responsibility

 

 

 

Shareholders discussed their priorities in the evolving area of corporate responsibility, including consideration of climate change risks, health and safety matters and employee resources

 

 

4     General Dynamics 2018 Proxy Statement


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Proxy Summary

 

PERFORMANCE AND EXECUTIVE COMPENSATION HIGHLIGHTS

Delivering Long-Term Shareholder Value.  In 2017, each of our businesses contributed to strong operating performance through exceptional execution and a focus on delivering shareholder value. We deployed capital prudently through continued investment in the future growth areas of our company and the acquisition of several accretive businesses. We also used $2.9 billion of cash in 2017 for share repurchases and dividends. In addition to our strong operating performance, we added several significant contracts to backlog, resulting in a robust backlog that supports our long-term growth expectations.

 

 

2017 FINANCIAL HIGHLIGHTS*

 

 

  Earnings from Continuing Operations

 

 

 

  $2.9 billion

 

 

 

Increased 8.7% over 2016

 

 

  Operating Margin

 

 

 

  13.5%

 

 

 

Increased in all four business groups

 

 

  Free Cash Flow from Operations**

 

 

 

  $3.5 billion

 

 

 

Significantly exceeded company expectations

 

 

  Return on Invested Capital**

 

 

 

  16.8%

 

 

 

50 basis points higher than 2016

 

 

  Quarterly Dividends

 

 

 

  $0.84 per share 

 

 

 

20th consecutive year with a dividend increase

 

 

  Order Backlog

 

 

 

  $63.2 billion

 

 

 

Increased nearly $1 billion

 

  * We adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, on January 1, 2017. Prior-period information for 2015 and 2016 has been restated and any comparisons shown in this proxy statement are to the comparable information.  
  ** See Appendix A 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 96% 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.

 

General Dynamics 2018 Proxy Statement     5


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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 skills 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

 

6     General Dynamics 2018 Proxy Statement


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 to ensure the Board maintains an appropriate mix. These skills are reflected in the following table. Each nominee also 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

 

 

James S. Crown

 

     

 

  

 

     

 

  

 

Rudy F. deLeon

 

  

 

  

 

     

 

  

 

  

 

Lester L. Lyles

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Mark M. Malcolm

 

     

 

  

 

     

 

  

 

 

Phebe N. Novakovic

 

 

  

 

  

 

  

 

  

 

  

 

  

 

 

C. Howard Nye

 

 

     

 

  

 

  

 

  

 

  

 

 

William A. Osborn

 

     

 

  

 

  

 

  

 

  

 

Catherine B. Reynolds

 

     

 

  

 

  

 

  

 

  

 

Laura J. Schumacher

 

     

 

  

 

  

 

  

 

  

 

Peter A. Wall

 

  

 

        

 

  

 

  

Why is this important for General Dynamics?

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

in-depth
 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

 

General Dynamics 2018 Proxy Statement     7


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Election of Directors

 

2018 Director Nominees.  The following 10 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.

 

     
JAMES S. CROWN  

     Lead Director since May 2010

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

     Mr. Crown currently serves as a director of J.P. Morgan Chase & Co.

 

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

 

 

 

LOGO

 

 

LEAD DIRECTOR

COMMITTEES:

Audit

Compensation

Nominating and Corporate Governance

     

DIRECTOR SINCE MAY 1987

AGE: 64

 
 
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: 65

 

 

8     General Dynamics 2018 Proxy Statement


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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: 71

 
     
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: 64

 
     
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: 60

 

 

General Dynamics 2018 Proxy Statement     9


Table of Contents

Election of Directors

 

     
C. HOWARD NYE  

    Chairman of Martin Marietta Materials, Inc. since 2014 and President and CEO since 2010; President and Chief Operating Officer, 2006 to 2009

    Executive Vice President of Hanson Aggregates North America, a producer of aggregates for the construction industry, 2003 to 2006

    Mr. Nye currently serves as Chairman of the Martin Marietta Materials, Inc. Board of Directors and as a Director of Cree, Inc. He has announced that he will not be standing for re-election to the Cree board at its 2018 annual meeting of shareholders.

 

Key Attributes/Skills/Expertise: Mr. Nye’s positions with Martin Marietta, a leading supplier of aggregates and heavy building materials, position him well to advise our businesses on a range of matters in the areas of engineering and manufacturing. Mr. Nye also brings extensive risk management experience, particularly in the area of employee safety. His strong business background and service on public company boards provide him with a deep understanding of the challenges and risks facing large public companies and their boards.

 

Mr. Nye was identified as a director nominee by the chairman and chief executive officer.

 

 

LOGO

 

COMMITTEES:

N/A

     

NEW DIRECTOR NOMINEE

AGE: 55

 
     
WILLIAM A. OSBORN  

     Chairman of Northern Trust Corporation, 1995 to 2009; Chief Executive Officer of Northern Trust Corporation, 1995 through 2007 and President of Northern Trust Corporation and The Northern Trust Company, 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: 70

 
     
CATHERINE B. REYNOLDS  

    Chairman and Chief Executive Officer of EduCap, Inc. since 1988

    Chairman and Chief Executive Officer of The Catherine B. Reynolds Foundation since 2000

    Founder and Chairman of Servus Financial Corporation, 1993 to 2000

    Ms. Reynolds currently serves as a director of Lindblad Expeditions Holdings, Inc.

 

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

 

LOGO

 

COMMITTEES:

AUDIT

     

DIRECTOR SINCE MAY 2017

AGE: 60

 

 

10     General Dynamics 2018 Proxy Statement


Table of Contents

Election of Directors

 

     
LAURA J. SCHUMACHER  

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

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

 

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

 

LOGO

 

COMMITTEES:

Compensation

Nominating and Corporate Governance

     

DIRECTOR SINCE FEBRUARY 2014

AGE: 54

 

 
     
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.

 

LOGO

 

COMMITTEES:

Finance and Benefit Plans

Nominating and Corporate Governance

     

DIRECTOR SINCE AUGUST 2016

AGE: 62

 
   

 

Director Retirements.  The Board is grateful to Mr. Chabraja for his wise counsel and 24 years of service on the Board, including 13 years as our Chairman. Mr. Keane joined our Board in 2004 and we appreciate the sound guidance he has provided over the years.

 

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.

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.

 

General Dynamics 2018 Proxy Statement     11


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.

 

12     General Dynamics 2018 Proxy Statement


Table of Contents

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.

 

 

General Dynamics 2018 Proxy Statement     13


Table of Contents

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. Reynolds, Ms. Schumacher and Messrs. Crown, deLeon, Keane, Lyles, Malcolm, Nye, Osborn and Wall each qualifies as an independent director. 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 19 of this Proxy Statement and found them to be immaterial. For each of the relationships that the Board considered for 2015, 2016 and 2017, the payments made or received by General Dynamics, and the charitable contributions made by General Dynamics, fell below the thresholds in our Director Independence Guidelines (the greater of $1 million or 2 percent of the consolidated gross revenues of the other company). Listed below are the relationships that existed in 2017 that were considered by the Board as part of their independence determinations.

 

 

Ms. Reynolds and Messrs. Crown, deLeon, 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 2017 payments fell below the greater of $1 million or 2 percent of the consolidated gross revenues of the organizations. None of the 2017 charitable contributions to these organizations exceeded $105,000.

 

 

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

 

14     General Dynamics 2018 Proxy Statement


Table of Contents

Governance of the Company

 

BOARD MEETINGS, BUSINESS UNIT VISITS AND ATTENDANCE

During 2017, the Board of Directors held nine meetings. Each of our directors attended at least 85 percent of the meetings of the Board and committees on which they served in 2017, with nine of our current 11 directors attending 100 percent of the Board and committee meetings. This included a multi-day meeting in February to review our 2017 operating plan, including the operating plans of each of our business groups. In October 2017, the Board visited facilities of our General Dynamics European Land Systems and Jet Aviation business units and met with those business units’ management teams. We encourage directors to attend each annual meeting of shareholders, and in 2017 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 2017. Currently, three of the four Board committees are composed entirely of independent, non-management directors, including those committees that are required by the rules of the New York Stock Exchange to be composed solely of independent directors. Each of the Board committees has a written charter. Copies of these charters are available on our website at www.gd.com/CorporateGovernance, or in print upon request.

Committee Members.  Listed below are the members of each of the four standing committees as of March 8, 2018.

 

    

AUDIT

COMMITTEE

 

COMPENSATION

COMMITTEE

 

FINANCE AND

BENEFIT PLANS

COMMITTEE

 

NOMINATING AND  

CORPORATE  

GOVERNANCE  

COMMITTEE   

 

  Nicholas D. Chabraja

 

     

 

LOGO

 

 

 

  James S. Crown LOGO

 

 

 

 

LOGO

 

  LOGO

 

    LOGO

 

 

  Rudy F. deLeon

 

   

 

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

 

 

 

  Catherine B. Reynolds  LOGO

 

 

 

LOGO

 

     

 

  Laura J. Schumacher

 

   

 

LOGO

 

   

 

LOGO

 

 

  Peter A. Wall

 

          LOGO

 

  LOGO

 

 

LOGO  Lead Director

   LOGO  Chairperson    LOGO  Member    LOGO  Audit Committee Financial Expert

 

General Dynamics 2018 Proxy Statement     15


Table of Contents

Governance of the Company

 

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

 

 

  AUDIT COMMITTEE

 

  

 

NUMBER OF MEETINGS IN 2017: 9        

 

   

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 consolidated financial statements with management and the independent auditor

 

   

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

 

   

Evaluates the scope of the internal audit plan

 

   

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

 

 

  COMPENSATION COMMITTEE

 

  

 

NUMBER OF MEETINGS IN 2017: 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 2017: 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 2017: 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

 

16     General Dynamics 2018 Proxy Statement


Table of Contents

Governance of the Company

 

RISK OVERSIGHT

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

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

 

 

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

 

 

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

 

 

Senior management is responsible 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. Topics discussed in 2017 include our cyber security risk management program, human capital management and program-specific matters.

 

 

External advisors provide independent advice on specific risks and review and comment on risk management processes and procedures as necessary.

The Role of the Board of Directors in Risk Management.  The full Board reviews and approves annually a corporate policy addressing the delegation of authority and assignment of management responsibility to ensure that the responsibilities and authority delegated to senior management are appropriate from an operational and risk-management perspective. In addition, the Board assesses the company’s strategic and operational risks throughout the year, with particular focus on these risks at an annual multi-day Board meeting in early February. At this meeting, senior management reports on opportunities and risks in the markets in which the company conducts business. Additionally, each business unit president and each business group executive vice president presents the unit’s and group’s respective operating plan and strategic initiatives for the year, including notable business opportunities and risks. The Board reviews, adjusts where appropriate, and approves the business unit and business group goals and adopts our company operating plan for the year. These plans and related risks are monitored throughout the year as part of periodic financial and performance reports given to the Board by the chief financial officer and executive vice presidents of each business group. The Board also receives briefings from senior management concerning a variety of matters and related risks to the company, including defense budget and acquisition matters and specific customer or program developments.

