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EXHIBIT 10.1
TRANSTECHNOLOGY CORPORATION
FY'96-98 INCENTIVE COMPENSATION PLAN
The goal of the 1996-98 Incentive Compensation Plan is to directly align the
focus and remuneration of the divisional and corporate management with that of
the shareholders. This means that long term growth in the value of the business,
in addition to short term profit increases, will be key considerations in
awarding bonuses. That is not to say, however, that short term achievements
should not be considered for the payment of bonuses or that the time frame of
paying out such "Shareholder Value" based bonuses should be excessively long.
Individuals receiving bonuses should have the criteria used in determining and
measuring those bonuses fall within events which they can control and/or
influence. Individuals, and individual business units, should be rewarded for
their performance and should not be penalized for the failure of another unit,
yet at the same time, at another level, it is important to recognize that we are
all in this together. Incentive Compensation should be adequately high to
motivate the best managers, yet not become an obstacle in the minds of
shareholders that management is receiving a disproportionate award. Each of
these considerations is addressed and included in this plan. The 1996-98 plan
reflects the input of the corporate officers and staff, division presidents, and
the Incentive Compensation Committee of the Board of Directors.
THE OBJECTIVES OF THE 1996-1998 INCENTIVE COMPENSATION PLAN ("THE PLAN") ARE TO
(1) RECOGNIZE THE ACHIEVEMENT OF ABOVE AVERAGE RESULTS IN THE CURRENT FISCAL
YEAR; AND, (2) REWARD INCREASES IN THE VALUE OF THE ENTITY (AS DETERMINED BY THE
MARKETS AND AS SHARED WITH THE SHAREHOLDERS) OVER THE LONGER TERM. These goals
are consistent with the guidelines and objectives of the incentive compensation
program as established by the Board of Directors.
DIVISIONAL BONUS POOLS
ANNUAL CASH BONUS
The Plan will have two components. The first is a bonus to be paid in cash
annually at the conclusion of the fiscal year end audit, as is currently done.
Determination of the bonus pool amount and eligibility will be essentially
unchanged from that used in the old plan. The '96-'98 Plan's bonus pool for a
division staff will be 2% of BTP before the bonus, any acquisition interest, and
corporate charges and .6% of that same sum for Division Presidents. The total
amount of the annual cash bonus pool, however, will be reduced by the
elimination of the "multiples" that were a significant portion of the '93-'95
Plan. The '93-'95 plan "multiples" were established as an incentive for the
divisions to provide consistent financial performance during the difficult
corporate restructuring that was
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INCENTIVE COMPENSATION PLAN 1996-98
AS APPROVED BY THE BOARD OF DIRECTORS JULY 12, 1995 AND
AS AMENDED OCTOBER 19, 1995
PAGE 2
accomplished over the period. Now, with the corporate restructuring essentially
complete, the focus of the '96-'98 Plan is to increase shareholder value,
primarily through annual increases in BTP. A comparison of the bonus target
criteria between the old and new plans is as follows:
CRITERIA '93-'95 '96-'98
Tactical plan operating income 35% 30%
Tactical plan objectives 30% 15%
Tactical plan cash flow 10% 10%
Return on investment 20% 15% 10%
Operating income growth 7.5% 10% 30%
Productivity growth 6% 0% 5%
Total 100% 100%
Consistent with the overall objective of the '96-'98 Plan to increase BTP over
the prior period, the "growth" criteria, operating income growth and
productivity growth have been increased to provide the proper focus for the
Divisions.
Each individual criteria for the annual cash bonus will stand on its own merit
and no bonus will be paid for the performance against the criteria that is less
than 80% of the target. In the event that a "hurdle" rate, such as tactical plan
targets, ROI, growth, etc are exceeded, then the relative points awarded under
that criteria may exceed the amount shown above by the ratio of the actual over
the target. As a result, based upon the measurable criteria, the bonus paid out
could be more than 100% of the target bonus.
