Exhibit 10.3

Nortel Networks Limited Annual Incentive Plan for Business Units

Section 1: Introduction

The Nortel Networks Limited Annual Incentive Plan for Business Units (the “BU
Plan”) is a short-term, incentive bonus plan that provides the potential for
“Eligible Employees” (as defined below) to receive cash awards based on their
contributions to the success of the relevant “Business Unit”1 of the Company2,
conditioned on the relevant Business Unit meeting its objectives.

The Plan is intended to drive business performance by rewarding Eligible
Employees for their contributions to the relevant Business Unit’s overall
success. An Eligible Employee’s contribution is determined by two factors:
(1) the impact of the employee’s role on business results and (2) the employee’s
performance during the employee’s active employment with the Company. The actual
award received by an Eligible Employee will reflect (1) the scope, complexity,
and responsibilities of the employee’s role, and the employee’s contribution and
performance during the Plan Period3 and (2) the relevant Business Unit’s
performance during the Plan Period as indicated by the Business Unit Performance
Factor, as described below.

Section 2: BU Plan Eligibility

Generally, regular full-time and regular part-time4 Company employees are
eligible to participate in the BU Plan (“Eligible Employees”), subject to the
following:

 

  (1) Eligible Employees, who participate in other Company incentive plans for a
full calendar month or the greater portion of a calendar month, as determined by
the Company, are not eligible to participate in the BU Plan during that

 

 

1

For purposes of the BU Plan, each of the following organizations constitutes a
“Business Unit”: MEN, CVAS, GSM, MSS, LG and Other. The Other Business Unit
consists of any organization other than MEN, CVAS, GSM, MSS, LG, Nortel Business
Services or Nortel Finance and Corporate Services or any of the sub-units of the
aforementioned organizations.

 

2

For purposes of the BU Plan, the “Company” is defined as Nortel Networks Limited
and its subsidiaries and affiliates and other entities, which it controls
directly or indirectly and which have been approved for participation in the BU
Plan by the “Senior Vice-President, HR”, who is defined for purposes of this BU
Plan as the person holding the most senior position responsible for human
resources or the equivalent at the Company, as identified by the Board of
Directors (as defined in Section 2).

 

3

Each calendar year consists of four Plan Periods, which align with the Company’s
four fiscal quarters (i.e., January 1st through March 31st (“Q1 Plan Period”),
April 1 st through June 30th (“Q2 Plan Period”), July 1 st through
September 30th (“Q3 Plan Period”) and October 1st through December 31st (“Q4
Plan Period”). The Plan Period(s) may be changed by the Board of Directors at
any time.

 

4

For purposes of the BU Plan, regular full-time and regular part-time Company
employees are those employees who are eligible for participation in the Company
health benefit plans based on their regularly scheduled hours.

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calendar month. For purposes of this document, “other incentive plans” mean
sales incentive compensation or any other incentive/bonus arrangements which the
Company determines have been offered in lieu of the BU Plan.

 

  (2) Subject to applicable law, employees who are covered under a collective
labor agreement are not eligible unless that collective labor agreement provides
for their participation in the BU Plan.

 

  (3)

Individuals determined by the Company to be students, co-op students, interns,
temporary5, or non-payroll workers (i.e., individuals who are not paid from a
Company employee payroll) are ineligible to participate in the BU Plan.

 

  (4) The Boards of Directors of Nortel Networks Corporation and Nortel Networks
Limited (the “Board of Directors”) may determine that certain Company employees
(including employees who are not otherwise eligible for the BU Plan) may be
eligible to receive an award from a Discretionary Bonus Pool created pursuant to
Section 5 hereof.

 

  (5)

Subject to applicable law, to be eligible for an award for any given Plan Period
an employee must be (a) actively employed in a role that is eligible under the
BU Plan or other incentive plan (“Incentive Eligible Role”) for at least
forty-five (45) calendar days in that Plan Period6 and (b) employed by the
Company on the last day of the applicable Plan Period or, if no longer employed
as of that date, involuntarily terminated by the Company during that Plan Period
for a reason determined by the Company to be other than for the employee’s
inappropriate actions or inactions, misconduct, breach of an agreement with the
Company or unsatisfactory performance or cause (as legally defined, if at all,
in the relevant jurisdiction)(collectively, “Cause”). For purposes of this
document, an employee will be considered to be “actively employed” on those days
when the employee is classified as “active” on the applicable Company payroll.

