Exhibit 10.6
SOLUTIA INC.
ANNUAL INCENTIVE PLAN
Purpose
     This annual incentive plan (the “Plan”) is applicable to those employees of
Solutia Inc. (the “Company”) and its subsidiaries who are executive officers of
the Company (“Covered Employees”), including members of the Board of Directors
who are such employees.
     The Plan is designed to reward, through additional cash compensation,
Covered Employees for their significant contribution toward improved
profitability and growth of the Company.
Eligibility
     All Covered Employees shall be eligible to be selected to participate in
this Plan. The Committee shall select the Covered Employees who shall
participate in this Plan in any year no later than 90 days after the
commencement of the fiscal year of the Company (or no later than such earlier or
later date as may be the applicable deadline (the “Determination Date”) for the
establishment of performance goals permitting the compensation payable to such
Covered Employee for such year hereunder to qualify as “qualified
performance-based compensation” under Treasury Regulation 1.162-27(e).
Administration
     The Plan shall be administered by the Executive Compensation and
Development Committee of the Board of Directors (the “Board”), or by another
committee appointed by the Board (the Executive Compensation and Development
Committee of the Board or such other committee, the “Committee”). The Committee
shall be comprised exclusively of members of the Board who are “outside
directors” within the meaning of Section 162(m)(4)(C) of the Internal Revenue
Code of 1986, as amended (the “Code”) and Treasury Regulation 1.162-27(e)(3).
The Committee shall have the authority, subject to the provisions herein, (a) to
select employees to participate in the Plan; (b) to establish and administer the
performance goals and the award opportunities applicable to each participant and
certify whether the goals have been attained; (c) to construe and interpret the
Plan and any agreement or instrument entered into under the Plan; (d) to
establish, amend, and waive rules and regulations for the Plan’s administration;
and (e) to make all other determinations which may be necessary or advisable for
the administration of the Plan. Any determination by the Committee pursuant to
the Plan shall be final, binding and conclusive on all employees and
participants and anyone claiming under or through any of them.
Establishment Of Performance Goals And Award Opportunities
     No later than the Determination Date for each year, the Committee shall
establish, in writing, the method for computing the amount of compensation which
will be payable under the Plan to each participant in the Plan for such year if
the performance goals established by the

 

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Committee for such year are attained in whole or in part and if the
participant’s employment by the Company or a subsidiary continues without
interruption during that year. Such method shall be stated in terms of an
objective formula or standard that precludes discretion to increase the amount
of the award that would otherwise be due upon attainment of the goals and may be
different for each participant. No provision of this Plan shall preclude the
Committee from exercising negative discretion with respect to any award
hereunder, within the meaning of Treasury Regulation 1.162-27(e)(2)(iii)(A).
     No later than the Determination Date for each year, the Committee shall
establish in writing the performance goals for such year. Such Performance Goals
may be based on such factors including, but not limited to: (a) revenue,
(b) earnings per Share, (c) net income per Share, (d) Share price, (e) pre-tax
profits, (f) net earnings, (g) net income, (h) operating income, (i) cash flow,
(j) earnings before interest, taxes, depreciation and amortization, (k) sales,
(l) total stockholder return relative to assets, (m) total stockholder return
relative to peers, (n) financial returns (including, without limitation, return
on assets, return on equity and return on investment), (o) cost reduction
targets, (p) customer satisfaction, (q) customer growth, (r) employee
satisfaction, (s) gross margin, (t) revenue growth, or (u) any combination of
the foregoing, or such other criteria as the Committee may determine.
Performance Goals may be in respect of the performance of the Company, any of
its Subsidiaries or Affiliates or any combination thereof on either a
consolidated, business unit or divisional level. Performance Goals may be
absolute or relative (to prior performance of the Company or to the performance
of one or more other entities or external indices) and may be expressed in terms
of a progression within a specified range.
Maximum Award
     The maximum amount of compensation that may be paid under the Plan to any
participant for any year is $7,500,000.
Attainment Of Performance Goals Required
     Awards shall be paid under this Plan for any year solely on account of the
attainment of the performance goals established by the Committee with respect to
such year. Awards shall also be contingent upon the participant remaining
employed by the Company or a subsidiary of the Company on the date specified by
the Committee for such year, provided that if no such date is specified, the
payment date of such award. In the event of termination of employment by reason
of death during the Plan year or in the event a participant is on a short term
leave of absence for such year, an award may be payable under this Plan to the
participant or the participant’s estate reflecting the employee’s actual service
for such year provided that the applicable performance goals were otherwise
satisfied, which shall be paid at the same time as the award the participant
would have received for such year had no termination of employment occurred and
which shall be equal to the amount of such award multiplied by a fraction the
numerator of which is the number of full or partial calendar months elapsed in
such year prior to termination of employment and the denominator of which is the
number twelve. A participant whose employment terminates prior to the end of a
Plan year for any reason not excepted above shall not be entitled to any award
under the Plan for that year. The foregoing criteria shall have any reasonable
definitions that the Committee may specify, which may include or exclude any or
all of the following items, as the Committee may specify: extraordinary, unusual
or non-recurring items; effects of accounting

 

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changes; effects of currency fluctuations; effects of financing activities
(e.g., effect on earnings per share of issuing convertible debt securities);
expenses for restructuring, productivity initiatives or new business
initiatives; non-operating items; acquisition expenses; and effects of
divestitures. Any such performance criterion or combination of such criteria may
apply to the participant’s award opportunity in its entirety or to any
designated portion or portions of the award opportunity, as the Committee may
specify.
Committee Certification Contingencies: Payment Of Awards
     Subject to the provisions above relating to death and short term leave of
absence, payment of any award under this Plan shall also be contingent upon the
Committee’s certifying in writing that the performance goals and any other
material terms applicable to such award were in fact satisfied, in accordance
with applicable treasury regulations under Code Section 162(m). Unless and until
the Committee so certifies, such award shall not be paid. Unless the Committee
provides otherwise or a Covered Employee elects otherwise in accordance with
procedures adopted by the Company, (a) earned awards shall be paid promptly
following such certification, and (b) such payment shall be made in cash
(subject to any payroll tax withholding the Company may determine applies).
     To the extent necessary for purposes of Code Section 162(m), this Plan
shall be resubmitted to shareholders for their reapproval with respect to awards
payable for the taxable years of the Company commencing on and after 5th
anniversary of initial shareholder approval.
Amendment. Termination And Term Of Plan
     The Board of Directors may amend, modify or terminate this Plan at any
time. The Plan will remain in effect until terminated by the Board.
Interpretation And Construction
     Any provision of this Plan to the contrary notwithstanding, (a) awards
under this Plan are intended to qualify as “qualified performance-based
compensation” under Treasury Regulation 1.162-27(e) and (b) any provision of the
Plan that would prevent an award under the Plan from so qualifying shall be
administered, interpreted and construed to carry out such intention and any
provision that cannot be so administered, interpreted and construed shall to
that extent be disregarded. No provision of the Plan, nor the selection of any
eligible employee to participate in the Plan, shall constitute an employment
agreement or affect the duration of any participant’s employment, which shall
remain “employment at will” unless an employment agreement between the Company
and the participant provides otherwise. Both the participant and the Company
shall remain free to terminate employment at any time to the same extent as if
the Plan had not been adopted.
Governing Law
     The terms of this Plan shall be governed by the laws of the State of
Delaware, without reference to the conflicts of laws principles thereof.