EXHIBIT 99.1
DESCRIPTION OF 2004 SOLUTIA ANNUAL INCENTIVE PROGRAM
This document summarizes the 2004 Solutia Annual Incentive Program ("Program").
INCENTIVE FUNDING
Solutia is organized along business lines in order to place emphasis on the
performance of each individual division. Incentive programs are aligned with
this structure. For 2004, the size of the incentive pool for those assigned
to business divisions will be based on the achievement of specific business
objectives. For employees assigned to "core" areas, overall enterprise
performance determines the size of the incentive pool. Unlike the 2003
incentive program, there IS NOT a threshold level of corporate performance
that must be met in order for the incentive program to fund.
The performance metrics that will determine the size of the incentive pool
for each core unit are free cash use and enterprise cost reduction. For each
business unit, the metrics include one or two of the following metrics:
EBIT, cost reduction, free cash flow, and EBITDA. For each of these metrics,
dollar amounts have been established that must be attained for funding of
the Program from 0.5x (75% of Plan) to 2.0x (150% of Plan).
DEFINITIONS OF MEASURES
For the purposes of the Program the performance measures have the following
meaning:
"EBIT" means, with respect to any specified entity for any period,
consolidated net income (loss) of such specified entity and its subsidiaries
for such period, determined on a consolidated basis and in accordance with
GAAP, excluding (without duplication), to the extent deducted in determining
consolidated net income (loss) (a) any extraordinary or non-recurring or
non-cash gains or losses or gains or losses from dispositions, (b)
restructuring charges, and (c) effects of discontinued operations, plus
(without duplication), in accordance with GAAP and to the extent deducted in
determining consolidated net income (loss), (i) interest expense, (ii)
income tax expense, and (iii) reorganization items.
"EBITDA" means, with respect to any specified entity (i.e., Pharmaceutical
Services) for any period, EBIT plus, in accordance with GAAP, (i)
depreciation expense, and (ii) amortization expense excluding amortization
of deferred credits.
"FREE CASH FLOW" or "FREE CASH USE" means, with respect to any specified
entity for any period, the cash flow provided by (used in) continued
operations of such specified entity and its subsidiaries for such period,
determined on a consolidated basis, in accordance with GAAP and subject to
historical internal reporting standards, less Capital Expenditures.
"CAPITAL EXPENDITURES" means, with respect to any specified entity for any
period, the aggregate of all expenditures by such specified entity and its
subsidiaries during such period that in accordance with GAAP; provided, that
the term "Capital Expenditure" shall not include (a) expenditures made in
connection with the replacement, substitution or restoration of assets or
the purchase of any other assets used or useful in the business of such
specified entity (i) to the extent financed from insurance proceeds paid on
account of the loss of or damage to the assets of any such specified entity
or its subsidiaries or (ii) with awards of compensation arising from the
taking by eminent domain or condemnation of the assets of any such specified
entity or its subsidiaries, (b) the purchase price of equipment that is
purchased simultaneously with the trade-in of existing equipment to the
extent that the gross amount of such purchase price is reduced by the credit
granted by the seller of such equipment for the equipment being traded in at
such time, (c) acquisitions, or (d) capital lease obligations paid or
payable during such period.
"COST REDUCTION" means, with respect to any specified entity for any period,
savings achieved from specified initiatives.
INCENTIVE AWARD DETERMINATION
The fundamental process follows these five steps:
1) Incentive pool is funded based on division/enterprise performance.
2) Incentive pool is allocated to division/corporate functional units and
manufacturing sites based on performance to goals as determined by
division/corporate management.
3) Managers make individual award recommendations based on the available
pool and individual performance to goals.
4) Division/Corporate senior management approves recommendations.
5) Solutia's Executive Compensation and Development Committee (the
Committee) gives final approval.
Actual awards will be paid out based on a combination of unit and individual
performance. Seventy-five percent of each employee's allocated amount
(individual target times unit factor) will be paid to recognize unit
performance. The remaining twenty-five percent will provide management with
a pool to recognize individual performance.
Note: Management reserves the right to make no award to individuals who
exhibit below standard performance, incidents of misconduct, etc.
In cases where an individual is assigned to a specific division, but also
supports other divisions, the incentive funding will be based on the
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following rules:
o Employees who support a division 50% or more of the time will
receive that division's incentive factor.
o Employees who support two divisions equally will receive an
average of the two divisions' incentive factors.
o Employees who support multiple divisions (and aren't covered by
the above) will receive the core incentive factor.
o Funding sources for an employee's award will be determined based
on the number of full months spent in each function or division.