An example of how a bonus could exceed 100% of the target bonus is set forth
below:
CRITERIA Actual Plan points Bonus points
Tactical plan operating income 120% 30% 36%
Tactical plan objectives 100% 15% 15%
Tactical plan cash flow 90% 10% 9%
Return on investment 20% 25% 10% 12%
Operating income growth 7.5% 10% 30% 40%
Productivity growth 6% 8% 5% 6.5%
Total 100% 100% 118.5%
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INCENTIVE COMPENSATION PLAN 1996-98
AS APPROVED BY THE BOARD OF DIRECTORS JULY 12, 1995 AND
AS AMENDED OCTOBER 19, 1995
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Under the above scenario, the actual bonus to be paid would be 118.5% of the
respective 2% and .6% for Division staff and Presidents. The excess over 100%
has no effect on the DEV portion of the bonus.
Division Presidents, who in the past received a cash bonus equal to 50% (i.e.,
1%) of that paid into the staff pool, has a pool established at 30% (or .6%) of
that established for the division staff. This reflects the desire to have
Division Presidents rewarded more as entrepreneurs who are paid upon the sale of
their business than as caretakers who complete each year and do not necessarily
have the longer term goal in mind. This reduction of 40% compared to the prior
years' plan is compensated for by establishing the Long Term component of the
plan, as discussed below.
The add-on restricted stock bonus would be reduced from the old plan's 25% to
10%. Criteria for awarding bonuses (operating income to tac plan, 20% return on
equity, cash flow objectives, 15% annual operating income growth, and
strategic/operational goals) are generally the same, as shown above, however, 6%
annual productivity increases will become one of the "bogies" for earning annual
cash bonuses.
LONG TERM INCREASE IN SHAREHOLDER VALUE BONUS
The second bonus component will be based upon the relative contribution to
increased shareholder value over a three year period as determined by the market
place. This component, in essence, determines a value for each operating
division based upon its Earnings before interest and taxes ("EBIT") and TTC's
Price Earnings multiple ("PE"). This PE is independently established in the
stock market and is a reflection of the value placed upon TTC by investors. The
increase in value of the entity over the three year term of the Plan (DELTA
ENTERPRISE VALUE, OR "DEV") would be determined and, to the extent that DEV
exceeded a hurdle rate of return, established by the Board and commensurate with
the long term financial goals of TTC, then 2.0% of that excess increase in value
would be paid to the Division President, in cash, at the end of the measurement
period (generally, 3/31/98).
The '96-'98 Plan therefore provides participants the opportunity to realize a
bonus not only by increasing annual earnings and achieving annual operating,
financial, and personal goals, but also for a achieving an increase in the value
of the company as a whole as expressed by a higher PE ratio. The correlation
with the PE ratio ties this portion of the bonus directly to real, long term
increases in shareholder value. However, out of fairness
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INCENTIVE COMPENSATION PLAN 1996-98
AS APPROVED BY THE BOARD OF DIRECTORS JULY 12, 1995 AND
AS AMENDED OCTOBER 19, 1995
PAGE 4
to the individual divisions, in order to avoid a "penalty" as a result of a bear
market, or the failure of another business unit, a floor PE, equal to that at
the beginning of the initial measurement period for "Enterprise Value", i.e.,
that at 3/31/95, would be established. The ending DEV then would be determined
using a PE not lower than the floor PE as established at the beginning of the
'96-98 Plan.
ENTERPRISE VALUE of a division will be determined by multiplying the division's
BTP (with corporate fees, interest and any accrued bonuses added back) by the
EBIT multiple. BTP will be that determined upon the completion of the year end
certified audit. Local third party debt will be subtracted in arriving at net
enterprise value, at the beginning and end of the measurement period.
