Exhibit 10.27

 

Schnitzer Steel Industries. Inc.

 

ECONOMIC VALUE ADDED (“EVA”) Bonus Plan

 

Effective Date: September 1, 2000

 

The following are the terms of the Schnitzer Steel Industries, Inc. (“The
Company” or “Schnitzer Steel”) EVA (Economic Value Added) Bonus Plan (the
“Plan”) for the eligible employees of the Company and its wholly-owned
subsidiaries (collectively, the “Employees” or “Participants”).  References to
the “Company” or “Schnitzer Steel” shall be deemed to refer instead to a wholly
owned subsidiary as the context requires for a particular employee, employed by
such subsidiary.

 

A.

1.

Purpose and Description of the Bonus Plan

 

In order to align employee incentives with shareholder and lender interests,
incentive compensation will reward the creation of value.  This Plan will tie
incentive compensation or bonuses to Economic Value Added (“EVA”) and, thereby,
reward value creation, but also “feel” the effect for declines in value. EVA is
mathematically defined as net operating profit after taxes (NOPAT), minus a
Capital Charge.

 

More simply put, NOPAT is the sum of taking the sales of a business, less all of
the costs and expenses incurred to manufacture the products and generate the
sales, including taxes.  Excluded from NOPAT are the costs incurred to finance
the business (e.g., interest costs on borrowings, dividends, etc.).  The Capital
Charge is one additional cost that is considered in the computation of EVA.  The
Capital Charge is a concept that considers the cost or the required returns of
the business’ lenders (e.g., banks, mortgage holders, etc.) and
owners/shareholders.  The size of the Capital Charge is primarily based upon the
amount of money invested in the business.  The more inventory, customer
receivables, equipment, etc., invested in the business the higher the Capital
Charge. Thus, a Participant will be motivated to minimize as well as optimize
the investment level in the business to maximize EVA. The following is the EVA
equation:

 

EVA =  Net Operating Profit After Taxes (NOPAT) – Capital Charge

 

In addition, the Plan’s “banking” feature, discussed in more detail below, is
designed to motivate Employees to make decisions that are not only beneficial to
the Company in the short-term, but also have lasting benefits that will endure
into the future.

 

 

2.

Eligibility

 

The Human Resources Department of the Company will determine eligibility. In
general, an employee of the Company and its wholly owned subsidiaries are
eligible so long as they are regular full time employees or part time employees
who are scheduled to work at least 24 hours or more per week on a regular basis
and have been employed as a regular employee for a minimum of 90 days, exclusive
of the employees subject to a collective bargaining agreement, unless such
agreement expressly provides otherwise.  Newly hired regular employees who meet
the criteria for participation are eligible to earn a prorated bonus based upon
the number of days employed in the fiscal year in which they are hired.

 

3.

Bonus Calculation

 

A Participant will earn an EVA Bonus based upon the actual EVA achieved by his
or her EVA Center(s) during the fiscal year as compared to a target (discussed
in more detail below).

 

Each year, a Participant’s declared bonus will be computed as follows:

 

EVA

 

 

Target

 

 

 

 

Bonus

=

Base

x

Bonus

x

Bonus

Declaration

Salary

 

Percentage

 

Multiple

 

To better understand how an EVA Bonus will be declared, see the example below.

 

BONUS MULTIPLE

 

The Bonus Multiple is determined by the EVA achieved for the fiscal year
compared to the EVA objective for that year. The Bonus Multiple is
mathematically determined as follows:

 

Bonus Multiple =  1 + Actual EVA - Target EVA

                                        EVA Leverage Amount

                                              (the “Interval”)

 

 

Target EVA is the required EVA needed for a Participant to earn a full Target
Bonus or 1.0 times the Target Bonus.  Beginning in fiscal years 2002 and each
fiscal year after, the EVA Target for each EVA Center will be objectively
determined by starting with last year’s EVA plus an improvement factor
(“Expected Improvement”).

 

The EVA Leverage Amount (also called the Interval) is the change in EVA over and
above the Target EVA required to double a Participant’s bonus (i.e., change from
a 1.0 to a 2.0 times Bonus Multiple) or the shortfall below Target EVA needed to
change from a 1.0 to a 0.0 times Bonus Multiple.  The EVA Leverage Amount varies
by EVA Center, based on the expected volatility of the operating results.

