EXHIBIT 10.8
(TENNECO AUTOMOTIVE LOGO)
EVA(R) INCENTIVE COMPENSATION
PLAN DOCUMENT
EFFECTIVE JANUARY 1, 2001
(STERN STEWART & CO. LOGO)
STERN STEWART & CO.
1345 Avenue of the Americas
New York, NY 10105
In view of the fact that EVA(R) and EVA(R) related methods and practices are
proprietary developments and services of Stern Stewart & Co., as a condition of
the engagement between Tenneco Automotive and Stern Stewart & Co., Tenneco
Automotive is required not to disclose any of the contents of this report to the
management of any other company, or consultant, accountant, or other
professional, which disclosure may be construed to be harmful to the consulting
practice of Stern Stewart & Co., without express written consent of Stern
Stewart & Co. All rights reserved. No part of this report may be reproduced or
transmitted in any form or by any means, electronic or mechanical, including
photocopy, recording, or any information storage and retrieval system, without
the written permission of Stern Stewart & Co. EVA(R) is a registered trademark
of Stern Stewart & Co. (C)All rights reserved.
TENNECO AUTOMOTIVE, INC.
EVA(R) INCENTIVE COMPENSATION PLAN DOCUMENT
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1. EVA INCENTIVE COMPENSATION...........................................3
1.1. Plan Overview...................................................3
1.2. Annual Incentive Plan...........................................3
1.3. Target Incentive Pay............................................4
1.4. Target Improvement..............................................4
1.5. Interval........................................................4
1.6. Bonus Bank......................................................6
1.7 Administration..................................................7
2. INCENTIVE COMPENSATION PLAN QUESTIONS AND ANSWERS...................10
3. DEFINITION OF TERMS.................................................12
APPENDIX: DEFINITION OF EVA.............................................13
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1. EVA INCENTIVE COMPENSATION
1.1. PLAN OVERVIEW
The objective of the EVA, or Economic Value Added, incentive compensation
program is to soundly link incentive awards to the creation of wealth, as well
as to promote a culture of performance and ownership (See Appendix for
Definition of EVA). In the program, long-term and enduring improvements in
shareholder wealth are rewarded with a share of the wealth created. The
framework provides the accountability needed by shareholders to empower
employees to manage the business as their own - to think like, act like, and be
rewarded as owners.
1.2. ANNUAL INCENTIVE PLAN
The incentive framework aligns employees with shareholders. It provides a
motivating force to grow shareholder wealth. The framework also manages the risk
imposed by Incentive pay and maintains a reasonable cost to shareholders.
Eligibility for the plan will be extended to all employees with the status of
either EICP (Executive Incentive Compensation Participant) or KMICP (Key
Management Incentive Compensation Participant).
The plan is built from five building blocks - parameters that have been tailored
to suit Tenneco Automotive's business, its people, and the objectives of its
shareholders: Target Incentive Pay, Target Improvement, EVA Interval, Bonus Bank
and Performance Weighting.
The plan pays TARGET INCENTIVE PAY for achieving TARGET IMPROVEMENT, the annual
EVA growth that is implicit from Tenneco Automotive's share price - the market's
expectation. In combination with Base Salary, the Target Incentive Pay should
provide participants with a competitive level of annual cash compensation.
The EVA INTERVAL simulates ownership by creating both upside opportunity and
downside risk. There is no limit to how large or how small incentive
declarations can be. They can even be negative. Exceeding investor expectations
increases Tenneco Automotive's value, while falling short of expectations
reduces Tenneco Automotive's value. The Interval is the exact EVA growth needed,
over and above Target Improvement, to get double Incentive Pay. It is also the
exact shortfall from Target Improvement that will cause zero Incentive Pay.
Incentive Pay Multiples can be calculated as:
<Table>
- ----------------------------------------------------------------------------------------
Incentive Pay Multiple Declared = 1 + [((DELTA)EVA - Target Improvement) / EVA Interval]
- ----------------------------------------------------------------------------------------
</Table>
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The BONUS BANK maintains a cumulative relationship between Incentive Pay paid
and EVA improvement, over time. All Incentive Pay declared (positive or
negative) is paid into your own personal bonus reserve. You must first always
pay off any negative balance. Secondly, you get a draw of up to 1.2x of your
Target Incentive Pay. Finally, you also receive one third of any remaining
balance in excess of 1.2x. Any remainder is banked forward to next year's
calculation.