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

 

 

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

 

General Dynamics 2018 Proxy Statement     17


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Governance of the Company

 

 

 

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

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

Succession Planning and Risk Management.  The Board considers senior management succession planning a core part of the company’s risk management program. At least annually, the Board reviews with the chief executive officer succession planning for senior leadership positions, and the timing and development required to ensure continuity of leadership over the short 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 business unit management teams. Each of the directors joining our Board over the past three years has conducted at least one of these business unit visits.

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 multi-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 reviewed with 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.

 

18     General Dynamics 2018 Proxy Statement


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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 2017 totaling approximately $1.2 million. In accordance with the related person transactions policy, the Nominating and Corporate Governance Committee reviewed and approved the services for 2017 and approved the continuation of the services in 2018.

 

 

Henry Crown and Company and one of its affiliated entities made payments of approximately $453,000 to the company in 2017 for the purchase of business jet spare parts and aircraft maintenance from our subsidiary, Gulfstream Aerospace Corporation. Additionally, these companies purchased aircraft services from our subsidiary, Jet Aviation. The amount of payments made to Jet Aviation in 2017 was approximately $269,000. 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.

 

 

An affiliated entity of Mr. Chabraja made payments of approximately $189,000 to the company in 2017 for the purchase of business jet spare parts and aircraft maintenance from our subsidiary, Gulfstream Aerospace Corporation. These purchases were in the ordinary course of business and on arm’s-length terms.

 

General Dynamics 2018 Proxy Statement     19


Table of Contents

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.

2017 Compensation.  Director compensation for 2017 was:

 

 

  COMPENSATION ELEMENT

 

  

 

AMOUNT

 

 

Annual Retainer

  

 

$85,000

 

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 $150,000 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 2017 and at its request, management engaged Aon to conduct a director compensation survey. Aon provided director compensation data for the peer group that we used to benchmark executive compensation. 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 was the first change to cash compensation since 2011 and the first change to equity compensation since 2015.

Non-management directors have the option of receiving all or part of their annual retainers in the form of Common Stock. The annual retainer, additional committee chair retainer (if any) and attendance fees paid to each director during 2017 are reflected in the Fees Earned or Paid in Cash column of the Director Compensation for Fiscal Year 2017 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 2017 table.

2018 Compensation.  In early 2018, as part of its annual review of director compensation, the Compensation Committee requested that management update its director compensation analysis. Management again engaged Aon 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. This information showed that the directors’ pay program was approximate to the median of the peer group. Based on this review, the committee recommended no changes to director compensation.

DIRECTOR STOCK OWNERSHIP GUIDELINES

The Board of Directors believes that each director should develop a meaningful ownership position in General Dynamics. Therefore, the Board of Directors adopted stock ownership guidelines 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 eight times the annual retainer. Non-management directors are subject to the same holding requirements as our named executive officers and are expected to retain shares upon the vesting of restricted stock or exercise of options until the ownership guidelines are met. Management directors are subject to the ownership requirements discussed under “Compensation Discussion and Analysis – Stock Ownership Guidelines.”

 

20     General Dynamics 2018 Proxy Statement


Table of Contents

Governance of the Company

 

DIRECTOR COMPENSATION TABLE

The table below provides total compensation for 2017 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 2017  
  NAME    FEES EARNED
OR PAID IN CASH (a)
    

STOCK

AWARDS (b)

     OPTION
AWARDS (C)
     ALL OTHER
COMPENSATION (d)
     TOTAL  

 

Mary T. Barra (e)

 

  

 

$

 

 

48,899

 

 

 

 

  

 

$

 

 

        74,767

 

 

 

 

  

 

$

 

 

        75,092

 

 

 

 

  

 

$

 

 

0

 

 

 

 

  

 

$

 

 

198,758

 

 

 

 

 

Nicholas D. Chabraja

 

  

 

$

 

 

        530,000

 

 

 

 

  

 

$

 

 

74,767

 

 

 

 

  

 

$

 

 

75,092

 

 

 

 

  

 

$

 

 

        4,080

 

 

 

 

  

 

$

 

 

        683,939

 

 

 

 

 

James S. Crown

 

  

 

$

 

 

189,000

 

 

 

 

  

 

$

 

 

74,767

 

 

 

 

  

 

$

 

 

75,092

 

 

 

 

  

 

$

 

 

2,140

 

 

 

 

  

 

$

 

 

340,999

 

 

 

 

 

Rudy F. deLeon

 

  

 

$

 

 

164,195

 

 

 

 

  

 

$

 

 

74,767

 

 

 

 

  

 

$

 

 

75,092

 

 

 

 

  

 

$

 

 

2,140

 

 

 

 

  

 

$

 

 

316,194

 

 

 

 

 

William P. Fricks (f)

 

  

 

$

 

 

68,399

 

 

 

 

  

 

$

 

 

74,767

 

 

 

 

  

 

$

 

 

75,092

 

 

 

 

  

 

$

 

 

60,000

 

 

 

 

  

 

$

 

 

278,258

 

 

 

 

 

John M. Keane

 

  

 

$

 

 

146,000

 

 

 

 

  

 

$

 

 

74,767

 

 

 

 

  

 

$

 

 

75,092

 

 

 

 

  

 

$

 

 

4,080

 

 

 

 

  

 

$

 

 

299,939

 

 

 

 

 

Lester L. Lyles

 

  

 

$

 

 

155,000

 

 

 

 

  

 

$

 

 

74,767

 

 

 

 

  

 

$

 

 

75,092

 

 

 

 

  

 

$

 

 

4,080

 

 

 

 

  

 

$

 

 

308,939

 

 

 

 

 

Mark M. Malcolm

 

  

 

$

 

 

164,195

 

 

 

 

  

 

$

 

 

74,767

 

 

 

 

  

 

$

 

 

75,092

 

 

 

 

  

 

$

 

 

2,140

 

 

 

 

  

 

$

 

 

316,194

 

 

 

 

 

James N. Mattis (g)

 

  

 

$

 

 

0

 

 

 

 

  

 

$

 

 

0

 

 

 

 

  

 

$

 

 

0

 

 

 

 

  

 

$

 

 

0

 

 

 

 

  

 

$

 

 

0

 

 

 

 

 

William A. Osborn

 

  

 

$

 

 

166,000

 

 

 

 

  

 

$

 

 

74,767

 

 

 

 

  

 

$

 

 

75,092

 

 

 

 

  

 

$

 

 

4,080

 

 

 

 

  

 

$

 

 

319,939

 

 

 

 

 

Catherine B. Reynolds (h)

 

  

 

$

 

 

91,663

 

 

 

 

  

 

$

 

 

49,590

 

 

 

 

  

 

$

 

 

50,318

 

 

 

 

  

 

$

 

 

2,140

 

 

 

 

  

 

$

 

 

193,711

 

 

 

 

 

Laura J. Schumacher

 

  

 

$

 

 

150,000

 

 

 

 

  

 

$

 

 

74,767

 

 

 

 

  

 

$

 

 

75,092

 

 

 

 

  

 

$

 

 

2,140

 

 

 

 

  

 

$

 

 

301,999

 

 

 

 

 

Peter A. Wall

 

  

 

$

 

 

144,000

 

 

 

 

  

 

$

 

 

74,767

 

 

 

 

  

 

$

 

 

75,092

 

 

 

 

  

 

$

 

 

2,140

 

 

 

 

  

 

$

 

 

295,999

 

 

 

 

 

(a)

Ms. Reynolds, Ms. Schumacher and Messrs. Fricks, Keane and Wall elected to receive 100 percent of their annual retainer in Common Stock. Ms. Barra and Messrs. deLeon and Lyles elected to receive 50 percent of their annual retainer in Common Stock. Based upon these elections and each director’s length of service for the year, they received the following number of shares of Common Stock with the associated approximate grant date fair value: Ms. Barra — 83 shares ($16,000); Mr. deLeon — 213 shares ($42,500); Mr. Fricks — 167 shares ($32,000); Mr. Keane — 430 shares ($85,000); Mr. Lyles — 213 shares ($42,500); Ms. Reynolds — 264 shares ($52,000); Ms. Schumacher — 430 shares ($85,000); and Mr. Wall — 301 shares ($60,000).

(b)

The amounts reported in the Stock Awards column reflect the aggregate grant date fair value computed in accordance with ASC Topic 718, Compensation — Stock Compensation. Assumptions used in the calculation of these amounts are included in Note P to our audited financial statements for the fiscal year ended December 31, 2017, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 12, 2018. Restricted stock awards outstanding as of December 31, 2017, for each director were as follows: 1,678 for Ms. Barra and Mr. Fricks; 1,970 for Messrs. Chabraja, Crown, Keane, Lyles, Osborn and Ms. Schumacher; 1,430 for Mr. deLeon; 1,120 for Mr. Malcolm; 590 for Mr. Wall; 245 for Ms. Reynolds; and 0 for Mr. Mattis.

(c)

The amounts reported in the Option Awards column reflect the aggregate grant date fair value computed in accordance with ASC Topic 718. Assumptions used in the calculation of these amounts are included in Note P to our audited financial statements for the fiscal year ended December 31, 2017, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 12, 2018. Option awards outstanding as of December 31, 2017, for each director were as follows: 3,780 for Ms. Barra; 23,940 for Messrs. Chabraja, Crown and Osborn; 8,180 for Mr. Fricks; 29,150 for Messrs. Keane and Lyles; 12,460 for Ms. Schumacher; 8,060 for Mr. deLeon; 6,700 for Mr. Malcolm; 3,590 for Mr. Wall; 1,470 for Ms. Reynolds; and 0 for Mr. Mattis.

(d)

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

(e)

Ms. Barra completed her term on the Board and did not stand for re-election at the May 2017 annual meeting.

(f)

Mr. Fricks completed his term on the Board and did not stand for re-election at the May 2017 annual meeting. The amount reported in the All Other Compensation column represents work performed for the company following Mr. Fricks’s retirement from the Board.

(g)

Mr. Mattis departed the Board in January 2017 and received no payments, equity awards or other compensation from the company in 2017.

(h)

Ms. Reynolds joined the Board in May 2017.

 

General Dynamics 2018 Proxy Statement     21


Table of Contents

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 2018. KPMG has been retained as the company’s independent auditors since 2002. In order to assure continuing auditor independence, the Audit Committee periodically considers whether there should be a regular rotation of the independent audit firm. The members of the Audit Committee believe that the continued retention of KPMG to serve as the company’s independent auditors is in the best interests of the company and its shareholders.