 

  (6) BU Plan awards will be pro-rated if paid to employees who during the
relevant Plan Period (a) transfer into or out of BU Plan eligible roles from or
to positions covered by other incentive plans and (b) participate in those other
incentive plans for a full calendar month or the greater portion of a calendar
month, as determined by the Company. The full amount of the BU Plan awards that
would have otherwise been paid to the employees in these circumstances will be
reduced by one-third for each of those full or partial months of participation
in other incentive plans during the Plan Period.

 

 

5

Where legally required, temporary full time employees on fixed term contracts
with the Company may be included as Eligible Employees subject to the other
conditions in Section 2 of the Plan.

 

6

The required period of active employment status may be changed by the Board of
Directors at any time.

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  (7) Employees who meet all of the BU Plan eligibility requirements, but whose
employment with the Company terminates between the end of the Plan Period and
the payment date for the award for that Plan Period for reasons determined by
the Company to be other than an involuntary termination for Cause, will be
eligible for an award for the applicable Plan Period. With respect to former
employees who continue to be eligible for a BU Plan award under Section 2(5)
(b) or this Section 2(7) of the BU Plan, the Company may deny payment of that BU
Plan award to those former employees if they engage in conduct after their
employment termination date and prior to the award payment date that constitutes
Cause, as determined by the Company.

Notwithstanding the foregoing, any payment made after termination of employment
to a “specified employee” that would be considered a “deferral of compensation”
within the meaning of, and subject to, Section 409A of the U.S. Internal Revenue
Code and regulations thereunder (“Section 409A”) will be paid on the later of
the date which is six months and one day after (a) the termination date and
(b) the date on which the award is otherwise payable under Section 4 of the BU
Plan. A “specified employee” means any U.S. taxpayer who is a key employee (as
defined in Section 416(i) of the U.S. Internal Revenue Code without regard to
paragraph 5 thereof) of the Company. (This is generally limited to employees who
are (i) in the top 50 officers having an annual compensation greater than
US$145,000, (ii) a 5-percent owner, or (iii) a 1-percent owner having an annual
compensation of more than US$150,000.). For this purpose, termination of
employment means “a separation from service” as defined in Section 409A.

 

  (8)

An employee’s Management Team7 may, in consultation with the relevant Human
Resources Business prime, make limited exceptions to the ‘actively employed’
requirement set out in Section 2(5) above where required by applicable law
(e.g., as required under applicable maternity, paternity, parental, military,
family, or medical leave laws), or where the Management Team determines that
circumstances clearly warrant an exception (e.g., disability, outsourcing,
divestiture, or death). In such situations, if the employee has, while actively
employed in a BU Plan eligible role, substantially satisfied contribution and
performance expectations for the Plan Period, the employee’s Management Team may
grant partial awards. If awards are paid in these circumstances, the awards will
be pro-rated to reflect the period the employee was actively employed in a BU
Plan eligible role as defined in Section 2(5) above, and will be commensurate
with the employee’s contribution and performance. Notwithstanding anything in
the foregoing to the contrary, nothing in the BU Plan shall preclude the Company
paying an employee an award under the BU Plan for more than the number of months

 

 

7

The “Management Team” consists of the managers with whom the employee has a
direct or indirect reporting relationship as set out in the Organization
Structure Manager (“OSM”) or its equivalent as maintained by the Company from
time to time.

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  the employee was actively employed in a BU Plan eligible role during the
relevant Plan Period (up to a maximum of three (3) months) pursuant to that
individual employee’s employment termination agreement, which the Senior
Vice-President, HR has approved.

 

  (9) Company affiliates and joint ventures may choose to offer the BU Plan or a
similar plan subject to the approval of the Senior Vice-President, HR.

Section 3: Award Elements

An Eligible Employee’s cash award for a Plan Period under the BU Plan will be
based on the following formula:

25%8 of Annual Base Salary x Award % x Business Unit Performance Factor9

Annual Base Salary means the annualized regular compensation paid to an Eligible
Employee, excluding any other compensation, such as, but not limited to,
bonuses, commissions, overtime, and relocation benefits. The Annual Base Salary
for these purposes will be measured for all Eligible Employees during the third
calendar month of the relevant Plan Period on a uniform date to be determined in
the sole discretion of the Senior Vice-President, HR.