PERFORMANCE WEIGHTING will be used to determine the final bonus declaration with
75% of Target Incentive Pay tied to total company EVA results and 25% of Target
Incentive Pay subject to the discretionary approval of the Chairman and the
Compensation Committee of the Board of Directors.
1.3. TARGET INCENTIVE PAY
Target Incentive Pay provides competitive pay for competitive performance. It
acts as a labor market benchmark that allows total compensation to be targeted
at a certain level. Target Incentive Pay is the "variable" pay that employees
expect to receive when performance meets expectations. At Tenneco Automotive,
Target Incentive Pay will vary depending upon salary grade level.
1.4. TARGET IMPROVEMENT
Target Improvement is the annual EVA growth required to warrant competitive pay.
Target Incentive Pay provides competitive awards for achieving Target
Improvement - the stock market's expectation for annual year-on-year EVA growth.
Target Incentive Pay is a benchmark derived from labor market studies; Target
Improvement is a benchmark derived from the share price. The Total Company
improvement target of $4MM is based on the expectations implied by Tenneco
Automotive's current stock price in relation to current EVA performance.
1.5. INTERVAL
The Interval sets the risk of the incentive plan. Generally, stable, predictable
businesses can handle more risk. The increased risk magnifies the effect that
variance from the EVA Target Improvement has on Incentive Pay. In other words,
the pay-performance line will be relatively "steep". Volatile or cyclical
businesses need a relatively less "steep" pay-performance line to maintain the
same level of compensation risk. In other words, the pay-performance line will
be relatively flat.
As per Figure 11, the Interval sets the slope of the pay-performance line,
driving plan
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risk. It is the amount of EVA growth above expectations needed to double Target
Incentive Pay. It is also the shortfall from Target Improvement that eliminates
Target Incentive Pay.
- --------------------------------------------------------------------------------
Zero Incentive Pay at: (DELTA)EVA = Target Improvement - EVA Interval
- --------------------------------------------------------------------------------
or,
- --------------------------------------------------------------------------------
Twice Target Incentive Pay at: (DELTA)EVA = Target Improvement + EVA Interval
- --------------------------------------------------------------------------------
For example, Tenneco Automotive must beat its $4MM Target Improvement by $16MM
to double Target Incentive Pay, or fall short of $4MM Target Improvement by
$16MM to declare zero Incentive Pay. Incentive Pay for any other performance
points can also be calculated using the aforementioned formula because the plan
function is a straight line (Figure 11).
FIGURE 1: 2001 RANGE FOR TENNECO AUTOMOTIVE, INC.
(GRAPHIC OMITTED)
The calibration of the Total Company Incentive Compensation Plan, i.e., Target
Improvement and Interval, have been established and fixed for a three (3) year
period.
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1.6. BONUS BANK
All Incentive Pay awards flow through a Bonus Bank, depicted in Figure 2. The
Bonus Bank promotes a long-term management horizon, ensures that only sustained
improvement is rewarded, and facilitates an equity-like payoff profile with both
unlimited upside and unlimited downside.
FIGURE 2: BONUS BANK
(GRAPHIC OMITTED)
As shown in Figure 3, when the balance exceeds 1.2 x Target Incentive Pay,
payment is equal to 1.2x Target Incentive Pay plus one-third of any remaining
balance. The remaining two-thirds is paid out if performance is sustained. If
EVA growth is poor, a negative amount can be banked. If a negative balance
exists, it must be paid off before any Incentive Pay is paid, maintaining the
relationship between cumulative excess returns and cumulative excess payouts.
Participants have their own individual Bonus Bank account.
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FIGURE 3: BONUS BANK HYPOTHETICAL ILLUSTRATION
TARGET INCENTIVE PAY: $100
<Table>
<Caption>
Year 1 Year 2 Year 3 Year 4
------ ------ ------ ------
Beginning Bank Balance $ 0 $ 40 $ 60 $ (30)
+ Incentive Pay Declared 180 170 (90) 120
----- ----- ----- -----
= New Bank Balance 180 210 (30) 90
Payout up to 1.2x Target 120 120 0 90
+ 1/3 of Excess 20 30 0 0
----- ----- ----- -----
= Total Payout 140 150 0 90
Ending Bank Balance $ 40 $ 60 $ (30) $ 0
</Table>
1.7. ADMINISTRATION
i. ELIGIBILITY: Designated US and non-US salaried employees to include
EICP participants and employees classified in US salary grades 24 and
above, or by specific designation for those below salary grade 24.
