EXHIBIT 10.18
December 20, 2004
Mr. James M. Jenness
2049 North Mohawk
Chicago, Illinois 60614
Dear Jim:
We are very excited that you have agreed to be Chairman of the Board and Chief
Executive Officer ("CEO") of Kellogg Company (the "Company"), subject to Carlos
Gutierrez's being sworn in as Secretary of Commerce. As we discussed, your
experience with the Company, and your extensive knowledge of our business will
make this transition as seamless as possible.
The following outlines the package of compensation and benefits that you
will receive in connection with agreeing to serve as the Company's CEO. Except
as specifically noted, all compensation and benefits will be provided only if
you actually begin employment as CEO.
1. Base Salary; Annual Incentive Plan.
Your starting base salary will be $1,050,000 per year (which approximates
the 50th percentile of the Company's peer group), and you will be eligible
for your first annual merit adjustment in April 2006. Under the Kellogg
Company Executive Compensation Deferral Plan, all base salary in excess of
$950,000 per year will be subject to mandatory deferral in stock units, to
be distributed in cash following your departure from employment with the
Company.
You will also participate in the Kellogg Company Annual Incentive Plan
(the "AIP"), with a target award for 2005 of 115% of base salary. Your
actual bonus awards will range from 0 to 200% of target, depending upon
achievement of the corporate, business unit and individual goals
established by the Company's Board of Directors (the "Board").
2. Long-Term Incentives.
You will also be eligible to participate in the Company's long-term
incentive program (the "LTIP"). The LTIP is currently comprised of grants
of stock options and the Executive Performance Plan (the "EPP"). Stock
options are typically awarded in the first quarter of the year, and all
stock option awards and features are otherwise subject to annual approval
by the Board. Each EPP is a three-year long-term performance plan, with
performance metrics and targets determined by the Compensation Committee
of the Board (the "Compensation Committee"). EPP awards range from 0% to
200% of target, depending upon the level of achievement of performance
goals established by the Compensation Committee, and are paid in shares of
Company stock. Additional terms and conditions of the EPP are described in
the plan summary that will be presented to you at the time of the award.
Mr. James M. Jenness
Page 2
December 20, 2004
Your 2005 LTIP target award will be established by the Compensation
Committee at approximately $5,000,000 - $6,000,000 (which approximates the
50th percentile of the Company's peer group), with 70% of that value being
reflected in your stock option award, and the remaining 30% representing
the target amount of your EPP award for the performance period 2005-2007.
3. Restricted Stock.
You will receive a restricted stock grant (the "Stock Grant") on the first
day of your employment as CEO (the "Start Date"), consisting of a number
of shares of the Company's common stock having an aggregate value of
$1,000,000, based on the average of the high and low trading price of the
common stock on the Start Date, rounded to the nearest whole number of
shares. The Stock Grant will vest on the third anniversary of the Start
Date, if you are still employed on that anniversary. If your employment is
terminated by the Company without Cause (as defined below) or by you for
Good Reason before the third anniversary of the Start Date, a pro-rata
portion of the Stock Grant will vest upon your termination. The pro-rata
portion will be determined by (i) multiplying the total number of shares
in the Stock Grant by a fraction, the numerator of which is the number of
whole and partial calendar months in the period from your Start Date
through the date of termination, and the denominator of which is 36, and
(ii) rounding to the nearest whole number of shares, if necessary.
Additional terms and conditions of your restricted stock grant are
described in the award letter and plan summary that will be presented to
you at the time of the award.
For purposes of this letter agreement, termination for "Cause" means
termination by the Company because of (i) your willful engaging in illegal
conduct or gross misconduct pursuant to which the Company has suffered a
loss, or (ii) your willful and continued failure to perform substantially
your duties hereunder in any material respect; provided, however, that in
the case of clause (ii), the Company must provide written notice of such
breach or failure within thirty (30) days of its discovery thereof, and
you shall have thirty (30) days from such written notice to cure such
breach or failure.
