Exhibit 10.1

 

2011 Executive Officer Bonus Plan

 

Objective:

 

·                                          Align the interests of employees and
shareholders in the future growth and success of ArthroCare Corporation (the
“Company”) by rewarding employee performance.

 

Bonus Pool:

 

·                                          The officer bonus pool is equal to
the sum of the target bonuses of all officers in the pool and are covered in
this document during the period of January 1, 2011 through December 31, 2011
(the “Bonus Period”).  Target bonuses are defined as a percentage of the year’s
salary and are specified in the paragraph under the “Bonus Potential” category
below.  The size of the bonus pool may be adjusted for promotional salary
increases of officers in the pool, or the addition of officers in the pool, and
then on a prorated basis. By way of example, the Total Bonus Potential for an
Eligible Participant who is a Vice President and who is in the 45% bonus
potential category with a base salary of $200,000 shall be $90,000.  The Total
Bonus Potential of an Eligible Participant, other than the Chief Executive
Officer, may be increased or decreased at the sole discretion of the
Compensation Committee upon the recommendation of the Chief Executive Officer of
the Company.  The Total Bonus Potential of the Chief Executive Officer may be
increased or decreased at the sole discretion of the Company’s Board of
Directors.

 

Eligible Participants:

 

·                                          All executive officers of the Company
from the period of January 1, 2011 through the payment date of a bonus (the
“Bonus Payment Date”) who began employment with the Company on or before
December 31, 2011, other than those employees who are ineligible due to
performance issues, as determined by the Compensation Committee of the Company’s
Board of Directors.  Executive officers must be employed on the bonus payment
date to be eligible for any payment.  Executive officers whose employment with
the Company begins after January 1, 2011 and who remain employed by the Company
through the Bonus Payment Date or executive officers who go on leave of absence
during 2011 will have their bonus prorated for time worked through the Bonus
Payment Date.

 

Bonus Potential:

 

·                                          45% of base salary for fiscal year
end December 31, 2011 for Senior Vice Presidents who are executive officers of
the company and whose titles are not listed below in the 50% target bonus
potential category.  90% of the target bonus potential will be based on the
achievement of the Company Goals described in the “Bonus Factors” section below
and 10% of the target bonus potential will be based on the individual’s annual
performance rating approved by the Chief Executive Officer for Senior Vice
President’s in this bonus potential category.

 

·                                          50% of base salary for fiscal year
end December 31, 2011 for Senior Vice President, Strategic Business Units;
Senior Vice President and Chief Financial Officer, and Senior Vice President and
President, International. 90% of the target bonus potential will be based on the
achievement of the Company Goals described in the “Bonus Factors”

 

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section below and 10% of the target bonus potential will be based on the
individual’s annual performance rating approved by the Chief Executive Officer.

 

·                                          80% of base salary for fiscal year
end December 31, 2011 for the Chief Executive Officer.  100% of the target bonus
potential will be based on the achievement of the Company Goals described in the
“Bonus Factors” section below.

 

Bonus Factors:

 

·                                          The payment to be earned by each
Eligible Participant will be a factor of both the Company’s achievement of the
below goals and the achievement by such Eligible Participant of personal
performance objectives determined by the Chief Executive Officer or, in the case
of the Chief Executive Officer, by the Board of Directors.  No participant is
eligible for a bonus if his or her annual performance rating is below 1.6 on a
scale of 1 to 5 (where 5 is the highest rating).  The Total Bonus Payment of an
Eligible Participant may be increased or decreased at the sole discretion of the
Chief Executive Officer or, in the case of the Chief Executive Officer, by the
Board of Directors.

 

In the event the Company achieves at least the “Minimum Achievement Level” (see
below), a bonus will be earned by each Eligible Participant.  The Total Revenue
Goal, Adjusted Operating Margin and Free Cash Flow Goals shall be as set forth
in the Company’s operating budget for the full year of 2011 as approved by the
Board of Directors.

 

·                                          The Total Revenue, Adjusted Operating
Margin and Free Cash Flow Goals shall be ascribed a percentage weight totaling
100% in the aggregate, as follows:

 

Total Revenue - 50% weight — $375M

 

Adjusted Operating Margin — 25% weight — 17%

 

Free Cash Flow — 25% weight - $80 Million

 

·                                          The Minimum Achievement Level is
determined by adding the weighted average of the full year Total Revenue Goal
(i.e., Total Revenue Achieved (as defined below) multiplied by 50%), plus the
weighted average of the Adjusted Operating Margin and Free Cash Flow Goals (same
formula).  If the sum of these percentages is equal to or greater than 85% a
bonus is payable.

 

·                                          If the Bonus Achievement Level is
between 85% and 100%, then Eligible Participants are eligible for a prorated
bonus equal to a 1 to 3 ratio of the bonus achieved.  For example, if the Bonus
Achievement Level is 85%, then Eligible Participants are eligible for 55% of
their Total Target Bonus Potential.

 

Bonus Multiplier:

 

·                                         If the Bonus Achievement Level is in
excess of 100%, then Eligible Participants are eligible for 100% of their Total
Bonus Potential, plus a percentage of their Total Bonus Potential equal to three
times the portion in excess of 100%.  For example, if the Bonus

 

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Achievement Level is 110%, then Eligible Participants are eligible for 100% of
their Total Target Bonus Potential, plus 30% of the Total Target Bonus
Potential.  The Bonus Achievement Level maximum is 120% and the maximum Total
Bonus Potential is 160%.

 

Defined Terms:

 

Total Revenue shall mean the amount of ArthroCare total revenue from the period
of January 1, 2011 through December 31, 2011.

 

Adjusted Operating Margin shall mean the GAAP operating income, excluding
“Investigation and Restatement” costs, for the calendar year 2011 divided by
GAAP consolidated revenues.

 

Free Cash Flow shall mean Adjusted Earnings before Interest, Tax, Depreciation,
Amortization and non-cash equity Compensation adjusted for income taxes paid,
changes in working capital and operational capital expenditures for the calendar
year ended 2011. Working capital is defined as the sum of accounts receivable,
inventory and other non-cash current assets less accounts payable, accrued
liabilities and other current liabilities.  For clarity, an increase in net
Working Capital will be a reduction in Free Cash Flow and a decrease in net
Working Capital will be an increase in Free Cash Flow.

 

Total Revenue Achieved shall mean the percentage determined by dividing the full
year total revenue by the Total Revenue Goal.

 

Adjusted Operating Margin Achieved shall mean the percentage determined by
dividing the full year Adjusted Operating Margin by the Adjusted Operating
Margin Goal.

 

Free Cash Flow Goal Achieved shall mean the percentage determined by dividing
the Free Cash Flow by the Free Cash Flow Goal.

 

Bonus Achievement Level shall mean the actual level of bonus achieved.

 

Any bonuses payable under this 2011 Bonus Plan are subject to the approval of
the Company’s Board of Directors and will not be paid before the Company has
filed with the SEC its Annual Report on Form 10-K for 2011.  The Board of
Directors may make such changes in plan participants, the bonus pool or any
other aspect of this plan as it deems appropriate at any time and without prior
notice.

 

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