MANAGEMENT INCENTIVE PROGRAM
As indicated earlier, Bowmar believes in a "superior pay for superior
performance" philosophy. Consequently, its incentive bonus plans are designed to
provide an attractive incentive for employees to deliver superior results.
Although each plan will follow the same general principles, incentive plans may
be tailored to the circumstances and economics of a division. Corporate and
division personnel will each have separate plans. Each plan will be based on the
philosophy of funding a bonus pool from earnings in excess of a calculated
minimum earnings requirement (MER). Senior managers in each division and at
Corporate will participate in the Senior Management pool which will be
distributed based primarily on their specific contribution to the success of the
operating unit generally determined by results measured against their individual
The Company has not placed any arbitrary ceiling on individual incentive
payments. All Senior managers will be kept apprised of the Company's policies
with respect to management incentives. They should clearly understand that such
plans are subject to specific Board approval as to adoption, terms and
conditions, modifications, continuance, accrual of incentive funds, and the
amount and timing of individual awards. Every effort will be made to maintain
equity and to adjust for any important windfalls or penalties which may
materially impact available funds or a particular person's contributions.
A detailed description of the bonus plan operation follows.
1) Bonus Plan Basics
a) The bonus plan outline and the specific bonus plan for each
division is subject to the approval of the Compensation Committee
of the Board and is subject to change annually.
b) A targeted earnings level will be established annually for each
division based on return on sales results for the industry most
closely related to that division.
c) Since we report earnings on a pre-tax, pre-bonus basis we convert
the above after tax target to a pre-tax, pre-bonus division
performance earnings target.
d) A Minimum Earnings Requirement (MER) will then be established for
each division. Once the MER has been met the bonus pool will begin
to build. The MER is defined as 50% of the Division Performance
e) In a turnaround where new management is in place the President of
Bowmar may, with the concurrence of the Compensation Committee,
authorize a "Turnaround Adjustment." The Turnaround Adjustment
amount will be added to the Division's Actual Performance Earnings
for purposes of calculating bonus pools.
2) Calculation of the Basic Bonus Pool
a) The Minimum Earnings Requirement must be met before money is
accrued into the bonus pool.
b) Since the MER is stated as a percent of sales, an increase in
sales will result in a corresponding increase in MER.
c) A portion of all earnings in excess of the MER will accrue into
the Basic Bonus Pool.
d) The rate at which money is accrued into the bonus pool will double
for Actual Division Performance Earnings in excess of the Division
e) The rates at which the Bonus Pool accrues in c) and d) above will
be established by the President of Bowmar with the concurrence of
the Compensation Committee.
a) The bonus plan covers all permanent division employees, both full
and part time who were employed as of the end of the third fiscal
quarter of the fiscal year.
b) Since bonuses are stated as a percent of earnings, part-time and
new employees are automatically pro-rated.
c) To be eligible for a bonus distribution an employee must be
employed on the day bonuses are distributed.
4) Allocation of the Basic Bonus Pool
a) The Basic Bonus Pool will be split into two bonus pools: the
General Bonus Pool and the Senior Management Bonus Pool
i) The split between the General Bonus Pool and the Senior
Management Bonus Pool will be determined by Bowmar's
President with the concurrence of the Compensation Committee.
ii) The split in i) above will be based upon the principles
outlined in the section of this policy entitled "Corporate
b) The General Bonus Pool
i) All Non-Senior Management employees eligible as defined in
3)a) above will share in this pool.
ii) The actual bonus payment will be based on the salaries paid
to the participating employees.
iii) The individual allocation to each employee is based on their
salary paid during the fiscal year as a percent of total
salaries paid during the fiscal year to employees
participating in the General Bonus Pool.
c) The Senior Management Bonus Pool
i) The Senior Management employees who are eligible are
generally employees who report directly to the Division
President or are in a role critical to the success of the
ii) A list of those considered eligible to participate in the
Senior Management Bonus Pool will be prepared by the Division
President and will be approved by Bowmar's President.
iii) As employees are promoted, hired, leave the company, etc.,
this list will be updated.
iv) The individual allocation of the Senior Management Pool will
be divided into two parts:
(a) One third of the pool will be distributed to those on
the list above based on their salary paid during the
fiscal year as a percent of total salaries paid during
the fiscal year to all employees on the Senior
(b) Two thirds of the pool will be based on each senior
manager's performance against an agreed upon set of
objectives (which will not include a goal for meeting
the profit target since that performance is rewarded in
(c) The methodology for allocating the performance-based
bonus above will be agreed upon in writing between the
Division President and the President of Bowmar
(d) If less than 100% of the Senior Management Bonus Pool is
allocated then the Division President, with the prior
approval of the President of Bowmar Instrument
Corporation, may use such funds to reward other key
contributors outside the Senior Management group.
5) Corporate Bonus Plan
The same basic structure that is used at operating units will apply to
the bonus plan for corporate office employees.
The difference will be in the determination of targets. A blend of the
divisions targets will be applied along with any turnaround adjustments granted
to individual divisions.
For example, if two divisions had the following sales levels and
targeted returns on sales:
Sales Return on Sales Target
----- --------------- --------
Division A 10,000,000 5.00% 1.67%
Division B 20,000,000 6.00% 4.00%
Then Corporate would have an after tax target of 5.67%.
This target would then be converted to a pre-tax, pre-bonus target.
(assuming a 40% tax rate and a pre-tax bonus of 7% of earnings, the
adjusted corporate target would be: 5.67 divided by 60 = 9.3% divided
by .93 = 10.0%). Corporate's pre-tax, pre-bonus target would be 10.0%.
A General Pool will be created and will be split into Base and Senior
Management Pools. The Compensation Committee of the Board will determine to what
extent and how to split the Senior Management Pool with input from the CEO as
regards Corporate Managers reporting to him.