--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

 
EXHIBIT 10.1
2008 Solutia Inc. Annual Incentive Plan

This document sets forth the terms of the Solutia Inc. Annual Incentive Plan
(the “Plan” or the “AIP”) for the year beginning January 1, 2008 and ending
December 31, 2008 (the Performance Year”).

Purpose

The purpose of the Solutia Inc. Annual Incentive Plan is to provide employees
with annual cash bonus opportunities to incent strong operational and financial
performance and promote the creation of shareholder value.

I.  
Performance Metrics

The Executive Compensation and Development Committee of the Company’s Board of
Directors (the “ECDC”) sets performance metrics for the Plan based on industry
expectation, market opportunities and other factors the ECDC believes are
relevant.  The 2008 performance metrics for each incentive pool are shown in the
following charts:

Business Unit Pools

 Unit  
 Performance Measure #1
 
Weight
   
 Performance Measure #2
 
Weight
 
 Performance Measure #3
 
Weight
 
Core
 
Enterprise EBITDAR
    50 %  
Enterprise Free Cash Flow
    50 %
NA
 
NA
 
Integrated Nylon
 
EBITDAR
    50 %  
Free Cash Flow
    50 %
NA
 
NA
 
Saflex
 
EBITDAR
    33.3 %  
Free Cash Flow
    33.3 %
Gross Margin %
    33.3 %
CPFilms
 
EBITDAR
    50 %  
Free Cash Flow
    50 %
NA
 
NA
 
Flexsys
 
EBITDAR
    50 %  
Free Cash Flow
    50 %
NA
 
NA
 
Other PPD
 
EBITDAR
    50 %  
Free Cash Flow
    50 %
NA
 
NA
 

Enterprise Discretionary Bonus Pool

 Unit
   
Performance Measure
   
 Weight
 
All
   
Enterprise EBITDAR
      100 %

 
1

--------------------------------------------------------------------------------

 

Target performance levels and funding factors have been established by the
ECDC.  Performance metrics may be adjusted, as appropriate, based on asset sales
and dispositions.  For purposes of the Plan the performance measures have the
following meaning:

·  
“EBITDAR” 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), (d) interest
expense, and (e) income tax expense plus, (f) depreciation expense, and (g)
amortization expense excluding amortization of deferred credits plus, (h)
reorganization items.  Calculation of EBITDAR shall exclude all impacts of fresh
start accounting and any effects of accounting policy changes made in connection
with fresh start, effective as of the emergence date.

·  
“Free Cash Flow” 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 related to asset sales and proceeds received by Solutia in excess of
management’s estimate from the disposition of any of the Company’s business
units or dividions, to the extent sold during the calendar year.

·  
“Gross Margin %” means, with respect to any specified entity for any period,
gross margin (the difference between the reported revenue less cost of goods
sold of the business unit) 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 operation, and (d) all impacts of fresh start
accounting, including accounting policy changes made in connection with fresh
start, effective as of the emergence date.

 
2

--------------------------------------------------------------------------------

 

II.  
Calculation of Incentive Awards

Solutia Inc. (the “Company”), for purposes of the Plan, is organized along
business lines (Integrated Nylon, Saflex, CPFilms, Flexsys, and Other
Performance Products Divisions (Other PPD), each a “Business”) in order to place
emphasis on key performance measures of each individual Business.

The size of the incentive pool available for awards will be based on the
achievement of specific performance measures (each incentive pool shall be
referred to herein as a “Business Unit Incentive Pool”).  Employees assigned to
specific a Business Unit will receive the funding factor tied to that Business
Unit’s specific performance measures.

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 actual funding of each Business Unit Incentive Pool and the Core Function
Incentive Pool shall be 90% of all aggregate target bonuses for individuals
assigned to each pool multiplied by the weighted average of the pre-established
funding factor for achievement of specific performance measures relative to
target performance.  The target performance and weightings for each performance
measure, and the related funding factors, have been determined by the ECDC based
upon the recommendation of the Chief Executive Officer of the Company (the
“CEO”).

The entire Business Unit Incentive Pool or the Core Function Incentive Pool will
be allocated in the form of awards to individuals assigned to these Pools.  Each
Pool will be divided equally into an objective award pool and a discretionary
award pool as described below:

·  
The objective award pool will be based upon business-unit performance and will
be equal to 45% of such individual’s target bonus multiplied by the relevant
funding factor.

·  
The discretionary award pool will be based upon a participant’s individual
performance versus established objectives, 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.

 
3

--------------------------------------------------------------------------------

 

In addition to the Business Unit Incentive Pools and the Core Function Incentive
Pool, an overall enterprise 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 level.  The
funding of the Enterprise Discretionary Incentive Pool shall be 10% of all
aggregate target bonuses multiplied by a pre-established funding factor.  All
participating employees will be eligible for a discretionary award from this
pool at the discretion of the CEO and the ECDC (if applicable).