Your Board of Directors is submitting this selection of KPMG as the independent auditors for 2018 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 2017 and 2016, and fees billed for other services rendered by KPMG during those years.

 

      2017      2016  

Audit Fees (a)

 

   $

 

19,967,000

 

 

 

   $

 

18,333,000

 

 

 

Audit-related Fees (b)

 

    

 

1,882,000

 

 

 

    

 

4,731,000

 

 

 

Tax Fees (c)

 

    

 

1,226,000

 

 

 

    

 

1,063,000

 

 

 

All Other Fees (d)

 

    

 

5,000

 

 

 

    

 

51,000

 

 

 

 

Total Fees

   $ 23,080,000      $ 24,178,000  

 

  (a)

Audit fees are fees for professional services performed by KPMG for the audit of our consolidated annual financial statements (including the audit of internal control over financial reporting) and review of our consolidated quarterly financial statements. These fees also include fees for services that are normally provided in connection with statutory and regulatory filings.

  (b)

Audit-related fees are fees for assurance and related services performed by KPMG that are reasonably related to the performance of the audit or review of our consolidated financial statements. These fees consist primarily of fees for professional services for benefit plan audits and evaluation of new accounting standards.

  (c)

Tax fees are fees for professional services performed by KPMG for tax compliance, tax advice and tax planning. These fees consist primarily of fees for tax return preparation and review, tax compliance services for expatriates and advice regarding tax implications of certain transactions.

  (d)

All other fees are primarily related to professional services performed by KPMG for information technology contract compliance, assessment and advisory services.

Auditor Independence.  The Audit Committee has considered whether the services rendered by KPMG are compatible with maintaining KPMG’s independence. Representatives of KPMG are expected to attend the Annual Meeting, may make a statement if they desire to do so and will be available to respond to questions.

Policy on Pre-Approval.  The company and the Audit Committee are committed to ensuring the independence of the independent 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.

 

22     General Dynamics 2018 Proxy Statement


Table of Contents

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: Mark M. Malcolm (Chair), James S. Crown, Lester L. Lyles, William A. Osborn and Catherine B. Reynolds.

None of these directors is an officer or employee of General Dynamics. They all meet the independence requirements of the New York Stock Exchange and Rule 10A-3 of the Exchange Act. The Board has determined that Mr. Malcolm, Mr. Osborn and Ms. Reynolds each qualifies as an “audit committee financial expert” as defined by the Securities and Exchange Commission 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 nine meetings in 2017.

The Audit Committee has reviewed and discussed with management and the company’s independent auditors for 2017, KPMG LLP, an independent registered public accounting firm, the company’s audited consolidated financial statements as of December 31, 2017, and for the year ended on that date. Management is responsible for the company’s financial reporting process, including maintaining a system of internal controls, and for preparing the consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP). KPMG is responsible for auditing those consolidated financial statements and for expressing an opinion on the conformity of the consolidated financial statements with GAAP. In addition, in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, the Audit Committee reviewed and discussed with management, the company’s internal auditors and KPMG, management’s report on the operating effectiveness of internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act and KPMG’s attestation report on the company’s internal control over financial reporting.

The Audit Committee has discussed with KPMG the matters required under applicable professional auditing standards and regulations adopted by the Public Company Accounting Oversight Board. In addition, the Audit Committee has received and reviewed the written disclosures and letter from KPMG required by applicable requirements of the Public Company Accounting Oversight Board regarding KPMG’s communications with the Audit Committee concerning independence, and has discussed with KPMG its independence, including the compatibility 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, 2017, for filing with the Securities and Exchange Commission.

This report is submitted by the Audit Committee.

 

      Mark M. Malcolm (Chair)

      James S. Crown

      Lester L. Lyles

  

William A. Osborn

Catherine B. Reynolds

February 10, 2018

 

General Dynamics 2018 Proxy Statement     23


Table of Contents

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.

 

24     General Dynamics 2018 Proxy Statement


Table of Contents

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

    26  

Business Overview

    26  

Company Performance Highlights

    27  

Executive Compensation Goals and Objectives

    29  

Leading Compensation Governance Practices

    29  

The Compensation Process

    30  

Setting Compensation Levels and Evaluating Performance

    30  

Peer Group and Benchmarking to the Market

    32  

Components of Executive Compensation and Alignment with Company Performance

    33  

Annual Base Salary

    34  

Annual Incentive Compensation

    34  

NEO Performance Metrics and Targets

    34  

Long-Term Incentive Compensation

    35  

Benefits and Perquisites

    37  

Other Considerations

    39  

2017 Shareholder Engagement

    39  

Potential Severance and Change in Control Benefits

    39  

Role of the Independent Compensation Consultant

    40  

Anti-Hedging and Anti-Pledging Policies

    40  

Stock Ownership Guidelines and Holding Requirements

    40  

Clawback Policy

    41  

Compensation and Risk Management

    41  

Tax Considerations

    41  

 

General Dynamics 2018 Proxy Statement     25


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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 2017 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 and manage our ten business units through four business groups as shown below:

 

 

GENERAL DYNAMICS

 

 

Aerospace

 

  

 

Combat Systems

 

 

•  Gulfstream Aerospace

•  Jet Aviation

  

•  European Land Systems

•  Land Systems

•  Ordnance and Tactical Systems

 

 

Information Systems and Technology

 

  

 

Marine Systems

 

 

•  Information Technology

•  Mission Systems

  

•  Bath Iron Works

•  Electric Boat

•  NASSCO

 

 

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COMPANY PERFORMANCE HIGHLIGHTS

Shareholder Value.  In 2017, the company’s commitment to operational excellence delivered another year of value creation for shareholders. The success of our approach under Ms. Novakovic’s leadership is evident in our strong operating results. We balance our focus on operations with a thoughtful capital deployment strategy. As stewards of your capital, in 2017 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 20th consecutive year and tactical share repurchases.

 

Dividend History    

 

 

LOGO

 

 

Our management team strongly believes in returning capital to shareholders. In addition to tactical share repurchases over the course of 2017, General Dynamics raised its quarterly dividend for the 20th consecutive year.

 

 

Financial Performance Summary.  In 2017, the company demonstrated the successful results of a continued focus on operational excellence, resulting in positive operating leverage, strong earnings and record-setting margin. The following charts show key performance metrics over relevant periods. On January 1, 2017, we adopted a new revenue recognition standard, Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. Prior-period information for 2015 and 2016 has been restated and any comparisons shown in this proxy statement are to the comparable information. In the fifth year under Ms. Novakovic’s leadership, the company 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.

 

 

Earnings from Continuing

Operations

 

LOGO

 

   

 

 

 

2017 marked another strong year for operating earnings. Our efficient conversion of backlog translated to higher than expected earnings growth over 2016 and exceeded the target amount set in the operating plan.

 

 

 

 

 

 

 

Operating Margin

 

LOGO

 

   

 

 

 

Management’s focus on profitability propelled operating margin to one of the highest levels in company history in 2017. Continued focus across the business on continuous improvement and cost cutting aided in providing one of the highest operating margins in the industry.

 

 

 

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Free Cash Flow from

Operations

 

LOGO

 

  

 

 

Free cash flow from operations increased in 2017 with contributions across our business groups. Free cash flow was at the highest level since 2015 and exceeded the amount set forth in the operating plan by almost $1 billion.

 

 

 

Return on Invested Capital     

 

 

LOGO

 

  

 

We focus on Return on Invested Capital (ROIC) because it reflects our ability to generate returns from the capital we have deployed in our operations. In 2017, ROIC improved 50 basis points to 16.8%.

 

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

 

Annual Incentive
Financial Performance Metrics

 

  

2017 Target    

 

  

2017 Actual    

 

  

2017 Achievement    

 

 

Earnings from Continuing Operations

  

 

$2.922 billion    

  

 

$3.031 billion*    

  

 

Exceeded    

Free Cash Flow from Operations

 

   $2.500 billion    

 

   $3.451 billion      

 

   Exceeded    

 

*Represents adjusted non-GAAP earnings from continuing operations which excludes a $119 million tax impact as a result of the passage of the Tax Cuts and Jobs Act of 2017 in late December 2017. The Compensation Committee chose to adjust the result because the tax impact resulting primarily from the change in value of deferred tax assets and liabilities was not reflective of the actual operating performance of the company in 2017. A reconciliation to the GAAP figure can be found in Appendix A.

 

Long-term Incentive   

 

2015 – 2017 Performance Period

 

Financial Performance Metrics

 

  

Target        

 

  

Actual        

 

  

Achievement        

 

 

Return on Invested Capital**

 

  

 

14.1%    

  

 

17.4%        

  

 

Exceeded        

**For purposes of determining the achievement for PRSUs granted in 2015, the calculation reflects the average of the ROIC reported on Form 10-K for each year during the performance period. As such, amounts for 2015 and 2016 do not reflect the adoption of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers.

 

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EXECUTIVE COMPENSATION GOALS AND OBJECTIVES

 

 

The goals of our executive compensation program are to incentivize management to achieve operational excellence and align the interests of management and shareholders. To achieve these goals, compensation for NEOs is driven by how the company performs on metrics that the Board of Directors believes create shareholder value.

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

Our program is evolving constantly to ensure alignment with shareholders and market best practices. Over the past several years, we have made strategic changes to the structure of our plans to maintain this alignment. In 2017, we introduced long-term incentive (LTI) guidelines which allow the Committee to make LTI grants within a set range determined by market data. The Committee also engaged a new independent compensation consultant to provide an outside, independent perspective on issues relating to executive compensation.

We believe that compensation decisions for NEOs should be made within a strong and independent governance framework. The executive compensation program is independently governed by the Committee with the support of company management and the Committee’s independent compensation consultant. The following are characteristics of the program that demonstrate strong governance.

 

Leading Executive Compensation Governance Practices

 

   

  

 

 

100 percent independent Compensation Committee

 

 

  

 

 

Independent compensation consultant reporting to the Compensation Committee

 

 

  

 

 

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

 

 

  

 

 

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

 

 

  

 

 

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

 

 

  

 

 

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

 

 

  

 

 

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

 

 

  

 

 

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

 

 

  

 

 

No employment agreements with NEOs

 

 

  

 

 

Double-trigger change in control arrangements

 

 

  

 

 

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

 

 

  

 

 

Clawback policy

 

 

  

 

 

Anti-hedging policy

 

 

  

 

 

Anti-pledging policy

 

 

  

 

 

Director and management engagement with shareholders

 

   

 

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Compensation Discussion and Analysis

 

 

 

THE COMPENSATION PROCESS

 

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

 

 

Compensate executives subject to clear and challenging performance metrics

 

 

Align executive compensation with shareholder value creation

 

 

Ensure retention and growth for executives in a competitive environment

Program objectives are achieved through the use of short- 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 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. The first steps in this process focus on establishing the operating goals for the company for the upcoming year. During this phase, the business units develop challenging but achievable goals which then form the basis of the business group operating plans. In consultation with the chairman and chief executive officer and chief financial officer, these plans are presented to the Board of Directors early the next year. After review and, where appropriate, adjustment, by the Board, the company operating plan for the year is adopted. Throughout the year, the Board reviews and monitors company performance as compared to the operating plan through a series of financial and operating reports given by the chief financial officer and the executive vice presidents.

