EXHIBIT
10.1





2007
PERFORMANCE INCENTIVE PLAN (the “Plan”)


PLAN PARTICIPANTS


All regular, full-time employees of Obagi Medical Products (the “Company”)
who have been notified in writing of their eligibility are considered eligible
Plan Participants (“Plan Participants”). 
Employees in Sales, and other employees participating in any other
variable incentive pay plans, shall not be eligible.  Any otherwise eligible employee who has an
existing incentive pay component in his or her employment agreement shall be
deemed a Plan Participant, and the incentive pay component of the employment
agreement shall be replaced in its entirety by the Plan Participant’s rights
under this Plan unless otherwise explicitly set forth in the employment
agreement.


Plan Participants must be full-time employees of the
Company on the last day of the Plan Period (as defined below) and on the date
any amount is paid under this Plan to be eligible to be paid such amount under
this Plan, except as otherwise provided in this Plan.


Eligible employees who join the Company during the
Plan Period may, if so designated by the Administrator (as defined below), be
eligible for Plan incentives on a pro-rata basis corresponding to the service
time provided to the Company during the Plan Period, but must have been
actively employed with the Company for at least one full quarter during the
Plan Period to be eligible.


PLAN PERIOD


Company Fiscal Year 2007 (January 1 through December
31, 2007) (the “Plan Period”)


ADMINISTRATION


Except as otherwise set forth in the Plan, the
Compensation Committee of the Company’s Board of Directors shall administer the
Plan (the “Administrator”).


PLAN POOL


The Plan shall operate first by the Company’s
determining the aggregate amount available for issuance to Plan Participants
(the “Plan Pool”) based upon the Company’s achievement of certain Company
Performance Objectives (as defined below). 
The total on-target pool for the Plan Period is $2,075,000 (the “On-Target
Plan Pool”). The On-Target Plan Pool is calculated based upon 100% achievement
of the Company’s financial objectives and the Company’s contributing an amount
to the Plan Pool assuming that the number of budgeted Plan Participants
projected to hold eligible positions at the end of the Plan Period, including
the budgeted 2007 hires, are each paid 100% of their on-target bonus amount.



   
 









 


The actual amount of the Plan Pool (meaning the actual aggregate amount
that will ultimately be available for payment to Plan Participants) will be
determined based upon the Company’s actual performance in relation to its
approved business plan, and the Plan Pool will be funded only on achievement by
the Company of the Performance Objectives at the minimum permissible level of
achievement (as described below).


After determination by the Company of the Plan Pool amount, individual
bonus payments to each Plan Participant will be based upon such individual’s
achievement of Individual Performance Objectives (as defined below) established
as set forth in this Plan.


The Plan Pool is intended to encompass the
contractual incentives existing in otherwise eligible employees’ employment
agreements that are replaced in their entirety by the Plan Participants’ rights
under this Plan unless otherwise explicitly set forth in the employment
agreements.  A Plan Participant’s
acceptance of any grant of an award or other right under this Plan is
conditioned upon his or her consent to such replacement unless otherwise
explicitly set forth in the Plan Participant’s employment agreement.


COMPANY PERFORMANCE OBJECTIVES TO FUND PLAN POOL


The Company performance
objectives (the “Company Performance Objectives”) shall be comprised of two
components, a revenue objective (the “Revenue Objective”) and an adjusted EBIT
objective (“Adjusted EBIT Objective”). 
The Compensation Committee shall establish the target Revenue Objective
and Adjusted EBIT Objective for the Plan Period; provided that they will be
measured on a consolidated basis and will match the current year’s operating
plan targets approved by the Board of Directors.  For purposes of the Plan, “Revenue” is
defined as reported on the Company’s consolidated financial statements, and “Adjusted
EBIT” is defined as Earnings Before Interest and Taxes adjusted to exclude the
impact of non-cash charges relating to the issuance of equity instruments, as
disclosed in the Company’s consolidated financial statements.


The relative weighting as
between the two Company Performance Objectives will be (for all purposes under
the Plan, including calculating the amount by which the Plan Pool will be
funded and, if appropriate depending upon the weighting of Individual
Performance Objectives, calculating the actual bonus amount to pay a Plan
Participant) as follows:  30% of the
bonus amount shall relate to the Revenue Objective and 70% shall relate to the
Adjusted EBIT Objective.