Those salaried employees participating in other incentive programs are
ineligible unless specifically stated otherwise.
ii. TRANSFERS: A Participant who transfers from one business unit to
another shall have their Bonus Bank transferred with them.
iii. RETIREMENT OR PERMANENT DISABILITY RETIREMENT: A Participant who
retires or becomes eligible for long term disability in accordance with
respective plan provisions shall receive full payment of their Bank
Balance and a pro rata Incentive Pay for the year in which they retire
or become disabled. Such payment shall be made in a lump sum or over
time at the employer's discretion.
iv. WORKERS' COMPENSATION OR LEAVE WITHOUT PAY (LWOP): A Participant who
leaves the payroll through Workers' Compensation or LWOP shall receive
no new Incentive Pay declarations while off the payroll, but shall
receive a pro rata Incentive Pay for the year in which they leave the
payroll. Such payment shall be made in a lump sum or over time at the
employer's discretion.
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v. TERMINATION : A Participant who is terminated and who has a positive
Bank Balance shall become vested with respect to such Bank Balance and
shall be paid in full at the regular time for making Incentive Pay
payments in respect of the termination.
vi. RESIGNATIONS AND OTHER TERMINATIONS (DISMISSALS): Except as provided by
the items above, voluntary termination of employment with Tenneco
Automotive or other termination shall result in forfeiture of any
unpaid declared Incentive Pay and of the balance in a Participant's
Bonus Bank.
vii. DEATH: The estate of a Participant who dies while in the employ of
Tenneco Automotive shall receive full payment of their Bank Balance and
a pro rata Incentive Pay for the year in which they die. Such payment
shall be made at the regular time for making Incentive Pay payments in
respect to the year of such death, and shall be paid to the designated
beneficiary or estate.
viii. NO GUARANTEE: Participation provides no guarantee the Incentive Pay
will be paid. The success of Tenneco Automotive as measured by the
achievement of EVA improvement, subject to approval by the Chairman and
the Board of Directors, shall determine the extent to which
participants shall be entitled to receive Incentive Pay.
Further, individual participant incentive payments will be subject to
final approval by the participant's manager and senior management team,
with consideration of the individual's successful job performance. The
management team will have discretionary approval of each individual
participant's payout amount.
ix. EXCLUSION CRITERIA: Participation in the plan is not a right, but a
privilege, subject to annual review by the employer. Tenneco Automotive
retains the right to withhold payment from any employee who violates
Company principles, philosophies, or the rules set up in the actual
incentive plan document.
x. NEGATIVE BALANCES: The entire Incentive Pay Declared is credited to
each employee's personal Bonus Bank account, with up to the Target
Incentive Pay and one third of any net positive balance paid out.
Residual amounts, including negative balances, are banked forward to be
credited or debited against future declared Incentive Pay amounts.
Negative balances shall not be held as claims against employees who
leave the payroll for any reason.
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xi. TIMING AND METHOD OF PAYOUT: Payouts, in accordance with plan
provisions, will be made in the form of lump-sum cash payments, subject
to applicable tax withholding, no later than at the end of the month of
February, based upon the previous year's performance.
xii. PLAN AMENDMENT/TERMINATION: The Company reserves the right to amend or
terminate this Plan at any time.
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2. INCENTIVE COMPENSATION PLAN QUESTIONS AND ANSWERS
i) WHY HAVE WE ADOPTED AN EVA-BASED ANNUAL INCENTIVE PLAN AT TENNECO AUTOMOTIVE?
In order to focus Tenneco Automotive employees on our stated mission of
"continually increasing shareholder value", incentive compensation is now tied
to EVA, a performance measure that is highly correlated with shareholder value.
By focusing on EVA improvement, the new plan strengthens the alignment between
managers and shareholder interests.
ii) HOW WERE THE EVA IMPROVEMENT TARGETS DETERMINED?
The EVA Incentive Compensation Plan is calibrated such that Target Incentive Pay
is paid for providing shareholders a competitive return versus comparable
investment alternatives.
iii) WHAT HAPPENS TO INCENTIVE COMPENSATION IF WE MISS THE EVA IMPROVEMENT
TARGET?
