Incentives, Downsizing, and Value Creation at General Dynamics

Posted: 27 Oct 1999

See all articles by Jay Dial

Jay Dial

Ohio State University (OSU) - Human Resource Research

Kevin J. Murphy

University of Southern California - Marshall School of Business; USC Gould School of Law

Abstract

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

JEL Classification: G31, G34, G35, J33

Suggested Citation

Dial, Jay and Murphy, Kevin J., Incentives, Downsizing, and Value Creation at General Dynamics. Available at SSRN: https://ssrn.com/abstract=5580

Jay Dial (Contact Author)

Ohio State University (OSU) - Human Resource Research ( email )

700 Fisher Hall
2100 Neil Avenue
Columbus, OH 43210-1144
United States

Kevin J. Murphy

University of Southern California - Marshall School of Business ( email )

BRI 308, MC 0804
Los Angeles, CA 90089-0804
United States
213-740-6553 (Phone)
213-740-6650 (Fax)

USC Gould School of Law

699 Exposition Boulevard
Los Angeles, CA 90089
United States

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