CUMMINS ENGINE COMPANY, INC.
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EXHIBIT 10(a)
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TARGET BONUS PLAN
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Adopted February 11, 1992
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OBJECTIVES:
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The Target Bonus Plan is designed to:
. Reinforce in the minds of Cummins management and other employees
the financial objectives of the Corporation.
. Attain and maintain a leadership position for the Corporation in
its method of compensating employees consistent with the
relative size of the business, the industry in which the
business competes and the relative performance of employees.
. Recognize the performance of the Corporation as a whole,
maximizing the contributions of the Corporation's various
businesses.
. Reward performance, both team and individual.
The Target Bonus Plan is an incentive plan providing compensation
which varies with the financial results of the Corporation.
PHILOSOPHY:
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Bonus payments will relate to the importance of the position in
influencing Corporate performance, the performance of the
Corporation in the fiscal quarter and the performance of the
individual in that quarter. Bonus payments are to encourage and
promote outstanding decisions and efforts by teams and individuals
for the benefit of the Corporation. If the employee team involved
in the Target Bonus Plan is successful in obtaining good
profitability for the Corporation, they, as a group, should share in
their success. The incentive of bonus payments encourages and
rewards profitable performance.
DEFINITIONS:
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1. "Base Salary" means the accumulated salary paid to the
participant during the applicable Quarter (exclusive of
allowances, incentive pay, reimbursed expenses, etc.) as
determined in accordance with rules established by the
Compensation Committee.
2. "Compensation Committee" means the Committee of the Board of
Directors of the Corporation designated to review compensation
of officers and directors.
3. "Corporation" means Cummins Engine Company, Inc.
4. "Participants" means the officers designated by the Compensation
Committee and/or other employees as designated by the President
or his designee.
5. "PBT" means the net income before interest expense of the
Corporation for the quarter as calculated by the Corporate
Accounting department.
6. "PBT ROS" means PBT divided by net sales of the Corporation for
the quarter.
7. "Plan" means the Target Bonus Plan described herein.
8. "Plan Year" means the Corporation's fiscal year.
9. "Return on Equity (ROE)" means Profit After Tax divided by
Average Net Worth.
10. "Average Net Worth" means the Net Worth of the Corporation as
of January 1 of the Plan Year, plus Net Worth of the
Corporation as of December 31 of that Plan Year, divided by
two (2).
11. "Profit After Tax" means the Profit After Tax of the
Corporation for the Plan Year as presented in quarterly or
year-end statements prepared for communication with
shareholders, and adjusted as deemed appropriate by the
President for purposes of calibrating this Plan.
ELIGIBILITY:
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Based on recommendations from management, the Compensation Committee
will designate certain officers of the Corporation each year who
shall be participants in the Plan, and shall designate the Target
Bonus Percentage applicable to such Participants. The Compensation
Committee, upon a recommendation from management, shall have the
power to change the Target Bonus Percentage of a Participant or
remove one or more Participants from the Plan.
Regarding employees other than officers, the Compensation Committee
delegates authority as specified in the foregoing paragraph to the
President of the Corporation.
TARGET BONUS PERCENTAGE:
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Each Participant in the Plan shall be assigned a distinct Target
Bonus Percentage by the Compensation Committee (if an Officer) or
the President (if not an officer) based on the following criteria:
1. Scope and breadth of the Participant's position.
2. Opportunity for independent thought and action.
3. Effect on the Corporation's performance.
4. Structure of decision making.
5. Working relationships.
6. Level of incentive compensation prevailing in the industry in
which the Corporation competes.
BONUS PAYOUT SCHEDULES:
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Annually a Bonus Payout Schedule will be calculated and made
available to Participants. The Bonus Payout Schedule will be
calculated to provide PBT ROS which translate to the following
levels of Return on Equity (ROE) for that Plan Year:
Target ROE
Equivalents Payout Factor
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.07 .1
Target: 13.8 1.0
19.2 2.0
The Target ROE levels and the equivalent PBT ROS Bonus Payout
Schedule may be changed by the Compensation Committee.
