EXHIBIT 10(f)
Amended 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

                                                      Performance            
Performance             Performance         Unit   Measure #1     Weight    
Measure #2     Weight     Measure #3     Weight  
 
  Enterprise           Enterprise Free                        
Core
  EBITDAR     50 %   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 %

 

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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 divisions, 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.

 

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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 a
specific 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.

 

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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 advice 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.

 

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  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.

 

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  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 or common stock of the Company and are to be
paid on or between January 1, 2009 and March 15, 2009. If all or a portion of
the payment is made after March 15, 2009, the amount paid after March 15, 2009
may be considered nonqualified deferred compensation under Code Section 409A,
and the Company shall comply with any IRS Form W-2 reporting requirements that
may apply to such amounts. 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.

 

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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.

 

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  •   Nothing in this Plan shall be deemed to modify any terms and conditions of
a participant’s 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.

 

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