Exhibit 10.26

 

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EXECUTIVE PERFORMANCE

 

INCENTIVE BONUS

 

PLAN DOCUMENT

  

 

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TABLE OF CONTENTS

 

Plan Objectives    2 Plan Administration    2 Plan Period    2 Eligibility    2
Plan Design    3 Quarterly Component    4 Annual Component    6

Corporate Revenue/Operating Margin Attainment

   6

Restricted Stock Unit Program

   7

Eligibility

   7

Program Period

   7

The Grant

   8

Milestones

   8

Vesting

   8

Payout of RSU Grant

   9

Other Important EPIB Plan Details

   9

Employment at Will

   9

Board of Directors/Compensation Committee Discretion

   9

Applicable Law and Venue

   9

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MCDATA EXECUTIVE PERFORMANCE INCENTIVE BONUS PLAN DOCUMENT

 

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Plan Objectives

The 2005 McDATA Executive Performance Incentive Bonus Plan (“Plan”) was
developed to provide cash incentives to McDATA Executives on a quarterly and
annual basis for achievement of internal corporate and individual goals. The
Plan is designed to further drive performance beyond “target” levels through the
availability of additional cash bonus opportunities for stretch performance.

This year, to provide a longer term incentive for McDATA’s executive team, a
Restricted Stock Program (“RSU Program”) will be included as part of EPIB.
Details of this program are outlined later in this plan document.

McDATA is occasionally referred to herein as the “Company.”

Plan Administration

The Chief Executive Officer and his selected designees in Human Resources will
administer this Plan as approved by the Compensation Committee of the Board of
Directors (“Compensation Committee”). The Compensation Committee must approve
any material exceptions to this Plan, and retains the right to amend or
discontinue this Plan in whole or in part at any time with or without notice to
the Plan participants. Questions about the Plan should be directed to the
Executive Compensation group in Human Resources at x84035.

Plan Period

The effective Plan period is from February 1, 2005 through January 31, 2006,
with performance measured and rewarded both on a quarterly and annual basis as
described in this document.

Eligibility

Upon eligibility, participants will be notified of their participation and the
terms of their participation in the Plan. The CEO, at his discretion, may
recommend employees to the Compensation Committee for participation in the Plan.

To be eligible for quarterly or annual rewards under the Plan, participants must
be in an active status defined as being a regular full-time employee on McDATA’s
US or international payroll for the entire applicable measurement period. Active
status includes employees on an approved leave of absence, subject to proration
as described in this document. Newly hired participants who become eligible for
participation in the Plan during the final month of a fiscal quarter shall not
be eligible to begin Plan participation until the first day of the following
quarter. The above notwithstanding, employees who become eligible to participate
in the Plan due to promotion shall participate in the Plan immediately on a
prorated basis.

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Except as described above, employees who become eligible to participate in the
Plan during a fiscal quarter will begin participation immediately. Any
applicable cash bonus payout in the fiscal quarter will be prorated based on the
actual days of eligible participation. Similarly, annual awards under the Plan
will be prorated based on the number of days of participation between the day
that the participant becomes eligible to participate in the Plan and the last
day of the Plan year.

Plan participants terminating employment with the Company or who are terminated
on or before the bonus delivery date for reasons other than death, permanent
disability, or change of control will not be eligible to receive unpaid cash
awards for the prior fiscal quarter or year, or for the fiscal quarter and year
in which the participant terminates employment. In the event that a participant
becomes ineligible to participate in the Plan due to a change of position or
reclassification of position, provided that the participant remains employed by
the Company, the participant shall be eligible to receive payment under the
Plan, if they would have received a payment under the plan had they remained in
it, on a prorated basis for the time period during which the employee was an
eligible participant.

All participants in the Plan will be deemed to be ineligible for the Company’s
Performance Incentive Bonus (“PIB”) plan. Any changes to Plan eligibility must
be approved by the Compensation Committee.

