What is a 'change-of-control excise tax gross-up'?

A 'change-of-control excise tax gross-up' is a provision in an executive's employment or severance agreement where the company agrees to reimburse the executive for any excise taxes they might have to pay if certain payments made to them upon a change of control of the company exceed specific limits defined by the Internal Revenue Code (Sections 280G and 4999).

Why is General Dynamics eliminating this provision?

General Dynamics is eliminating this provision to align its executive compensation practices with its established policy since April 2009. It standardizes the treatment of change-of-control benefits across its executive team and removes a potential financial liability for the company.

Does this mean the CEO will receive less compensation in a change-of-control scenario?

Not necessarily. The amended agreement ensures that the executive receives the greatest after-tax benefit. If a change-of-control payment would trigger an excise tax, the company will either pay the full amount or reduce it (cutback) – whichever option provides the executive more money after taxes. The executive will be responsible for paying the excise tax themselves, rather than the company reimbursing them.

Is this change related to any specific event or concern about a change of control?

The filing does not indicate any specific event or concern about an imminent change of control. It appears to be a proactive measure to standardize executive compensation agreements and align them with the company's long-standing policy.

GD 8-K: Leadership Changes

Summary

General Dynamics Corporation (GD) filed an 8-K on October 12, 2016, primarily to announce an amendment to the severance protection agreement for its Chairman and Chief Executive Officer, Phebe N. Novakovic. The key change is the elimination of the "change-of-control excise tax gross-up" provision from her agreement. This amendment aligns Ms. Novakovic's agreement with the company's policy established in April 2009, which removed similar gross-up provisions from new severance agreements. Ms. Novakovic was the sole remaining executive officer with a pre-2009 agreement that contained this provision. This action standardizes executive compensation practices and removes a potentially significant financial obligation for the company in the event of a change of control, while ensuring executives still receive the greatest after-tax benefit possible through either full payment or a cutback.

Key Highlights

1Amendment to CEO Phebe N. Novakovic's severance protection agreement.
2Elimination of the change-of-control excise tax gross-up provision for the CEO.
3Aligns CEO's agreement with the company's post-April 2009 policy.
4CEO Novakovic was the only remaining executive with a pre-2009 agreement containing this provision.
5Other legacy pre-2009 executive agreements are also being amended to remove the tax reimbursement.
6New terms ensure executives receive the greatest after-tax benefit in a change-of-control scenario, with the executive responsible for excise taxes.
7No other significant financial or operational updates are reported in this filing.

GENERAL DYNAMICS CORP 8-K Report, Executive Changes (Oct 12, 2016)

Summary

Key Highlights

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