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

The Committee convenes again in early March to review the final scorecards for the company and approve any base salary increases, annual incentive payments and long-term incentive grants. The Committee reviews, refines and approves compensation for the chairman and chief executive officer in executive session at the March meeting. The Committee approves compensation based on the clearly defined and disclosed performance goals described in this Proxy Statement. The Committee’s decisions also reflect factors such as the degree of difficulty of goals, market conditions and exceptional individual achievement.

 

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2017 EVALUATION AND COMPENSATION PROCESS TIMELINE

 

 

November 2016

 

 

 Business units present plans to the CEO

 

 The CEO, in consultation with the chief financial officer and executive vice presidents, establishes company operating goals

 

                                                 

 

 

                                                 

 

February 2017

 

 

 Business units present operating plans to the Board of Directors

 

 The board reviews, adjusts where appropriate, and approves business group operating goals and adopts the company operating plan

 

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

 

 

     
 

January – February 2018

 

 

 Based on achievement against the operating plan, the CEO calculates and assigns a score for each NEO other than herself and the Compensation Committee calculates and assigns a score for the CEO

 

 The assigned score is based strictly on performance against the company’s operating plan, the difficulty of the operating plan and the individual’s contributions to the success of the operating plan

 

 The score is converted into an annual incentive recommendation which is, together with base salary and long-term incentive recommendations, presented to the Committee on a scorecard

 

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

 

     
 

March 2018

 

 

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

 

 Based on the calculated score, the Committee reviews, refines and approves compensation for the CEO in executive session

 

 

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PEER GROUP AND BENCHMARKING TO THE MARKET

Each year, the Committee, with support from its independent compensation consultant, identifies a core group of companies that are:

 

 

In similar industries and where General Dynamics competes for business

 

 

Likely sources of or destinations for executive talent

 

 

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

 

 

Reasonably similar in organizational structure and complexity

 

 

Consist of some of the peers of our peer companies

The companies in our peer group for 2017, which is unchanged from 2016, are listed below. We believe this peer group is appropriate for our industry and where we compete for talent. Peer group proxy data and survey data provided by Aon are utilized to assess the competitiveness of our executive compensation practices, structures and levels. The Committee will continue to review and analyze the peer group for reasonableness and competitiveness with General Dynamics’ business offerings.

 

 

                Peer Group Companies*

 

 

    

Market     
Capitalization     

(in millions)     

  

    
Revenue     

(in millions)     

   Employee     
Population     
   Peer of Peers  
       

The Boeing Company

 

   $ 175,642     

 

   $ 93,392     

 

   140,800     

 

    

 

    

 

 

 

       

Honeywell International Inc.

 

   $ 116,064     

 

   $ 40,534     

 

   131,000     

 

    

 

    

 

 

 

       

L-3 Technologies Inc.

 

   $ 15,460     

 

   $   9,573     

 

     31,000     

 

    

 

    

 

 

 

       

Lockheed Martin Corporation

 

   $ 92,056     

 

   $ 51,048     

 

     100,000     

 

    

 

    

 

 

 

       

Northrop Grumman Corporation

 

   $ 53,426     

 

   $ 25,803     

 

     70,000     

 

    

 

    

 

 

 

       

Raytheon Company

 

   $ 54,305     

 

   $ 25,348     

 

     64,000     

 

    

 

    

 

 

 

       

Rockwell Collins, Inc.

 

   $ 22,214     

 

   $   7,640     

 

     29,000     

 

    

 

    

 

 

 

       

Textron Inc.

 

   $ 14,907         $ 14,198     

 

     37,000     

 

    

 

    

 

 

 

       

United Technologies Corporation

 

   $ 101,874     

 

   $ 59,837     

 

   204,700     

 

    

 

    

 

 

 

       

Median

 

   $ 54,305     

 

   $ 25,803     

 

     70,000     

 

        
       

General Dynamics

 

   $ 60,747     

 

   $ 30,973     

 

     98,600     

 

    

 

    

 

 

 

       

General Dynamics (Percentile Rank)  

 

   52%  

 

   54%  

 

   62%  

 

        

  *Peer group data are as of December 31, 2017.

 

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COMPONENTS OF EXECUTIVE COMPENSATION AND ALIGNMENT WITH

COMPANY PERFORMANCE

 

Each NEO receives a mix of fixed and variable components of compensation. The following charts summarize the various forms of compensation.

 

 

LOGO

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

 

 

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

 

 

To emphasize a culture of ownership and strengthen management’s alignment with long-term shareholder interests, the Committee requires one of the strictest set of stock ownership guidelines across the Fortune 100 for the NEOs. Our CEO is required to hold General Dynamics stock with a value equal to 15 times base salary. The other NEOs are required to hold 10 times base salary.

 

CEO Target Compensation Mix

 

 

Other NEO Target Compensation Mix

 

LOGO   LOGO

Linking Pay Levels to the Market and General Dynamics Performance.  Each component of our NEO compensation is targeted to the median of the peer group. To the extent compensation exceeds targeted levels, it is directly attributable to

 

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performance which increases shareholder value and exceeds measurable, clearly defined performance goals. Conversely, total compensation can be substantially less than target for performance that falls significantly short of pre-established targets.

Setting Challenging Targets Based on Market Conditions.  Annual and long-term incentives are based on measurable and objective performance metrics. Annual incentive performance targets were set in early 2017 based on backlog, anticipated order activity and expected market conditions. Three-year target goals for the PRSUs were set in early 2017 based on our long-term operating plans. Targets were in line with guidance provided to the market by company management.

ANNUAL BASE SALARY

We pay executives an annual salary in cash that is tied to the peer group median (50th percentile) for salaries of executives in comparable positions at our peer group companies based on survey data. Salaries are reviewed annually, and increases, when they occur, are driven by changes in the market. We believe that organizations that perform well over the long term, like General Dynamics, make an effort to pay salaries at or near the market median and create opportunities for executives to earn above-median compensation through annual and long-term incentives that are awarded based on performance relative to challenging and clear performance goals. The goal of our base salary is to provide a competitive, fixed rate of cash compensation. In 2017, the market median for base salary increased for all NEOs except the CEO.

 

 

  NAME AND TITLE

 

 

2016 BASE
SALARY

 

 

2017 BASE
SALARY

 

 

% INCREASE

 

 

Ms. Novakovic

Chairman and Chief Executive Officer

 

 

$ 1,585,000

 

 

$ 1,585,000

 

 

0%

 

 

Mr. Aiken

Senior Vice President and Chief Financial Officer

 

 

$    710,000

 

 

$    770,000

 

 

8%

 

 

Mr. Casey

Executive Vice President, Marine Systems

 

 

$    755,000

 

 

$    780,000

 

 

3%

 

 

Mr. Roualet

Executive Vice President, Combat Systems

 

 

$    755,000

 

 

$    780,000

 

 

3%

 

 

Mr. Johnson

Executive Vice President, Information Systems and Technology

 

 

 

$    725,000

 

 

$    780,000

 

 

8%

 

ANNUAL INCENTIVE COMPENSATION

The NEOs are eligible to earn an annual incentive paid in cash based on the company’s prior-year performance. The incentive is designed to place at risk a significant portion of each NEO’s annual compensation. The incentive is based on performance against specific, measureable goals established at the beginning of the year and approved by the Committee as well as the Committee’s assessment of each NEO’s individual performance during the year. The goals are designed to be difficult but achievable through solid execution. The Committee believes the chosen incentive metrics are good indicators of the company’s overall performance and lead to the creation of long-term value for our shareholders.

NEO PERFORMANCE METRICS AND TARGETS

In 2017, the annual incentive for each NEO was determined based on the same metrics: company operating earnings and free cash flow from operations. The Committee decided that, because the executive vice presidents play a major role in the overall success of the company in addition to overseeing their business group, they should be evaluated on the same company-wide metrics as the chief executive officer and the chief financial officer. The below charts demonstrate the NEO goals for 2017.

Each NEO’s target annual incentive, as a percentage of base salary, was determined during our annual compensation benchmarking process and is designed to provide total cash compensation near the 50th percentile of the peer group if targets are met. Consistent with peer and market practice, the maximum incentive that can be earned under this plan is two times the target amount. For performance that falls significantly short of the pre-established target, there may be no payout. 2017 was a strong operational year

 

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for General Dynamics. Above-target annual incentives were awarded to NEOs in recognition of their role in driving these results as well as for their individual performance and achievements throughout the year. The below table summarizes each NEO’s target and the Committee’s determination of final incentives.

NEO Financial Goals

 

 

Performance Metric

 

 

Weighting

 

 

2017 Target

 

 

2017 Actual

 

 

Earnings from Continuing Operations

 

 

50%

 

 

$2.922 billion

 

 

$3.031 billion*

 

 

Free Cash Flow from Operations

 

 

50%

 

 

$2.500 billion

 

 

$3.451 billion

 

*Represents adjusted non-GAAP earnings from continuing operations which excludes a $119 million tax impact as a result of the passage of the Tax Cuts and Jobs Act of 2017 in late December 2017. The Committee chose to adjust the result because the tax impact resulting primarily from the change in value of deferred tax assets and liabilities was not reflective of the actual operating performance of the company in 2017. A reconciliation to the GAAP figure can be found in Appendix A.

