General Dynamics

Annual Meeting: May 4

General Dynamics appeared on our overpaid list last year for many reasons, but one outstanding feature was the large bonus that was apparently not tax-qualified. As you may know, every summary compensation table contains two columns that cover two kinds of bonuses: one that says bonus and the one that says NEIC (Non-Equity Incentive Compensation). The latter is much more common because as long as it meets the threshold of “performance based” under SEC definitions – a low bar – it is deductible under Section 162(m). For the most part boards and CEOs considered the nominal link to performance a small price to pay for tax deductions.

But not at General Dynamics. In 2014, Phebe N. Novakovic’s package of $19,388,084 included $4.25 million in a bonus. In 2015, the total increased to $20,424,104 and there was an increase as well in the presumably non-tax deductible bonus to $4,850,000.

It appears, however, that the board must have heard from shareholders. “In March of 2016, the Committee recommended, and the Board approved, subject to approval by the shareholders at the Annual Meeting, the General Dynamics Corporation Executive Annual Incentive Plan that supports the deductibility of payments made under the bonus component of total cash compensation. This change will affect any potential bonus payment that will be made in 2017 based on 2016 performance.”

I expect shareholders will support the tax-avoidance 162(m) plan, but many will likely vote against the excessive pay package again this year.