Exhibit 10.1
2006 SOLUTIA ANNUAL INCENTIVE PROGRAM
This document sets forth the terms of the Solutia Annual Incentive Program
(the "Program") for the year beginning January 1, 2006 and ending December
31, 2006 (the "Performance Year").
PURPOSE
The purpose of the Program is to provide identified key employees with
annual cash bonus opportunities to incent strong operational and financial
performance and promote the creation of enterprise value.
INCENTIVE FUNDING
Solutia Inc. (the "Company"), for purposes of the Program, is organized
along business lines (Integrated Nylon, Saflex, CPFilms, Plastic Products
and Chemicals, each a "Business") in order to place emphasis on key
performance parameters of each individual Business.
The size of the incentive pool available for awards to those employees
assigned to a specific Business will be based on the achievement of specific
objective performance parameters (each incentive pool shall be referred to
herein as a "Business Unit Incentive Pool").
For employees assigned to enterprise-wide functions ("Core Functions"),
overall enterprise performance shall determine the incentive pool available
for awards (such pool to be referred to as the "Core Function Incentive
Pool").
The funding of each Business Unit Incentive Pool and the Core Incentive Pool
shall be 90% of all aggregate target bonuses for individuals assigned to
such pool multiplied by the weighted average of pre-established funding
factor for achievement of specific objective performance parameters relative
to a targeted performance. The target performance for each performance
parameter, the related funding factors, and the weighting of each such
parameter have been determined by the Executive Compensation and Development
Committee of the Company's Board of Directors (the "ECDC") based upon the
recommendation of the Chief Executive Officer of the Company (the "CEO").
The entirety of each Business Unit Incentive Pool or the Core Incentive Pool
will be allocated to awards for individuals assigned to such pools. Each
pool will be divided equally into an objective award pool and a
discretionary award pool as described below.
In addition to the Business Unit Incentive Pools and the Core Incentive
Pool, an overall corporate discretionary bonus pool (the "Enterprise
Discretionary Incentive Bonus Pool") shall be funded by the enterprise-level
EBITDAR performance relative to a pre-established target performance. The
funding of the Enterprise Discretionary Incentive Pool shall be 10 percent
(10%) of all aggregate target bonuses multiplied by a pre-established
funding factor. All participating employees will be eligible for
discretionary awards from this pool at the discretion of the CEO and the
ECDC.
1
The performance metrics for 2006 are as set forth in the following chart:
CORE POOL AND BUSINESS POOLS
- -------------------------------------------------------------------------------------------------------------------------
UNIT MEASURE WEIGHT MEASURE WEIGHT MEASURE WEIGHT
- -------------------------------------------------------------------------------------------------------------------------
Enterprise Free Cash
CORE POOL EBITDAR 45% Flow 55% N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
Free Cash
INTEGRATED NYLON POOL EBITDA 50% Flow 50% N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
Free Cash Gross
SAFLEX POOL EBITDA 33-1/3% Flow 33-1/3% Margin % 33-1/3%
- -------------------------------------------------------------------------------------------------------------------------
Free Cash
CPFILMS POOL EBITDA 50% Flow 50% N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
Free Cash
CHEMICALS POOL Flow 100% N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
Free Cash
PLASTIC PRODUCTS POOL Flow 100% N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
ENTERPRISE DISCRETIONARY BONUS POOL
----------------------------------------------------------
UNIT MEASURE WEIGHT
----------------------------------------------------------
ALL Enterprise EBITDAR 100%
----------------------------------------------------------
Targeted performance levels and funding factors have been established by the
ECDC.
2
DEFINITIONS OF MEASURES
For the purposes of the Program the performance measures have the following
meaning:
"EBITDA" 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, non-recurring, non-operational or non-cash
gains or losses, (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 plus, (x) depreciation expense, and (y)
amortization expense excluding amortization of deferred credits.
"EBITDAR" means EBITDA plus, in accordance with GAAP and subject to
historical internal reporting standards, reorganization items.
"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, excluding (without duplication), to
the extent deducted in determining cash flow provided by (used in) continued
operations (a) any extraordinary, non-recurring or non-operational gains or
losses, (b) restructuring charges, and (c) effects of discontinued
operations, less Capital Expenditures, plus net proceeds received by Solutia
in excess of management's estimate from the disposition of any of the
Company's business units, divisions or properties, 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 and subject to
historical internal reporting standards; 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.
"GROSS MARGIN %" means, with respect to any specified entity for any period,
gross margin divided by revenue 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 gross
margin or revenue (a) any extraordinary, non-recurring, non-operational or
non-cash gains or losses or gains or losses from dispositions, (b)
restructuring charges, and (c) effects of discontinued operations.