THE EBIT MULTIPLE is derived using TTC's PE ratio based upon the average closing
price for the ten days following the release of the current fiscal year end
earnings (May 17, 1995) divided by the per share income from continuing
operations for that fiscal year ($1.45). The resultant PE ratio is then
multiplied by TTC's ratio of Net Income from continuing operations to EBIT in
order to obtain the EBIT multiple. For the seven trading days following the
release of FY'95 earnings, the average PE was approximately 8 times. For FY'95
net income from continuing operations was $7 million and EBIT was $12.7 million,
yielding a ratio of 55%. Multiplying this ratio times the PE of 8 yields an EBIT
multiple of 4.5.
To determine Enterprise Value, using the above EBIT multiple on Breeze
Industrial's FY'95 results, yields an enterprise value of $35.8 million at the
end of FY'95. The final beginning Enterprise Value, for purposes of calculating
DEV under the bonus plan, would not be determined until the closing trades on
June 1, 1995 are reported, thus completing the ten day trading period.
The DEV Hurdle Rate has been established at 12% by the Board of Directors. This
rate is established to represent the overall return an investor would seek at
the beginning of the three year measurement period. To the extent that the
actual realized return only meets that expectation, no DEV bonus would be paid,
as the increase in shareholder value would not be considered "above average" or
"outstanding", the criteria for earning a bonus. However, to the extent that the
hurdle was exceeded, then an increase in shareholder value beyond the
expectations of the market has been deemed delivered, and participants in the
plan will truly have earned a bonus based upon delivering increases in
shareholder value. The DEV bonus payout has been established at 2% of the excess
of
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INCENTIVE COMPENSATION PLAN 1996-98
AS APPROVED BY THE BOARD OF DIRECTORS JULY 12, 1995 AND
AS AMENDED OCTOBER 19, 1995
PAGE 5
the DEV required using the compounded hurdle rate. The "target" Enterprise Value
will be determined in June, 1995. An annual statement of "Interim" Enterprise
Value will be circulated amongst the divisions at the end of FY'96 and FY'97 in
order to communicate progress towards the DEV goal and to provide measurement
points in the event of certain events.
There is no ceiling or cap placed upon the bonuses to be paid. The DEV PE floor
ratio would be established as previously noted.
IN THE EVENT OF THE SALE OF A DIVISION, the final Enterprise Value will be the
selling price of the Division and the DEV bonus will be calculated on the
difference between the final Enterprise Value and the Base Enterprise value.
IN THE EVENT OF THE SALE OR MERGER OF TRANSTECHNOLOGY, the final Enterprise
Value will be calculated using the PE ratio which results from the transaction's
selling price per share of TTC stock against the most recent fiscal year end
earnings data.
IN THE EVENT OF TERMINATION OF EMPLOYMENT, DEATH, OR DISABILITY, bonus
calculation rules will be applied as are currently done for longevity, however,
the final DEV bonus for such participants will be calculated using the PE ratio
and EPS at the end of the current fiscal year as if it were the final year of
the Plan.
IN THE EVENT OF A CHANGE IN CONTROL, as defined in the Long Term Incentive Plan
approved by the shareholders, the Enterprise Value would be calculated using the
EBIT multiplier based on a PE derived from the average closing price of TT stock
for the ten trading days immediately preceding the change in control and the EPS
from the most recent fiscal year ended prior to the change in control or the
trailing four fiscal quarters, whichever is greater, (adjusted for actual shares
outstanding prior to the change in control). Within ten days of a change in
control occurring, the bonus pool under the resultant DEV calculation will be
paid out in cash to the participants.
For purposes of this plan, A GROUP DIRECTOR will be treated as a President of
the entire group with any bonus calculated based upon the operations of the
group on a consolidated basis. PRESIDENTS OF BUSINESS UNITS WITHIN A GROUP will
be treated as Division Presidents. In a case where a Group Director also acts as
a Division President, in recognition of the fact that the second in charge at
the local operation in essence performs the role of a local Division President,
the Group Director shall designate the person to be
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INCENTIVE COMPENSATION PLAN 1996-98
AS APPROVED BY THE BOARD OF DIRECTORS JULY 12, 1995 AND
AS AMENDED OCTOBER 19, 1995
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treated, for purposes of this Plan, as Division President. In no instance may a
Group Director receive a bonus as Group Director and Division President.