Award % is the percentage determined for each Eligible Employee based on the
scope, complexity, and responsibilities of the employee’s role and that
employee’s contribution and performance during the Plan Period. For Job
Complexity Indicator (“JCI”) 1-6, the Board of Directors has approved Award %
ranges from 0% to 40%. For JCI 55, the Board of Directors has approved Award %
ranges from 0% to 400%. The JCI level for these purposes will be measured
concurrently with Annual Base Salary as described above. For each JCI, the
Senior Vice-President, HR may set a suggested narrower award range, intended to
reflect a market trend to give certain Eligible Employees with higher levels of
responsibility a higher incentive potential. Within the ranges approved by the
Board of Directors, an Eligible Employee’s Management Team will determine the
recommended Award % for that employee for each Plan Period based on the above
factors. Without limiting the generality of the foregoing, the Award % for a JCI
55 Eligible Employee is determined by multiplying the individual performance
factor determined by the Eligible Employee’s Management Team (“Individual
Performance Factor”) by the target percentage established under the BU Plan for
such Eligible Employee and in effect as of each Plan Period end date, as
modified by the Board of Directors in its sole discretion (“AIP Target
Percentage”). An Eligible Employee’s

 

 

8

The percentage of Annual Base Salary that is applied to the formula may be
changed by the Board of Directors at any time.

9

The BU Plan award will be pro-rated as applicable under Section 2(6) and (8).

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recommended Award % is subject to review, modification and approval by the
Senior Management Team and the Board of Directors as provided in Section 4.10

The total BU Plan award for all Eligible Employees for a Business Unit is
recommended by the Senior Management Team for approval by the Board of Directors
after the end of the Plan Period. The Board of Directors will determine, in its
sole discretion, whether all or any part of the recommended total BU Plan award
for a Business Unit for the Plan Period will be paid and the amount of any total
BU Plan award for a Business Unit in respect of that Plan Period.

Business Unit Performance Factor applicable to each Business Unit shall be
determined by the Board of Directors in its sole discretion based on its
assessment of that Business Unit’s achievements against performance metrics
targets established for that Business Unit by the Board of Directors in its sole
discretion for the relevant Plan Period. The Business Unit Performance Factor
may be based on one or more performance metrics, each with specific targets. The
performance metrics may have equal or different weightings. Performance metrics
are the general Business Unit objectives for the Plan Period. Targets will be
based on objective and/or subjective criteria established to measure, directly
or indirectly, the performance metrics. Weightings will be the relative weight
or percentage accorded in the relevant Business Unit Performance Factor for
achieving each specific target. After approval by the Board of Directors, the
relevant Business Unit’s objectives for the Plan Period will be communicated to
Eligible Employees within that Business Unit. The Business Unit Performance
Factor for each Business Unit is deemed to be 1.0 (achievement) throughout the
Plan Period and is then adjusted by the Board of Directors based on its
determination of each Business Unit’s performance. The Senior Management Team
may, in its sole discretion, recommend to the Board of Directors that the
Business Unit Performance Factor be adjusted with respect to certain sub-units
within a Business Unit, JCI levels or any other groups of employees and the
Board can approve such adjustment to the relevant Business Unit Performance
Factor, in its sole discretion, based on additional factors that the Senior
Management Team and Board of Directors determine in their sole discretion are
relevant to the award including, without limitation, collective relative
contribution to achievement of the key Business Unit objectives during the Plan
Period.

Except as otherwise required by applicable law, the Business Unit Performance
Factor used in an Eligible Employee’s Award calculation will be based on the
Business Unit to which the Eligible Employee is aligned in the Company’s
Organization Structure Manager (OSM) as of a uniform date in the third calendar
month in the relevant Plan Period to be determined in the sole discretion of the
Senior Vice-President, HR; provided, however, that the Business Unit Performance
Factor used in the Award calculation of Eligible Employees who are in the Other
Business Unit shall be the average of the Business Unit Factors for all of the
remaining Business Units.

