General Dynamics: Compensation Strategy (A) and (B) Case

1
General Dynamics Compensation Strategy (A) and
(B) Case

• US Defense Industry and General Dynamics in the
  early 1990s -Threats and Opportunities
• Threats Opportunities

2
General Dynamics Compensation Strategy (A) and
(B) Case

• US Defense Industry and General Dynamics in the
  early 1990s -Threats and Opportunities
• Threats
  Opportunities
• 1. 82 GD revenues 1. GD in all 3
  segments
• from defense of defense
  industry
• 2. Post cold war decline 2. GD a major
  player
• in defense spending in defense
• 3. M A activity 3. GD has large
  backlog
• in defense of
  defense projects
• 4. Change to fixed price from
• cost plus economics

3
General Dynamics Case

• What was the change in Executive Pay at GD before
  and after CEO Anders?
• Before After

4
General Dynamics Case

• What was the change in Executive Pay at GD before
  and after CEO Anders?
• Before After
• 1. Lower risk 1. Higher risk
• 2. Prominent salaries GainSharing cash
  bonuses
• 3. Accounting-based tied to stock perf.
  No cap.
• Bonuses 2. Stock
  option awards
• 4. Stock options - currently 3. Restricted stock
• under water 4. Option exchange

5
General Dynamics Case

• What was the purpose of the new executive pay
  plan called Gain/Sharing?
• What made the Gain/Sharing Plan controversial?

6
General Dynamics Case

• How did the Gain/Sharing Plan effect GD
  operations in the 1991-1993 period?

7
General Dynamics Case

• How did the Gain/Sharing Plan effect GD
  operations in the 1991-1993 period?
• 1. 50 reduction in RD spending
• 2. Large reduction in capital expenditures 321M
  to 82M
• 3. Reduction in inventories, working capital.
• 4. Large layoffs of employees
• 5. Returned excess cash to shareholders, CEO
  refused to diversify away from defense industry.
• 6. Sell off of Cesna Aircraft, Data Systems,
  Fighter Aircraft units.

8
General Dynamics Case

• What was the market reaction to GD Managements
  decisions in the 1991-1993 period?
• How did other stakeholders react to the
  Gain/Sharing bonuses?

9
General Dynamics Case

• Did the Gain/Sharing executive pay policy provide
  the right incentives for the company to achieve
  its strategic objectives?
• Should GD management have done anything
  differently to satisfy other stakeholders?
• Should executive pay be used as a tool to change
  a companys culture?