Over-Achievement of
Company Performance Objectives:  If either or both of the Revenue
Objective or Adjusted EBIT Objective is exceeded, an amount in excess of the
target bonus amount will be contributed to the Plan Pool based on the
above-target performance level actually achieved and the relative weighting (as
set forth below) of the relevant Company Performance Objective(s) (the “Over-Achievement
Amount”).  The maximum amount above the
target bonus amount that may be contributed to the Plan Pool is 150% of the
target bonus amount.  In addition to any
cash bonuses paid in connection with any such Over-Achievement Amount, the
Administrator may, in its sole discretion, grant options to purchase Common
Stock of the Company having an aggregate 123R value as of the grant date equal
to the Over-Achievement Amount.



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Minimum Company Performance
Level:  For the Plan Pool to be funded and for any
incentives to be earned by Plan Participants, both of the following thresholds
must be achieved (the “Minimum Company Performance Levels”):


·                  For Executives: The Company must achieve at
least 92.5% of the Revenue Objective AND at least 92.5% of the Adjusted EBIT
Objective; and


·                  For Non-executives: The Company must achieve
at least 85% of the Revenue Objective AND at least 85% of the Adjusted EBIT
Objective.


PLAN POOL FUNDING


Once the Revenue Objective and Adjusted EBIT
Objective are achieved at the Minimum Company Performance Levels, the Plan Pool
funding will then be determined by the actual level of achievement of the
Revenue Objective and Adjusted EBIT Objective beyond the respective minimum
levels as outlined in the tables below.


Plan Pool Funding Table


 


	
   

  	
   

  	
  Measurement

  	
   

  	
  Base Bonus Achievement

  
	
  Bonus
  Component

  	
   

  	
  Weighting

  	
   

  	
  Period

  	
   

  	
  Bonus Payment Scale

  	
   

  	
  Percentage

  
	
  Revenue
  Objective

  	
   

  	
  30%

  	
   

  	
  Annually

  	
   

  	
  Financial Performance

  	
   

  	
  50%-100%

  
	
  Adjusted EBIT
  Objective

  	
   

  	
  70%

  	
   

  	
  Annually

  	
   

  	
  Financial Performance

  	
   

  	
  50%-100%

  



 


2007 Financial Performance Incentive Plan


The actual amount of contributions to the Plan Pool
will be conditioned upon achievement of a minimum level of performance with
respect to the Revenue Objective and the Adjusted EBIT Objective (measured on
an annual basis).



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Financial
Performance Base Bonus (On Target) Payment Scale


	
   

  	
   

  	
  Executive

  	
   

  	
  Non-Executive

  	
   

  	
  Bonus Achievement

  
	
  Performance
  Level

  	
   

  	
  Revenue Objective or Adjusted EBIT

  Performance Objective vs. Target

  	
   

  	
  Revenue Objective or Adjusted EBIT

  Performance Objective vs. Target

  	
   

  	
  Percentage

  
	
  Below Threshold

  	
   

  	
  0%-92.4%*

  	
   

  	
  0%-84.9%

  	
   

  	
  0%

  
	
  Base/ Target
  Threshold

  	
   

  	
  92.5%-100%*

  	
   

  	
  85%-100%

  	
   

  	
  Prorated up to
  100% on following Algorithm:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  Exec - 5% reduction in bonus amount that relates to
  the Objective (based on relative weighting of the two Objectives) as to which
  there was under-achievement for each 1% below the target achievement level; 

  

  Non-Exec. - 3% reduction in bonus amount that relates to the Objective (based
  on relative weighting of the two Objectives) as to which there was under
  achievement for each 1% below target achievement level

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  Performance Weighting: 30% Revenue; 70% EBIT

  
	
  Maximum

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  100%

  



 


Performance Thresholds. There will be no contribution to the Plan
Pool of any amount, and no payment to any Plan Participant under the Plan, if
the Company does not achieve at least the minimum/threshold level of
performance with respect to both the Revenue Objective and the Adjusted EBIT
Objective as set forth above. To clarify, if the Minimum Company Performance
Level for one Objective is not achieved, no amount will be contributed to the
Plan Pool, and no amount will be paid to a Plan Participant even with respect
to the portion of his or her bonus to which the other Objective relates even if
the performance for that other Objective is within the “Threshold” Performance
Level.


