Exhibit 10.1

CHATTEM, INC.

ANNUAL CASH INCENTIVE PLAN

 

1. PURPOSE

The purpose of the Plan is to provide cash incentive compensation to Executive
Officers and other key employees within a pay-for-performance framework that
enables the Company to provide a total compensation opportunity that attracts,
motivates and retains such employees and contributes to the Company’s ability to
maximize its return to shareholders. The Plan is intended to reward Participants
for achieving specified annual financial performance objectives, focuses
strongly on Company and individual performance, and is designed to ensure that
the Company’s total compensation package for Participants remains competitive.
The Plan is also intended to qualify the compensation paid under the Plan as
“performance-based compensation” within the meaning of Section 162(m) so as to
exempt such eligible compensation from the deduction limits imposed by
Section 162(m) and to make such eligible compensation deductible by the Company
for federal income tax purposes.

 

2. DEFINITIONS

As used herein, the following terms shall have the meanings ascribed to such
terms below:

 

  (a) “Authorized Officers” means the Chairman and Chief Executive Officer of
the Company and the President and Chief Operating Officer of the Company.

 

  (b) “Award” means any cash award payable under the Plan, including any
Incentive Award and any Discretionary Bonus.

 

  (c) “Board” means the board of directors of the Company.

 

  (d) “Code” means the Internal Revenue Code of 1986, as amended.

 

  (e) “Company” means Chattem, Inc.

 

  (f) “Committee” means the Compensation Committee of the Board, which shall be
comprised solely of two or more “outside directors” as defined in regulations
promulgated under Section 162(m).

 

  (g) “Corporate Performance Levels” means the following levels of overall
Company performance (or such other levels as may be established by the Committee
from time to time), each of which shall correspond to a Performance Goal
established by the Committee in accordance with the Plan in respect of the
Incentive Awards:

 

  (i) “Level 1”, which term when used herein shall mean “Minimal: Results which
are the lowest permissible for the payment of an Incentive Award under the
Plan.”

 

  (ii) “Level 2”, which term when used herein shall mean “Good: Results which
are fully adequate and expected.”

 

  (iii) “Level 3”, which term when used herein shall mean “Outstanding: Results
which are measurably above what could be expected as a norm.”

 

  (iv) “Level 4”, which term when used herein shall mean “Exceptional: Results
which are remarkable and extraordinary.”

 

  (h) “Disability” means a disability that entitles the Participant to benefits
under the Company’s Long-Term Disability Plan, as amended from time to time.

 

  (i) “Discretionary Bonus” means any cash bonus awarded to a Participant
pursuant to Section 8 hereof.

 

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  (j) “Executive Officer” means an “executive officer” as defined in Rule 3b-7
promulgated under the Securities Exchange Act of 1934, as amended.

 

  (k) “Incentive Award” means any annual cash incentive award payable to a
Participant under this Plan based on the achievement of the Performance Goals
associated with Corporate Performance Levels with respect to a Performance
Period.

 

  (l) “Participant” means (i) each Executive Officer of the Company and
(ii) each other key employee of the Company recommended by the Authorized
Officers and approved by the Committee as a participant under the Plan, as
determined from time to time by the Committee.

 

  (m) “Participant Grouping” means, with respect to Incentive Awards, the
grouping to which a Participant is assigned for a given Performance Period based
upon the Participant’s position at the Company, as more fully described in
Section 5 hereof.

