February 6, 2002
Michael McLain
325 Willow Springs Road
Indianapolis, IN 46240
RE: FY 2002 Aearo Company Management Incentive Program
Dear Michael:
As a key member of the Aearo management team, you have been selected to
participate in the Company's Management Incentive Program. This letter provides
specific information about your participation in the plan. It details the
potential payout you can earn based upon Aearo's financial performance and the
successful achievement of your individual goals.
Your target payout opportunity is expressed as a percentage of your base annual
salary as stated below. The target payout is comprised of two components.
Seventy-five percent of the payout is based upon Aearo's Global Operating Cash
Flow (OCF). The remaining twenty-five percent is based upon the achievement of
your individual goals.
The OCF threshold, target, and stretch values are set at the beginning of the
fiscal year. If Aearo achieves its FY 2002 stretch goal of $54.8MM OCF, you will
earn 200% of your target OCF component payout. If OCF for the year is at the
threshold value, you will only earn 50% of your target OCF component payout. The
OCF component payout will be prorated to reflect actual Aearo OCF performance
between the threshold and stretch values. If OCF falls below the threshold
value, no OCF component payout will be made.
How much of the goals-based component is paid will be determined by your
performance against your goals as assessed by your manager and affirmed through
the process of two-level review. Further, if OCF performance is below threshold,
any funding for the goals-based component of the plan would be at the discretion
of the Board of Directors.
A summary of your FY 2002 payout potential follows:
Factors:
- ------------------------------------------------ ----------------------
Current Base Annual Salary: $500,000
- ------------------------------------------------ ----------------------
Participation Level: 50%
- ------------------------------------------------ ----------------------
Target payout: $250,000
- ------------------------------------------------ ----------------------
Page Two
FY 2002 Threshold FY 2002 Target FY 2002 Stretch
$46.2MM OCF $50.5MM OCF $54.8MM OCF
- ------------------------ ------------------- ----------------- ---------------
- ------------------------ ------------------- ----------------- ---------------
OCF Component (75%) $93,750 $187,500 $375,000
- ------------------------ ------------------- ----------------- ---------------
- ------------------------ ------------------- ----------------- ---------------
Goals Component (25%) $62,500 $62,500 $62,500
- ------------------------ ------------------- ----------------- ---------------
- ------------------------ ------------------- ----------------- ---------------
Total Potential Payout $ $ $
- ------------------------ ------------------- ----------------- ---------------
Base annual salary at the close of the fiscal year (9/30/02) will be used in
calculating payouts. Participants who voluntarily terminate their employment or
who are involuntarily terminated for performance-related reasons prior to the
close of the fiscal year forfeit any payout under the program. Employees who are
involuntarily terminated prior to the close of the fiscal year as the result of
reductions-in-force, redundancy, or job elimination would receive a prorata
portion of any payout made based on months worked during fiscal 2002.
Fiscal Year 2002 promises to be a challenging one. Let's all stay focused on
achieving our financial objectives through successful new product launches,
sales growth, and careful expense management.
Sincerely,
[OBJECT OMITTED]
Michael A. McLain
Note: Global Operating Cash Flow (OCF) is synonymous with Earnings before
Interest, Taxes, Depreciation and Amortization (EBITDA).