For purposes of this letter agreement, termination for "Good Reason" means
termination by you because of (i) a reduction in your base salary, as in
effect from time to time, (ii) the Company's failure to provide any fringe
benefit plan or substantially similar benefit or compensation plan which
has been made generally available to other management employees of the
Company at a level which is generally consistent with past practices;
provided, however, that nothing in this clause shall be construed to
constrain the Company from amending or eliminating any benefit or
compensation plan; (iii) a breach by the Company of its obligations to you
under this letter agreement in any material respect, or (iv) the
assignment of any duties inconsistent with the role of Chairman of the
Board and Chief Executive Officer of the Company or a diminution in your
responsibilities, authority or duties as in effect immediately prior to
such change; provided however, that in the case of each of clauses (i)
through (iv) hereof, you must provide written notice of any such alleged
action of the Company within thirty (30) days
Mr. James M. Jenness
Page 3
December 20, 2004
of the date you knew of such action and the Company shall have thirty (30)
days from such written notice to cure such action.
4. Retirement Benefits.
You will be eligible to participate in the Kellogg Company Salaried
Pension Plan (the "Qualified Plan"), the Kellogg Company Supplemental
Retirement Plan (the "Supplemental Plan") and the Kellogg Company Excess
Benefit Plan (the "Excess Plan") (collectively, the "Pension Plans"), to
the same extent and on the same basis as other senior executives, with the
modification explained below. The Qualified Plan is funded by Company
contributions to a trust, and the Supplemental Plan and the Excess Plan
benefits are paid by the Company out of general assets. None of the
Pension Plans requires employee contributions. Under the current terms of
the Pension Plans, you will begin building service credits on a monthly
basis the day you begin employment; you will become vested in the plan
upon completion of 5 years of vesting service; the amount of your benefit
is based on the number of years that you work for the Company and your
final average pay, which includes your AIP bonus (but not your EPP payouts
or equity compensation); and survivor options and disability benefits are
provided under the plan.
In addition to the Pension Plans, you will participate in the Kellogg
Company Key Executive Benefits Plan (the "Key Executive Plan") to the
extent necessary to ensure that if your employment with the Company is
terminated (1) after you have completed three years of service but before
you have completed five years of service and attained age 62, or (2) by
you for Good Reason at any time before you have completed five years of
service and attained age 62, you will receive an aggregate pension benefit
equal to the benefit you would have received under the Pension Plans if
you had attained age 62 with 5 years of service (provided that the amount
of your accrued pension benefit will be determined based on your actual
years of service and your actual compensation during employment).
Furthermore, whenever your employment with the Company terminates, you
will receive a retiree medical benefit, for you and your eligible
dependents during your lifetime, similar to the coverage that Carlos would
have had in the event he had retired under the applicable plan at the time
your employment terminates, or the cash equivalent thereof, as reasonably
determined by the Company.
5. Other Employment and Severance Benefits.
You will also be eligible to participate in the Kellogg Company Savings
and Investment Plan and the Kellogg Company Supplemental Savings and
Investment Plan (Restoration Plan), to the same extent and on the same
basis as other senior executives. Under the current terms of these plans,
you will be eligible to start making your own contributions immediately,
and after you have completed one year of service, the Company will begin
contributing to your account at a rate of 100 percent for the first 3
percent of your contributions and 50 percent on the next 2 percent of your
contributions.
Mr. James M. Jenness
Page 4
December 20, 2004
You will also be entitled to participate in the Company's other employee
benefit plans and senior executive benefit plans, as in effect from time
to time. The employee benefit plans currently include life insurance,
medical insurance, dental plan, salary continuation plan in the event of
personal illness, holidays, and vacation. The senior executive benefit
plans currently include the Executive Survivor Income Plan, which provides
Company sponsored life insurance, and the Change of Control policy, which
provides certain benefits in connection with a change of control of the
Company. When you leave the Company, if (a) you use your good faith
efforts to sell your primary residence in the Battle Creek/Kalamazoo area
for the highest price available at the time, and (b) the sale takes place
within 12 months of your departure date, the Company will pay to you the
excess, if any, of your purchase price over the sale price of the
residence.
In addition, in the event your employment is terminated by the Company
without Cause or by you for Good Reason, you will be entitled to receive
severance in an amount as determined by the Board (but in no event less
than two times your then-current base and target bonus), conditioned upon
your signing and not revoking a form of separation agreement furnished by
the Company, which would include, among other things, an agreement not to
compete and a release of claims. You would not be eligible to receive
severance payments if you are otherwise eligible to receive payments under
the Change of Control policy.
The Company also will pay the expenses involved in moving you and your
family to your new location consistent with our relocation policy.