Plan Design

Total annual bonus eligibility (target bonus), expressed as a percentage of base
salary, is determined during the annual compensation review and is approved by
the Compensation Committee. For example, a participant with a base salary of
$200,000 and a target bonus of 40% will have a target bonus of $80,000.

The target bonus is comprised of both quarterly and annual components. The
quarterly component is equal to 75% of the target bonus, or 18.75% of the target
bonus on a quarterly basis, and is based on the achievement of quarterly
corporate Revenue and Operatin Margin targets, and then by performance of
individual objectives. The annual component is equal in total to 25% of the
target bonus and is based upon achievement of annual corporate Revenue and
Operating Margin targets.

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Example: Annual Target Incentive = $80,000         Target Payment               
% of
Annual     $ Target    Payment
Frequency    Qtrly
Target Quarterly Component (75%)           

Qtrly Revenue/Operating Margin Matrix + Qtrly Individual Objectives (both must
be achieved for payment)

   75 %   $ 60,000    Quarterly    $ 15,000 Annual Component (25%)           

Part A - Annual Revenue/Op. Mrg. Matrix

   25 %     20,000    Annually      NA

Total Annual & Quarterly

   100 %   $ 80,000      

For new participants or for those who have changed positions since the
development of the this Plan, cash award eligibility will be determined using
the same market survey approach that was used to develop the original Plan, with
final approval required by the Compensation Committee.

Quarterly Component

Payment in any quarter is dependent first upon achievement of at least the
Threshold level of performance within the approved quarterly Revenue/Operating
Margin Matrix, then upon achievement of individual objectives. Each quarter,
following the release of the previous quarter’s financial results, the
Compensation Committee will reset Threshold, Target, and Stretch ranges for both
revenue and operating margin for the next quarter to determine the level of
performance required to fund the quarterly bonus pool. Provided that minimum
“Threshold” revenue and operating margin are attained, the matrix provides for
payment ranging from 50% to 150% of the quarterly target bonus depending on
corporate performance. The corporate performance matrix for Q1 2005 is provided
on the following page as an example:

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               Q1 2004                Operating Margin                Threshold
  Target   Stretch          3.0%   4.5%   6.0%    STRETCH    107M    80%   110%
  150% REVENUE    TARGET    104M    65%   100%   135%    THRESHOLD    101M   
50%   90%   120%

When corporate performance is sufficient to fund the bonus pool as described
above, the pool will be allocated among participants based on the achievement of
pre-established objectives. These objectives will be established and weighted by
the CEO for each participant prior to or during the quarter being measured.
Following the end of the quarter, the CEO will assess performance relative to
each objective and determine an attainment level on a percentage basis. The
final payment for each objective is calculated as follows:

Corporate Attainment % x Objective Weight % x Objective Attainment % x Quarterly
Target

Bonus ($) = Objective Payment Amount ($)

Achievement of individual objectives alone is not sufficient to warrant payment
if corporate Threshold Revenue and Operating Margin are not achieved.

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Continuing with the previous example, a hypothetical quarterly payment schedule
for Q1 – Q4 is outlined on the following page:

For illustrative Purposes only

 

Example:           

Base Salary

   $200,000        

Target Incentive %

   40%        

Target Incentive $

   $80,000    =      $60,000 Qtrly/4 = $15,000 per Qtr            $20,000 Annual

 

Pd

   Cash
Target   

Corp. Rev/EPS

Attain

   Eligible
Cash   

Individually

Assigned

Objectives

   Weight   Indiv.
Attain.   Objective
Payout   Total
Payout Q1    $ 15,000    Below Threshold    $0    Objective A    40%   100%    
NA*               Objective B    30%   50%     NA*               Objective C   
30%   100%     NA*                                                 $ 0 Q2    $
15,000    Stretch (150%)    $22,500    Objective B    40%   100%   $ 9,000     
         Objective D    30%   100%   $ 6,750               Objective E    30%  
100%   $ 6,750   $ 22,500                          Q3    $ 15,000    Threshold
(50%)    $7,500    Objective F    60%   100%   $ 4,500               Objective G
   40%   80%   $ 2,400                  Objective NA        $ 0                 
                               $ 6,900 Q4    $ 15,000    Target (100%)   
$15,000    Objective G    30%   100%   $ 4,500               Objective H    30%
  50%   $ 2,250               Objective I     40%   100%   $ 6,000              
                                  $ 12,750                                     
Total Q1 - Q4 Quarterly Incentive Earnings   $ 42,150             Total Q1 - Q4
Possible Incentive Earnings (at Target)   $ 40,000