NEO Annual Incentive Achievement

 

 

  NAME AND TITLE

 

 

 

   2017 BASE   
   SALARY   

 

 

 

   TARGET   
   INCENTIVE   
    (% OF BASE)   

 

 

 

   MAXIMUM   
   INCENTIVE   
   (% OF BASE)   

 

 

 

   TARGET   
   INCENTIVE    

 

 

 

   MAXIMUM   
   INCENTIVE    

 

 

 

   ANNUAL   
   INCENTIVE   
    PAYOUT   

 

 

Ms. Novakovic

Chairman and Chief Executive Officer

 

 

 

$ 1,585,000

 

 

 

170%

 

 

 

340%

 

 

 

$ 2,694,500

 

 

 

$5,389,000

 

 

 

$5,300,000

 

 

Mr. Aiken

Senior Vice President and Chief Financial Officer

 

 

 

$   770,000

 

 

 

100%

 

 

 

200%

 

 

 

$   770,000

 

 

 

$1,540,000

 

 

 

$1,386,000

 

 

Mr. Casey

Executive Vice President, Marine Systems

 

 

 

$   780,000

 

 

 

100%

 

 

 

200%

 

 

 

$   780,000

 

 

 

$1,560,000

 

 

 

$1,404,000

 

 

Mr. Roualet

Executive Vice President, Combat Systems

 

 

 

$   780,000

 

 

 

100%

 

 

 

200%

 

 

 

$   780,000

 

 

 

$1,560,000

 

 

 

$1,404,000

 

 

Mr. Johnson

Executive Vice President, Information Systems and Technology

 

 

 

$   780,000

 

 

 

100%

 

 

 

200%

 

 

 

$   780,000

 

 

 

$1,560,000

 

 

 

$1,378,000

 

LONG-TERM INCENTIVE COMPENSATION

Long-term incentive compensation (LTI) is provided to NEOs to align management’s interest with that of shareholders several years into the future. LTI comprises a major portion of total compensation provided to NEOs and thus gives management a significant personal stake in the long-term success of General Dynamics. By awarding LTI through various types of equity instruments, different elements of shareholder alignment are achieved. We award LTI based on the following allocation:

 

Long-Term Incentive Allocation

 

LOGO

 

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Setting Long-term Grant Amounts. The Committee uses guidelines that are constructed around the market median and balances other considerations such as prior-year performance, complexity of the role, length of service, future expected contributions to the company and impact on dilution, when determining actual LTI grant amounts. We believe that this approach allows for the consideration of factors in addition to the quantitative metrics that drive annual incentive payments. This allows the Committee to make grant decisions that better meet the needs of our business and shareholders.

PERFORMANCE RESTRICTED STOCK UNITS

Performance Restricted Stock Units (PRSUs) are a form of equity compensation tied to the achievement of specific performance goals and linked to the long-term performance of the company. This element of executive compensation closely connects executives to the company’s financial and stock performance over the long term and acts as a retention tool. NEOs who voluntarily resign or are terminated for cause immediately forfeit all PRSUs that have not vested unless otherwise determined by the Committee. PRSUs at General Dynamics are structured as follows:

Target Setting:

 

The three-year ROIC target is set on the date of grant. The Committee does not have discretion to reset the target during the three-year performance cycle.

 

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

For the 2017-2019 performance period, the ROIC target was established at 15.2 percent. This target reflects the multi-year operating plan for the company and takes into account management’s assessment of future performance. Because we operate in a dynamic and competitive environment, the target established each year represents the outlook for the three-year period and may not be comparable to past targets or past achievement. In light of these circumstances, the Committee believes this three-year target is challenging but achievable through continued strong operating performance.

Plan Operation:

 

After the three-year performance period, the number of PRSUs earned will be determined based on the following performance and payout schedule, which applies a +/- 2.5 percent collar around the three-year average ROIC target:

 

 

Three-Year Average 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

 

We define ROIC as net operating profit after taxes divided by average invested capital. Net operating profit after taxes is defined as earnings from continuing operations plus after-tax interest and amortization expense. Average invested capital is defined as the sum of the average debt and shareholders’ equity excluding accumulated other comprehensive loss (AOCL). ROIC excludes goodwill impairments and non-economic accounting changes as they are not reflective of company performance. The ROIC calculation for purposes of measuring PRSU performance would be adjusted if a significant business acquisition or divestiture (as defined in Regulation S-X of the Exchange Act) occurs during the performance period.

2015-2017 PRSU Achievement.  For PRSUs granted in 2015, the Committee has certified the three-year ROIC achievement against the target established for the 2015-2017 performance period. After reviewing company results, the Committee certified our three-year average ROIC of 17.4% which was 3.3% above the target and translated into a payout of 150% of the target number of shares.

 

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RESTRICTED STOCK

Restricted stock awards are designed to attract and retain executives by providing them with some of the benefits associated with stock ownership during the restriction period, while incentivizing them to remain with General Dynamics. Restricted stock awards are service-based, meaning that executives who voluntarily resign or are terminated for cause prior to the end of the vesting period forfeit their restricted stock unless otherwise determined by the Committee. The Committee has determined that the use of three-year cliff vesting on our restricted stock ensures that executives are focused on long-term value creation while supporting the company’s need to attract and retain executives during all market conditions. During the vesting period, executives may not sell, transfer, pledge, assign or otherwise convey their restricted shares. Executives are eligible, however, to vote their shares and receive dividend payments and other distributions on our Common Stock when declared by the Board of Directors.

STOCK OPTIONS

The Committee grants stock options to align executive interests with shareholder interests for many years into the future. They serve as a retention tool and a value driver. Stock options give our NEOs the right to buy a share of our Common Stock in the future at a predetermined exercise price, which is established as the average of the high and low stock price of our Common Stock on the date of award. In 2017, the exercise price for stock options granted in March was $191.71 for each stock option. Stock options vest after three years, with 50 percent of the grant exercisable after two years and 50 percent exercisable after three years, and expire 10 years after the grant date.

Stock option values are determined using the Black-Scholes methodology applying the same assumptions used for recognizing stock option expense in our audited financial statements. These assumptions are set out in Note P to our financial statements contained in our Form 10-K. The Black-Scholes formula is based on a set of key variables and assumptions and is an accepted model for valuing stock options under FASB ASC Topic 718.

As with restricted stock and PRSU awards, NEOs who voluntarily resign or are terminated for cause immediately forfeit all stock options that have not vested unless otherwise determined by the Committee. Our equity compensation plan prohibits the repricing of stock options, including the exchange of underwater stock options for another award or for cash, without the approval of shareholders.

BENEFITS AND PERQUISITES

BENEFITS

General Dynamics-provided benefits are an important tool used to attract and retain outstanding executives. Benefit levels are reviewed periodically to ensure they are cost-effective, competitive and support the overall needs of our employees. The company makes available medical, dental, vision, life insurance and disability coverage to all NEOs. NEOs can select the level of coverage appropriate for their circumstances. The company also provides NEOs group life insurance coverage worth two times base salary and long-term disability coverage worth 50 percent of base salary.

COMPANY-SPONSORED RETIREMENT PLANS

We provide retirement plans to our eligible employees, including the eligible NEOs, through a combination of qualified 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 NEOs.

The benefit under the plan is payable as a life annuity. The Salaried Retirement Plan is a funded, tax-qualified, noncontributory defined-benefit pension plan. It was amended effective January 1, 2007, to exclude any employee initially hired or who incurs a break in service after that date. The benefit formula under the Salaried Retirement Plan for employees hired before December 31, 2006, is

 

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1.0 percent times a participant’s highest final average pay frozen as of December 31, 2013, multiplied by years of service earned on or after January 1, 2007, and before January 1, 2014, plus 1.333 percent times a participant’s highest final average pay frozen as of December 31, 2010, multiplied by years of service earned prior to January 1, 2007. Final average pay for purposes of calculating retirement benefits includes a NEO’s base salary and annual incentive. The company makes contributions to the Salaried Retirement Plan through payments into a trust fund from which the benefits are paid.

Supplemental Retirement Plan.  The amount of cash compensation used to calculate pension benefits for participants in the Salaried Retirement Plan is limited by the Internal Revenue Code ($270,000 in 2017). To provide a benefit calculated on compensation in excess of this compensation limit, the company provides eligible executives coverage under the General Dynamics Corporation Supplemental Retirement Plan. Benefits under the Supplemental Retirement Plan are general unsecured obligations of General Dynamics. Each NEO, other than Mr. Johnson, participates in the Supplemental Retirement Plan. Beginning January 1, 2014, pension accruals under this plan stopped for employees at our corporate headquarters including the participating NEOs.

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

401(k) Plan.  Each NEO is eligible to participate in the General Dynamics Corporation 401(k) Plan, 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 2017, for NEOs other than Mr. Johnson, the 401(k) Plan provided for a company-matching contribution of 100 percent on before-tax contributions up to the first 6 percent of a participant’s eligible pay. From January 1, 2017, through July 13, 2017, Mr. Johnson participated in a version of the 401(k) Plan that provided for a company-matching contribution of 50 percent on before-tax contributions up to the first 6 percent of a participant’s eligible pay. From July 14, 2017, through August 31, 2017, Mr. Johnson participated in a version of the 401(k) Plan that provided for a company-matching contribution of 100 percent on before-tax contributions up to the first 1 percent of a participant’s eligible pay and 50 percent on before-tax contributions of the next 5 percent of a participant’s eligible pay. Finally, Mr. Johnson became eligible on September 1, 2017, for the version of the 401(k) Plan that provides for a company-matching contribution of 100 percent on before-tax contributions up to the first 6 percent of a participant’s eligible pay. Our matching contributions during 2017 for the NEOs are included in footnote (d) to the All Other Compensation column of the Summary Compensation Table.

Supplemental Savings Plan.  The company provides a Supplemental Savings Plan to key employees, including each NEO. The purpose of the Supplemental Savings Plan is to allow key executives to defer salary and receive matching contributions on compensation in excess of the compensation limit imposed by the Internal Revenue Service on earnings used to calculate 401(k) contributions. Matching contributions during 2017 for the NEOs are included in footnote (d) to the All Other Compensation column of the Summary Compensation Table.

Other Retiree Benefits.  Eligible key executives throughout the company, including the NEOs, can purchase group term life insurance prior to retiring of up to two times their base pay. For executives who retire early (prior to age 65), we pay for insurance coverage equal 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.

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.

 

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The perquisites provided to our NEOs in 2017 were financial planning and tax preparation services, physical examinations, home security systems, personal liability and supplemental accidental death and dismemberment insurance, and the personal use of automobiles owned or leased by the company. In addition, personal use of our aircraft was provided only to our chairman and chief executive officer as required by the Board to help ensure her security and accessibility.

We have provided additional information on perquisites in footnote (d) to the All Other Compensation column of the Summary Compensation Table.

 

OTHER CONSIDERATIONS

2017 SHAREHOLDER ENGAGEMENT

As part of our ongoing shareholder engagement program, each year we engage with our largest shareholders to understand their views on our executive compensation program or executive compensation generally. In 2017 and the past several years, we have engaged with holders of approximately 65 percent of our outstanding Common Stock. Following changes to our executive compensation program resulting in part from shareholder engagement, our shareholders have expressed very strong support for our program and the results the program is driving. At our 2017 annual shareholder meeting, investors strongly supported our executive compensation program with over 95 percent of shares voted in favor of our Say on Pay proposal. We consider feedback from our shareholder engagement program, the results of our annual Say on Pay vote and other considerations to ensure that our executive compensation program continues to meet our compensation objectives.

POTENTIAL 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. Our severance protection agreements for NEOs exclude any provision for reimbursement of excise taxes that may become due upon a change in control.

Payments and benefits provided to NEOs pursuant to the change in control agreements are described in the Potential Payments upon Termination or Change in Control section beginning on page 50 of this Proxy Statement.

