General Dynamics: Compensation Strategy

(A) and (B) Case

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

What was the change in Executive Pay at GD before

and after CEO Anders?
Before After
 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
 General Dynamics Case

What was the purpose of the new executive pay plan

called Gain/Sharing?

What made the Gain/Sharing Plan controversial?

 General Dynamics Case

How did the Gain/Sharing Plan effect GD operations

in the 1991-1993 period?
 General Dynamics Case
How did the Gain/Sharing Plan effect GD operations
in the 1991-1993 period?
1. 50% reduction in R&D 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.
 General Dynamics Case

What was the market reaction to GD Management’s

decisions in the 1991-1993 period?

How did other stakeholders react to the Gain/Sharing

bonuses?
 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

company’s culture?