Financial Performance Above
Threshold Level


 


	
   

  	
   

  	
  Executive

  	
   

  	
  Non-Executive

  	
   

  	
  Amount of Bonus in Excess of Target 

  Bonus Amount

  
	
  Performance Level

  	
   

  	
  Revenue or Adjusted EBIT

  Performance vs. Target

  	
   

  	
  Revenue or Adjusted EBIT

  Performance vs. Target

  	
   

  	
  Percentage Based only on Adjusted EBIT
  overage

  
	
  Below Threshold

  	
   

  	
  0%-92.4%

  	
   

  	
  0%-84.9%

  	
   

  	
  If either Revenue
  or EBIT is below the respective Threshold, the total bonus payout is 0%

  
	
  Base/Target Threshold

  	
   

  	
  92.5%-100%

  	
   

  	
  85%-100%

  	
   

  	
  0%

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Above Threshold

  	
   

  	
  Must be
  a minimum of 100%

  	
   

  	
  Greater than 100%

  	
   

  	
  100%+ prorated up
  to a maximum of 150% on the following Algorithm

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  5% increase in
  bonus amount that relates to the Objective (based on relative weighting of
  the two Objectives) as to which there was over-achievement for each 1%
  overachievement of Objective

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  Performance
  Weighting: 30% Revenue; 70% EBIT

  
	
  Maximum

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  150%

  



 


·                                          Achievement Above Threshold. If the Revenue Objective and
Adjusted EBIT Objective are exceeded, an increased bonus amount will be funded
to the Plan Pool based on such over-achievement.  The increased bonus amount will be subject to
the maximum over-achievement cap of 150% specified above.  The relative weighting between the two Objectives
for purposes of calculating an amount based upon over-achievement will be the
30/70 weighting described above.



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Financial bonus amounts will be calculated and
accrued on a quarterly basis, but final bonus payment amounts will be
determined on an annual basis. Actual bonus payments will be made in accordance
with the performance periods on page one.


BONUS PAYMENT AMOUNTS


·                              In the event that the Plan Pool has been funded pursuant to the terms
of this Plan, Plan Participants may be eligible to receive individual incentive
awards as set forth below.


·                              The Administrator will establish individual target bonus amounts that
might be paid under the Plan which will be expressed as a percentage of each
Plan Participant’s annual base salary at the end of the Plan Period (unless a
Plan Participant’s salary is changed during the Plan Period, as set forth
below).


·                              The Administrator will determine the
individual target bonus amounts based on grade level and position title, as
follows:


·                                          Plan
Participants holding the position of Director or above will be advised by their
supervisor of their individual target incentive percentage.


·                                          Plan
Participants holding the position Senior Manager or below may have no explicit
incentive targets communicated in advance, and may receive general information
on Plan funding.


·                              Individual Plan Participant’s actual incentive award amounts will be
determined based on his or her achievement of one or more individual
performance goals (each an “Individual Performance Objective”) established by
his or her supervisor (or with respect to executive officers by the Administrator),
and in some cases, may also be based on achievement of Company objectives as
described above.  The Company may instead establish conditions
to a Plan Participant’s right to be paid a bonus amount under the Plan based
upon achievement  by the Company (or a
business unit thereof) of corporate performance objectives, including without
limitation the Company Performance Objectives.


·                              Plan Participants must achieve at least an
overall “satisfactory” level of performance achievement for the Plan Period, as
defined and determined solely by the Company, in order to be eligible to earn
any incentive under either the Individual or Company Performance Objectives, as
applicable.