 

The Expected Improvement and EVA Leverage Amount were determined by independent
financial analysis at the inception of the Plan and will remain unchanged for
the first two full fiscal years of the Plan, except in the event of a material
change in the Company’s businesses or capital structure.  The Company’s Chief
Financial Officer maintains a list of the Expected Improvements and EVA Leverage
Amount for each EVA Center.

 

EVA TARGET BONUS

 

Eligible Participants will have a Target Bonus expressed as a percentage of
their base salary (the “Target Bonus Percentage”).  The Target Bonus Percentage
varies by level of responsibilities within the Company.  Human Resources
maintains the list of Participants and their Target Bonus Percentages.

 

The Target Bonus for each Participant is determined by multiplying the
Participant’s Base Salary, as defined below, paid during the fiscal year by the
Target Bonus Percentage.

 

Base Salary

 

Base Salary includes overtime (if applicable) and paid time off (PTO) as defined
by the Human Resources Department, but excludes commissions, relocation
payments, auto allowances, severance benefits, disability benefits, other fringe
benefits and extraordinary payments.  See additional discussion on Individual
Awards below.

The following is an example of an EVA Bonus Declaration for a fictitious
“Participant A”:

 

Base Salary  = $35,000

EVA Target Bonus = 10% of Base Salary or $3,500

EVA Leverage Amount or Interval = $2,000,000

Target EVA for fiscal 200X = $500,000

Actual EVA for fiscal 200X = $650,000

Bonus Multiple =

                                                1 + (650,000 – 500,000)

                                                               
2,000,000                    = 1.075

 

EVA Bonus Declaration

=

Base Salary x Target Bonus Percentage x Bonus Multiple

 

=

$35,000 x 10% x 1.075

 

=

$3,763

 

 

 

 

 

4.

Performance Versus Target

 

The Plan has significant upside, as well as downside performance potential.  As
note above, the Bonus Multiple is based on EVA improvement of the Participants’
assigned EVA Center(s).  If the EVA Center achieves its Target EVA, the
Participant will achieve his or her Target Bonus Percentage or 1.0 times his or
her Bonus Multiple.  If the EVA Center exceeds its Target EVA, the Participant
will earn a multiple greater then 1.0.  Conversely if the EVA Center falls below
its EVA Target, the Participant will earn a multiple that is less then 1.0.

 

EVA performance and incentive earnings are directly linked; the better the
performance of a Participants’ EVA Centers, the more the Participant will earn.

 

Does this mean that base pay can be taken away from you?  No.  It does mean,
however, that it is possible to earn a “negative bonus”.  A negative bonus will
occur if the actual EVA in any year falls dramatically short of the EVA Target. 
In this case, the negative bonus would be applied to the EVA Bonus Bank, if
applicable.  (See the discussion below regarding the EVA Bonus Bank.)

 

Participants, Grades 1 to 8, including eligible hourly Participants, will not
participate in the EVA Bonus Bank and therefore, will not be subject to a
negative bonus.  In exchange, their Bonus Multiple for these Participants will
not exceed 2.0.

 

 

5.

Payment of Bonus and EVA Bonus Bank (Grades 9 and Above)

 

The amount of any positive bonus shall be paid in cash (net of withholdings) to
the Participant, subject to a banking system of two thirds of the amount in
excess of the annual EVA Target Bonus.  The total bonus payment for each Plan
year will be determined as follows:

 

                Beginning Bank Balance

+              Bonus Declared

=              Available Bank Balance

 

-               Bank Payout to Participant

[Up to Target Bonus plus 33 1/3% of any remaining amount in the Bank]

 

=              Ending Bank Balance

 

The banking system serves to smooth bonus payouts over the business cycle.  This
banking system also ensures that performance is sustained by making the payout
of bank balances contingent on sustained performance, through the formula
outlined above.

As described above, it is possible to earn a negative bonus.  As such, it is
also possible for a Participant’s Bonus Bank balance to be negative.  In the
event a Participant’s Bonus Bank is negative going into a new plan year and
during that year a positive EVA Bonus is declared for a Participant’s EVA
Center, 50% of the declared Bonus (to the extent the Bonus Bank is negative)
will be used to reduce the negative Bonus Bank.  The remaining declared bonus
would be paid to the Participant during the current year.