6. Other Benefits.
We understand that you have resigned from your position with Integrated
Merchandising Systems, LLC ("IMS"), in order to make yourself available to
accept the position as the Company's Chairman and CEO. We also understand
the financial and other consequences that would occur if you do not become
the Company's Chairman and CEO. Accordingly, subject to the next two
sentences, the Company will pay you $2,215,000 (the "Payment") to
compensate you for your forfeiture of specific benefits from IMS or an
affiliate of IMS relating to bonus and performance programs (the
"Forfeited Benefits") and in recognition of the preparatory work you are
doing during this interim period. The Payment will be made to you on or
before December 31, 2004, regardless of whether you become the Company's
Chairman and CEO. As we discussed, if Carlos is sworn in as Secretary of
Commerce and you do not become the CEO for any reason other than your
death or disability or a termination of this letter agreement by the
Company, you will not be entitled to receive any portion of the Payment
(and you will refund to the Company any portion of the Payment that you
have already been paid). You also agree that you will refund to the
Company any portion of the Payment that you receive from the Company to
the extent that you actually receive the applicable Forfeited Benefit from
IMS or an affiliate of IMS.
Mr. James M. Jenness
Page 5
December 20, 2004
We also recognize that it may be difficult to secure a comparable position
under these circumstances for a variety of reasons, including the fact
that you are subject to a non-compete with IMS, and that by resigning your
position you have given up substantial death and disability benefits from
IMS. Consequently, if Carlos remains the CEO, or if he is sworn in as
Secretary of Commerce but you do not become the CEO as a result of your
death or disability or a termination of this letter agreement by the
Company, the Company will pay you (or your estate, in the event of your
death) $1,600,000 (your estimated average total compensation for the past
three years) annually for the next three years. As we discussed, this
amount would be offset by income that you earn from another employer or
other similar business arrangement during that three-year period. In any
event, we would expect that you would remain on our Board.
7. Tax Law Change.
As you may know, the American Jobs Creation Act of 2004 (the "AJCA") made
sweeping changes to the tax law governing nonqualified deferred
compensation. Any deferred compensation that you may earn as CEO will be
subject to the new rules, and a failure to comply with those rules would
result in substantial tax penalties to you. It is the Company's intention
to make every effort to comply with the new rules, to avoid adverse tax
consequences to you and other employees. The changes will be designed with
the intention of preserving the economics of the affected arrangements.
In particular, we anticipate that it will be necessary to amend the
Supplemental Plan, the Excess Plan, the Key Executive Plan, and the
Supplemental Savings and Investment Plan, among other Company
arrangements, to comply with the new rules by, among other things,
imposing stricter limits on the timing of payouts and elections by
participants. These amendments will apply to you in the same manner as to
the Company's other executives. Furthermore, although we believe that this
letter agreement complies with the new tax law, and that no provision of
this letter agreement constitutes a material modification, within the
meaning of Section 885(d)(2)(B) of the AJCA, of the Supplemental Plan, the
Excess Plan or the Key Executive Plan, the Treasury Department has not yet
issued regulations under the AJCA, and many questions remain unclear.
Accordingly, if the Company determines, after regulations are issued and
in consultation with its tax advisors, that any provision of this letter
agreement does not so comply, or does constitute such a material
modification, the provisions in question will not be operative, and you
and the Company will make mutually acceptable revisions to this letter
agreement so that you receive the same economic benefits in a manner that
avoids adverse tax consequences to you and the other participants in the
listed plans.
8. Miscellaneous.
As a matter of Company policy, your employment is contingent upon you
successfully passing a drug screen. Under Company policy, all employment
is at-will, and any exceptions must be in writing and approved by an
authorized officer. The Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or
Mr. James M. Jenness
Page 6
December 20, 2004
otherwise) to all or substantially all of the business and/or assets of
the Company to assume expressly and agree to perform this letter agreement
in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place. "Company"
means the Company as hereinbefore defined and any successor to its
business and/or assets as aforesaid that assumes and agrees to perform
this letter agreement by operation of law or otherwise.
We are very excited about the prospect of your becoming the Chairman and
Chief Executive Officer of Kellogg Company. Upon your execution of this letter
agreement, it will become a binding agreement between you and the Company.
Sincerely,
/s/ Gordon Gund
Gordon Gund
Chairman, Nominating and
Governance Committee
Acknowledged and agreed this
22 day of December, 2004
/s/ James M. Jenness
- --------------------
James M. Jenness