exv10w26







Exhibit 10.26









Annual Incentive Plan

Fiscal Year – 2009




Effective April 1, 2008 – March 31, 2009









	 	 	 
	
	 	






	 	 	 	 	 
	
	 	
	 	






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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:

	 	FY2009 Incentive Plan Components
	 
	 	 
	Exhibit II:

	 	FY2009 Incentive Plan Payout Schedule
	 
	 	 
	Exhibit III:

	 	FY2009 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



Most management-level employees of Navarre are eligible to participate in the Plan. New hires must
be employed prior to September 1st to be eligible for a pro-rata incentive payment for that fiscal
year. 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:





	•	 	Financial Objectives
	 
	•	 	Individual Objectives




The potential bonus percentage based on these components is determined by the participant’s level
and type of position. This is summarized in Exhibit I.




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)




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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 FY2009, the Compensation Committee has determined that the Financial Objectives are:





	 	•	 	Consolidated Operating Income of $20 million (for all participants)
	 
	 	•	 	Consolidated Net Sales of $664 million (for corporate participants)
	 
	 	•	 	Subsidiary Budgeted Operating Income (for subsidiary participants)
	 
	 	•	 	Subsidiary 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 FY2009, the Compensation Committee has determined that the Financial Objective threshold is
Consolidated Operating Income of $16 million.




Growth Multiplier



For FY2009, 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.



The Compensation Committee has determined that the maximum discretionary pool for FY2009 is
$500,000, which may be awarded in whole or in part.




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VI. Individual Objectives




Goal Setting



Plan participants and their managers will share accountability for establishing annual goals for
the Individual Objectives component of the incentive plan. Generally, participants will have three
to five specific and measurable goals which may be weighted or prioritized. These goals
should tie directly to the overall company, subsidiary, or department goals. Joint agreement on
goals will be confirmed with signatures of the participant and his/her manager. These goals must
be provided to Human Resources within two months of becoming eligible for the Annual Incentive
Plan.




Goal Monitoring



Participants will normally meet with their managers at least quarterly to review progress on the
established goals.




Goal Modification



Goals may be modified during the plan year if the business or the individual’s position requires
the change.




Goal Measurement



Plan participants and their managers will discuss the participant’s goal achievement on their
Individual Objectives and managers must submit the achievement to HR for approval in a timely
manner. The Compensation Committee will evaluate and determine achievement of the CEO’s individual
performance and review the achievement for the other executive officers.




VI. 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, 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




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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 FY2009, 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 achievement on specific goals and communicate the incentive payment amount. Human Resources
will prepare a communication document to assist managers to effectively communicate this
information.




VII. 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.




VIII. Unfunded Plan



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




IX. 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.




X. 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




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	%
	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
Payout Schedule for Financial Objectives



	 	 	 	 	 	 	 	 	 
	 	 	Percent of	 	Payout
	 	 	Target / Budget	 	%
	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




Incentive Payout Calculation Examples



Example #1: Navarre achieves 80% of Consolidated Operating Income, 100% of Consolidated
Net Sales, and participant achieves 80% of their individual objectives.



Corporate Director ($80,000 base salary with a bonus opportunity of 25%)




	 	 	 	 	 	 	 	 	 
	Consolidated	 	Subsidiary 	 	Consolidated Net	 	 	 	 
	Operating Income	 	Operating Income	 	Sales	 	Subsidiary Net Sales	 	Individual Objectives
	10% of base salary
- 

(40% of total)

	 	 	 	5% of base salary -


(20% of total)
	 	 	 	10% of base salary -


(40% of total)






	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Incentive Component
	 	% Attained	 	 	Payout %	 	 	Calculation	 	 	Payout	 
	Consolidated Op Income
	 	 	80	%	 	 	50	%	 	 	$80,000 x 10% x 50%	 	 	$	4,000	 
	Subsidiary Op Income
	 	 	—	%	 	 	—	%	 	 	—	 	 	$	0	 
	Consolidated Net Sales
	 	 	100	%	 	 	100	%	 	$	80,000 x 5% x 100	%	 	$	4,000	 
	Subsidiary Net Sales
	 	 	—	%	 	 	—	%	 	 	—	 	 	$	0	 
	Individual Objectives
	 	 	80	%	 	 	80	%	 	$	80,000 x 10% x 80	%	 	$	6,400	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	$	14,400	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 





Example #2: Navarre achieves 90% of Consolidated Operating Income, 100% of Subsidiary
Operating Income, 80% of Subsidiary Net Sales, and the participant achieves 95% of their individual
objectives.




Subsidiary VP ($100,000 base salary with a bonus opportunity of 40%)




	 	 	 	 	 	 	 	 	 
	Consolidated	 	Subsidiary	 	Consolidated Net	 	 	 	 
	Operating Income	 	Operating Income	 	Sales	 	Subsidiary Net Sales	 	Individual Objectives
	8% of base salary
- 
(20% of total)

	 	16% of base salary -


(40% of total)
	 	 	 	8% of base salary -


(20% of total)
	 	8% of base salary -

(20% of total)






	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Incentive Component
	 	% Attained	 	 	Payout %	 	 	Calculation	 	 	Payout	 
	Consolidated Op Income
	 	 	90	%	 	 	75	%	 	 	$100,000 x 8% x 75%	 	 	$	6,000	 
	Subsidayr Op Income
	 	 	100	%	 	 	100	%	 	$	100,000 x 16% x 100	%	 	$	16,000	 
	Consolidated Net Sales
	 	 	—	%	 	 	—	%	 	 	—	 	 	$	0	 
	Subsidiary Net Sales
	 	 	80	%	 	 	50	%	 	$	100,000 x 8% x 50	%	 	$	4,000	 
	Individual Objectives
	 	 	95	%	 	 	95	%	 	$	100,000 x 8% x 95	%	 	$	7,600	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	$	33,600	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 






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Example #3 – Growth Multiplier: Navarre achieves 110% of Consolidated Operating Income,
100% of Subsidiary Operating Income, 90% of Subsidiary Net Sales, and the participant achieves 100%
of their individual objectives.




Subsidiary VP ($100,000 base salary with a bonus opportunity of 40%)




	 	 	 	 	 	 	 	 	 
	Consolidated	 	Subsidiary	 	Consolidated Net	 	 	 	 
	Operating Income	 	Operating Income	 	Sales	 	Subsidiary Net Sales	 	Individual Objectives
	8% of base salary -

(20% of total)

	 	16% of base salary -


(40% of total)
	 	 	 	8% base salary -


(20% of total)
	 	8% of base salary -


(20% of total)






	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Incentive Component
	 	% Attained	 	 	Payout %	 	 	Calculation	 	 	Payout	 
	Consolidated Op Income
	 	 	110	%	 	 	100	%	 	 	$100,000 x 8% x 100%	 	 	$	8,000	 
	Subsidiary Op Income
	 	 	100	%	 	 	100	%	 	$	100,000 x 16% x 100	%	 	$	16,000	 
	Consolidated Net Sales
	 	 	—	%	 	 	—	%	 	 	—	 	 	$	0	 
	Subsidiary Net Sales
	 	 	90	%	 	 	75	%	 	$	100,000 x 8% x 75	%	 	$	6,000	 
	Individual Objectives
	 	 	100	%	 	 	100	%	 	$	100,000 x 8% x 100	%	 	$	8,000	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	$	38,000	 
	 	 	 	 	 	 	110% Achievement = 10% Multiplier	 	$	3,800	 
	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	$	41,800	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 






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