 

For example, lets assume a Participant has a negative Bonus Bank of $1,000
beginning the year.  During the year, a $1,500 bonus is declared.  Under these
circumstances $750 would be paid in the current year (50% of the $1,500) and the
Participant’s Bonus Bank would enter the following year with a balance of a
negative $250 (-$1,000 beginning Bonus Bank + $750 or 50% of the current year’s
Declared Bonus).

 

The payment will be made (net of withholding) shortly after the Company’s fourth
quarter earnings release.

 

The Bonus Bank balance, if any, is not separately funded or set aside like a
401(K) or pension plan and remains an asset of the Company, subject to the
rights of general creditors.  Further, it is not adjusted for interest or gains
and losses.

 

B.

1.

Administration and Guidelines of the Plan

 

The Finance and Human Resources Departments will administer the Plan. 
Guidelines for EVA adjustments and the “capitalization” of certain items will be
maintained by the Company’s Chief Financial Officer and may be reviewed upon
request.

 

 

2.

Duration of the Current Plan Provisions

 

It is anticipated that the EVA Bonus Plan will endure long into the future.
However, the current provisions in the Plan have been set and will not change,
except in the circumstances noted below, until August 31, 2003.  After that
date, the Plan’s provisions will be reviewed and key factors may be
recalibrated.

 

A key factor subject to recalibration is the Company’s estimated Cost of Capital
used in the determination of the EVA Capital Charge.  After extensive
independent financial analysis we have estimated the Company’s average Cost of
Capital to be 10%.  This amount will not change through August 31, 2002. 
However, beginning in September 2002, the Cost of Capital will be reviewed
annually by the Company’s Chief Financial Officer to verify that the Cost of
Capital being used is a reasonable approximation of the actual cost to the
Company.  The Cost of Capital will only change if there is a greater than 1
percent increase or decrease in the estimated Cost of Capital from the prior
year.

 

In addition, if during the two fiscal years following the Plan’s adoption, the
Company materially changes in either its form, lines of business or capital
structure, the President of the Company and the Compensation Committee each
reserve the right to make any changes to the EVA Bonus Plan as they deem
appropriate.

 

The President of the Company and the Compensation Committee each have the right
to discontinue the EVA Bonus Plan at any time after August 31, 2003, upon not
less than thirty days advance notice.

 

 

3.

Individual Awards

 

Individual Awards for Participants shall be based on the Base Salary (as defined
above) actually paid to the Participant during the fiscal year.

 

The Individual Awards for Shared Service Participants of the Company will be
based upon an analysis of the amount of time the Participant charged to
Schnitzer Steel in the prior fiscal year.  That amount of time will be rounded
to the nearest 25%. In the case of a new Participant, the Individual Award will
be based upon the time charged to Schnitzer Steel during the fiscal year, again
rounded to the nearest 25%.

 

For example, Participant A charged 1,350 hours to Schnitzer Steel in the prior
year, which would equate to 65% (1,350/2,080) of his or her time employed by the
Schnitzer Group of companies.  This amount would be rounded up to 75%. Since the
amount was based upon the prior fiscal year, if that allocation is not a
reasonable indicator of time (greater than 25% variance) for the then current
year, the Individual Award would be adjusted accordingly.  The remaining
potential bonus if any (in the example above, 25%), would be paid at the sole
discretion of the Office of the President and would be paid when bonuses are
paid by the other Schnitzer Group companies.

 

 

4.

Determination of Bonus Awards

 

The Company’s Chief Financial Officer will compute each EVA Center’s Actual EVA
for the applicable plan year and present it for approval by the President. As
soon as reasonably practical after the Company’s fourth quarter press release,
the bonus payments will be made to the Participants.

 

 

5.

New Hires/Promotions

 

An individual who is hired/promoted into a position that participates in the
Bonus Plan may be eligible for an Individual Award on a pro-rata basis for that
year so long as he/she has been employed full time for 90 consecutive calendar
days.  The pro-rata basis will be determined by the number of days the
Participant holds his or her respective position(s) for the respective fiscal
year.  For example, a Participant is hired into a bonus eligible position on
November 17th.  He or she would be eligible to earn 288/365ths of his or her
Target Bonus for the year.

 

Mid-year promotions that change the Participant’s Target Bonus and/or EVA Center
will be prorated based upon the number of days employed in each position and/or
EVA Center during the fiscal year.

 

 

6.

