CUMMINS ENGINE COMPANY, INC.
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EXHIBIT 10(b)
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FIVE-YEAR PERFORMANCE PLAN
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Effective as January 27, 1980
Amended as of December 10, 1985
Amended as of September 22, 1987
Amended as of January 12, 1989
The Five-year Performance Plan is hereby adopted by the Board of
Directors of Cummins Engine Company, Inc. (hereinafter called "the
Company"), with the objectives and upon the terms set forth herein.
1. Objectives:
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The objectives of the Plan are to:
(a) Serve as a balance to the short-term compensation provided by
base salary and bonus;
(b) Place emphasis on the medium-term performance of the Company
in direct relationship to its industry competitors;
(c) Strengthen the relationship between management and shareholder
interests by basing participation upon ownership of common stock of
the Company;
(d) Encourage participants to remain with the Company through
important business cycles.
Plan payments are intended to relate the varied influence
participating officers and key non-officers have in their
functional positions on the mid-term (5 year) operating results of
the Company. Calculation of the payout is intended to measure the
Company's internal performance (as measured by Return on Equity)
relative to a defined group of industry competitors over the same
mid-term period.
2. Definitions:
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(a) Average Net Worth -- Net worth of the Company as of January 1
plus net worth of the Company as of December 31, divided by two
(2).
(b) Base Salary -- The annualized salary of the participant in
effect on December 31 of the last year of each award cycle or the
year in which the participant joined the Company, whichever is
later.
(c) Compensation Committee -- The Committee of the Board of
Directors of the Company designated to review compensation of
officers, key non-officers and directors.
(d) Participants -- Officers or other employees designated
annually by the Compensation Committee.
(e) Plan -- The Five-year Performance Plan described herein.
(f) Award Cycle -- The five (5) year period upon which a
particular year's payout is calculated. A new cycle begins each
year as defined by the Company's fiscal year. Payout in any one
year is based upon actual results of the most recently completed
five (5) year period.
(g) Profit After Tax -- The profit after tax of the Company for
the calendar year as presented in the audited year-end statement
prepared for communication to shareholders.
(h) Return on Equity -- Profit after tax divided by average net
worth.
(i) Competitors -- Selected companies whose primary industry is
similar to Cummins. Those competitors are:
General Motors Dana
Ford Motor Company Fruehauf
Caterpillar Allis-Chalmers
Deere Paccar
Eaton Clark Equipment
(j) Takeover -- The occurrence of any of the following: (i) there
shall be consummated (A) any consolidation or merger of the Company
in which the Company is not the continuing or surviving corporation
or pursuant to which shares of the Company's common stock would be
converted in whole or in part into cash, other securities or other
property, other than a merger of the Company in which the holders
of the Company's common stock immediately prior to the merger have
substantially the same proportionate ownership of common stock of
the surviving corporation immediately after the merger, or (B) any
sale, lease, exchange or transfer (in one transaction or a series
of related transactions) of all or substantially all the assets of
the Company, or (ii) the stockholders of the Company shall approve
any plan or proposal for the liquidation or dissolution of the
Company, or (iii) any "person" (as such term is used in Sections
13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), other than the Company or a
subsidiary thereof or any employee benefit plan sponsored by the
Company or a subsidiary thereof or a corporation owned, directly or
indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company, shall
become the beneficial owners (within the meaning of Rule 13d-3
under the Exchange Act) of securities of the Company representing
25 percent or more of the combined voting power of the Company's
then outstanding securities ordinarily (and apart from rights
accruing in special circumstances) having the right to vote in the
election of directors ("Voting Shares"), as a result of a tender or
exchange offer, open market purchases, privately negotiated
purchases or otherwise, or (iv) at any time during a period of two
(2) consecutive years, individuals who at the beginning of such
period constituted the Board of Directors of the Company shall
cease for any reason to constitute at least a majority thereof,
unless the election or the nomination for election by the Company's
stockholders of each new director during such 2-year period was
approved by a vote of at least two-thirds (2/3) of the directors
then still in office who were directors at the beginning of such 2-
year period, or (v) any other event shall occur that would be
required to be reported in response to Item 6(e) (or any successor
provision) of Schedule 14A of Regulation 14A promulgated under the
Exchange Act.
3. Eligibility:
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The Compensation Committee shall determine each year the officers
and other employees of the Company who shall be Participants in the
Plan.
4. Target Award:
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Participants in the Plan shall be assigned a Target Award for an
Award Cycle by the Compensation Committee, in its discretion, based
on the following criteria, and such other criteria as the
Compensation Committee may determine from time to time:
(a) Scope and breadth of the Participant's position;
(b) Effect on the Company's mid-term performance;
(c) Work relationships.
