Meeting May 3

Phebe N. Novakovic, CEO of General Dynamic received compensation of over $21 million for the second year in a row in 2017.

ISS has recommended that shareholders voted against pay at the company due to pay for performance misalignment. The company issued a defense with the SEC taking strong issue with that contention.

In this document the company goes so far as to say, “In 2017, our pay-for-performance philosophy generated strong results for the company.”

Really? That’s what generated the results? It wasn’t a favorable stock market? It wasn’t the government contracts? The federal budget that allows for increased defense spending? According to GD's 2017 annual report, 61% of the company's total revenue in 2017 came from the federal government. 

One consistent component of pay at General Dynamics has been repeated large option grants which reward executives when the stock price is up no matter whether the cause is external factors, or the use of company stock buybacks. Stock buybacks provide only a short term boost for stock and do nothing to promote long term growth. The use of buyback are particularly problematic if purchased at the top of the market   

According to press reports General Dynamic spent $3.5 billion in stock buybacks from 2009 to 2012, and $9.4 billion from 2013 to 2016. “From 2005 through the first half of 2017, the top five defense contractors — Boeing, Lockheed Martin, Northrop Grumman, Raytheon, and General Dynamics — spent more than $114 billion on share repurchases, company filings show.”

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It is also important to remember that a desire to make short term financial goals inspired cutting corners may undermine the long term health of a company.

In April 2018, four complaints were filed against the company at the Labor Department charging that General Dynamics underpaid employees at call centers in Arizona, Florida, Kentucky, and Texas by improperly classifying them. According to a Washington Post article, approximately 10,000 workers who run help hotlines for public health insurance programs, including the Affordable Care Act marketplaces lost up to $100 million over the past five years.

Aside from the moral issues of such alleged actions – and they are serious – consider the potential fall-out for General Dynamics if such actions disturb its relationship with its biggest customer.

In 2014, President Obama issued an executive order called Fair Pay Safe Workplaces that could have inhibited contractors from winning future government contracts based on labor violation history. Trump repealed this order but a similar order, or something even more demanding, could be enacted in the future.

Shareholders who want long term sustainable growth have many reasons to be concerned about compensation at General Dynamics.