Exhibit 10.2

 

HOUGHTON MIFFLIN COMPANY

2005 MANAGEMENT INCENTIVE PLAN

 

Purpose

 

The 2005 Management Incentive Plan is designed to motivate and reward
performance that contributes to the achievement of divisional and corporate
financial objectives. This year’s plan focuses on four primary financial
measures: Consolidated Corporate Cash Flow and EBITDA (Earnings Before Interest,
Taxes, Depreciation and Amortization) and Division Revenue and EBITDA.

 

Minimum Performance Requirements

 

Financial Objectives

 

Payment of incentive compensation for achievement of financial objectives may
only occur if:

 

  •   For Corporate Measures: Consolidated Corporate EBITDA and Cash Flow are
both 90% or more of target.

 

  •   For Division Measures: Division Revenue and EBITDA are both 90% or more of
target.

 

Personal Quantitative Objectives (where applicable)

 

Payment of incentive compensation linked to achievement of these individual
objectives may occur only if:

 

  •   Both Consolidated Corporate financial measures are at 90% or more of
target (CFS employees).

 

  •   Both Division financial measures are at 90% or more of target (Division
employees).

 

Payout Formulas

 

Financial Objectives

 

Weightings: Subject to some variations for plan participants with Personal
Quantifiable Objectives, financial objectives are generally weighted:

 

•      For Corporate Employees:

   60% Consolidated Corporate EBITDA      40% Consolidated Corporate Cash Flow

•      For Division Employees:

   40% Division EBITDA      30% Division Revenue      30% Consolidated Corporate
Cash Flow

 

Target Payouts: Bonus payouts under the plan range from 10% to 100% for target
performance. The Company calculates bonus payments based on achievement of
financial objectives at threshold, target and above-target performance levels.
Minimum performance levels (threshold) will earn bonus payouts at 25% of Target
levels for applicable financial objectives. Subject to certain caps, incremental
performance above targeted performance levels result in increased bonus payouts.

 

Caps: The portion of any participants’ bonus linked to above-target Consolidated
Corporate Cash Flow results can be multiplied by a factor no greater than 2 in
calculating a participant’s bonus payment. The portion of a Division
participant’s bonus payment linked to above-target Revenue results cannot be
multiplied by a factor greater than the factor by which the participant’s
Division EBITDA component is multiplied. Any metrics for participants having
incentive Targets below 25% can be multiplied by a factor no greater than 1.75.

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Individual Objectives.

 

The Company bases payment of incentive compensation for achievement of personal
quantitative objectives on the Division/Department executive’s assessment of
each participant’s degree of success in achieving those objectives. There is no
“above-target” payout for achievement of personal objectives.

 

Eligibility

 

Participants in this plan include executives, directors, managers, and
professional staff as designated by Senior Executives of Houghton Mifflin.

 

Dates of Employment

 

Individuals who are placed in bonus-eligible positions prior to the 15th of the
month from January through September may be eligible for a prorated incentive
payment. Determination of current year participation will be made by the hiring
manager in conjunction with the Human Resources Manager and Compensation
Business Partner. Individuals placed in bonus-eligible positions in the fourth
quarter (October – December), will be eligible for participation in the
management incentive plan beginning the following year.

 

Voluntary and Involuntary Terminations

 

A participant whose employment terminates, voluntarily or involuntarily, prior
to year-end is not eligible for an incentive award, unless required by law,
except for the following reasons:

 

  (1) Retirement after age 55 with at least five years of service,

 

  (2) Death, or permanent disability.

 

In the event of a covered retirement, death, or permanent disability, a pro rata
share of the award (based on the number of months of eligible employment during
that year) will be paid to the participant, or his or her heirs, based upon the
extent of partial achievement of applicable objectives.

 

  (3) Organizational Restructuring, Facility Closings and Reduction in Force.

 

If an organizational restructuring, facility closing or reduction in force
occurs during the fourth quarter of the year (October – December), participant
employees whose employment ends because of those events may be eligible for a
pro-rated bonus payment to be calculated through the employee’s separation date.
The pro-rated payment will be determined by using a full year of
company/business financial results pro-rated for the partial year through the
employee’s separation date, plus individual objective scores based on manager’s
assessment of accomplishments for the partial year.

 

Leave of Absence

 

If a participant is on a leave of absence during the year, the Company retains
the discretion to pay a pro rata share of his/her annual incentive award.

 

Transfers

 

If the participant transfers from one position to another during the year and
continues to participate in the Plan, the employee’s performance will be
measured against the objectives in each position and then prorated to reflect
the number of months each position was held. If the transfer involves a change
in target bonus opportunity, the actual bonus calculation will be based on a
combination of the bonus percentages applied to the participant throughout the
year that reflects the number of months worked under each of the bonus
percentages.

 

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Plan Administration

 

Amendments, Modifications, Exercise of Discretion

 

Houghton Mifflin reserves the right to terminate this plan or amend its terms
whenever, in its judgment, it is in the best interest of the Company to do so.
Subject to the approval of the Board of Directors, the Company interprets the
terms and application of the plan, may make adjustments to financial objectives
in its discretion, and determines whether and to what degree financial results
are achieved. All such Company determinations are final and binding on all
participants. The total payouts under the Plan are subject to approval of the
Board of Directors, based upon recommendations of the CEO.

 

Performance Standards

 

The Company reserves the right, in it sole discretion, to deny, decrease, or
otherwise adjust a bonus payment for any participant who is not in good standing
or not considered a satisfactory employee (e.g., on written warning or any
disciplinary/performance plan) for all or any portion of the plan year. Payment
of bonus is not an acknowledgement that a participant’s performance is
satisfactory.

 

Effect on Employment Status

 

Nothing contained in the Plan shall limit in any way the right of the Company to
terminate a participant’s employment, adjust an employee’s position or salary at
any time, or adjust a bonus target, or be evidence of any agreement or
understanding, expressed or implied, that any person will be employed in a
particular position or at a particular rate of compensation. Unless otherwise
stated in a written employment agreement between an individual and the Company,
all employees of the Company are employed on an at-will basis.

 

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