 

  (n) “Performance Goals” means, with respect to each Performance Period, one or
more targeted levels of performance based on one or more of the following
objective business criteria: revenues, sales, earnings before interest, taxes,
depreciation and amortization (EBITDA), earnings per share, earnings,
price/earnings ratio, debt or debt-to-equity, expenses, cost of goods sold, cost
reductions and savings, assets, operating income, operating margins, stock
price, working capital and components thereof, return on revenues or
productivity, return on capital, equity or assets, cash flow, market share,
total shareholder return (stock price increase plus dividends), accounts
receivable, manufacturing, production or inventory, customer satisfaction,
economic value added or any increase or decrease of one or more of the foregoing
over a specified period. The Committee may, after taking into account whether
such action would result in the loss of an otherwise available exemption for
performance-based compensation under Section 162(m), appropriately adjust any
evaluation of performance in respect of a Performance Goal to eliminate or
offset the effect of unusual, unplanned, non-recurring or extraordinary items or
occurrences affecting the Company or the financial statements of the Company,
including, without limitation, the effect of mergers, acquisition, divestitures,
changes in laws, regulations or accounting principles or such other objective
adjustments as may be consistent with the purposes of the Performance Goals set
for the given Performance Period and specified by the Committee within the
Performance Period. The Performance Goals may be expressed in terms of overall
Company performance or the performance of any business unit, division,
subsidiary, acquired business, partnership or joint venture of the Company. The
portion of any Award paid under the Plan based on the achievement of the
Performance Goals is intended to constitute “performance-based compensation”
within the meaning of Section 162(m).

 

  (o) “Performance Period” means the Plan Year or such other shorter or longer
period as may be designated by the Committee, during which performance will be
measured in order to determine a Participant’s eligibility to receive payment of
an Award. The Committee may establish different Performance Periods for
different Participants, and the Committee may establish concurrent or
overlapping Performance Periods.

 

  (p) “Plan” means the Chattem, Inc. Annual Cash Incentive Plan, as set forth
herein and as may be amended from time to time.

 

  (q) “Plan Year” means the 12-month period beginning on the first day of the
Company’s fiscal year and ending on the last day of such fiscal year.

 

  (r) “Retirement” means separation from service with the Company and its
subsidiaries, by a Participant at or after age 65, or as otherwise approved by
the Committee in its sole discretion.

 

  (s) “Section 162(m)” means Section 162(m) of the Code and any regulations
promulgated thereunder.

 

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3. ADMINISTRATION OF THE PLAN

The Plan shall be administered by and under the direction of the Committee. The
Committee shall review the Plan on a periodic basis. The Committee shall have
full, exclusive and final authority in all determinations and decisions
affecting the Plan and Participants, including sole authority to interpret and
construe any provision of the Plan, to adopt, amend and rescind such rules and
regulations for administering the Plan as it may deem necessary or appropriate
under the circumstances and to make any other determination it deems necessary
or appropriate for the administration of the Plan, in each case subject to and
consistent with the provisions of the Plan. Without limiting the generality of
the foregoing, the Committee shall have the power, duty and authority (a) to
establish Performance Periods and the Performance Goals, the performance
measurement and evaluation criteria and guidelines to be used to determine
Awards and the maximum potential Incentive Awards payable to Participants for
such Performance Periods, (b) to designate or approve eligible persons to become
Participants and the Participant Groupings that may apply to Participants each
Performance Period, (c) to resolve all questions relating to the eligibility of
Participants, Participant Groupings and the right of any Participant to receive
an Award under the Plan, (d) to calculate the amount (including any reduction
thereof pursuant to Section 7(a) hereof) and approve the payment of the
Incentive Award payable to each Participant each Performance Period, (e) to
determine the extent to which the Performance Goals actually were achieved each
Performance Period, (f) to correct defects, supply omissions or reconcile
inconsistencies with respect to the Plan, (g) to engage any administrative,
legal, consulting, clerical or other services it deems appropriate in
administering the Plan, and (h) to approve the grant of Discretionary Bonuses
and the Performance Goals, Performance Periods and all other criteria
thereunder. All actions taken or determinations made by the Committee with
respect to the Plan shall be final, binding and conclusive upon all parties. The
Committee, in its sole discretion and on such terms and conditions as it may
provide, may delegate all or part of its administrative authority and powers
under the Plan to one or more directors or employees of the Company to the
extent permitted under the exemption for performance-based compensation under
Section 162(m). Any expenses relating to administration of the Plan shall be
borne by the Company.