 

 

10

For purposes of the Plan only, the “Senior Management Team” shall consist of the
President, Nortel Business Services (NBS), the Senior Vice President of
Corporate Services and Chief Financial Officer and the Senior Vice-President,
HR.

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Section 4: BU Plan Awards

Awards for each Plan Period are calculated based on 25%11 of an Eligible
Employee’s Annual Base Salary, the Eligible Employee’s Award % (which reflects
the scope, complexity and responsibilities of the employee’s role and the
employee’s contribution and performance during the Plan Period), and the
Business Unit Performance Factor. Notwithstanding any provision in the BU Plan
to the contrary, the maximum BU Plan award payable to a JCI 55 Eligible Employee
in a Plan Period is a cash amount equal to 25% of such Eligible Employee’s
Annual Base Salary multiplied by a percentage equal to two (2) times the
Eligible Employee’s AIP Target Percentage.

Any award under the BU Plan to an Eligible Employee is subject to the discretion
of the Eligible Employee’s Management Team and Senior Management Team and the
Board of Directors. That is, an Eligible Employee’s Management Team determines,
in its discretion, the Award % for an Eligible Employee subject to review,
modification and approval by the Senior Management Team. Specifically, the
Senior Management Team reserves the right, in its discretion, to review and
adjust Eligible Employees’ Award percentages, which are assigned to those
Eligible Employees by their Management Team, to reflect its assessment of the
employees’ contributions to the Business Unit or the achievement of the Business
Unit’s key objectives, as well as to ensure that the final payouts, if any, are
within appropriate budgetary guidelines. Finally, the Board of Directors
reserves the right, in its discretion, to make a final determination of the
Award % of any Eligible Employee. The Board of Directors determines, in its sole
discretion, the achievement of the targets for the performance metrics, the
final calculation of the Business Unit Performance Factor (which may include a
determination of a Business Unit Performance Factor of zero, even if certain of
the performance metrics targets are achieved, and/or an adjustment to the
relative weighting of the performance metrics) and whether BU Plan awards will
be paid in respect of a Plan Period. During the Plan Period, the Board of
Directors can review Business Unit objectives, performance measures, weightings,
and targets to determine whether they remain appropriate. The Board of Directors
may, at its sole discretion, adjust the Business Unit’s objectives, performance
measures, weightings, targets, and/or plan payouts for the Plan Period, as it
deems necessary, to reflect changes in business conditions or other
circumstances.

Subject to applicable law, the Senior Vice-President, HR, may approve the
reduction of BU Plan awards payable to Eligible Employees for a Plan Period by
the full or partial amount of other bonuses or similar payments, including,
without limitation, Company performance related payments required by applicable
law, that are payable to such employees in respect of any part of such Plan
Period. The Senior Vice-President, HR, will have sole discretion to determine
those bonuses or payments that are subject to the preceding sentence and the
amount of any such reduction to the BU Plan award.

 

 

 

11

The percentage of Annual Base Salary that is applied to the formula may be
changed by the Board of Directors at any time.

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If the Board of Directors approves the payment of a total BU Plan award for a
Business Unit for a Plan Period in accordance with the provisions of the BU
Plan, the payment of any BU Plan award approved for an Eligible Employee under
the BU Plan in that Business Unit in respect of such Plan Period will be made as
follows: (i) with respect to BU Plan awards approved for the Q1 Plan Period, Q2
Plan Period or Q3 Plan Period, as soon as practicable following the 1st day of
the second calendar month following the end of the relevant Plan Period but in
no event later than March 15th of the calendar year following the applicable
Plan Period, and (ii) with respect to BU Plan awards approved for the Q4 Plan
Period, as soon as practicable following March 1st of the calendar year
following the Q4 Plan Period, but in no event later than December 31st of the
calendar year following the applicable Q4 Plan Period. BU Plan awards are
considered income and are therefore subject to national, state/provincial,
and/or local taxes. All appropriate taxes and other withholdings will be
deducted from any such awards and payments as required by applicable law. Each
BU Plan award for each separate Plan Period will be treated as a separate
payment for purposes of Section 409A.

