Exhibit 10.37

 
Obagi System Logo [obagisystemlogo.jpg]
 
2010 PERFORMANCE INCENTIVE PLAN (the “Plan”)

The 2010 Performance Incentive Plan amends, restates and is the successor plan
to the 2009 Performance Incentive Plan, which was adopted under the Obagi
Medical Products, Inc. 2005 Stock Incentive Plan.

PLAN PARTICIPANTS

All regular, full-time employees of Obagi Medical Products (the “Company”) who
have been notified in writing of their eligibility are considered eligible Plan
Participants (“Plan Participants”).  Employees in Sales, and other employees
participating in any other variable incentive pay plans, shall not be
eligible.  Any otherwise eligible employee who has an existing incentive pay
component in his or her employment agreement or offer letter shall be deemed a
Plan Participant, and the incentive pay component of the employment agreement
shall be replaced in its entirety by the Plan Participant’s rights under this
Plan unless otherwise explicitly set forth in the employment agreement or offer
letter.

Plan Participants must be full-time employees of the Company on the last day of
the Plan Period (as defined below) to be eligible to be paid any amount under
this Plan.

Eligible employees who join the Company during the Plan Period may, if so
designated by the Administrator (as defined below), be eligible for Plan
incentives on a pro-rata basis corresponding to the service time provided to the
Company during the Plan Period, but must have been actively employed with the
Company for at least one full quarter during the Plan Period to be eligible.

PLAN PERIOD

Company Fiscal Year 2010 (January 1 through December 31, 2010) (the “Plan
Period”)

ADMINISTRATION

Except as otherwise set forth in the Plan, the Compensation Committee of the
Company’s Board of Directors shall administer the Plan (the “Administrator”).

PLAN POOL

The Plan shall operate first by the Company’s determining the aggregate amount
available for issuance to Plan Participants (the “Plan Pool”) based upon the
Company’s achievement of certain Company Performance Objectives (as defined
below).  The total on-target pool for the Plan Period is $2,128,417 (the
“On-Target Plan Pool”). The On-Target Plan Pool is calculated based upon 100%
achievement of the Company’s

 
 

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financial objectives and the Company’s contributing an amount to the Plan Pool
assuming that the number of budgeted Plan Participants projected to hold
eligible positions at the end of the Plan Period, including the budgeted 2010
hires, are each paid 100% of their on-target bonus amount.

The actual amount of the Plan Pool (meaning the actual aggregate amount that
will ultimately be available for payment to Plan Participants) will be
determined based upon the Company’s actual performance in relation to its
approved business plan, and the Plan Pool will, unless otherwise determined by
the Administrator due to facts and circumstances that it believes relevant, be
funded only on achievement by the Company of the Performance Objectives at the
minimum permissible level of achievement (as described below).

After determination by the Company of the Plan Pool amount, individual bonus
payments to each Plan Participant will be based upon such individual’s
achievement of Individual Performance Objectives (as defined below) established
as set forth in this Plan.

The Plan Pool is intended to encompass the contractual incentives existing in
otherwise eligible employees’ employment agreements or offer letters that are
replaced in their entirety by the Plan Participants’ rights under this Plan
unless otherwise explicitly set forth in the employment agreements or offer
letters.  A Plan Participant’s acceptance of any grant of an award or other
right under this Plan is conditioned upon his or her consent to such replacement
unless otherwise explicitly set forth in the Plan Participant’s employment
agreement or offer letter.
 
COMPANY PERFORMANCE OBJECTIVES TO FUND PLAN POOL

The Company performance objectives (the “Company Performance Objectives”) shall
be comprised of two components, a revenue objective (the “Revenue Objective”)
and an adjusted EBIT objective (“Adjusted EBIT Objective”).  The Compensation
Committee shall establish the target Revenue Objective and Adjusted EBIT
Objective for the Plan Period; provided that each objective will be measured on
a consolidated basis and will match the current year’s operating plan targets
approved by the Board of Directors.  For purposes of the Plan, “Revenue” is
defined as reported on the Company's consolidated financial statements, and
“Adjusted EBIT” is defined as Earnings Before Interest and Taxes adjusted to
exclude the impact of non-cash charges relating to the issuance of equity
instruments, as disclosed in the Company’s consolidated financial statements.

The relative weighting as between the two Company Performance Objectives will be
(for all purposes under the Plan, including calculating the amount by which the
Plan Pool will be funded and, if appropriate depending upon the weighting of
Individual Performance Objectives, calculating the actual bonus amount to pay a
Plan Participant) as follows:  30% of the bonus amount shall relate to the
Revenue Objective and 70% shall relate to the Adjusted EBIT Objective.