3
All results will exclude the Pharmaceutical Services Division.
Performance metrics may be adjusted, as appropriate, based on assets sales
and dispositions.
INCENTIVE AWARD DETERMINATION
All bonuses will have an objective and a discretionary portion.
* The objective portion of bonuses will be based strictly upon the
objective business-unit performance for the employee's respective
business unit relative to the pre-established target, or enterprise
performance for Core personnel. The objective portion of bonuses
will be equal to 45% of such individual's target bonus multiplied
by the relevant funding factor. The objective portion of bonuses
will come from the portion of the Business Unit Incentive Pool or
the Core Function Incentive Pool allocated to objective awards.
* The discretionary portion of bonuses shall be determined by a
review of a participant's individual performance versus set goals,
performance in relation to peers, and according to the process
described below. The discretionary portion of an individual
participant's bonus may range from zero upward. The discretionary
portion of bonuses will come from, and the aggregate of all such
amount shall be limited by, the portion of the relevant Business
Unit Incentive Pool or Core Function Incentive Pool allocated to
discretionary awards or the Enterprise Discretionary Incentive
Pool.
The fundamental process for determination of bonuses under the Program is as
follows:
1) The Business Unit and Core Function Incentive Pools are determined and
funded based on Business Unit/Enterprise performance relative to the
pre-established targets, funding factors, and weighting. The Business
Unit and Core Function Incentive Pools are then allocated equally to
objective awards and discretionary awards as described above.
2) The Enterprise Discretionary Incentive Pool is determined and funded
based on the enterprise EBITDAR performance relative to the
pre-established target.
3) The objective portion of bonuses are determined and approved by the
ECDC.
4) The portion of each Business Unit Incentive Pool or Core Function
Incentive Pool allocated to discretionary awards will be further
allocated pro-rata and re-allocated (as appropriate) to managers within
such Business or Core function. These managers will make individual
award recommendations based upon individual performance compared to
goals and performance in relation to peers. Individual discretionary
awards will be approved by the Business President, the CEO, and the
ECDC.
5) Discretionary bonuses out of the Enterprise Discretionary Bonus Pool
will be determined at the discretion of the CEO with the advice of the
Enterprise Leadership Team, as he deems appropriate, and approved the
ECDC.
6) The ECDC shall determine the discretionary bonus for the CEO. Any
discretionary bonus paid to the CEO in excess of 50% of the CEO's
target bonus multiplied by the relevant funding factor shall not, at
the discretion of the ECDC, diminish awards available under the Core
Function Incentive Pool, the Business Unit Incentive Pool or the
Enterprise Discretionary Bonus Pool.
4
In cases where an individual is assigned to a specific Business or Core, but
supports more than one Unit, the incentive funding will be based on the
following rules:
* Employees who support a Unit more than 50 percent of the time will receive
that Unit's incentive factor.
* Employees who support two Units equally will receive an average of the
two Units' incentive factors.
* Employees who support multiple Units (and aren't covered by the above)
will receive the Core incentive factor.
* Funding sources for an employee's award will be determined based on the
number of full months spent in each function or Unit.
Each employee's actual award will also depend on individual performance in
serving all relevant functions and Units and will include input from each
respective manager.
TARGET AWARD OPPORTUNITY AND ACTUAL AWARD
Actual awards will vary as described above based upon achievement of
Business or Enterprise performance measures and individual performance.
Management, the CEO and the ECDC reserve the right to make no award to
individuals who exhibit below standard performance, incidents of misconduct,
etc.
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.
For more information on your target award opportunity please speak with your
manager or HR Representative.
PAYMENT OF AWARDS
Awards will be paid out no later than two and a half months following the
close of calendar year 2006.
ADMINISTRATION
The program is administered by the ECDC.
5
ADDITIONAL QUESTIONS AND ANSWERS FOR PARTICIPANTS
WHAT HAPPENS IF...
* 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.
* 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.
* 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.
* 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.
* 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, or upon returning
to regular employment, if later.
* YOU RETIRE (AS DEFINED BY THE ECDC), 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.
* 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 ECDC will be made to your legal representative at the
normal time and will reflect your actual service to the nearest whole
month.
* YOU VOLUNTARILY RESIGN: You will not be eligible to receive an award
unless you are an active employee at the time of payment.
* 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.
6
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 ECDC (or its delegate). All awards are subject to the sole discretion of
the ECDC 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 ECDC (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.
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.
7