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 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.

8. 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?

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 company’s culture?