Over-Achievement of Company Performance Objectives: If either or both of the
Revenue Objective or Adjusted EBIT Objective is exceeded, an amount in excess of
the target bonus amount will be contributed to the Plan Pool based on the
above-target performance level actually achieved and the relative weighting (as
set forth below) of the relevant Company Performance Objective(s) (the
"Over-Achievement Amount").  The

 
 

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maximum amount above the target bonus amount that may be contributed to the Plan
Pool is 150% of the target bonus amount.  In addition to any cash bonuses paid
in connection with any such Over-Achievement Amount, the Administrator may, in
its sole discretion, grant options to purchase Common Stock of the Company
having an aggregate 123R value as of the grant date equal to the
Over-Achievement Amount.

Minimum Company Performance Level:  For the Plan Pool to be funded and for any
incentives to be earned by Plan Participants, both of the following thresholds
must be achieved (the “Minimum Company Performance Levels”):

§  
For Executives: The Company must achieve at least 80% of the Revenue Objective
AND at least 80% of the Adjusted EBIT Objective; and

§  
For Non-executives: The Company must achieve at least 80% of the Revenue
Objective AND at least 80% of the Adjusted EBIT Objective.

 
PLAN POOL FUNDING

Once the Revenue Objective and Adjusted EBIT Objective are achieved at the
Minimum Company Performance Levels, the Plan Pool funding will then be
determined by the actual level of achievement of the Revenue Objective and
Adjusted EBIT Objective beyond the respective minimum levels as outlined in the
tables below.

Plan Pool Funding Table

   
Measurement
 
Base Bonus Achievement
 
 
Bonus Component
Weighting
Period
Bonus 
Scale
Payment    Percentage
Revenue Objective
30%
Annually
Financial Performance
50%-100%
Adjusted EBIT Objective
70%
Annually
Financial Performance
50%-100%

 
2010 Financial Performance Incentive Plan

    The actual amount of contributions to the Plan Pool will be conditioned upon
achievement of a minimum level of performance with respect to the Revenue
Objective and the Adjusted EBIT Objective (measured on an annual basis).

 
Financial Performance Base Bonus (On Target) Payment Scale
 

 
Executive
Non-Executive
Bonus Achievement
Performance Level
Revenue Objective or Adjusted EBIT
Performance Objective vs. Target
Revenue Objective or Adjusted EBIT
Performance Objective vs. Target
Percentage
Below Threshold
0%-79.9%*
0%-79.9%
0%
Base/ Target Threshold
80%-100%*
80%-100%
Prorated up to 100% on following Algorithm:
     
 
Exec - 5% reduction in bonus amount that relates to the Objective (based on
relative weighting of the two Objectives) as to which there was
 

 
 

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under-achievement for each 1% below the target achievement level;
 
Non-Exec. - 3% reduction in bonus amount that relates to the Objective (based on
relative weighting of the two Objectives) as to which there was under
achievement for each 1% below target achievement level
     
Performance Weighting: 30% Revenue; 70% EBIT
Maximum
   
100%

 
Performance Thresholds.Unless otherwise determined by the Administrator due to
facts and circumstances that it believes relevant, there will be no contribution
to the Plan Pool of any amount, and no payment to any Plan Participant under the
Plan, if the Company does not achieve at least the minimum/threshold level of
performance with respect to both the Revenue Objective and the Adjusted EBIT
Objective as set forth above. To clarify, if the Minimum Company Performance
Level for one Objective is not achieved, no amount will be contributed to the
Plan Pool, and no amount will be paid to a Plan Participant even with respect to
the portion of his or her bonus to which the other Objective relates even if the
performance for that other Objective is within the “Threshold” Performance
Level. 

Financial Performance Above Threshold Level

 
Executive
Non-Executive
Amount of Bonus in Excess of Target Bonus Amount
Performance Level
Revenue or Adjusted EBIT
Performance vs. Target
Revenue or Adjusted EBIT
Performance vs. Target
Percentage Based only on Adjusted EBIT overage
Below Threshold
0%-79.9%
0%-79.9%
If either Revenue or EBIT is below the respective Threshold, the total bonus
payout is 0%
Base/Target Threshold
80%-100%
80%-100%
0%
       
Above Threshold
Must be a minimum of 100%
Greater than 100%
100%+ prorated up to a maximum of 150% on the following Algorithm
     
5% increase in bonus amount that relates to the Objective (based on relative
weighting of the two Objectives) as to which there was over-achievement for each
1% overachievement of Objective
     
Performance Weighting: 30% Revenue; 70% EBIT
Maximum
   
150%

n Achievement Above Threshold. If the Revenue Objective and Adjusted EBIT
Objective are exceeded, an increased bonus amount will be funded to the Plan
Pool based on such over-achievement.  The increased bonus amount will be subject
to the maximum over-achievement cap of 150% specified above.  The relative
weighting between the two Objectives for purposes of calculating an amount based
upon over-achievement will be the 30/70 weighting described above.

Financial bonus amounts will be calculated and accrued on a quarterly basis, but
final bonus payment amounts will be determined on an annual basis. Actual bonus
payments will be made in accordance with the performance periods on page one.