 

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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 Meridian Compensation Partners, LLC (Meridian) as an independent compensation consultant to provide advice on executive compensation matters. The Committee found that Meridian provided important perspectives about market practices for executive compensation, peer company analysis and selection, the levels and structure of the compensation program and compensation governance. During 2017, at the Committee’s request, Meridian performed the following specific services:

 

 

Attended all Committee meetings

 

 

Provided a regulatory education session for the Committee

 

 

Provided information and advice relating to executive compensation matters

 

 

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

 

Before engaging Meridian, the Committee reviewed the factors influencing independence (as specified by the New York Stock Exchange listing standards) and determined that no conflict of interest exists.

 

ANTI-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 owned by Mr. Crown or his spouse individually, or shares held in trusts for the benefit of his children (Crown Personally Held Shares). The company has reviewed the potential pledging of the Attributed Shares with Mr. Crown, recognizes Mr. Crown’s distinct obligations with respect to Henry Crown and Company and the trusts, and believes such shares may be prudently pledged or held in margin loan accounts. Under the company’s anti-pledging policy, Crown Personally Held Shares are considered company securities that are owned directly by Mr. Crown and, accordingly, may not be and are not held in margin accounts or otherwise pledged as collateral, nor may the economic risk of such shares be hedged.

 

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

 

 

Stock Ownership Guidelines

 

 

CEO

  

 

15x Base Salary

 

Other NEOs

 

  

 

10x Base Salary

 

 

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

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.

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). The exemption from Section 162(m)’s deduction limit for performance-based compensation has been repealed as of 2018, such that compensation paid to our covered executive officers in excess of $1 million will not be deductible, unless it qualifies for transition relief applicable to certain arrangements in place as of November 2, 2017.

 

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EXECUTIVE COMPENSATION

SUMMARY COMPENSATION

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

   

2017 

2016 

2015 

 

 

 

  $

 

1,585,000

1,585,000

1,583,750

 

 

 

  $

 

— 

— 

4,850,000 

 

 

 

  $

 

6,999,332   

7,079,144   

6,856,781   

 

 

 

  $

 

7,000,390 

7,077,746 

6,855,267 

 

 

 

   

$5,300,000     

5,150,000     

—     

 

 

 

   

$300,661     

155,239     

—     

 

 

 

   

$316,046     

310,948     

278,306     

 

 

 

  $

 

21,501,429

21,358,077

20,424,104

 

 

 

Jason W. Aiken

Senior Vice President and Chief Financial Officer

   

2017 

2016 

2015 

 

 

 

  $

 

755,000

701,250

662,500

 

 

 

  $

 

— 

— 

900,000 

 

 

 

  $

 

1,625,701   

1,490,275   

1,344,547   

 

 

 

  $

 

1,624,228 

1,489,540 

1,345,267 

 

 

 

   

$1,386,000     

1,200,000     

—     

 

 

 

   

$  85,192     

38,464     

—     

 

 

 

   

$  65,619     

139,984     

58,305     

 

 

 

  $

 

5,541,740

5,059,513

4,310,619

 

 

 

John P. Casey

Executive Vice President, Marine Systems

   

2017 

2016 

2015 

 

 

 

  $

 

773,750

747,500

716,250

 

 

 

  $

 

— 

— 

1,020,000 

 

 

 

  $

 

1,610,364   

1,642,427   

1,299,410   

 

 

 

  $

 

1,609,342 

1,642,472 

1,300,360 

 

 

 

   

$1,404,000     

1,400,000     

—     

 

 

 

   

$447,894     

242,463     

—     

 

 

 

   

$  63,650     

64,724     

58,204     

 

 

 

  $

 

5,909,000

5,739,586

4,394,224

 

 

 

Mark C. Roualet

Executive Vice President, Combat Systems

   

2017 

2016 

2015 

 

 

 

  $

 

773,750

747,500

713,750

 

 

 

  $

 

— 

— 

995,000 

 

 

 

  $

 

1,610,364   

1,619,332   

1,299,410   

 

 

 

  $

 

1,609,342 

1,620,593 

1,300,360 

 

 

 

   

$1,404,000     

1,400,000     

—     

 

 

 

   

$330,396     

168,004     

—     

 

 

 

   

$  83,926     

69,278     

67,230     

 

 

 

  $

 

5,811,778

5,624,707

4,375,750

 

 

 

S. Daniel Johnson

Executive Vice President, Information Systems and Technology

   

2017 

2016 

2015 

 

 

 

  $

 

766,250

713,750

680,000

 

 

 

  $

 

 

— 

850,000 

 

 

 

  $

 

1,560,519   

1,457,671   

1,236,491   

 

 

 

  $

 

1,559,351 

1,457,274 

1,235,342 

 

 

 

   

$1,378,000     

1,250,000     

—     

 

 

 

   

$         —     

—     

—     

 

 

 

   

$  52,508     

54,297     

44,752     

 

 

 

  $

 

5,316,628

4,932,992

4,046,585

 

 

 

(a)

Payments are reported for the fiscal year in which the related services were rendered, although the actual payments are made in the succeeding year. Bonus awards for 2017 performance were made under the General Dynamics Corporation Executive Annual Incentive Plan and are shown in 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 ASC Topic 718. These amounts reflect our calculation of the value of these awards at the grant date and do not necessarily correspond to the actual value that may ultimately be realized by the named executive officer. Assumptions used in the calculation of these amounts are included in Note P to our audited financial statements for the fiscal year ended December 31, 2017, included in our Annual Report on Form 10-K filed with the SEC on February 12, 2018. Stock Awards include awards of restricted stock and performance restricted stock units (PRSUs). The maximum grant date value of 2017 PRSUs for each named executive officer, which assumes a 150 percent maximum payout, is $5,249,403 for Ms. Novakovic; $1,219,276 for Mr. Aiken; $1,207,773 for Mr. Casey; $1,207,773 for Mr. Roualet; and $1,170,390 for Mr. Johnson.

(c)

The values listed in this column represent the change in the present value of accumulated benefits from December 31 of the prior year to December 31 of the respective year calculated for all the pension plans in which the executive participates. The values are an actuarial estimate of the present value of the future cost of pension 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.

 

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(d)

All Other Compensation for 2017 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

 

  

 

$2,565

 

  

 

$47,900

 

  

 

$16,253

 

  

 

$249,328

 

 

  Mr. Aiken

 

  

 

$3,989

 

  

 

$30,400

 

  

 

$  4,666

 

  

 

$  26,114

 

 

  Mr. Casey

 

  

 

$3,860

 

  

 

$31,300

 

  

 

$13,154

 

  

 

$  15,336

 

 

  Mr. Roualet

 

  

 

$4,276

 

  

 

$31,300

 

  

 

$  9,042

 

  

 

$  39,308

 

 

  Mr. Johnson

 

  

 

$   803

 

  

 

$22,600

 

  

 

$19,558

 

  

 

$    9,547

 

 

(1)

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

(2)

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

(3)

Noncash items (perquisites) provided to named executive officers in 2017, which for one or more named executive officers is in the aggregate equal to or greater than $10,000, were as follows: financial planning and tax preparation services, home security systems and, solely for the chairman and chief executive officer, personal use of company aircraft. Perquisites that exceeded the greater of $25,000 or 10 percent of the total amount of perquisites were as follows: Ms. Novakovic — $195,641 related to personal travel on company aircraft, and $30,959 related to a home security system installed at Ms. Novakovic’s personal residence. The 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.

 

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2017 EQUITY-BASED AWARDS

General Dynamics’ long-term compensation for senior executives, including the named executive officers, consists of equity awards in the form of restricted stock, PRSUs and stock options. The following table provides information on the equity awards in 2017 for the named executive officers. The table includes the grant date of each equity award, the number of shares of restricted stock, PRSUs and stock options, the exercise price of the stock options, the closing price of our Common Stock on the date of grant and the grant date fair value of the equity awards. As discussed in the Compensation Discussion and Analysis section, we use the average of the high and low stock price of our Common Stock on the date of the grant, not the closing price, to value the restricted stock and PRSUs and set the exercise price for stock options.

 

GRANTS OF PLAN-BASED AWARDS IN FISCAL YEAR 2017  

  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                       
    3/1/17       2/28/17                0                 18,255        27,382        18,255        —           —         $ 6,999,332  
   

 

3/1/17

 

 

 

   

 

2/28/17

 

 

 

            

 

—         

 

 

 

    

 

       —

 

 

 

    

 

       —

 

 

 

    

 

       —

 

 

 

    

 

211,620   

 

 

 

   $

 

191.71   

 

 

 

    

 

7,000,390

 

 

 

  Mr. Aiken                     0        $   770,000        $1,540,000                       
    3/1/17       2/28/17                0                   4,240          6,360          4,240        —           —         $ 1,625,701  
   

 

3/1/17

 

 

 

   

 

2/28/17

 

 

 

            

 

—         

 

 

 

    

 

     —

 

 

 

    

 

       —

 

 

 

    

 

       —

 

 

 

    

 

49,100   

 

 

 

   $

 

191.71   

 

 

 

    

 

1,624,228

 

 

 

  Mr. Casey                     0        $   780,000        $1,560,000                       
    3/1/17       2/28/17                0                   4,200          6,300          4,200        —           —         $ 1,610,364  
   

 

3/1/17

 

 

 

   

 

2/28/17

 

 

 

            

 

—         

 

 

 

    

 

     —

 

 

 

    

 

       —

 

 

 

    

 

       —

 

 

 

    

 

48,650   

 

 

 

   $

 

191.71   

 

 

 

    

 

1,609,342

 

 

 

  Mr. Roualet                     0        $   780,000        $1,560,000                       
    3/1/17       2/28/17                0                   4,200          6,300          4,200        —           —         $ 1,610,364  
   

 

3/1/17

 

 

 

   

 

2/28/17

 

 

 

            

 

—         

 

 

 

    

 

     —

 

 

 

    

 

       —

 

 

 

    

 

       —

 

 

 

    

 

48,650   

 

 

 

   $

 

191.71   

 

 

 

    

 

1,609,342

 

 

 

  Mr. Johnson                     0        $   780,000        $1,560,000                       
    3/1/17       2/28/17                0                   4,070          6,105          4,070        —           —         $ 1,560,519  
     

 

3/1/17

 

 

 

   

 

2/28/17

 

 

 

                              

 

—         

 

 

 

    

 

     —

 

 

 

    

 

       —

 

 

 

    

 

       —

 

 

 

    

 

47,140   

 

 

 

   $

 

191.71   

 

 

 

    

 

1,559,351

 

 

 

(a)

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

(b)

These amounts relate to PRSUs granted in 2017. Each PRSU represents the right to receive a share of Common Stock upon release of the PRSU. The exact number of PRSUs that may be earned is determined based upon a performance metric set by the Compensation Committee, which for 2017 grants is the company’s return on invested capital over the three-year period from 2017-2019, and can range from 0 to 150 percent of the PRSUs originally awarded. Dividend equivalents accrue on PRSUs during the performance period and are subject to the same vesting conditions based upon performance. For PRSUs granted in 2017, the PRSUs are released to the participant following the three-year performance period, to the extent earned.

