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MORE INSTANT CASH THAN A LOTTERY

At the urging of management, General Dynamics Corp. share holders in early May adopted a compensation plan that ties huge cash bonuses for the defense contractor's top 25 managers to increases in its depressed share price. "It will be productive only if the course charted for the Corporation by their decisions, judgments, and actions produces the intended objective of increased shareholder value," management assured shareholders in its proxy statement.

Fortunately for General Dynamics' top brass, the payoff for their "decisions, judgments, and actions" came quickly. When trading closed on May 6--only five days after GD shareholders approved the new plan--the stock price closed above 35 9/16 for the 10th consecutive day, triggering $7.6 million in bonuses for the top 25 managers.

LUCKY BUCKS. "This is basically a bastardization of a good idea," complains Anne O. Faulk of Faulk & Co., which advises institutions on voting their proxies. "Ten days just isn't a very long time, and you won't see management's salaries going down when the share price falls."

General Dynamics officials declined to be interviewed about compensation. Director Elliot H. Stein, chairman emeritus of Stifel Financial Corp. and chairman of the board's compensation committee, didn't return phone calls about the plan. But GD's proxy statement says the plan makes "employees' interests more aligned to those of shareholders, and rewards them accordingly for increases in the price of the Corporation's stock, that is, improved shareholder value."

That fails to mollify Faulk and other critics--including Pentagon brass--disturbed by the size and timing of GD management's bonanza. The second-largest U. S. defense contractor lost $578 million in 1990, primarily because of restructuring charges and a $700 million write-off prompted by the Navy's cancellation of the A-12 attack plane. Many of GD's core programs face dim futures. And on May 1, Chief Executive William A. Anders announced plans to slash spending and dump 27,000 of the company's 90,000 workers over the next four years.

At the center of the controversy is GD's new three-year Gain/Sharing Plan, adopted by the board on Feb. 15, when the $10.2 billion defense giant's stock price was languishing at 25 9/16. The plan was unusual, since few U. S. companies pay cash bonuses tied to short-term stock-price moves. But when GD's stock exceeds 35 9/16 for at least 10 consecutive trading days, executives get a cash bonus equal to their base salary. The stock met that test on May 6, leading to an effective doubling of top management's salaries (table).

If the share price continues to rise, so does management's take: For each additional $10 jump sustained for at least 10 straight trading days, top managers receive extra bonuses equal to twice their base salaries, or about $15.2 million a pop. Shareholders are also upset at option awards that allow Anders and other executives to vastly increase their holdings at bargain prices.

It's not just shareholders who find all this hard to swallow. So does the Defense Dept., GD's biggest customer. In a letter to Anders dated Apr. 18, the Pentagon warned that it doesn't want taxpayers to foot GD's bonuses. "Should . . . you choose to bill the enhanced compensation to Government contracts, the Government will take appropriate action to withhold from billings and subsequently disallow any and all excessive compensation," wrote Walter R. Yeoman, a contracting officer for the Defense Contract Management Command.

There has also been a top-level meeting of Defense Dept. officials to discuss the bonuses, which may spur a probe of GD's pay policy. Fumes one Pentagon source: "The extra compensation is just outrageous, and we are not going to allow it" to be billed to Uncle Sam.

Any look at salaries is sure to turn up the case of Harvey Kapnick. A former outside director who served on the compensation committee that approved the Gain/Sharing plan, Kapnick on Apr. 15 joined GD as vice-chairman. Under terms determined by his former committee, Kapnick gets a pro-rated cash bonus based on the difference between GD's 33 1/2 average share price on the day he began work and the May 6 closing price. His windfall comes to about $120,000--though he has been on the payroll less than a month. Kapnick couldn't be reached for comment.

Giving a new employee a performance-based bonus at the rate of $7,500 per day is sure to raise questions. But one thing is certain: When it comes to linking pay to performance, few companies do it like General Dynamics.GENERAL DYNAMICS'

BIG EARNERS

1990 May 6, 1991,

salary bonus *

WILLIAM A. ANDERS** $550,000 $800,000

CEO

LESTER CROWN 298,883 298,883

Executive vice-president

JAMES R. MELLOR 385,731 385,731

President

HERBERT F. ROGERS 576,922 576,922

Vice-chairman

HARVEY KAPNICK** 0 120,000

Vice-chairman

* Based on formula outlined in company proxy statement

** Anders' bonus estimate is based on his 1991 salary. Kapnick started as a

General Dynamics employee on Apr. 15, 1991. His bonus estimate is pro-rated

from that date, rather than the Feb. 15, 1991, date used for others

DATA: COMPANY REPORTS, BW ESTIMATES

James E. Ellis in Chicago, with Seth Payne in Washington


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