 
 

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BONUS PAYMENT AMOUNTS

n
In the event that the Plan Pool has been funded pursuant to the terms of this
Plan, Plan Participants may be eligible to receive individual incentive awards
as set forth below.

n
The Administrator will establish individual target bonus amounts that might be
paid under the Plan which will be expressed as a percentage of each Plan
Participant’s annual base salary at the end of the Plan Period (unless a Plan
Participant’s salary is changed during the Plan Period, as set forth below).

n
The Administrator will determine the individual target bonus amounts based on
grade level and position title, as follows:

n  
Plan Participants holding the position of Director or above will be advised by
their supervisor of their individual target incentive percentage.

n  
Plan Participants holding the position Senior Manager or below will have no
explicit incentive targets communicated in advance, and may receive general
information on Plan funding.

n
Individual Plan Participant’s actual incentive award amounts will be determined
based on his or her achievement of one or more individual performance goals
(each an “Individual Performance Objective”) established by his or her
supervisor (or with respect to executive officers by the Administrator), and in
some cases, may also be based on achievement of Company objectives as described
above.  The Company may instead establish conditions to a Plan Participant’s
right to be paid a bonus amount under the Plan based upon achievement  by the
Company (or a business unit thereof) of corporate performance objectives,
including without limitation the Company Performance Objectives.

n
Plan Participants must achieve at least an overall “satisfactory” level of
performance achievement for the Plan Period, as defined and determined solely by
the Company, in order to be eligible to earn any incentive under either the
Individual or Company Performance Objectives, as applicable.

 
WHEN PLAN INCENTIVES ARE EARNED AND PAID

Achievement of Company and Individual Performance Objectives will be assessed at
the end of the Plan Period, and if achieved as applicable, the Plan Participant
will earn and become entitled to payment of Plan bonus amounts after the end of
the Plan Period. Awards for Executive-level Plan Participants must be approved
by the Compensation Committee or Board of Directors, as applicable. Unless the
Administrator determines that facts and circumstances warrant an exception,
achievement of the Company’s Revenue Objectives and Adjusted EBIT Objectives
must both be equal to or greater than the Minimum Company Performance Levels or
no incentives will be earned. Achievement of the Company’s Revenue Objective and
Adjusted EBIT Objective will be assessed by the Board of Directors’ Compensation
Committee, and their decision shall be final and binding. Achievement of
individual performance results will be determined by appropriate Company
management and approved by the CEO.

The Plan Participant must be an active employee in good standing on the last day
of the Plan Period for any incentive to be earned. Payment on earned incentives
will be made

 
 

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as soon as reasonably possible following the end of the Plan Period’s financial
audit by the companies independent auditors and in any event prior to March 15,
2011, and will be net of all applicable withholdings.

If an employee’s base salary and/or bonus incentive changes during the Plan
Period due to promotion, market adjustment, etc., the target incentive bonus
will be pro-rated based on time in the old and new levels.

LEAVES OF ABSENCE AND TERMINATION OF EMPLOYMENT

The CEO will determine in his sole discretion whether a Plan Participant on a
leave of absence or disability or in the event of the Participant’s death during
the Plan Period may be eligible for a partial or prorated incentive. Plan
Participants must be actively employed on the last day of the Plan Period in
order to be eligible for any incentives. Except as set forth above, Plan
Participants who terminate for any reason during the Plan Period are not
eligible for incentive awards.

AT-WILL EMPLOYMENT

Participation in this Plan is not an agreement (express or implied) between the
Plan Participant and the Company that the Company will employ the Plan
Participant for any specific period of time, nor is there any agreement for
continuing or long-term employment.  The Plan Participant and the Company each
have the right to terminate the employment relationship at any time and for any
or no reason. This at-will employment relationship can only be modified by an
agreement signed by the Plan Participant and the Company’s Chief Executive
Officer.

DETERMINATIONS, CHANGES AND EXCEPTIONS TO PLAN

This document highlights the principal features of the Plan, but it does not
describe every situation that can occur. The Company and the Administrator
retain the right to interpret, revise, modify or delete the Plan at its sole
discretion at any time.  This document supersedes any previous incentive plan
document including any specific provisions stated in the Plan Participant’s
offer letter or employment agreement specifying eligibility, amount, and
participation in any incentive or bonus program unless otherwise explicitly set
forth in the offer letter or employment agreement.  The Company reserves the
right to make any reasonable adjustments to the Plan, including but not limited
to project assignments, as necessary to reflect business and economic
conditions. The CEO and/or the Compensation Committee, as applicable, must
approve any exceptions, modifications or adjustments to the Plan.  The Company
further retains full and final discretion to determine whether a Plan
Participant has earned any incentives pursuant to the Plan.  The Compensation
Committee shall have the full and final discretion to adjust in good faith the
Company Performance Objectives and/or achieved financial results to reflect the
occurrence of extraordinary events during the Plan period, including merger and
acquisition transactions and other corporate events not contemplated at the
beginning of the Plan period or when the Company’s operating budget for the
current Plan year was approved.  All such determinations or adjustments shall be
final and binding on all persons.
 
 
 

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