Defense Contractors: Pay, Benefits, and Restructuring During Defense
Downsizing (Briefing Report, 10/10/95, GAO/NSIAD-96-19BR).
Pursuant to a congressional request, GAO provided information on the top
10 Department of Defense (DOD) contractors, focusing on: (1) executive
and employee compensation and executive stock options; (2) the nature
and extent of these contractors' restructuring efforts in response to
defense downsizing; and (3) the assistance provided to workers separated
because of defense contractor downsizing.
GAO found that: (1) the salary, bonus, and other cash payouts paid to
the companies' top 5 executives ranged from about $230,000 in 1989 to
$17.92 million in 1993; (2) although the net realized value of the
executives' stock options ranged from $27,000 to about $26 million, not
every executive exercised stock options in a given year; (3) the
contractors' average annual compensation to salaried employees ranged
from $48,100 to $55,000 and average annual compensation to hourly
employees ranged from $30,200 to $39,500 in 1994; (4) contractors'
restructuring efforts in response to decreasing DOD procurement included
acquiring or merging with competitors, divesting noncore business units,
consolidating production facilities, and commercializing military
technologies; (5) contractors' assistance to separated employees
included termination pay, outplacement services, and extension of
employee health, dental, and insurance benefits; (6) 9 of the 10
companies encouraged voluntary separations by adding years to age and
length of service computations to increase an employee's retirement
annuity, continuing health insurance, or cash buyouts; and (7) DOD
indicated that not all of the contractors' expenses for these items were
reimbursable under their defense contracts.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: NSIAD-96-19BR
TITLE: Defense Contractors: Pay, Benefits, and Restructuring
During Defense Downsizing
DATE: 10/10/95
SUBJECT: Executive compensation
Compensation
Employee incentives
Reductions in force
Securities
Severance pay
Fringe benefits
Department of Defense contractors
Military downsizing
Contractor personnel
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Cover
================================================================ COVER
Briefing Report to Congressional Requesters
October 1995
DEFENSE CONTRACTORS - PAY,
BENEFITS, AND RESTRUCTURING DURING
DEFENSE DOWNSIZING
GAO/NSIAD-96-19BR
DOD Contractors
(705073)
Abbreviations
=============================================================== ABBREV
AIA - Aerospace Industries Association of America, Inc.
DOD - Department of Defense
GAO - General Accounting Office
SEC - Securities and Exchange Commission
Letter
=============================================================== LETTER
B-259287
October 10, 1995
The Honorable Floyd D. Spence
Chairman
The Honorable Ronald V. Dellums
Ranking Minority Member
Committee on National Security
House of Representatives
The Honorable Jack Reed
House of Representatives
In response to your request, we have developed information on (1) the
compensation provided to executives and employees of the top 10
defense contractors and the amounts executives realized through the
exercise of stock options, (2) the nature and extent of restructuring
efforts due to defense downsizing, and (3) the assistance provided to
workers being separated as a result of defense contractor downsizing.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
COMPENSATION AND VALUE OF
STOCK OPTIONS EXERCISED
---------------------------------------------------------- Letter :1.1
For 1989 through 1994, we examined the salary, bonus, and other cash
payout received by the 5 highest paid executives at each of 10
defense companies. We also examined the net value realized from the
executives' exercise of stock options. The stock options may have
been provided to them in prior years. The salary, bonus, and other
cash payout paid to these executives ranged from about $230,000 in
1989 to $17.92 million in 1993. The net realized value of exercised
stock options for the top five executives varied greatly. In most
cases, at least one of the executives at each company did not
exercise stock options in a given year. For those times when stock
options were exercised, the amount realized ranged from about $27,000
to $26 million.
In 1989, the average annual compensation paid by different defense
contractors to salaried employees (as reported by 6 out of the
10 companies) ranged from $35,900 to $48,700. By 1994, the figures
had increased to $48,100 and $55,000, respectively. In 1989, the
average annual compensation for hourly employees ranged from $24,700
to $35,200, and in 1994 these figures ranged from $30,200 to $39,500.
RESTRUCTURING STRATEGIES AND
COMMERCIAL USE OF MILITARY
TECHNOLOGY
---------------------------------------------------------- Letter :1.2
The restructuring strategies companies have used to adjust to the
decreases in Department of Defense (DOD) procurement have included,
to varying degrees, the following:
acquiring and/or merging with competitors,
divesting themselves of units no longer considered to be part of
their core business,
consolidating production facilities to reduce excess capacity, and
commercializing military technologies.