Depending on local laws and policies, BU Plan awards may have an impact on some
benefits and may or may not be included in the “eligible earnings” for purposes
of capital accumulation and retirement plans offered in the various regions by
the Company. Where appropriate, deductions may be made from BU Plan awards in
accordance with the specific capital accumulation and retirement plan in which
the Eligible Employee participates.

Notwithstanding anything in the BU Plan to the contrary, if the Board of
Directors, in its sole discretion, upon consideration of facts and circumstances
determined by the Board of Directors to be relevant, concludes that an Eligible
Employee has committed intentional misconduct, as defined in the Policy
Regarding Recoupment of Incentive Compensation (the “Recoupment Policy”)
relating to the forfeiture and/or recoupment of incentive compensation,
including BU Plan award payments, the Eligible Employee will forfeit any planned
but unpaid BU Plan award and/or reimburse the Company the amount of the BU Plan
award received, as determined by the Board of Directors.

Section 5: Discretionary Bonus Pool

During a Plan Period, the Board of Directors may consider the creation of a
separate Discretionary Bonus Pool under the BU Plan to provide discretionary,
incremental bonus awards. These awards may be made to all employees of the
Company or employees of the Company who individually or in groups made a
relative contribution that significantly added to the overall success of the
Company, whether or not the employees are eligible to participate in the BU Plan
under the criteria set out in Section 2 of this document. The determination that
a Company employee is eligible for a Discretionary Bonus Pool award does not
otherwise entitle that employee to generally participate in the BU Plan. The
Board of Directors have complete discretion to determine: the establishment of
the Discretionary Bonus Pool; the eligibility criteria for participation; any
performance metrics, weightings and targets; the achievement, if any, of the
targets for the performance metrics; and the amount of the awards, if any, paid
from the Discretionary

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Bonus Pool. Whether or not an Eligible Employee receives a BU Plan award shall
have no effect on that employee’s eligibility to receive a Discretionary Bonus
Pool award.

Discretionary Bonus Pool awards will be considered income and therefore subject
to national, state/provincial, and/or local taxes. All appropriate taxes and
other withholdings will be deducted from the award as required by applicable
law.

Depending on local laws and policies, Discretionary Bonus Pool awards may have
an impact on some benefits and may or may not be included in the “eligible
earnings” for purposes of capital accumulation and retirement plans offered in
the various regions by the Company. Where appropriate, deductions may be made
from the Discretionary Bonus Pool awards in accordance with the specific capital
accumulation and retirement plan in which the employee participates.

Section 6: Interpretations and Amendments

This document, as amended from time to time, constitutes the “Nortel Networks
Limited Annual Incentive Plan for Business Units”. In the event of any conflicts
or inconsistencies between the provisions of the BU Plan and any other document
or communication, written or oral, concerning the BU Plan, the provisions of
this document, as amended from time to time, will govern.

The Senior Vice-President, HR, subject to approval of the Board of Directors in
certain cases, as it may specify, will interpret the provisions of the BU Plan
and that interpretation will be final and binding on the Company, the Business
Units and all BU Plan participants. This document is also subject to
interpretation to comply with applicable laws. It is not and shall not be
construed as either an employment contract or as a contract concerning the
subject matter contained herein. There is no guarantee that any award under the
BU Plan will actually be paid. Any award is determined at the discretion of an
Eligible Employee’s Management Team, the Senior Management Team and the Board of
Directors, as the case may be. If any awards, however, are paid, they will be
determined and paid in accordance with the provisions herein.

The BU Plan can only be terminated or amended by the Board of Directors, which
has the full authority, at any time, to terminate the BU Plan or to delete,
modify and/or add to any and all terms, conditions, and provisions of the BU
Plan.

As adopted by the Board of Directors of Nortel Networks Limited on July 25,
2002, as amended on January 23, 2003 with effect from January 1, 2003, as
amended on July 28, 2003 with effect from January 1, 2003, as amended on
February 26, 2004 with effect from January 1, 2004, as amended on March 9, 2006
with effect from January 1, 2006, as amended on March 15, 2007 with effect from
January 1, 2007, as amended on February 22, 2008 with effect from January 1,
2008, as amended on February 20, 2009 with effect from January 1, 2009, as
amended on November 13, 2009 with effect from October 1, 2009 and as amended on
March 10, 2010 with effect from January 1, 2010.