If actual EVA growth falls short of target, your incentive compensation declared
will be less than your Target Incentive Pay. EVA growth would need to be
extremely poor to get zero Incentive Pay. However, unlike traditional incentive
compensation plans, some incentive compensation can actually be declared even if
you "miss" the target. Your incentive compensation is the variable portion of
your pay, separate from your fixed salary. This variable portion is "at-risk"
and payment of this portion is aligned with performance on behalf of
shareholders. In other words, you receive a competitive level of pay if
shareholders receive a competitive return.
iv) SINCE EVA INCLUDES A CHARGE FOR CAPITAL, IS INCENTIVE PAY PAID FOR POSITIVE
EVA?
No. The underlying principle of the EVA incentive plan is that employees should
share with investors in any incremental value creation. In this sense, we
motivate employees to think like and act like owners. Incremental investor value
is created by EVA growth, not the absolute EVA amount, whether positive or
negative. Thus, the focus of an EVA plan is always on EVA improvement. Each
dollar of EVA improvement drives both incremental value and incentive
compensation.
v) HOW CAN YOU PAY INCENTIVE PAY FOR AN EVA IMPROVEMENT THAT IS LESS THAN ZERO?
Small Incentive Pay will be paid to managers proportionate to the poor, but
non-zero, return to shareholders. But remember, for any Incentive Pay less than
1x Target, the total compensation will be below market.
vi) WHEN WOULD I GET ZERO INCENTIVE PAY?
Plan participants receive zero Incentive Pay when there is a zero return to
investors (i.e.
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zero dividends and a share price that stays flat). A zero return to investors
does not occur until EVA improvement is less than the Target EVA Improvement
minus the EVA Interval (+$4 MM - $16 MM = -$12 MM). In other words, EVA would
have to decline by $12MM. Additionally, a participant's individual poor
performance may result in a reduced or zero payout.
vii) WHY DO THE EVA INCENTIVE PAY PLANS EMPLOY A BONUS BANK?
The Bonus Bank's primary objectives are to:
o Extend management's time horizon for decisions beyond a single year by
rewarding only sustained EVA performance
o Smooth Incentive Pay payments over the course of the business cycle
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3. DEFINITION OF TERMS
CAPITAL
The net investment in the operations of the business.
CAPITAL CHARGE
Calculated as the Cost of Capital times Capital. The capital charge is deducted
from profit (NOPAT, see below) to calculate EVA. The capital charge represents
the minimum required level of profit for EVA to be break-even.
COST OF CAPITAL
The rate of return required to compensate all investors for investing in the
business. It represents the rate of return that an investor could earn by
choosing another investment with equivalent risk. It is calculated using a
weighted average of the expected return on the firm's debt and equity capital.
ECONOMIC VALUE ADDED (EVA)
Economic Value Added; NOPAT - (Capital x Cost of Capital). A measure of profit
after subtracting the cost of all capital employed.
MARKET VALUE ADDED (MVA)
The excess market value above capital, it is the wealth created by the company.
NET OPERATING PROFIT (NOPAT)
Net Operating Profits After Tax. It represents the after-tax profit of a
business.
TARGET INCENTIVE PAY
The variable pay required to bring total cash compensation to a competitive
level. Target Incentive Pay is paid for EVA growth that meets investor
expectations.
TARGET IMPROVEMENT
The amount of EVA added to the prior year's result to arrive at the target for
the year ahead. The Target Improvement operationalizes the drive for continuous
improvement. It is calibrated from share price.
EVA INTERVAL
The amount of EVA in excess of target required to earn two times the Target
Incentive Pay, also the amount of EVA below target that drives Incentive pay to
zero.
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APPENDIX:
DEFINITION OF EVA
EVA, or ECONOMIC VALUE ADDED, is the measure of a firm's true economic profit
after charging for the cost of all capital employed. EVA is the one measure that
properly accounts for all of the complex trade-offs involved in creating value.
EVA is expressed as:
ECONOMIC VALUE ADDED = NOPAT - CAPITAL CHARGE
Where: NOPAT = Net Operating Profit After Taxes
Capital Charge = Cost of Capital * Capital Employed
EVA equals after-tax operating profits less a charge for the use of the capital
employed to create those profits. With EVA as a performance measure, a company
is effectively held accountable for returns on both debt and equity investment
with the capital charge incorporating both the explicit obligation to credit
providers as well as the implicit obligation to shareholders. EVA is the profit
remaining after this capital charge is subtracted from the company's NOPAT, or
net operating profit after tax.
Whether EVA is currently positive or negative is largely unimportant. The key
focus of EVA is improvement. If EVA is currently positive, the challenge is how
to grow EVA. If EVA is negative, then improving EVA to make it less negative
similarly creates value.
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