Annual Component

The Annual Component of the Plan constitutes 25% of participants’ target bonus.
The payout of the annual component is based upon achievement of annual corporate
Revenue and Operating Margin targets.

Corporate Revenue/Operating Margin Attainment

Payment under the Annual Component is based on the attainment of annual
corporate revenue and operating margin goals, set forth in an Annual Performance
Matrix approved by the Compensation Committee. Like the quarterly performance
matrix, the Annual Performance Matrix allows for payment provided a Threshold
level of performance is achieved, and also provides for payment at a Stretch
level when Target performance is sufficiently exceeded. Payment based entirely
on corporate performance relative to the Annual Performance Matrix and is not
dependent upon the achievement of individual objectives. The 2005 Annual
Performance Matrix will be presented to the Compensation Committee for approval
at the May 23rd meeting.:

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2005 Annual Performance Matrix

 

               Operating Margin                Threshold   Target   Stretch   
      5.00%   6.00%   8.00%    STRETCH    $800M    80%   120%   150% REVENUE   
TARGET    $675M    65%   100%   125%    THRESHOLD    $550M    50%   80%   110%

Example: For the participant in the example used thus far, the portion of the
target bonus eligible for payment under this matrix is $20,000 ($80,000 x 25%).
Assume for this example that the company records 2005 revenue of $575 million,
and operating margin of 6.5%. For revenue, the Threshold level is achieved, and
for Operating Margin the Target level is met, resulting in a payment at 80% of
target, or $16,000 ($20,000 x 80%).

Actual attainment of annual performance will be measured following the Q4 2005
earnings release.

Restricted Stock Unit Program

Eligibility

All Executives who participate in the Executive Performance Incentive Bonus Plan
are eligible to participate in the Restricted Stock Unit Program. The effective
date of the program is May 5, 2005. Employees who become eligible for EPIB
during the course of the year will become eligible for the RSU program subject
to the same pro-ration schedule and other terms of eligibility defined earlier
in this plan document.

Program Period

The initial program period begins May 5,2005 and ends January 31, 2006.
Subsequent Program Periods will begin each February 1st and end the following
January 31st. Any grant made to newly eligible participants during a Program
Period will be subject to the same vesting schedule as other program
participants for that Program Period.

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The Grant

The Compensation Committee approved the initial grant for eligible participants
on May 5, 2005. This program is currently scheduled to expire on January 31,
2009. Other grants for individuals who become eligible to participate after this
date will be subject to the approval of the Compensation Committee as well. Any
grants made between May 5, 2005 and January 31, 2006 shall be grants under this
2005 RSU Program Period.

Milestones

Annually the Compensation Committee will set the performance criteria as the
Annual Milestone. The same Annual Milestone, which is subject to Compensation
Committee Approval, will measure all participants in the program. For this
fiscal year, the Compensation Committee approved that the Annual Milestone will
be to reach at least 10% Non-GAAP Operating Margin by Q4.

Vesting

Each participant’s individual grant will vest according to the following
schedule:

 

  •   If the Annual Milestone is met, 25% of the overall grant will vest as of
the later of the last day of the Program Period or as of the date the metric is
publicly disclosed.

 

  •   If the Annual Milestone is not met, 12.5% of the grant for the Program
Period is forfeited. The other 12.5% will be allocated to the Executive’s
Retention Account. The Executive’s Retention Account shall vest on January 31,
2009 provided that the Executive is still employed with McDATA.

In the event of a death or disability all RSU’s granted under the RSU Program
shall be forfeited.