Each employee's actual award will also depend on individual performance in
serving all relevant divisions and will include input from each respective
manager.
ELIGIBILITY
Certain designated full- and part-time employees who are scheduled to work
at least half the standard workweek are eligible. New hires and other
part-year situations will be prorated for whole months. Further details
regarding eligibility are available in the "What Happens If" section of this
document.
TARGET AWARD OPPORTUNITY
For more information on your target award please speak with your manager or
HR Representative. Actual awards will vary based on both achievement of
targets and individual performance.
PAYMENT OF AWARDS
Payment of awards will be paid out in the first quarter of 2005.
ADMINISTRATION
The program is administered by the Executive Compensation and Development
Committee.
WHAT HAPPENS IF . . .
o YOU ARE PROMOTED TO, OR HIRED INTO, A PARTICIPATING POSITION
BEFORE DECEMBER 15 OF THE PERFORMANCE YEAR: You may be considered
for a prorated award that reflects your actual participation
rounded to the nearest whole month.
o YOU CHANGE GRADE LEVELS (AND INCENTIVE TARGETS) DURING THE YEAR:
You may be considered for a prorated award that reflects your
actual participation in both positions to the nearest whole month.
o YOU RETIRE (AS DEFINED BY THE COMMITTEE), ARE DEEMED TOTALLY AND
PERMANENTLY DISABLED BY THE COMMITTEE, ARE ON LEAVE OF ABSENCE OR
ARE INVOLUNTARILY TERMINATED OTHER THAN FOR CAUSE; If you were in
a participating position during any part of the performance year,
you may be considered for an award that reflects your actual
service rounded to the nearest whole month. You will receive
payment of your annual award for the year, if any, at the time
awards are normally paid.
o YOU DIE: If you were in a participating position during any part
of the performance year, any award that may be granted by the
Committee will be made to your legal representative at the normal
time and will reflect your actual service to the nearest whole
month.
o YOU VOLUNTARILY RESIGN: You will not be eligible to receive an
award unless you are an active employee at the time of payment.
o YOU ARE TERMINATED FOR CAUSE: You will receive no incentive award
for the year.
o YOU TRANSFER FROM ANOTHER SOLUTIA UNIT NOT PARTICIPATING IN THIS
PLAN TO A PARTICIPATING POSITION OR VICE VERSA: You may be
considered for an award based on the time you spent in the
participating position.
o YOU TRANSFER FROM A PARTICIPATING POSITION TO ANOTHER
PARTICIPATING POSITION: You may be considered for an award which
represents your participation in each participating position.
ADDITIONAL INFORMATION ABOUT THE ANNUAL INCENTIVE PROGRAM
PENSION AND SIP IMPLICATIONS
The entire amount of any annual award made for a year will become part of
the earnings used to calculate your pension and Savings and Investment Plan
(SIP) contributions, subject to IRS and SIP limits. For participants outside
the United States, the process established in your country, pension plan or
retirement program will apply.
TAXES
For U.S. participants, any award you receive under the Program is taxable as
ordinary income in the year of payment and is subject to all applicable
withholding taxes in the year paid. For participants outside the United
States, country tax regulations will apply.
LEGAL INFORMATION
In all events, whether any cash award is made to a participant will depend
on management's recommendation and the decision of the Committee (or its
delegate, as appropriate). All awards are subject to the sole discretion of
the Committee or its delegate, and nothing in this document or any other
document describing or referring to the Program shall confer any right
whatsoever on any person to be considered for any incentive commitments or
awards.
This document does not purport to be complete and is subject to and governed
by actions, rules and regulations of the Committee (or its delegate, as
appropriate) and may be changed or discontinued at any time without notice
or liability. Incentive commitments and awards shall be subject to and
governed by the specific terms and conditions of the Program and the
applicable award.
Nothing in this document or any other document describing or referring to
the Program shall confer on any employee or participant the right to
continue in the employ of the Company or affect the right of the Company to
terminate the employment of any such person with or without cause.
Nothing contained herein shall require the Company to segregate any monies
from its general fund or to create any trusts, or to make any special
deposits for amounts payable to any participant.
No bonus commitment or unpaid bonus award shall be pledged or transferred
except as specifically provided for herein (such as in the case of death).
If any participant attempts to pledge, assign, transfer or otherwise
alienate any award, any obligation of the Company shall terminate.
The Company will withhold any federal, state or local, domestic or foreign
taxes as required by law or regulation or as the Company deems appropriate
from any payment that it makes to participants hereunder.
The Program is subject to the laws of the Sate of Delaware.
The Program may be amended or terminated by the Company at any time.