 

4. PARTICIPATION

Eligibility for participation in any Incentive Award for any Performance Period
is limited to Participants, as determined on the first day of such Performance
Period. Any person who is hired or promoted into a position qualifying such
person as a Participant or who is otherwise designated or approved by the
Committee as a Participant eligible for an Incentive Award after the
commencement of such Performance Period but prior to the date on which 25% of
the Performance Period has elapsed shall be eligible to receive a pro rata
portion (based on the number of days in the Performance Period during which such
person was such a Participant) of the Incentive Award such person would have
received if he or she had participated for the entire Performance Period
provided attainment of the Performance Goal is substantially uncertain at the
date of eligibility. No person shall participate in any Incentive Award for a
Performance Period in which such person first becomes a Participant on or after
the date on which 25% of the Performance Period has elapsed or when the
attainment of a Performance Goal is not substantially uncertain unless otherwise
approved by the Committee based upon (i) a determination that satisfaction of
the Performance Goal is substantially uncertain, or (ii) such alternative
Performance Period or Performance Goal as may be determined by the Committee in
compliance with the exemption for performance-based compensation under
Section 162(m). In the event a Participant’s employment with the Company is
terminated due to his or her Retirement, Disability or death during a
Performance Period, the Participant (or his or her beneficiary or estate) will
be eligible to receive a pro rata portion (based on the number of days in the
Performance Period during which such Participant was a Participant) of the
Incentive Award the Participant would have received if he or she had
participated for the entire Performance Period provided the Performance Goals
are met and certified by the Committee for such Performance Period and payment
is made at such time as payments are made to other Participants with respect to
the Performance Period. In the event a Participant’s employment with the Company
is terminated for any other reason during a Performance Period, the Participant
shall not be entitled to any Incentive Award for such Performance Period, except
that the Committee may in its sole discretion, and to the extent permissible
without resulting in the loss of an otherwise available exemption for

 

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performance-based compensation under Section 162(m), determine such Participant
is entitled to an Incentive Award payment (but which shall not exceed, nor be
paid earlier than, the amount determined in the preceding sentence as if the
Participant’s termination was due to Retirement, Disability or death).

 

5. PARTICIPANT GROUPINGS

No later than the 90th day of each Performance Period (but in no event after 25%
of such Performance Period has elapsed), the Committee shall assign each
Participant to a Participant Grouping, or approve the Participant Groupings
recommended by the Authorized Officers, based on the Participant’s position at
the Company on the first day of such Performance Period (or on the day on which
such Participant first becomes a Participant during such Performance Period in
accordance with the provisions of Section 4 above). Except as otherwise
determined by the Committee, (a) each of the Authorized Officers shall be
assigned to separate Participant Groupings, with the Company’s Chairman and
Chief Executive Officer being the sole member of one Participant Grouping and
the Company’s President and Chief Operating Officer being the sole member of a
second Participant Grouping, (b) all other Executive Officers and certain other
key employees shall be assigned to a third Participant Grouping, and (c) all
other Participants shall be assigned to a fourth, fifth or additional
Participant Grouping, as determined by the Committee from time to time based on
its assessment of the relative impact such Participants are likely to have on
achieving the Performance Goals. The range of potential Incentive Awards for
which a Participant may be entitled shall be based on the Participant Grouping
assigned to such Participant, as set forth in the Table of Maximum Potential
Incentive Awards attached hereto as Exhibit A, as may be amended from time to
time. As a general rule, the higher a Participant’s position within the Company,
the higher the Participant Grouping assigned to such Participant and the higher
the range of potential Incentive Awards the Participant will be eligible to
receive.