ASSISTANCE TO SEPARATED
EMPLOYEES
---------------------------------------------------------- Letter :1.3
The categories of assistance usually available to all separated
employees consist of
termination pay based upon salary level and length of service;
outplacement services such as job counseling, help on resume
writing, interviewing techniques, and listings of job
opportunities; and
extension of employee health, dental, and insurance benefits for a
time period after separation.
Nine out of the 10 companies we surveyed provided incentives to
encourage voluntary separation. The incentives usually included a
combination of
years added to age and length of service computations to give the
employee a higher retirement annuity,
continued medical insurance benefits, and
cash buyout.
AGENCY COMMENTS
------------------------------------------------------------ Letter :2
In commenting on a draft of this report, DOD indicated that (1) DOD's
share of a contractor's total sales does not necessarily represent
the percentage of compensation costs charged to DOD contracts; (2)
significant portions of an executive's compensation paid and claimed
by the contractor may not be allowable under government laws and
regulations, contract terms, and advance agreements; and (3) any
compensation based on increases in the price of corporate securities
is unallowable and not recoverable against DOD contracts, nor are any
amounts determined to be unreasonable.
The Aerospace Industries Association of America, Inc. (AIA), in
commenting on our draft as the representative for the companies
involved in our review, stated that the information we presented was
fair and objective.
SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3
For our study, we selected the top 10 defense contractors (see app.
I for the list of contractors) awarded DOD contracts in 1993 where
the value of the contracts was equal to at least one-third of each
company's total sales in 1993. We reviewed, for the period 1989 to
1994, data on executive compensation and stock options exercised,
data on employee compensation, restructuring strategies, and
assistance to separated employees at these contractors. The data on
executive compensation and stock options exercised is that of the top
five executives of the corporations as reported in the companies'
annual proxy statements that are publicly available. In response to
our requests, each of the companies provided data on employee
compensation, corporate restructuring efforts, and assistance to
separated employees. We did not independently verify this data. Our
work on this assignment also included visits to some of these
companies and discussions with AIA officials. We performed the work
from August 1994 through August 1995.
---------------------------------------------------------- Letter :3.1
Unless you publicly announce the contents of this report earlier, we
plan no further distribution until 30 days from its issue date. At
that time, we will send copies of this report to the Secretary of
Defense, DOD Inspector General, Defense Contract Audit Agency, and
officials of the AIA. We will also make copies available to others
upon request.
Please contact me on (202) 512-4587 if you or your staff have any
questions regarding this report. Major contributors to this briefing
report were Charles F. Rey, Gordon W. Lusby, Frederick E.
Lundgren, and
Allen D. Westheimer.
David E. Cooper
Director, Acquisition Policy, Technology,
and Competitiveness Issues
INFORMATION ON EXECUTIVE AND
EMPLOYEE COMPENSATION AT TOP 10
DEFENSE CONTRACTORS
============================================================ Chapter I
EXECUTIVE COMPENSATION ELEMENTS
---------------------------------------------------------- Chapter I:1
(See figure in printed
edition.)
The three major elements of a typical executive compensation package
are salary, annual bonus plans, and other compensation arrangements.
Typically, a company's compensation committee (composed of members of
the Board of Directors) determines the amount and form of executive
compensation to be awarded each year. In general, this committee
considers such factors as company performance indicators or goals,
historical practices, and the current competitive environment (the
compensation practices of the marketplace). Salary is typically
established by determining the value of the executive's duties and
comparing it to salaries paid to similar executives of similar firms.
An executive's bonus is usually based on a comparison of the goals
set for the executive to the actual performance achieved by the
company for the time period being evaluated. Other compensation may
include the cash value of perquisites such as life insurance, club
memberships, and relocation reimbursements. Executives may also
receive various types of stock awards, including stock options, stock
appreciation rights, and restricted stock. However, we did not
determine the present value of unexercised stock awards or the total
number of shares executives held. We are reporting the net realized
value of stock options exercised during a particular fiscal year.
The stock options may have been awarded in previous years.
The Securities and Exchange Commission (SEC) changed its compensation
reporting requirements during the period being evaluated. For 1989
through 1992, it required corporations to report compensation for
their top five executives as a single amount that included base
salary, bonus, and other compensation. In October 1992, the SEC
issued new rules that required proxy statements to provide a more
detailed, 3-year history of compensation for the five most highly
paid executives earning more than $100,000 annually in salaries and
bonuses. The SEC also required firms to report estimates of the
value of stock options and stock appreciation rights granted.
RANGE OF SALARY, BONUS, AND
OTHER COMPENSATION FOR TOP FIVE
EXECUTIVES
---------------------------------------------------------- Chapter I:2
(See figure in printed
edition.)
