GENERAL DYNAMICS CORP — Proxy Solicitation & Information Statement 2014

Apr 15, 2014

DEFA14A 1 d713171ddefa14a.htm DEFA14A DEFA14A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES

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April 2014 Shareholder Outreach on Executive Compensation April 2014

April 2014 Executive Summary Focused Strategy Under New CEO in 2013 Strong Company Performance and Return of Capital to Shareholders Shareholder Outreach and Response to 2013 Say on Pay Vote Compensation Structure Linking Pay to Performance Strong, Independent Compensation Governance and Practices Balanced Board Tenure and Sound Governance Practices 2

April 2014 Focused Strategy Under New CEO New Leadership with a Refined Focus. Phebe Novakovic became Chair and CEO on January 1, 2013, articulating a focus on getting Back to Basics Strong, Improving Performance. By highlighting operational effectiveness and cost management, each of the four business groups – Aerospace, Information Systems and Technology, Combat Systems and Marine Systems – demonstrated strong and improving performance in 2013 Driving Growth and Value. The company achieved a direct, positive result on shareholder value by driving performance in three key areas: Increasing Return on Invested Capital Expanding Margins Managing for Cash Flow 3

April 2014 Focus on Driving Shareholder Value. Strong long-term stock performance combined with a history of increasing dividends and share buybacks 2013 Operating Performance. Significant improvement through a renewed focus on margin expansion, cash generation and ROIC With no acquisitions in 2013, free cash flow was returned to shareholders in the form of dividends and share repurchases Announced in January 2014 an accelerated share repurchase program to repurchase 11.4 million shares Solid Performance and Return of Capital to Shareholders Strong Total Shareholder Return in 2013 Increase in Dividend Payments 4 $50 $60 $70 $80 $90 $100 $0.38 $0.42 $0.47 $0.51 $0.56 $0.62 2009 2010 2011 2012 2013 2014

April 2014 Shareholder Outreach and Response to 2013 Say on Pay Vote In response to our say on pay vote, our Compensation Committee Chair and members of the management team engaged directly with several of our largest shareholders and took action in response to address feedback Shareholder Feedback Company Response Lengthen the performance measurement period for the performance-based long-term incentives to more than one year Performance Restricted Stock Units (PRSUs) will be subject to a three- year performance period, instead of a one-year period starting with 2015 grants Focus on the alignment of compensation with company performance and shareholder value drivers Implemented and disclosed scorecards for each NEO with specific, measurable goals used to drive compensation Demonstrate a link between executive compensation and performance, and how performance metrics relate to total shareholder return Enhanced CD&A disclosure to show the connection between the program’s structure and performance (primarily through the use of equity), and by disclosing realizable pay relative to company stock performance Disclose realizable pay to help shareholders better understand the alignment of compensation with company performance Added new disclosure showing 3-year realizable pay for the CEO, demonstrating that the program closely aligns executive compensation with company performance Clarify disclosure regarding specific components of the program New CD&A disclosure that more clearly discusses each component of compensation and the well-disciplined process used to set and grant compensation Carefully consider shareholder dilution and annual burn rate when granting equity compensation Given the company’s higher use of equity based compensation relative to other companies, the dilution and burn rate is generally slightly higher on a relative basis. The Committee believes this use of equity more closely links executive and shareholder interests 5

April 2014 Compensation Structure Linking Pay to Performance Annual Incentives Long-Term Incentives Short Term Pay Long Term Pay Cash Performance RSUs (25%) Restricted Stock (25%) Stock Options (50%) Base Salary Cash Key Elements of Pay Performance Metrics Affecting Ultimate Value Fixed compensation to attract and retain NEOs Earnings from Continuing Operations Sales Business Group Performance Free Cash Flow from Operations Stock Price Indexed to Total Cash Compensation Return on Invested Capital (Moving to 3-Year Measurement) 6

April 2014 Aligning Pay with Performance During Our Senior Leadership Transition Phebe Novakovic became CEO in 2013 and began building her management team; SVP and CFO L. Hugh Redd retired on Dec. 31, 2013 as part of this transition Mr. Redd served through all of 2013 but was not employed by the company in March 2014, which is when 2013 long-term incentive awards were granted in recognition of 2013 and prior years’ performance Executives not employed at the company at the time equity grants are made are not entitled to such grants To compensate Mr. Redd for agreeing to retire on Dec. 31, precluding his receipt of an equity grant in 2014, the company agreed to provide a pension service credit The $2 million incremental value of the service credit approximately correlates to the estimated amount of the grant date value of the equity compensation that Mr. Redd would have been entitled to had he remained with the company, given his bonus and salary The Compensation Committee believes this form of compensation links Mr. Redd’s pay with performance, while recognizing his willingness to support the leadership transition The company has not provided service credits to any other current executive officers. In light of concerns raised about the use of pension service credits, the company will not provide service credits to any named executive officers going forward 7

April 2014 Strong, Independent Compensation Governance and Practices 100% independent Compensation Committee Independent compensation consultant reporting to the Compensation Committee Strong link between pay and performance with 92% of CEO and 81% of NEO compensation variable Market-leading stock ownership requirements of 15x base salary for CEO and 10x for the other NEOs No employment agreements with NEOs Double-trigger change-in-control arrangements Adopted a clawback policy Anti-hedging policy in place and adopted anti-pledging policy Limited perquisites Eliminated excise tax gross-ups 8

April 2014 Balanced Board Tenure and Sound Governance Practices Director Tenure We have a well-balanced board with a mix of long-term experience and fresh perspective, each with a diverse range of backgrounds, talent, skill and expertise that are valuable in the board’s responsibility and oversight role 100% committee independence Right to call special meetings (10% individual; 25% group of shareholders) Action by written consent Robust independent lead director role Majority voting Annual elections No poison pill in place Qualified directors with a deep understanding of the company’s core business areas and complex issues and risks facing public company boards Governance Practices 5 Directors 4 Directors 9 3 Directors