 

6. POTENTIAL INCENTIVE AWARDS

To make an Incentive Award to any Participant for any Performance Period, the
Committee shall, no later than the 90th day of that Performance Period (but in
no event after 25% of such Performance Period has elapsed), establish
Performance Goals for each of the Corporate Performance Levels applicable to
Participants (based on each Participant’s Participant Grouping) for such
Performance Period. The Level 1 Corporate Performance Level must be achieved as
a condition to the payment of any Incentive Award under the Plan. So long as the
Level 1 Corporate Performance Level is met or exceeded, each Participant shall
be eligible for a range of potential Incentive Awards, each of which shall be
equal to the product of (a) a percentage (as set forth in the Table of Maximum
Potential Incentive Awards attached hereto as Exhibit A) of the Participant’s
annual base salary on the first day of the applicable Performance Period, and
(b) a fraction, the numerator of which is the number of days in the applicable
Performance Period and the denominator of which is 365. The percentages are
based both on the Corporate Performance Level achieved and the Participant
Grouping to which the Participant has been assigned. If actual performance for a
Performance Period falls between any two of the Performance Goals associated
with the Corporate Performance Levels, the associated potential Incentive Award
will be determined by means of straight-line interpolation. The potential
Incentive Award associated with the Level 4 Corporate Performance Level may not
be increased, even if actual performance for a Performance Period exceeds the
Performance Goal associated with that Corporate Performance Level. The potential
Incentive Award associated with each specified Corporate Performance Level
(including any interpolated point between Corporate Performance Levels) and
Participant Grouping represents the maximum Incentive Award that a Participant
will be eligible to receive. The Committee may increase, decrease, or otherwise
amend the Corporate Performance Levels and corresponding percentages as may be
determined by the Committee from time to time.

 

7. AWARD PROCEDURES

 

  (a)

Calculation of Incentive Awards. Following the completion of each Performance
Period, the Committee shall calculate for each Participant the amount of such
Participant’s Incentive Award based on the level of attainment of the
Performance Goals (as reduced, if at all, pursuant to the following

 

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sentence), and the total amount of the Award payable to such Participant. The
Committee may, in its sole discretion, reduce (but not increase) the resulting
Incentive Award otherwise payable to any Participant for a particular
Performance Period, regardless of the level of attainment of the Performance
Goals, at any time prior to the payment of Awards pursuant to Section 7(c)
below, if the Committee determines that the Participant’s individual performance
for such Performance Period warrants such a reduction. However, any such
reduction shall be limited to the following percentages based on the
Participant’s Participant Grouping (as may be amended by the Committee from time
to time) of the resulting Incentive Award otherwise payable to such Participant:

 

Participant Grouping

   Possible Reduction  

Chairman & CEO (I)

   30 %

President & COO (II)

   40 %

Other Executive Officers and Certain Other Key Employees (III)

   40 %

Other Participants (IV)

   50 %

Other Participants (V)

   50 %

Evaluation of a Participant’s individual performance will be assessed in a
non-formula fashion relative to various qualitative objectives and criteria,
such as the Participant’s overall contribution to the Company’s success and
successful implementation of business strategy. The goals relative to individual
performance for each Performance Period shall be set (i) by the Authorized
Officers for all other Participants; and (ii) by the Compensation Committee for
the Authorized Officers.

 

  (b) Certification of Awards. Following the completion of each Performance
Period, prior to the payment of any Awards under the Plan with respect to such
Performance Period, the Committee shall certify (to the extent required by
Section 162(m)) the extent to which the Performance Goals for such Performance
Period actually were achieved or exceeded and the amount of the Award payable to
each Participant for such Performance Period. Approved minutes of a meeting of
the Committee may be used for this purpose.

 

  (c) Timing of Awards. The Company shall distribute Awards payable to
Participants under the Plan as soon as is administratively practicable following
the end of each Performance Period, but in no event later than the 15th day of
the third month following the end of the later of (i) the Company’s taxable year
in which such Award was earned or (ii) the Participant’s taxable year in which
such Award was earned, or as otherwise as may be required to qualify under the
short-term deferral exception from the provisions of Section 409A of the Code.