The table shows the range (lowest and highest) of annual executive
salary, bonus, and other types of cash or equivalent compensation at
all
10 companies for their top 5 executives for the period 1989 to 1994.
The lowest amount received by any of the top 5 executives at the 10
defense contractors we examined was about $230,000 paid in 1989. In
turn, the highest amount received was about $17.92 million in 1993.
More detailed information is available in appendix IV.
RANGE OF NET VALUE OF EXERCISED
STOCK OPTIONS FOR TOP FIVE
EXECUTIVES
---------------------------------------------------------- Chapter I:3
(See figure in printed
edition.)
The table shows the range (the smallest and largest amount) of net
realized value of stock options exercised in the year by the top
5 executives at all 10 companies for the period 1989 through 1994.
The approximate largest amount realized in each of the years is as
follows:
1989 $918,000,
1990 $1,826,000,
1991 $2,681,000,
1992 $21,166,000,
1993 $25,989,000, and
1994 $8,533,000.
In most of the cases during 1989 through 1994, at least one executive
at each company did not exercise stock options during a fiscal year.
In addition, for almost one-third of the time none of the executives
exercised any stock options at the companies we examined. More
detailed information is available in appendix V.
HIGHEST AND LOWEST AVERAGE
ANNUAL COMPENSATION OF SALARIED
EMPLOYEES
---------------------------------------------------------- Chapter I:4
(See figure in printed
edition.)
Note: Data reported by 6 out
of the 10 companies for 1989-93
and 4 companies for 1994.
(See figure in printed
edition.)
The chart represents the range of average annual compensation for
salaried employees at the companies that reported data. The company
with the lowest average employee annual salary in 1989 reported the
amount of compensation at $35,900. The company with the highest
average annual salary in 1989 reported an amount of $48,700. In
1994, the figures were $48,100 and $55,000, respectively.
HIGHEST AND LOWEST AVERAGE
ANNUAL COMPENSATION OF HOURLY
EMPLOYEES
---------------------------------------------------------- Chapter I:5
(See figure in printed
edition.)
Note: Data reported by 6 out
of the 10 companies for 1989-93
and 4 companies for 1994.
(See figure in printed
edition.)
The chart represents the range of average annual wages for hourly
employees at the companies that reported data. The company with the
lowest average employee annual wages in 1989 reported the amount of
compensation at $24,700. The company with the highest average annual
wages in 1989 reported an amount of $35,200. In 1994, the figures
were $30,200 and $39,500, respectively.
INFORMATION ON RESTRUCTURING
STRATEGIES AT TOP 10 DEFENSE
CONTRACTORS
=========================================================== Chapter II
RESTRUCTURING STRATEGIES AT TOP
10 DEFENSE CONTRACTORS
--------------------------------------------------------- Chapter II:1
(See figure in printed
edition.)
With the end of the Cold War starting in the late 1980s, defense
contractors have generally faced a declining demand for their defense
products. As government defense contracts were completed, defense
contractors found that new orders were smaller or nonexistent and in
general, they needed to make adjustments to restructure, convert,
consolidate, and/or eliminate excess production capacity.
We found that the restructuring strategies companies have used to
adjust to the decreases in DOD procurement have included, to varying
degrees, (1) acquisition and/or merger with competitors, (2)
divestiture of units no longer considered to be part of the core
business, (3) consolidation of production facilities to reduce excess
capacity, and (4) commercialization of military technologies.
ACQUISITIONS AND MERGERS,
1994-95
--------------------------------------------------------- Chapter II:2
(See figure in printed
edition.)
ACQUISITIONS AND MERGERS,
1989-93
--------------------------------------------------------- Chapter II:3
(See figure in printed
edition.)
Of the 10 companies we reviewed, 8 have participated in a major
acquisition or merger event between 1989 and 1995. Some of these
companies participated in several separate acquisition events.
MAJOR DIVESTITURES
--------------------------------------------------------- Chapter II:4
(See figure in printed
edition.)
Note: Data as reported by the
companies.
(See figure in printed
edition.)
Two companies have used the strategy of divestiture. One sold some
of its defense business units. The other split its organization into
two separate companies, one primarily commercial, the other primarily
defense.
EXAMPLES OF CONSOLIDATION
EFFORTS, 1989-94
--------------------------------------------------------- Chapter II:5
(See figure in printed
edition.)
Based upon the information provided, some of the companies have
undergone a form of consolidation. This strategy may involve
consolidating any or a combination of (1) business units, (2)
management layers, and (3) organizational activities or functions.
COMMERCIAL USE OF MILITARY
TECHNOLOGY
--------------------------------------------------------- Chapter II:6
(See figure in printed
edition.)