If threshold performance levels are not met, there would be no bonus pool for
that performance year.  If a bonus pool is funded, a participant would be
eligible to receive a minimum bonus of 45% of their performance adjusted target
bonus (after applying the funding factor that is based on financial
performance).  The maximum funding factor that can be achieved under this plan
is 3.0x target performance (if the maximum performance is achieved).  After
applying the funding factor, the participant’s maximum opportunity is 2.0x the
performance adjusted bonus.

The process for determining bonuses is as follows:

1)  
Incentive Pools are determined and funded based on Business Unit/Core
performance relative to the pre-established targets, funding factors, and
weighting.  The Pools are then allocated equally to objective awards and
discretionary awards.

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)  
Managers will make individual award recommendations based upon individual
performance compared to established objectives for individual discretionary
portion.  Individual discretionary awards will be approved by the Business Unit
President and the CEO.

5)  
Bonus amounts from the Enterprise Discretionary Bonus Pool will be determined at
the discretion of the CEO with the advise of the Executive Leadership Team
(ELT).

6)  
The ECDC shall determine the discretionary bonus for the CEO and approve
discretionary awards for the ELT.  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

--------------------------------------------------------------------------------

 

7)  
The ECDC has determined that the maximum bonus an individual can receive under
the AIP is 200% of his/her performance adjusted target bonus (after applying the
funding factor).

8)  
In cases where an individual is assigned to a specific Business Unit or Core,
but supports more than one Business Unit, the performance metric component of
the funding will be based on the following rules:

·  
Employees who support a Business Unit more than 50% of the time will receive
that Unit’s funding factor.

·  
Employees who support two Business Units equally will receive an average of the
two Units’ funding factors.

·  
Employees who support multiple Business Units (and aren’t covered by the above)
will receive the Core funding factor.

·  
Funding sources for an employee’s award will be determined based on the number
of full months spent, rounded if applicable, in each function or Business Unit.

Each employee’s actual award will also depend on individual performance in
serving all relevant functions and Business Units and will include input from
each respective manager.

Actual awards based on the performance metric will vary as described above based
upon achievement of Business Unit or Core 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.

III.           Administration

The ECDC and the CEO, whose decisions are final, shall administer the Plan
jointly.  The Senior Vice President – Human Resources will be responsible for
the administrative procedures governing the Plan, including ensuring the
existence of approved Performance Measures and the presentation of the
performance results under the Plan to the ECDC for its approval.  The following
administrative procedures shall govern:

1.  
The ECDC will approve individual incentive awards for the CEO and all Executive
Leadership Team (ELT) members.  The CEO and his direct reports may approve all
other incentive awards.

2.  
Employees must be actively employed with the company on the day of the payout to
receive an award.

 
5

--------------------------------------------------------------------------------

 

3.  
Employees who retire, resign, or are terminated shall not be eligible for an
award if they are not employed by Solutia on the date of payment.

4.  
Employees on leave of absence during the Performance Year will be considered for
a prorated award reflecting actual serve, rounded to the nearest whole
month.  Payment will be made, if any, at the time awards are normally paid, or
upon returning from leave of absence, if later.

5.  
In the event of an employee’s death, payment will be made to the employee’s
estate reflecting the employee’s actual service to the nearest whole month.

6.  
Employees promoted or hired before December 1 into a position that is eligible
to participate may be considered for an award that will be prorated reflecting
the employees’ actual participation to the nearest whole month.

7.  
Awards for Employee who change jobs (and incentive targets) during the year will
be prorated to reflect the employee’s actual participation in both positions to
the nearest whole month.

8.  
Employees who transfer from another Business Unit not participating in this plan
to a participating position or vice versa during the Performance Year will
receive a prorated award based on the time spent in the participating position.

9.  
Employees who are involuntarily terminated with severance between the end of the
Performance Year and prior to the payout may be eligible to receive an award.

10.  
Awards are paid in cash and will be made no later than 75 days following the end
of the Performance Year in the United States.  Awards outside of the United
States are determined at the same time as the awards for participants in the
United States and paid as soon as administratively possible once approved.

IV.           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 their
country, pension plan or retirement program will apply.

 
6

--------------------------------------------------------------------------------

 

V.           Taxes

For U.S. participants, any award you receive under the Plan is taxable as
supplemental income in the year of payment and is subject to all applicable
withholding taxes in the year paid at a minimum of 25%.  For participants
outside the United States, the laws of the tax jurisdiction(s) to which you are
subject will apply.

VI.           Legal Information

·  
In all events, whether any cash award is made under the Plan to a participant
will depend on management’s recommendation and the decision of the ECDC (or its
delegate).

·  
Nothing in this document or any other document describing or referring to the
Plan shall confer any right whatsoever on any person to be considered for any
incentive commitments or awards.

·  
This document is subject to and governed by actions, interpretation, and 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 Plan and
the applicable award.

·  
Nothing in this document or any other document describing or referring to the
Plan 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 Plan is subject to the laws of the State of Delaware.

 
7

--------------------------------------------------------------------------------

 

·  
Nothing in this Plan shall be deemed to modify any terms and conditions of a
participants employment agreement.

·  
The Plan 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.

 
8

 

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------