 

  (d) Maximum Incentive Award. Notwithstanding anything to the contrary in this
Plan, under no circumstances shall the aggregate amount of all Awards payable to
any single Participant with regard to any Plan Year exceed the lesser of
(i) 200% of the Participant’s annual base salary on the first day of any Plan
Year (or the first day of the applicable Performance Period if not employed on
the first day of any Plan Year) or (ii) $2,000,000.

 

  (e) Form of Payment. All Awards under the Plan shall be paid in cash in a
single lump sum amount.

 

8. DISCRETIONARY BONUSES

Incentive Awards are not the exclusive means for the Committee to award
compensation to Participants under the Plan. In addition, the Committee may, in
its sole discretion, make other Awards to Participants consistent with the
provisions of this Plan. Such other Awards may only take the form of Awards
based on the achievement of objective Performance Goals pre-established by the
Committee for an applicable Performance Period and otherwise designed to qualify
for the exemption for performance-based compensation under Section 162(m).
Nothing contained in this Plan shall preclude the Committee from awarding
incentive compensation or other discretionary bonuses to employees, including
Participants, under other Company plans or arrangements, except that any such
compensation or bonus shall not be for the purpose of replacing amounts that
were not earned under this Plan.

 

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9. GENERAL PROVISIONS

 

  (a) Effective Date; Shareholder Approval. The Plan shall become effective upon
adoption by the Board and shall apply beginning with Awards earned in respect of
performance during the Company’s fiscal year in which the Plan is so adopted,
provided, however, the Plan is subject to approval by the Company’s shareholders
and shall be submitted for such approval at the 2008 Annual Meeting of
Shareholders. If the Plan is not approved by the shareholders at that meeting,
the Plan shall cease to be effective and no payments shall be made with respect
to any Awards hereunder.

 

  (b) Term; Amendment and Termination. The Plan shall remain in effect until the
earlier to occur of (i) termination by the Committee, or (ii) the date of the
first shareholder meeting that occurs in the fifth year after the year in which
the shareholders approve the Plan if the Plan is not re-approved by the
shareholders at that meeting. The Committee may amend, suspend or terminate the
Plan, in whole or in part, at any time and from time to time, for any reason. An
amendment to the Plan will be subject to the approval of the Company’s
shareholders only if such approval is necessary to maintain the Plan in
compliance with Section 162(m). In the event of the termination of the Plan, no
further Awards or other benefits shall accrue under the Plan, and amounts which
are then payable with respect to a prior Performance Period shall continue to be
an obligation of the Company and shall be paid as scheduled. No Awards shall be
made with respect to the Performance Period during which the Plan is terminated,
except in accordance with the express provisions of the Plan or as otherwise
provided by the Committee.

 

  (c) Code Section 409A. The payments under this Plan are intended to constitute
short-term deferral payments for purposes of Code Section 409A and the Committee
shall interpret and construe the Plan in accordance with such intent. In
carrying out such intent, the Committee may take any and all actions it
determines necessary or appropriate to preserve the intended tax treatment of
the payments under this Plan.

 

  (d) No Employment Rights. Nothing in this Plan shall be construed as
conferring upon any Participant any legal or other right for a continuation of
employment with the Company, nor shall it interfere with rights of the Company
to discharge any Participant or otherwise act with relation to the Participant.
The Company may take any action (including discharge) with respect to any person
who is a Participant and may treat such person without regard to the effect
which such action or treatment might have upon such person as a Participant
under this Plan.