The Target Award for an Award Cycle shall be expressed as a
percentage of Base Salary.
The Target Award for a respective Award Cycle shall be the highest
such percentage approved for that Participant prior to the actual
payout for that Award Cycle. Target Awards for an Award Cycle thus
may be changed during the course of an Award Cycle (but prior to
the payout being made for such Award Cycle) based on the
Compensation Committee's evaluation of changes in the
aforementioned factors for each Participant.
The eligibility of new Participants and their levels of
participation, if any, in Award Cycles already begun shall be at
the discretion of the Compensation Committee.
5. Payout Formula:
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The Payout Formula relates a Performance Index of the Company's
competitive performance over a five (5) year Award Cycle to a
Payout Factor designed to produce competitive cash accumulation
opportunities for Participants.
The Performance Index is derived from a comparison of the Company's
Return on Equity measured against the Return on Equity for the
Competitors over the same 5-year Award Cycle. For each Award
Cycle, the Company's Return on Equity is divided by the median
Return on Equity of its Competitors to arrive at a 5-year
Performance Index. In the event the Company has a year that
produces a negative Return on Equity, the Performance Index for
that year will equal zero. This index is then transposed to a 5-
year Payout Factor as contained in Exhibit A hereto. The Payout
Factor may be changed by the Compensation Committee in its
discretion. However, in the event of a Takeover, the provisions of
Section 8 shall apply in lieu of the provisions of this Section.
6. Payout Award:
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The Payout Award shall be determined as follows:
Base Salary x Target Award for x Award Cycle
the Award Cycle Payout Factor
7. Plan Restrictions:
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To strengthen the link between the Plan Participants and the
Shareholders, the following restrictions will be applicable:
(a) To be eligible to receive the Payout Award at the end of any
particular Award Cycle, a Participant is required to own on the
last day of such Award Cycle 500 shares of the Company's common
stock if the Participant was a Participant during any part of the
first year of such Award Cycle. If the Participant was not a
Participant during the first year of any respective Award Cycle,
then no stock ownership requirement exists to be eligible to
receive a payout for that Award Cycle. The foregoing common stock
ownership requirement shall be effective for Award Cycles ending
with the Company's 1985 fiscal year and thereafter, and such
requirement may be waived by the Compensation Committee if unusual
circumstances exist.
(b) Unless determined otherwise by the Compensation Committee,
Participants will be eligible to receive stock options under any
stock option plan of the Company in addition to any participation
under this Plan.
(c) The Company must have a positive return on equity when
averaged over a 5-year Award Cycle for any payout to occur.
8. Termination of Employment:
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(a) If a Participant's employment with the Company terminates
(except through retirement, disability or death), such Participant
will not receive a payout for any Award Cycle for which payment has
not been made where such Participant's employment and participation
in the Plan was for a period of 1 year or less. If a Participant's
employment so terminates during the second through the fifth years
of employment and participation in the Plan, the Compensation
Committee, in its discretion, shall determine whether the
Participant will receive a proportionate share payable at the end
of each of the Award Cycles initiated while such employee was
actively participating in the Plan.
(b) If a Participant retires, becomes disabled, or dies, the
Participant, or such Participant's estate, shall be entitled to
receive a share payable at the end of each of the Award Cycles
proportionate to the number of years such employee participated
during such cycle.
9. Performance Plan Payout:
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Any payout under the Plan will be made after the audit of the
Company's financial statements and after Return on Equity for the
Company and the Competitors have been determined. In general, the
payout date will occur as soon as possible following the end of an
Award Cycle, but not later than June 30 following such Award Cycle.
10. Takeover:
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In the event of a Takeover, the provisions of Section 5 shall not
apply. An Award for each Award Cycle in progress shall be payable
in full upon the date of the Takeover and shall be determined for
each cycle as follows:
Base Salary x Target Award for x Award Cycle Payout Factor
the Award Cycle
x Award Cycle Percent
Completion Factor
The Payout Factor for all Payout Award calculations shall be
determined by averaging the high 3 Performance Indexes of the last
5 Award Cycles completed prior to the Takeover. If fewer than 5
Award Cycles have been completed, the highest Performance Index of
those cycles completed will be used. The appropriate Index is then
transposed to a Payout Factor as contained in Exhibit A hereto.
The Award Cycle Percent Completion Factor for each Payout Award
calculation shall be determined by dividing the number of days in
the particular cycle completed prior to the Takeover by the number
of days in a complete cycle, 1,825 days.
11. Notice:
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To the extent practicable, the Plan shall be communicated as early
as possible to each Participant in each Award Cycle to permit
maximum incentive to be generated by the Plan.
12. Term:
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The Plan will continue from year to year until terminated by the
Compensation Committee.