INCENTIVES, DOWNSIZING, AND VALUE CREATION AT GENERAL DYNAMICS

In 1991, defense contractor General Dynamics engaged a new management team which adopted an explicit corporate objective of creating shareho lder value. The company tied executive compensation to shareholder wea lth creation, and subsequently implemented a strategy that included do wnsizing, restructuring, and exit. Paying large executive cash bonuses amid layoffs ignited controversy. However, by 1993 shareholders reali zed gains approaching $4.5 billion, representing a dividend-reinvested return of 553%. The study shows how incentives assist in shaping stra tegy, illustrates the political costs and economic benefits of downsiz ing and demonstrates that even firms in declining industries have subs tantial opportunities for value creation.