The Target ROE Equivalents will be checked periodically to determine
if they remain competitively appropriate.
TARGET BONUS:
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A Target Bonus is obtained for each Participant by multiplying the
Base Salary times the Target Bonus Percentage of the Participant.
During each Plan Year, the Participant will be informed of his/her
Target Bonus Percentage and Base Salary for purposes of the Plan for
that Plan Year.
EARNED BONUS:
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Corporate performance for each quarter in excess of the Target PBT
ROS or performance less than the Target PBT ROS will result in an
increased or diminished bonus, respectively, from the Target Bonus
communicated to the Participant. Earned Bonus will be calculated by
multiplying the Target Bonus Percentage times the Base Salary earned
in the quarter times the Bonus Factor associated with the actual PBT
ROS for that quarter as specified in the Bonus Payout Schedule in
effect for that Plan Year.
EXTRAORDINARY CHARGES AND CREDITS:
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For purposes of determining the Bonus Factor, the Corporate PBT will
exclude certain extraordinary charges and credits which occur
infrequently and are not a part of normal operating activities.
Some examples of extraordinary charges and credits which would not
have an effect on Corporate PBT in calculating Bonus Factor are:
. Gain or loss from disposal of principal operating location or
investment;
. Cost of Early Retirement Incentive programs;
. One-tine, cumulative Accounting adjustments;
. Cost of plant closings and operation restructurings.
Some examples of items that are recurrent and normal elements of
operating activities and WOULD BE included in Corporate PBT in
calculating Bonus Factor are:
. Write-down or write-off of receivables, inventories, equipment
leased to others or other intangible assets;
. Gains or losses from exchange or translation of foreign
currencies, including those related to major devaluations or
revaluations;
. Effects of a layoff of employees and benefits extended as part of
a layoff;
. Adjustments of accruals on long-term contracts.
The President of the Corporation is authorized to make final
determination of whether an extraordinary charge or credit is to be
included in PBT for purposes of calculating the Bonus Factor, within
the above guidelines.
ADJUSTMENT FOR INDIVIDUAL PERFORMANCE:
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The Earned Bonus will be the bonus paid except in unusual
circumstances where poor individual performance justifies a reduced
bonus. Unusually outstanding, one-time performance may be rewarded
outside of the Plan with monetary citation at the time the
outstanding performance is made. These variances must be approved
by the President of the Corporation.
OTHER ADJUSTMENTS:
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A Participant during any quarter, as approved by the Compensation
Committee (if an officer) or the President (if not an officer), will
be eligible for an Earned Bonus that will be calculated on the basis
of the amount of his/her Base Salary earned in that quarter and the
Target Bonus Percentage in effect at the end of that quarter.
TERMINATION OF EMPLOYMENT:
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During any quarter that a Participant's employment is voluntarily or
involuntarily terminated, including termination due to death,
disability or retirement, the amount of the Earned Bonus for that
quarter will be paid to the Participant or his/her legal
representative or estate, whichever is applicable, at the Bonus
Distribution Date next following that quarter.
BONUS DISTRIBUTION DATE:
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Any bonus earned pursuant to this Plan will be distributed as soon
as practicable following the determination of PBT ROS. In general,
the Bonus Distribution Date should be approximately six (6) weeks
following the end of the quarter in which the bonus is earned.
AMENDMENT AND TERMINATION:
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The Board of Directors may at any time amend, modify, alter or
terminate this Plan.
MISCELLANEOUS:
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There shall be no bonus pool or cumulative bonus pool. This Plan is
based upon the number of Participants, the Target Bonus Percentages
assigned and the number of Participants therein, the PBT ROS and the
Bonus Factors assigned thereto and the Base Salaries of the
Participants.
Nothing in this Plan shall be deemed to confer on any Participant
the right to continue in the employ of the Corporation or affect the
right of the Corporation to terminate the employment of any
Participant with or without cause.