 

  (e) Nonalienation of Benefits; No Additional Rights. No Award payable at any
time under the Plan shall be subject in any manner to alienation, sale,
transfer, assignment, pledge, attachment, garnishment or encumbrance of any
kind, and shall not be subject to or reached by any legal or equitable process
(including execution, garnishment, attachment, pledge or bankruptcy) in
satisfaction of any debt, liability or obligation, prior to the payment of the
Award. Any attempt to alienate, sell, transfer, assign, pledge or otherwise
encumber any such Award, whether presently or thereafter payable, shall be void.
No person shall have claim to an Award under this Plan, except as otherwise
provided for herein, or to continued participation under this Plan. There is no
obligation for uniformity of treatment of Participants under this Plan.

 

  (f) Beneficiary Designation. A Participant may designate a beneficiary who
upon his or her death is to receive an Award that otherwise would have been paid
to the Participant under the Plan. All beneficiary designations shall be in
writing and on a form approved by the Committee for such purpose, and any such
designation shall only be effective if and when delivered to the Committee or
its representative during the lifetime of the Participant. In the event there is
not a beneficiary designated on file for the Participant, such Participant’s
beneficiary shall be deemed to be the Participant’s surviving spouse or, if
there is no such spouse, the Participant’s estate.

 

  (g)

Withholding. The Company may withhold from any Award payable under this Plan any
applicable federal, state and local income and employment taxes and any other
amounts which the Company is

 

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required by law to deduct and withhold from such Award or which the Company may
reasonably estimate to be necessary to cover any taxes for which the Company may
be liable and which may be assessed with regard to such Award.

 

  (h) Plan Unfunded. All amounts paid under the Plan shall be paid from the
general assets of the Company. The rights of any Participant or beneficiary to
receive an Award or other benefit under the Plan shall be only those of a
general unsecured creditor, and neither the Company nor the Board or the
Committee shall be responsible for the adequacy of the general assets of the
Company to meet and discharge Plan liabilities. Awards under the Plan shall be
reflected on the accounting records of the Company, but neither this Plan nor
the maintenance of such accounting records shall be construed to create, or
require the creation of, a trust, custodial account or escrow account with
respect to any Participant. No Participant shall have any right, title or
interest whatsoever in or to any investment reserves, accounts or funds that the
Company may purchase, establish or accumulate to aid in providing the unfunded
Awards or other benefits described in the Plan.

 

  (i) Binding Effect. The Plan shall be binding upon and inure to the benefit of
the Company, its successors and assigns and the Participants, their heirs,
executors, administrators and legal representatives.

 

  (j) Severability. If any provision of this Plan is held unenforceable, the
remainder of the Plan will continue in full force and effect without regard to
such unenforceable provision and will be applied as though the unenforceable
provision were not contained in the Plan.

 

  (k) Governing Law. The Plan will be construed in accordance with and governed
by the laws of the State of Tennessee, without reference to the principles of
conflict of laws.

 

  (l) Headings. Headings are inserted in this Plan for convenience of reference
only and are to be ignored in any construction of the provisions of the Plan.

 

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EXHIBIT A

Table of Maximum Potential Incentive Awards

 

     Participant Grouping  

Corporate
Performance
Level

   Chairman &
CEO
(I)     President &
COO
(II)     Other Executive
Officers and
Certain Other
Key Employees
(III)     Other
Participants
(IV)     Other
Participants
(V)  

4

   150.0 %   100.0 %   60.0 %   50.0 %   40.0 %

3

   75.0 %   75.0 %   45.0 %   37.5 %   30.0 %

2 (target)

   50.0 %   50.0 %   30.0 %   25.0 %   20.0 %

1

   25.0 %   25.0 %   15.0 %   12.5 %   10.0 %

 

Note: The maximum potential Incentive Award payable to each Participant under
the Plan each Performance Period, based upon the Corporate Performance Level
achieved and such Participant’s Participant Grouping for such Performance
Period, is equal to the product of (i) a percentage (as set forth in the table
above) of the Participant’s annual base salary on the first day of the
applicable Performance Period, and (ii) a fraction, the numerator of which is
the number of days in the applicable Performance Period and the denominator of
which is 365.