Please see example below for further clarification:

 

     Initial Grant
Date    # RSU’s    Mileston Date*    #RSU’s    Attainment    #Earned   
Units Forfeited    Units Placed
in Retention
Account

Example #1

   2/1/2005    40,000                            1/31/2006    10,000    yes   
10,000    0    0          1/31/2007    10,000    no       5,000    5,000      
   1/31/2008    10,000    no       5,000    5,000          1/31/2009    10,000
   yes    10,000    0    0 Example #2    2/1/2005    20,000    1/31/2006   
5,000    no       2,500    2,500          1/31/2007    5,000    yes    5,000   
0    0          1/31/2008    5,000    yes    5,000    0    0          1/31/2009
   5,000    yes    5,000    0    0 Example #3    2/1/2005    80,000    1/31/2006
   20,000    no       10,000    10,000          1/31/2007    20,000    no      
10,000    10,000          1/31/2008    20,000    no       10,000    10,000      
   1/31/2009    20,000    yes    20,000    0    0

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* Payout to occur within 2 and a half months of Milestone Date

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Payout of RSU Grant

Payout of vested RSU’s will occur within 2  1/2 months after the end of the
Program Period. An Executive will receive one share of McDATA class B common
stock for each vested unit. Such shares shall be granted under the terms of the
McDATA 2001 Equity Incentive Plan. McDATA shall have the right to deduct any
Federal/State/or Local Tax required by law to be withheld from other
compensation it pays the Executive. McDATA also reserves the right to demand
payment in advance or no later than at the time the taxes are owed, as a
condition to issuing such shares. An Executive may make a voluntary election to
defer  1/2 of any portion of a grant, which is vested as a result of meeting an
annual Milestone, if the election to defer is made at least 6 months prior to
the end of the Program Period. To make the election to defer, the Executive
shall enter into a Deferral Election Agreement.

Other Important EPIB Plan Details

Cash/Equity awards payable to participants on any type of approved leave of
absence will be prorated based on the number of days worked during the quarter.

In the event of the death of an eligible participant during the bonus quarter,
applicable bonus payments will made to the participant’s designated beneficiary
or to the estate in the absence of a designated beneficiary on the regular bonus
delivery date based on their actual completion of service during the quarter and
the Company’s cash payment levels as of the end of the quarter.

Employment at Will

The above information does not constitute a guarantee of work, job status or
employment for any period of time. The employment of all Plan participants may
be terminated at will at any time by either party, with or without prior notice.
This Plan does not create a contract of employment, either expressed or implied,
between the participant and the Company.

Board of Directors/Compensation Committee Discretion

This Plan has been approved by the Compensation Committee who may, upon the
recommendation of the CEO or independently, alter, amend, extend or revoke the
Plan or any other Plan provisions without prior notice to participants. The Plan
may be terminated at any time. Participants will be notified in a timely manner
of any material changes to the Plan.

The Compensation Committee may approve the addition or removal of a participant
from the Plan, as well as changes to a participant’s eligibility under the Plan,
including an altered payment or share acceleration arrangement either
retrospectively or in advance.

Applicable Law and Venue

If any provision of the Plan is found to be void or unenforceable under
applicable law or regulations, it shall be deleted, and the remainder of the
Plan shall remain unmodified and in full force and effect. The Plan shall be
governed and construed in all aspects by the laws of the State of Colorado. The
Plan participant further irrevocably waives any and all laws or regulations that
may be applicable to the Plan in any jurisdiction, except for the laws and
regulations of the State of Colorado.

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The Plan participant irrevocably consents to personal jurisdiction and subject
matter jurisdiction of the state of Colorado for any matters arising out of or
associated with the Plan. The Plan participant agrees that the exclusive forum
for resolving any disputes arising out of or associated with the Plan shall be
heard by an appropriate court in the State of Colorado, regardless of where the
Plan participant is domiciled, resides or performs duties for McDATA.

Receipt of your Target Bonus Statement shall be deemed acceptance of the terms
and conditions of this Plan.

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