Transfers

 

A Participant who transfers his or her employment from one EVA Center to another
shall have his or her EVA Bonus Bank transferred to the new EVA Center.  For the
year including the transfer, the Participant will have his or her bonus award
based on time spent in each particular EVA Center on a pro-rata basis for the
portion of year the individual was employed by each EVA Center (adjusted by the
number of days employed in the EVA Center during the fiscal year).  The
Participant’s pro-rata share will be based on the EVA Center’s full year EVA
performance.

 

 

7.

Death or Disability

 

A Participant who dies or becomes permanently disabled, as defined by the
Company’s disability policy, while in the employment of Schnitzer Steel shall
receive full payment of his or her Bonus Bank Balance after the impact of a
pro-rata bonus (based upon the number of days employed) for the fiscal year in
which he or she dies or becomes permanently disabled.  In the event of death,
the payment will be made to the Participant’s estate. Such payment shall be made
at the regular time for making bonus payments in respect to the year of such
death or disability.

 

 

8.

Retirement

 

A Participant who retires from the Company shall receive full payment of his or
her Bonus Bank balance and will be eligible for a pro-rata bonus (based upon the
number of days employed) for the fiscal year in which he or she retires.  Such
payment shall be made in a lump sum at the regular time of making bonus
payments. For the purposes of this paragraph 8, a person who is at least age 55
is deemed to be “retired” when he or she would receive retirement benefits under
his or her retirement pension plan, if any.

 

 

9.

Involuntary Termination without Cause

 

A Participant who is involuntarily terminated without cause shall receive full
payment of his or her Bonus Bank balance and will be eligible for a pro-rata
bonus (based upon the number of days employed) for the fiscal year in which he
or she was involuntarily terminated without cause. Such payment shall be made in
a lump sum at the regular time of making bonus payments.

 

 

10.

Voluntary Resignation or Termination with Cause

 

Voluntary termination of employment (except in the event of Retirement) or
termination with cause (consistent with Company policy) shall result in
forfeiture of the Participant’s Bonus Bank balance and pro-rata bonus for the
year of voluntary resignation or termination with cause.   Further, an employee
must still be employed by the Company on the payment date in order to be paid
for the prior year bonus.

 

For example: A Participant was employed for the entire fiscal year ended August
31, 2001 and his or her EVA Center earned a Bonus Multiple for the year then
ended.  However, the Participant terminates his or her employment on September
30, 2001.  The bonus payments for fiscal 2001 were paid on October 1, 2001.  In
this case, the Participant would forfeit his or her entire fiscal 2001 bonus and
Bonus Bank, if any.

 

 

11.

Negative Bonus Bank Balances Upon Termination

 

Negative ending Bonus Bank balances are waived upon a Participant’s termination
of employment.

 

  

12.

General Provisions

 

 

 

 

 

a)

Withholding of Taxes

 

 

 

 

 

 

 

The Company shall have the right to withhold the amount of taxes, which in the
determination of the Company are required to be withheld under law with respect
to any amount due or paid under the Plan.

 

 

 

 

 

 

b)

Expenses

 

 

 

 

 

 

 

All expenses and costs in connection with the adoption and administration of the
Plan shall be borne by the Company.

 

 

 

 

 

 

c)

No Prior Right or Offer

 

 

 

 

 

 

 

Except and until expressly granted pursuant to the Plan, nothing in the Plan
shall be deemed to give any Participant any contractual or other right to
participate in the benefits of the Plan.  No award to any such Participant in
any fiscal year shall be deemed to create a right to receive any award or to
participate in the benefits of the Plan in any subsequent fiscal year.

 

 

 

13.

Limitations

 

 

 

 

 

a)

No Continued Employment

 

 

 

 

 

 

 

Neither the establishment of the Plan or the grant of an award thereunder shall
be deemed to constitute an express or implied contract of employment with any
Participant for any period of time, or change a Participant’s “at will” status,
or in any way abridge the rights of the Company to determine the terms and
conditions of employment or to terminate the employment of any Participant with
or without cause, at any time.

 

 

 

 

 

 

b)

Not Part of Other Benefits

 

 

 

 

 

 

 

The benefits provided in this Plan shall not be deemed a part of any other
benefit provided by the Company to its employees.  The Company does not assume
and shall have no obligation to Participants, except as expressly provided in
this Plan.

 

 

 

 

 

 

c)

Other Incentive or Benefits

 

 

 

 

 

 

 

Nothing contained herein shall limit the Company’s power to grant bonuses to
employees of the Company, whether or not they are Participants in this Plan.