(c)

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

(d)

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

(e)

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

 

44     General Dynamics 2018 Proxy Statement


Table of Contents

Executive Compensation

 

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 2017. As explained in the Compensation Discussion and Analysis section, we require officers to retain shares of Common Stock issued to them as compensation, up to pre-determined levels, based on their position with General Dynamics. Once an ownership level is attained, the officer must maintain that minimum ownership level until he or she no longer serves as an officer of General Dynamics. The amounts reported in the Value Realized on Exercise and the Value Realized on Vesting columns in the table below are before-tax amounts.

 

OPTION EXERCISES AND STOCK VESTED IN FISCAL YEAR 2017  
    

 

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

 

  

 

 

 

 

                75,000

 

 

 

 

  

 

 

 

 

$8,893,500   

 

 

 

 

     

 

 

 

 

                118,352

 

 

 

 

  

 

 

 

 

$20,769,592   

 

 

 

 

  Mr. Aiken

 

    

 

21,500

 

 

 

    

 

$2,563,445   

 

 

 

       

 

4,649

 

 

 

    

 

$     815,853   

 

 

 

  Mr. Casey

 

    

 

69,895

 

 

 

    

 

$9,021,706   

 

 

 

       

 

22,577

 

 

 

    

 

$  3,962,038   

 

 

 

  Mr. Roualet

 

    

 

59,460

 

 

 

    

 

$7,993,208   

 

 

 

       

 

23,615

 

 

 

    

 

$  4,144,196   

 

 

 

  Mr. Johnson

 

    

 

 

 

 

    

 

            —   

 

 

 

             

 

8,135

 

 

 

    

 

$  1,427,611   

 

 

 

 

General Dynamics 2018 Proxy Statement     45


Table of Contents

Executive Compensation

 

OUTSTANDING EQUITY AWARDS

The following table provides information on outstanding stock option and stock awards held by the named executive officers as of December 31, 2017. The table shows the number of stock options that a named executive officer holds (both exercisable and unexercisable), the option exercise price and its expiration date. For stock awards, the table includes the number of shares of restricted stock that are still subject to the restriction period (i.e., have not vested). For restricted stock and PRSUs, the market value is based on the closing price of the company’s Common Stock on December 31, 2017.

 

OUTSTANDING EQUITY AWARDS AT 2017 FISCAL YEAR-END

 

     OPTION AWARDS (A)    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

                           157,356        $32,014,078          85,122        $17,318,071    
              211,620        $191.71          2/28/2027                    
              320,260        135.85        3/1/2026                    
       124,415        124,415        136.78        3/3/2025                    
       466,380               112.40        3/4/2021                    
       733,000               67.70        3/5/2020                    
       39,500               67.90        5/1/2019                    
       14,720               71.01        3/6/2019                    
  Mr. Aiken                            31,660        $6,441,227          17,747        $3,610,627    
              49,100        $191.71          2/28/2027                    
              67,400        135.85        3/1/2026                    
       24,415        24,415        136.78        3/3/2025                    
       90,180               112.40        3/4/2021                    
       28,890               67.70        3/5/2020                    

  Mr. Casey

                           32,015        $6,513,452          17,190        $3,497,306    
              48,650        $191.71          2/28/2027                    
              74,320        135.85        3/1/2026                    
       23,600        23,600        136.78        3/3/2025                    
       90,470               112.40        3/4/2021                    
  Mr. Roualet                            29,175        $5,935,654          17,935        $3,648,876    
              48,650        $191.71          2/28/2027                    
              73,330        135.85        3/1/2026                    
       23,600        23,600        136.78        3/3/2025                    
       75,640               112.40        3/4/2021                    
       68,650               70.08        3/19/2020                    

  Mr. Johnson

                           20,444        $4,159,332          16,825        $3,423,046    
              47,140        $191.71          2/28/2027                    
              65,940        135.85          3/1/2026                    
        

 

22,420

 

 

      

 

22,420

 

 

      

 

136.78

 

 

      

 

3/3/2025

 

 

                                           
(a)

Of the 211,620 stock options held by Ms. Novakovic with an exercise price of $191.71, 105,810 will become exercisable on March 1, 2019, and 105,810 will become exercisable on March 1, 2020. Of the 320,260 stock options held by Ms. Novakovic with an exercise price of $135.85, 160,130 became 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, 2018.

Of the 49,100 stock options held by Mr. Aiken with an exercise price of $191.71, 24,550 will become exercisable on March 1, 2019, and 24,550 will become exercisable on March 1, 2020. Of the 67,400 stock options held by Mr. Aiken with an exercise price of $135.85, 33,700 became exercisable on March 2, 2018, and 33,700 will become exercisable on March 2, 2019. Of the 48,830 stock options held by Mr. Aiken with an exercise price of $136.78, 24,415 became exercisable on March 4, 2018.

Of the 48,650 stock options held by Mr. Casey with an exercise price of $191.71, 24,325 will become exercisable on March 1, 2019, and 24,325 will become exercisable on March 1, 2020. Of the 74,320 stock options held by Mr. Casey with an exercise price of $135.85, 37,160 became exercisable on March 2, 2018, and 37,160 will become exercisable on March 2, 2019. Of the 47,200 stock options held by Mr. Casey with an exercise price of $136.78, 23,600 became exercisable on March 4, 2018.

Of the 48,650 stock options held by Mr. Roualet with an exercise price of $191.71, 24,325 will become exercisable on March 1, 2019, and 24,325 will become exercisable on March 1, 2020. Of the 73,330 stock options held by Mr. Roualet with an exercise price of $135.85, 36,665 became exercisable on March 2, 2018, and 36,665 will become exercisable on March 2, 2019. Of the 47,200 stock options held by Mr. Roualet with an exercise price of $136.78, 23,600 became exercisable on March 4, 2018.

Of the 47,140 stock options held by Mr. Johnson with an exercise price of $191.71, 23,570 will become exercisable on March 1, 2019, and 23,570 will become exercisable on March 1, 2020. Of the 65,940 stock options held by Mr. Johnson with an exercise price of $135.85, 32,970 became exercisable on

 

46     General Dynamics 2018 Proxy Statement


Table of Contents

Executive Compensation

 

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

 

(b)

For awards made prior to 2017, 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. For awards of restricted stock made in 2017, shares will release to participants on the first day on which the New York Stock Exchange is open for business after the third anniversary of the day of grant.

Of the 157,356 restricted shares or units held by Ms. Novakovic, 28,740 restricted shares were released on January 2, 2018, with a market value of $5,805,193; 25,065 restricted shares will be released on January 2, 2019; 26,055 restricted shares will be released on January 2, 2020; 18,255 restricted shares will be released on March 2, 2020; and 59,241 PRSUs were released on January 2, 2018, with a market value of $11,966,090.

Of the 31,660 restricted shares or units held by Mr. Aiken, 5,560 restricted shares were released on January 2, 2018, with a market value of $1,123,064; 4,915 restricted shares will be released on January 2, 2019; 5,485 restricted shares will be released on January 2, 2020; 4,240 restricted shares will be released on March 2, 2020; and 11,460 PRSUs were released on January 2, 2018, with a market value of $2,314,805.

Of the 32,015 restricted shares or units held by Mr. Casey, 5,560 restricted shares were released on January 2, 2018, with a market value of $1,123,064; 4,750 restricted shares will be released on January 2, 2019; 6,045 restricted shares will be released on January 2, 2020; 4,200 restricted shares will be released on March 2, 2020; and 11,460 PRSUs were released on January 2, 2018, with a market value of $2,314,805.

Of the 29,175 restricted shares or units held by Mr. Roualet, 4,660 restricted shares were released on January 2, 2018, with market value of $941,273; 4,750 restricted shares will be released on January 2, 2019, 5,960 restricted shares will be released on January 2, 2020; 4,200 restricted shares will be released on March 2, 2020; and 9,605 PRSUs were released on January 2, 2018, with a market value of $1,940,114.

Of the 20,444 restricted shares or units held by Mr. Johnson, 2,120 restricted shares were released on January 2, 2018, with a market value of $428,219; 4,520 restricted shares will be released on January 2, 2019; 5,365 restricted shares will be released on January 2, 2020; 4,070 restricted shares will be released on March 2, 2020; and 4,369 PRSUs were released on January 2, 2018, with a market value of $882,494.

 

(c)

Represents PRSUs that released in the first quarter of 2018 or, subject to satisfaction of the performance condition and Compensation Committee determination, may release during the first quarter of 2019 or 2020.

For Ms. Novakovic, 39,736 PRSUs released during the first quarter of 2018; 26,898 may release during the first quarter of 2019; and 18,488 may release during the first quarter of 2020.

For Mr. Aiken, 7,791 PRSUs released during the first quarter of 2018; 5,662 may release during the first quarter of 2019; and 4,294 may release during the first quarter of 2020.

For Mr. Casey, 7,530 PRSUs released during the first quarter of 2018; 6,240 may release during the first quarter of 2019; and 4,253 may release during the first quarter of 2020.

For Mr. Roualet, 7,530 PRSUs released during the first quarter of 2018; 6,152 may release during the first quarter of 2019; and 4,253 may release during the first quarter of 2020.

For Mr. Johnson, 7,165 PRSUs released during the first quarter of 2018; 5,538 may release during the first quarter of 2019; and 4,122 may release during the first quarter of 2020.

 

General Dynamics 2018 Proxy Statement     47


Table of Contents

Executive Compensation

 

COMPANY-SPONSORED RETIREMENT PLANS

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

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

The table shows the actuarial present value as of December 31, 2017, of the pension benefits earned for each named executive officer over the course of the officer’s career. All retirement plans in the table operate in exactly the same manner for the named executive officers as for all other plan participants. A description of the material terms and conditions of each of these plans and agreements follows the table.

 

 

PENSION BENEFITS FOR FISCAL YEAR 2017

 

  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

  

 

$   416,616

  

 

None

  

Supplemental Retirement Plan

 

   13

 

   $2,111,699

 

  

 

  Mr. Aiken (c)

  

 

Salaried Retirement Plan

  

 

11

  

 

$   218,311

  

 

None

  

Supplemental Retirement Plan

 

   11

 

   $   227,777

 

  

 

  Mr. Casey (d)

  

 

Salaried Retirement Plan

  

 

32

  

 

$1,282,577

  

 

None

  

Supplemental Retirement Plan

 

   32

 

   $3,035,542

 

  

 

  Mr. Roualet (e)

  

 

Salaried Retirement Plan

  

 

29

  

 

$   990,611

  

 

None

  

Supplemental Retirement Plan

 

   29

 

   $1,644,920

 

  

 

  Mr. Johnson

 

  

 

 

  

 

 

  

 

             —

 

  

 

 

  (a)

The Present Value of Accumulated Benefit under each plan has been calculated as of December 31, 2017, using the company’s FASB ASC Topic 715, Compensation – Retirement Benefits, assumptions as of year-end 2017. For a discussion of this calculation, see Note Q to our consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 12, 2018.