(See figure in printed
edition.)
The chart represents examples of efforts at the some of the top 10
contractors to find commercial uses for military technologies they
have developed. The list is not comprehensive. These companies may
have additional examples, and companies not shown may also have
examples.
INFORMATION ON ASSISTANCE TO
SEPARATED EMPLOYEES AT TOP 10
DEFENSE CONTRACTORS
========================================================== Chapter III
ASSISTANCE AVAILABLE TO
SEPARATED SALARIED AND HOURLY
EMPLOYEES
-------------------------------------------------------- Chapter III:1
(See figure in printed
edition.)
Sharp reductions in defense expenditures have led to significant
downsizing of defense contractors and resulted in substantial
reductions in defense-related employment. Overall defense spending
and employment peaked in the mid-to-late 1980s and have steadily
declined since then. The most dramatic spending drops, and those
that have most directly affected the defense industry, have been in
the procurement accounts. Total defense-related employment at its
peak in 1987 was about 7 million workers and has declined to an
estimated 4.8 million in 1995. The Department of Labor estimates
that defense industry employment will continue to decrease for the
next 2 years.
The top 10 defense contractors we reviewed reported a total of about
188,000 employees being either voluntarily or involuntarily separated
between 1989 and 1994. At these companies, separations of employees
ranged from less than 2,000 to over 51,000. While data is limited on
the number of voluntary or involuntary separations, available
information indicates that a substantial percentage were
involuntarily separated. Insufficient data is available to determine
a breakdown of separations of executives or salaried and hourly
employees.
The following figures describe the types of assistance those top 10
defense contractors provide to either voluntarily or involuntarily
separated salaried and hourly employees. Data was not available on
assistance provided to executives. Voluntarily separated employees
typically received incentives to leave a company. Involuntarily
separated employees are those who were laid off.
EXAMPLES OF TERMINATION PAY FOR
INVOLUNTARILY SEPARATED
EMPLOYEES
-------------------------------------------------------- Chapter III:2
(See figure in printed
edition.)
EXAMPLES OF OUTPLACEMENT
SERVICES OFFERED
SALARIED/HOURLY EMPLOYEES
-------------------------------------------------------- Chapter III:3
(See figure in printed
edition.)
EXAMPLES OF BENEFITS FOR
VOLUNTARILY OR INVOLUNTARILY
SEPARATED EMPLOYEES
-------------------------------------------------------- Chapter III:4
(See figure in printed
edition.)
(See figure in printed
edition.)
VOLUNTARY SEPARATION PROGRAMS
-------------------------------------------------------- Chapter III:5
(See figure in printed
edition.)
EXAMPLES OF VOLUNTARY
SEPARATION PROGRAMS FOR
SALARIED EMPLOYEES
-------------------------------------------------------- Chapter III:6
(See figure in printed
edition.)
EXAMPLES OF VOLUNTARY
SEPARATION PROGRAMS FOR HOURLY
EMPLOYEES
-------------------------------------------------------- Chapter III:7
(See figure in printed
edition.)
LIST OF TOP 10 CONTRACTORS
=========================================================== Appendix I
(See figure in printed
edition.)
TOTAL SALES OF TOP 10 DEFENSE
CONTRACTORS
========================================================== Appendix II
(See figure in printed
edition.)
TOTAL EMPLOYEES OF TOP 10 DEFENSE
CONTRACTORS
========================================================= Appendix III
(See figure in printed
edition.)
COMPENSATION OF TOP FIVE
EXECUTIVES
========================================================== Appendix IV
(See figure in printed
edition.)
(See figure in printed
edition.)
(See figure in printed
edition.)
(See figure in printed
edition.)
Note: Data as reported in
company proxy statements.
Total current compensation
comprised of salary, bonus, and
other types of cash or
equivalent compensation.
(See figure in printed
edition.)
NET REALIZED VALUE OF EXERCISED
STOCK OPTIONS
=========================================================== Appendix V
(See figure in printed
edition.)
(See figure in printed
edition.)
(See figure in printed
edition.)
(See figure in printed
edition.)
Note: Data as reported in
company proxy statements.
(See figure in printed
edition.)
RELATED GAO REPORTS
Defense Sector: Trends in Employment and Spending
(GAO/NSIAD-95-105BR, Apr. 19, 1995).
Defense Downsizing: Selected Contractor Business Unit Reactions
(GAO/NSIAD-95-114, May 3, 1995).
Overhead Costs: Defense Industry Initiatives to Control Overhead
Rates (GAO/NSIAD-95-115, May 3, 1995).