Exhibit 10.1
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ANNUAL INCENTIVE PLAN
FISCAL YEAR 2008
Effective April 1, 2007 — March 31, 2008
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July 11, 2007 final

 

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Contents

I.   Purpose of the Plan   II.   Eligibility   III.   Administration of Plan  
IV.   Plan Design   V.   Financial Objectives   VI.   Individual Objectives  
VII.   Incentive Payments   VIII.   Amendment, Suspension and Termination   IX.
  Unfunded Plan   X.   Other Benefit and Compensation Programs   XI.   Governing
Law

     
Exhibit I:
  FY2008 Incentive Plan Components
 
   
Exhibit II:
  FY2008 Incentive Plan Payout Schedule
 
   
Exhibit III:
  FY2008 Incentive Payout Calculation Examples

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I.   Purpose of the Plan

The purpose of the Annual Incentive Plan is to align all participants with the
business objectives of Navarre Corporation and its subsidiaries (the “Company”)
by motivating, rewarding and recognizing participants for their achievements and
impact on the Company’s success.

II.   Eligibility

All management-level employees of the Company are normally eligible to
participate in the Plan. New hires must be employed prior to January 1st to be
eligible for a pro-rata incentive payment for that fiscal year (example: you
must be employed by December 31st, 2007 in order to be eligible for the FY08
incentive plan year which pays out in the first quarter of FY09). Participants
who terminate from the company, for any reason, prior to the date of the
incentive payment, will lose their eligibility to receive an incentive payment.

III.   Administration

The Plan is administered by the Compensation Committee of the Company’s Board of
Directors (the “Compensation Committee”). The Chief Executive Officer of the
Company (the “CEO”) will make recommendations to the Compensation Committee
regarding participation, level of awards, changes to the Plan, financial
objectives, and other aspects of the Plan’s administration. The Compensation
Committee has the authority to interpret the Plan, and, subject to the Plan’s
provisions, to make and amend rules and to make all other decisions necessary
for the Plan’s administration. Any decision of the Compensation Committee in the
interpretation and administration of the Plan, shall lie within its sole and
absolute discretion and shall be final, conclusive and binding on all parties
concerned. Specifically, the Compensation Committee has the authority to approve
payout percentages and to approve individual awards, including discretionary
awards, for the executive officers. The CEO has the authority to approve
individual awards, including discretionary awards, for other participants
consistent with the Plan.

IV.   Plan Design

The Annual Incentive Plan has two components:
1. Financial Objectives
2. Individual Objectives
The potential bonus percentage based on these two components is determined by
the participant’s level and type of position. This is summarized in Exhibit I.

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V.   Financial Objectives

Early each fiscal year the Compensation Committee will approve the Financial
Objectives for such fiscal year. The Financial Objectives will be based on
attainment of specific levels of performance of the Company (or of a subsidiary,
division, or department thereof) with reference to one or more of the following
criteria: (i) consolidated earnings before or after taxes; (ii) EBITDA (earnings
before interest, taxes, depreciation and amortization); (iii) net income;
(iv) operating income; (v) earnings per share; (vi) return on shareholders’
equity; (vii) expense management; (viii) return on investment; (ix) improvements
in capital structure; (x) net sales; (xi) maintenance or improvements of profit
margins; (xii) stock price; (xiii) market share; (xiv) cash flow; (xv) working
capital; (xviii) return on assets; (xv) asset turnover; (xvi) inventory
turnover; (xvii) economic value added (economic profit) and (xviii) total
shareholder return. Payment is made on each Financial Objective as indicated in
the Annual Incentive Plan Payout Schedule (Exhibit II).
For FY2008, the Compensation Committee has determined that the Financial
Objectives are:
Consolidated Operating Income — $24 million
Consolidated Net Sales — Budgeted Net Sales
Business Unit Budgeted Operating Income (for subsidiary participants)
Business Unit Budgeted Net Sales (for subsidiary participants)
Threshold
The Compensation Committee may determine one or more threshold Financial
Objectives which must be attained in order for any bonus payout to be earned
(other than a discretionary pool payout).
For FY2008, the Compensation Committee has determined that the threshold
Financial Objective is Consolidated Operating Income of $19.2 million.
Growth Multiplier
For FY2008, subject to the maximum payment provision in Paragraph VII, the
Compensation Committee has determined that if Consolidated Operating Income
exceeds the target, a participant’s incentive payment will be increased by the
same percentage that Consolidated Operating Income exceeds the stated target
(the Growth Multiplier). This provides for an enhanced incentive payout which is
totally funded by improvement in Consolidated Operating Income. See III for a
sample calculation.
Discretionary Pool
The Compensation Committee may also establish a discretionary pool to reward
participants in the plan with exemplary performance during the fiscal year be
paid out whether or not the threshold Financial Objectives are attained.