  (b)

Ms. Novakovic’s total service is 17 years and credited service is 13 years.

  (c)

Mr. Aiken’s total service is 16 years and credited service is 11 years.

  (d)

Mr. Casey’s total service is 39 years and credited service is 32 years.

  (e)

Mr. Roualet’s total service is 36 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 $270,000 for 2017, and does not pay annual benefits beyond a predetermined benefit limit, which was $215,000 for 2017.

Beginning January 1, 2014, pension accruals stopped for employees at our corporate headquarters, including the participating named executive officers. The Salaried Retirement Plan pays a monthly benefit equal to the product of (1) the benefit percentage times (2) the final average monthly pay times (3) the years of credited service. For credited service earned prior to January 1, 2007, the benefit percentage equals 1.333 percent. For credited service earned on or after January 1, 2007, the benefit percentage equals 1.0 percent. Final average monthly pay is equal to the average of the participant’s highest 60 consecutive months of pensionable earnings out of the participant’s last 120 months of employment. For credited service earned prior to January 1, 2007, the final average monthly pay used in the benefit calculation froze as of December 31, 2010. The normal retirement age under the Salaried Retirement Plan is age 65. The Salaried Retirement Plan benefit is calculated as a single-life monthly annuity beginning at age 65 and has multiple actuarially equivalent payment forms from which participants can choose to take their benefit. A cash lump sum is only available if a participant’s accrued benefit is less than $5,000. None of the eligible named executive officers had reached the normal retirement age as of December 31, 2017.

 

48     General Dynamics 2018 Proxy Statement


Table of Contents

Executive Compensation

 

A participant with at least 10 years of service qualifies for early retirement at age 55. Ms. Novakovic and Messrs. Casey and Roualet qualified for early retirement as of December 31, 2017. A participant who is eligible for early retirement is entitled to receive the following:

 

  (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, 2017. In addition, the table shows contributions made by both the named executive officers and General Dynamics in 2017 along with the earnings on each executive’s total account.

 

NONQUALIFIED DEFERRED COMPENSATION FOR FISCAL YEAR 2017  
  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    

 

 

 

 

  

 

 

 

 

$136,145    

 

 

 

 

  

 

—  

 

  

 

 

 

 

$1,820,918      

 

 

 

 

 

  Mr. Aiken

 

  

 

 

 

 

$  14,200    

 

 

 

 

  

 

 

 

 

$14,200    

 

 

 

 

  

 

 

 

 

$  28,913    

 

 

 

 

  

 

—  

 

  

 

 

 

 

$   169,760      

 

 

 

 

 

  Mr. Casey

 

  

 

 

 

 

$  75,500    

 

 

 

 

  

 

 

 

 

$15,100    

 

 

 

 

  

 

 

 

 

$  37,800    

 

 

 

 

  

 

—  

 

  

 

 

 

 

$   882,640      

 

 

 

 

 

  Mr. Roualet

 

  

 

 

 

 

$  75,500    

 

 

 

 

  

 

 

 

 

$15,100    

 

 

 

 

  

 

 

 

 

$169,073    

 

 

 

 

  

 

—  

 

  

 

 

 

 

$1,092,055      

 

 

 

 

 

  Mr. Johnson

 

  

 

 

 

 

$  72,500    

 

 

 

 

  

 

 

 

 

$14,500    

 

 

 

 

  

 

 

 

 

$629,927    

 

 

 

 

  

 

—  

 

  

 

 

 

 

$3,527,534      

 

 

 

 

(a)

The registrant contributions of $31,700, $14,200, $15,100, $15,100 and $14,500, for Ms. Novakovic and Messrs. Aiken, Casey, Roualet and Johnson, respectively, are included in the All Other Compensation column of the Summary Compensation Table.

(b)

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

(c)

Certain amounts in the Aggregate Balance at Last Fiscal Year End column were previously reported in the Summary Compensation Table in the Salary column (in the case of executive contributions) or in the All Other Compensation column (in the case of registrant contributions) for the named executive officers. The amounts previously reported as executive and registrant contributions were as follows: (i) Ms. Novakovic, $647,500 and $163,950; (ii) Mr. Aiken, $33,200 and $33,200; (iii) Mr. Casey, $251,000 and $57,225; (iv) Mr. Roualet, $165,500 and $36,600; and (v) Mr. Johnson, $110,519 and $22,103.

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.

 

General Dynamics 2018 Proxy Statement     49


Table of Contents

Executive Compensation

 

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, 2017.

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 2017 table, for those named executive officers who are eligible to receive benefits; and

 

  (2)

the amounts listed in the Nonqualified Deferred Compensation for Fiscal Year 2017 table.

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

Change in Control Agreements – Double Trigger.  For a change in control situation, we have change in control agreements (also referred to as severance protection agreements) with key employees, including each of the named executive officers. 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, 2017, 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 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. Our severance protection agreements do not provide for excise tax gross-ups. Rather, the agreements provide that, in the event change in control benefits would trigger an excise tax under Section 280G and Section 4999, then the value of the benefits will be either (1) delivered in full or (2) subject to a cutback, whichever provides the executive officer the greatest benefit on an after-tax basis (with the excise tax being the responsibility of the executive to pay).

 

50     General Dynamics 2018 Proxy Statement


Table of Contents

Executive Compensation

 

 

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)

 

  

 

 

 

 

$       475,732

 

 

 

 

  

 

 

 

 

$              —

 

 

 

 

  

 

 

 

 

$     269,040

 

 

 

 

  

 

 

 

 

$     272,216

 

 

 

 

  

 

 

 

 

$     310,831  

 

 

 

 

 

Retiree Medical and Dental Benefit (b)

 

  

 

 

 

 

         52,457

 

 

 

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

66,097

 

 

 

 

  

 

 

 

 

118,170

 

 

 

 

  

 

 

 

 

—  

 

 

 

 

 

Stock Options

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

—  

 

 

 

 

 

Restricted Stock

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

—  

 

 

 

 

 

PRSUs

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

—  

 

 

 

 

 

Total

 

  

 

 

 

 

$       528,189

 

 

 

 

  

 

 

 

 

$              —

 

 

 

 

  

 

 

 

 

$     335,137

 

 

 

 

  

 

 

 

 

$     390,386

 

 

 

 

  

 

 

 

 

$     310,831  

 

 

 

 

  Death (c)                                             

 

Life Insurance Benefit

 

  

 

 

 

 

$    3,170,000

 

 

 

 

  

 

 

 

 

$  1,540,000

 

 

 

 

  

 

 

 

 

$  1,560,000

 

 

 

 

  

 

 

 

 

$  1,560,000

 

 

 

 

  

 

 

 

 

$  1,560,000  

 

 

 

 

 

Stock Options (d) (e)

 

  

 

 

 

 

  32,428,743

 

 

 

 

  

 

 

 

 

6,760,422

 

 

 

 

  

 

 

 

 

7,168,595

 

 

 

 

  

 

 

 

 

7,101,671

 

 

 

 

  

 

 

 

 

6,505,709  

 

 

 

 

 

Restricted Stock (d) (f)

 

  

 

 

 

 

  19,960,970

 

 

 

 

  

 

 

 

 

4,109,588

 

 

 

 

  

 

 

 

 

4,181,813

 

 

 

 

  

 

 

 

 

3,981,431

 

 

 

 

  

 

 

 

 

3,270,420  

 

 

 

 

 

PRSUs (d) (g)

 

  

 

 

 

 

  22,104,708

 

 

 

 

  

 

 

 

 

4,392,683

 

 

 

 

  

 

 

 

 

4,433,619

 

 

 

 

  

 

 

 

 

4,044,249

 

 

 

 

  

 

 

 

 

2,838,992  

 

 

 

 

 

Total

 

  

 

 

 

 

$  77,664,421

 

 

 

 

  

 

 

 

 

$16,802,693

 

 

 

 

  

 

 

 

 

$17,344,027

 

 

 

 

  

 

 

 

 

$16,687,351

 

 

 

 

  

 

 

 

 

$14,175,121  

 

 

 

 

  Retirement, Termination without Cause or Disability (c)                                      

 

Retiree Life Insurance Benefit (a)

 

  

 

 

 

 

$       475,732

 

 

 

 

  

 

 

 

 

$              —

 

 

 

 

  

 

 

 

 

$     269,040

 

 

 

 

  

 

 

 

 

$     272,216

 

 

 

 

  

 

 

 

 

$     310,831  

 

 

 

 

 

Retiree Medical and Dental Benefit (b)

 

  

 

 

 

 

         52,457

 

 

 

 

  

 

 

 

 

 

 

 

 

  

 

 

 

 

66,097

 

 

 

 

  

 

 

 

 

118,170

 

 

 

 

  

 

 

 

 

—  

 

 

 

 

 

Stock Options (e) (h)

 

  

 

 

 

 

  23,351,475

 

 

 

 

  

 

 

 

 

4,810,871

 

 

 

 

  

 

 

 

 

5,066,053

 

 

 

 

  

 

 

 

 

5,021,569

 

 

 

 

  

 

 

 

 

4,606,089  

 

 

 

 

 

Restricted Stock (f) (h)

 

  

 

 

 

 

  19,539,274

 

 

 

 

  

 

 

 

 

4,019,044

 

 

 

 

  

 

 

 

 

4,088,140

 

 

 

 

  

 

 

 

 

3,888,372

 

 

 

 

  

 

 

 

 

3,183,508  

 

 

 

 

 

PRSUs (g) (h)

 

  

 

 

 

 

  22,104,708

 

 

 

 

  

 

 

 

 

4,392,683

 

 

 

 

  

 

 

 

 

4,433,619

 

 

 

 

  

 

 

 

 

4,044,249

 

 

 

 

  

 

 

 

 

2,838,992  

 

 

 

 

 

Total

 

  

 

 

 

 

$  65,523,646

 

 

 

 

  

 

 

 

 

$13,222,598

 

 

 

 

  

 

 

 

 

$13,922,949

 

 

 

 

  

 

 

 

 

$13,344,576

 

 

 

 

  

 

 

 

 

$10,939,420  

 

 

 

 

  Change in Control, with Qualifying Termination                                             

 

Annual Incentive (i)

 

  

 

 

 

 

$    5,150,000

 

 

 

 

  

 

 

 

 

$  1,200,000