Exhibit 99.1
2005 SOLUTIA ANNUAL INCENTIVE PROGRAM
This document sets forth the 2005 Solutia Annual Incentive Program (the
"Program") for the year beginning January 1, 2005 and ending December 31,
2005 (the "Performance Year").
INCENTIVE FUNDING
Solutia Inc. (the "Company") 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 2005, 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.
The performance metrics that will determine the size of the incentive pool
for each division and core unit are as follows:
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UNIT MEASURE WEIGHT MEASURE WEIGHT MEASURE WEIGHT
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Core EBITDAR 75% Free Cash Flow 25% N/A N/A
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Integrated Nylon EBITDA 55% Free Cash Flow 22.5% Cost Reduction 22.5%
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Performance Products EBITDA 60% Free Cash Flow 5% New Revenue 35%
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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, in accordance with GAAP
and subject to historical internal reporting standards, 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, and (ii) income tax expense.
"EBITDA" means, with respect to any specified entity for any period, EBIT
plus, in accordance with GAAP, (i) depreciation expense, and (ii)
amortization expense excluding amortization of deferred credits.
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"EBITDAR" means EBITDA plus, in accordance with GAAP, reorganization items.
In the event that either of the Company's equity interest in its 50/50 joint
ventures is disposed of during the calendar year, the EBITDAR incentive
targets will be revised accordingly to exclude forecasted equity income for
the period from the date of the transaction closing to year-end.
"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, plus net
proceeds received by Solutia in excess of management's estimate from the
disposition of the Company's equity interest in either of its 50/50 joint
ventures, to the extent sold during the calendar year.
"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 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 initiatives identified in the annual budget.
"NEW REVENUE" means, with respect to any specified entity for any period,
total revenue generated from (i) a distinct set of products which have
generally become commercially available since January 1, 2000, and possess
above average profitability potential, (ii) products not currently
available, including products generated internally as well as those acquired
through acquisitions, and (iii) sales of core products when those products
penetrate completely new market spaces, provided that there is a high
probability those new spaces will in the future contain new and
differentiable technology. Products included in categories (i) and (iii)
above for purpose of this definition are identified on Schedule A, as
maintained by the Committee.
Performance metrics may be adjusted, as appropriate, based on assets sales
and dispositions.
INCENTIVE AWARD DETERMINATION
Actual awards will be paid out based on a combination of unit and individual
performance. For each employee's allocated amount (individual target award
multiplied by unit funding), a portion will be paid to recognize unit
performance. The remaining portion will provide management with a pool to
recognize individual performance.
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ORGANIZATIONAL LEVEL UNIT PERFORMANCE INDIVIDUAL PERFORMANCE
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Executive Leadership and
their Direct Reports 75% 25%
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Other Participants 50% 50%
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The fundamental process follows these five steps:
1) Incentive pool is funded based on division/enterprise (unit)
performance.
2) A portion of the incentive pool is allocated to individuals based on
their unit's performance. For example, if the employee is part of
Performance Products and Performance Products is funded at 1X, 50% of
the employee's target bonus will be awarded to the employee for the
unit's performance.
3) The portion of funding to recognize individual performance will be
allocated to the managers within the units who will make individual
award recommendations based on the available pool and individual
performance compared to goals.
4) Division/corporate senior management approves recommendations.
5) The Company's Executive Compensation and Development Committee gives
final approval.
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 or the core,
but supports more than one division, the incentive funding will be based on
the following rules:
o Employees who support a division more than 50 percent 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-time and part-time employees who are scheduled to
work at least half the standard workweek are eligible for participation in
the Program. Further details regarding eligibility are available in the
"What Happens If" section of this document.
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TARGET AWARD OPPORTUNITY
For more information on your target award opportunity please speak with your
manager or HR Representative. Actual awards will vary based on both
achievement of unit performance measures and individual performance.
PAYMENT OF AWARDS
Awards will be paid out no later than two and one-half months following the
close of calendar year 2005.
ADMINISTRATION
The program is administered by the Executive Compensation and Development
Committee of the Company's Board of Directors (the "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 an
award, that may be prorated, reflecting your actual participation
rounded to the nearest whole month.
o YOU CHANGE JOBS (AND INCENTIVE TARGETS) DURING THE PERFORMANCE YEAR:
You may be considered for an award, that may be prorated, reflecting
your actual participation in both positions to the nearest whole month.
o YOU TRANSFER FROM ANOTHER SOLUTIA UNIT NOT PARTICIPATING IN THIS PLAN
TO A PARTICIPATING POSITION OR VICE VERSA DURING THE PERFORMANCE YEAR:
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 DURING THE PERFORMANCE YEAR: You may be considered for an
award which represents your participation in each participating
position.
o YOU ARE ON A SHORT TERM LEAVE OF ABSENCE (LESS THAN SIX MONTHS ABSENCE
DURING THE PERFORMANCE YEAR): You may be considered for a prorated
award that reflects your actual participation 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 RETIRE (AS DEFINED BY THE COMMITTEE), HAVE BEEN ON A LEAVE OF
ABSENCE EXTENDING BEYOND SIX MONTHS OF THE PERFORMANCE YEAR, OR ARE
INVOLUNTARILY TERMINATED OTHER THAN FOR CAUSE: You will not be eligible
to receive an award unless you are an active employee at the time of
payment.
o YOU DIE DURING THE PERFORMANCE YEAR: 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.
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o YOU ARE TERMINATED FOR CAUSE: You will receive no incentive award for
the year.
ADDITIONAL INFORMATION ABOUT THE ANNUAL INCENTIVE PROGRAM
PENSION AND SAVINGS AND INVESTMENT PLAN (SIP) IMPLICATIONS
For participants in the United States, the entire amount of any annual award
made for a year will become part of the earnings used to calculate your
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, the laws of the tax jurisdiction(s) to which you are subject will
apply.
LEGAL INFORMATION
In all events, whether any cash award is made under the Program to a
participant will depend on management's recommendation and the decision of
the Committee (or its delegate). 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) 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 this 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 hereunder 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 payments that it makes to participants hereunder.
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The Program is subject to the laws of the State of Delaware.
The Program may be amended, modified or terminated without notice by the
Company at any time, including (but not limited to) any such amendment,
modification or termination that reduces or eliminates any benefit otherwise
to be paid or payable hereunder.
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