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The Compensation Committee has determined that the maximum discretionary pool
for FY2008 is $500,000, which may be awarded in whole or in part in the
discretion of the Compensation Committee.

VI.   Individual Objectives

To be eligible for a payout on Individual Objectives, written incentive
objectives must be approved and submitted to Human Resources in a timely manner.
Goal Setting
Plan participants and their managers will share accountability for establishing
annual specific goals for the Individual Objectives factor of the incentive
plan. Generally participants will have three to five specific and measurable
goals which may be weighted or prioritized. Joint agreement on goals will be
confirmed with signatures of the participant, their manager and their functional
Vice President.
Goal Monitoring
Participants will normally meet with their managers at least quarterly to review
progress on specific goals. This review may include specific discussion of the
participant’s year-to-date performance rating on goals. Progress on specific
goals of all participants will then be reviewed and discussed at quarterly
off-site meetings of the Senior Management Team.
Goal Modification
Goals may be modified during the plan year if the business or the individual’s
position requires the change. The Senior Management Team will normally be
consulted for input before any changes are made.
Goal Measurement
Plan participants and their managers will discuss the participant’s performance
level on their Individual Objectives and managers must submit the ratings to
Human Resources for approval in a timely manner. The Compensation Committee will
rate the CEO’s individual performance and review the ratings for the other
executive officers.

VII.   Incentive Payments

Results and Adjustments
Actual business results for the fiscal year will be provided by the Chief
Financial Officer and approved by the Compensation Committee. The Compensation
Committee may approve adjustments to actual business results to reflect
organizational, operational, or other changes which have occurred during the
year,

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e.g., acquisitions, dispositions, expansions, contractions, material
non-recurring items of income or loss, extraordinary items, effects of
accounting changes or other events which might create unwarranted hardships or
windfalls to participants.
Payments
Payments under the Plan will normally be paid within 45 days of the annual
audit. Payment will be made for the number of full months that the participant
held a qualifying position during the plan year and checks will be taxed in
compliance with Internal Revenue Service guidelines for bonuses. Checks will
normally be hand delivered in one-on-one meetings by the participant’s manager.
Maximum Payment
Notwithstanding anything to the contrary provided in this Plan, the Compensation
Committee may establish a maximum pay-out to any one participant for any fiscal
year.
For FY2008, the Compensation Committee has determined that the total payment to
any participant under this Plan shall not exceed 150% of the participant’s base
salary.
Communication
After year-end closing, managers should meet individually with each participant
to communicate the final rating on specific goals and the incentive payment
amount. Human Resources will prepare a communication document to assist managers
to effectively communicate this information. To ensure consistent communication
throughout the organization, this document will include an outline of all
information that should be included in the meeting.

VIII.   Amendment, Suspension and Termination

The Compensation Committee or the Board of Directors may at any time, and
without prior notice, terminate, suspend, amend or modify the Plan or any
incentive payments under the Plan not yet paid. No incentive payment will be
made during any suspension of the Plan or after its termination.

IX.   Unfunded Plan

The Plan shall be unfunded and the Company shall not be required to segregate
any assets for incentive payments under the Plan.

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X.   Other Benefit and Compensation Programs

Payments received by a participant under this Plan shall not be deemed a part of
a participant’s regular, recurring compensation for purposes of the termination,
indemnity or severance pay law of any state and shall not be included in, nor
have any effect on, the determination of benefits under any other employee
benefit plan, contract or similar arrangement provided by the Company unless
expressly so provided by such other plan, contract or arrangement. Nothing in
the Plan shall be construed as a contractual payment obligation or guarantee of
employment for any participant.

XI.   Governing Law

To the extent that Federal laws do not otherwise control, the Plan and all
determinations made and actions taken pursuant to the Plan shall be governed by
the laws of Minnesota and construed accordingly.