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INCENTIVE COMPENSATION PLAN 1996-98
AS APPROVED BY THE BOARD OF DIRECTORS JULY 12, 1995 AND
AS AMENDED OCTOBER 19, 1995
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CORPORATE OFFICE POOLS
ANNUAL CASH BONUSES
The Plan will have two components. The first is a bonus to be paid in cash
annually at the conclusion of the fiscal year end audit, as is currently done.
The '93-'95 Plan bonus pool for the corporate office pools, combined, was 2.5%
of BTP before the bonus. Under the '96-98 Plan, this pool would change to 3.25%
of net after tax income from continuing operations. This change of measuring the
the pool from BTP to after tax earnings serves as a reduction of annual cash
bonuses by approximately 60%. Criteria for awarding bonuses are as set forth
below:
Officers Officers Staff
CRITERIA '93-'95 '96-'98 '96-98
Tactical plan operating income 35% 30% 20%
Personal plan objectives 30% 15% 40%
Tactical plan cash flow 10% 10% 5%
Return on investment 20% 15% 10% 5%
Operating income growth 7.5% 10% 30% 25%
Productivity growth 6% 0% 5% 5%
Total 100% 100% 100%
Each individual criteria for the annual cash bonus will stand on its own merit
and no bonus will be paid for performance against the criteria that is less than
80% of the target. No bonus pool will be paid against the criteria that is less
than 80% of target. As in the Division bonus program, performance in excess of
100% of goal for operating income, cash flow, return on investment, operating
income and/or productivity growth may result in bonus points exceeding 100% of
the target bonus.
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INCENTIVE COMPENSATION PLAN 1996-98
AS APPROVED BY THE BOARD OF DIRECTORS JULY 12, 1995 AND
AS AMENDED OCTOBER 19, 1995
PAGE 8
In the old plan, there were two separate pools for the corporate officers/staff
and other corporate staffers received subjective bonuses unaffiliated with hard
targets or measurements. In the new plan, the pool has been slightly increased
but the number of participants broadened. Allocations of the corporate pool are
as follows:
CEO 30.46%
COO 20.31%
CFO 16.92%
VP Operations 13.04%
General Counsel 8.46%
Corp. Staff 10.80%
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Total 100%
Bonus awards from the pool for non-officers would be based 40% upon the
achievement of personal objectives and 60% upon the achievement of corporate
goals. Personal goals must be established by department heads jointly with the
participants, in writing, at the beginning of the fiscal year and made subject
to review at year end, prior to recommendation of bonus payments.
Corporate Officers will receive an add-on bonus in restricted stock equal to 10%
of the annual cash bonus, similar to that feature in the Division's plans.
Current criteria for meeting non-financial objectives and goals generally remain
unchanged, although the productivity increase standard has been added to the
corporate goals as a bonus criteria.
LONG TERM INCREASE IN SHAREHOLDER VALUE BONUS
The Corporate Office will have a single DEV pool which will be based upon
changes in Enterprise Value using the PE ratio calculated using the same methods
as that for the Divisions applied to Net income (after tax) from continuing
operations for the period. There would be no adjustment to an EBIT multiplier
for the Corporate Office pool. Payout procedures and timing are the same as that
used in the Divisions. The DEV component of the Corporate Office pool will be
paid in cash upon the conclusion of the FY'98 year end audit and the ten day
stock trading period following the release of the audited earnings. The DEV
bonus pool, which will equal 5% of the excess DEV over the 12% hurdle rate, will
be allocated in the same manner as the annual cash bonus pool as reflected
above.