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Exhibit I
FY2008 Annual Incentive Plan Components:

                                              Consolidated   Subsidiary        
        Operating   Operating   Consolidated   Subsidiary   Individual Job Level
  Income   Income   Net Sales   Net Sales   Objectives
CEO,CFO and COO
    60 %             20 %             20 %
Subsidiary Presidents
    20 %     40 %             20 %     20 %
Subsidiary GM’s
    20 %     40 %             20 %     20 %
Corporate VP’s
    60 %             20 %             20 %
Subsidiary VP’s
    20 %     40 %             20 %     20 %
Corporate Directors
    40 %             20 %             40 %
Subsidiary Directors
    20 %     20 %             20 %     40 %
Corporate Managers
    40 %             20 %             40 %
Subsidiary Managers
    20 %     20 %             20 %     40 %

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EXHIBIT II
Annual Incentive Plan
FY2008 Payout Schedule for Financial Objectives

                      Percent of   Payout     Objective   %
Target
    100 %     100 %
 
    99 %     97.5 %
 
    98 %     95.0 %
 
    97 %     92.5 %
 
    96 %     90.0 %
 
    95 %     87.5 %
 
    94 %     85.0 %
 
    93 %     82.5 %
 
    92 %     80.0 %
 
    91 %     77.5 %
 
    90 %     75.0 %
 
    89 %     72.5 %
 
    88 %     70.0 %
 
    87 %     67.5 %
 
    86 %     65.0 %
 
    85 %     62.5 %
 
    84 %     60.0 %
 
    83 %     57.5 %
 
    82 %     55.0 %
 
    81 %     52.5 %
Minimum
    80 %     50 %
 
  Below 80%   0% Payout

Incentive Plan Upside Potential: Incentive Payments may exceed 100% of the
targeted bonus opportunity, up to a maximum of 150% of base salary, if
Consolidated Operating Income exceeds budget. This is accomplished through the
use of the Growth Multiplier which increases the final incentive payment by the
same percentage that Consolidated Operating Income exceeds the stated objective.
Please see example two in Exhibit III for details.

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EXHIBIT III
FY2008 Incentive Payout Calculation Examples
Example One: Financial Objectives are set for the fiscal year for Operating
Income and Net Sales. Navarre achieves 80% of Operating Income, both
Consolidated and Subsidiary, 100% of Net Sales, both Consolidated and
Subsidiary, and participant achieves 80% of their individual objectives.
Subsidiary VP ($100,000 base salary with a Bonus opportunity of 40%)

                                  Consolidated   Subsidiary   Consolidated      
    Individual Operating Income   Operating Income   Sales   Subsidiary Sales  
Objectives
8% (20% of total)
  16% (40% of total)     0 %   8% (20% of total)   8% (20% of total)

                                      %                   Incentive Component  
Attained   Payout %   Calculation   Payout
Consolidated Op Income
    80 %     50 %     .50 x .08 x $100,000     $ 4,000  
Subsidiary Op Income
    80 %     50 %     .50 x .16 x $100,000     $ 8,000  
Consolidated Sales
    100 %     100 %     1.0 x 0 x $100,000     $ 0  
Subsidiary Sales
    100 %     100 %     1.0 x .08 x $100,000     $ 8,000  
Individual Objectives
    80 %     80 %     .80 x .08 x $100,000     $ 6,400  
 
                             
 
                          $ 26,400  

Example Two: Financial Objectives are set for the fiscal year for Operating
Income and Net Sales. Navarre achieves 150% of Operating Income, both
Consolidated and Subsidiary, 90% of Net Sales, both Consolidated and Subsidiary,
and participant achieves 95% of their individual objectives.
Subsidiary VP ($100,000 base salary with a Bonus opportunity of 40%)

                      Consolidated   Subsidiary   Consolidated       Individual
Operating Income   Operating Income   Sales   Subsidiary Sales   Objectives
8% (20% of total)
  16% (40% of total)     0 %   8% (20% of total)   8% (20% of total)

                                      %                   Incentive Component  
Attained   Payout %   Calculation   Payout
Consolidated Op Income
    150 %     100 %     1.0 x .08 x $100,000     $ 8,000  
Subsidiary Op Income
    150 %     100 %     1.0 x .16 x $100,000     $ 16,000  
Consolidated Sales
    90 %     75 %     .75 x 0 x $100,000     $ 0  
Subsidiary Sales
    90 %     75 %     .75 x .08 x $100,000     $ 6,000  
Individual Objectives
    95 %     95 %     .95 x .08 x $100,000     $ 7,600  
 
                             
 
                          $ 37,600  
Growth Multiplier
    150 %             150% x 37,600     $ 56,400  

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