WHEN PLAN INCENTIVES ARE EARNED AND PAID


Achievement of Company and Individual Performance
Objectives will be assessed at the end of the Plan Period, and if achieved as
applicable, the Plan Participant will earn and become entitled to payment of
Plan bonus amounts after the end of the Plan Period. Awards for Executive-level
Plan Participants must be approved by the Compensation Committee or Board of
Directors, as applicable. Achievement of the Company’s Revenue Objectives and
Adjusted EBIT  Objectives must both be
equal to or greater than the Minimum Company Performance Levels or no incentives
will be earned. Achievement of the Company’s Revenue Objective and Adjusted
EBIT Objective will be assessed by the Board of Directors’ Compensation
Committee, and their decision shall be final and binding. Achievement of
individual performance results will be determined by appropriate Company
management and approved by HR and the CEO.



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The Plan Participant must be an active employee in good
standing on the last day of the Plan Period and on the date any incentive is
paid under this Plan for such incentive to be earned. Payment on earned incentives will be made as
soon as reasonably possible following the end of the Plan Period, and in any
event prior to March 15, 2008, and will be net of all applicable withholdings.


If
an employee’s base salary and/or bonus incentive changes during the Plan Period
due to promotion, market adjustment, etc., the target incentive bonus will be
pro-rated based on time in the old and new levels.


LEAVES OF ABSENCE AND TERMINATION OF EMPLOYMENT


Plan Participants must be actively employed on the last day of the Plan
Period and the day any incentive award payment is made under this Plan in order
to be eligible for such incentive award, except that the CEO will determine in
his sole discretion whether a Plan Participant who is on a leave of absence or
disability or dies during the Plan Period may be eligible for a partial or
prorated incentive.  Except as set forth
above, Plan Participants who terminate for any reason during the Plan Period or prior to the date any incentive award payment
is made under this Plan are not eligible for such incentive awards.


AT-WILL EMPLOYMENT


Participation in this Plan is not an agreement (express or implied)
between the Plan Participant and the Company that the Company will employ the
Plan Participant for any specific period of time, nor is there any agreement
for continuing or long-term employment. 
The Plan Participant and the Company each have the right to terminate
the employment relationship at any time and for any or no reason. This at-will
employment relationship can only be modified by an agreement signed by the Plan
Participant and the Company’s Chief Executive Officer.


DETERMINATIONS,
CHANGES AND EXCEPTIONS TO PLAN


This document highlights the principal features of the
Plan, but it does not describe every situation that can occur. The Company
retains the right to interpret, revise, modify or delete the Plan at its sole
discretion at any time.  This document
supersedes any previous incentive plan document including any specific
provisions stated in the Plan Participant’s offer letter or employment
agreement specifying eligibility, amount, and participation in any incentive or
bonus program unless
otherwise explicitly set forth in the offer letter or employment agreement.  The
Company reserves the right to make any reasonable adjustments to the Plan,
including but not limited to project assignments, as necessary to reflect
business and economic conditions. The CEO, Human Resources, and/or the
Compensation Committee, as applicable, must approve any exceptions,
modifications or adjustments to the Plan. 
The Company further retains full and final discretion to
determine whether a Plan Participant has earned any incentives pursuant to the
Plan.  All such determinations shall be
final and binding.



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[Obagi Medical Products Letterhead]


________ ___, 2007


[Name]


[Address]


[Address]


Re:          Amendment to [Employment
Agreement][Offer Letter] dated                                           


Dear [Name]:


On
August ____, 2007, the Compensation Committee of the Board of Directors of
Obagi Medical Products, Inc. (the “Company”) adopted the 2007
Performance Incentive Plan (the “Plan”), attached hereto as Exhibit A,
providing eligible employees with the potential to receive a cash bonus if
certain Company and individual targets are achieved as set forth in the Plan
and as determined by the Compensation Committee.  Pursuant to the terms of the Plan, the
Company has the right to interpret, amend or terminate the Plan at any time in
its sole discretion.


The
Plan is intended to replace and supersede all bonus payment and incentive pay
components, including the right to participate in any other bonus or incentive
plan of the Company, contained in the employment agreement or offer letter of
all employees of the Company.  As a result,
in order to participate in the Plan, an employee must consent to the
replacement of any bonus or incentive pay components in the employee’s
employment agreement or offer letter with the terms of the Plan.


If you would like to participate in the Plan in
accordance with its terms, please sign below to acknowledge and accept
the terms of this Amendment and to agree that the Plan terms replace and
supersede any bonus payment or incentive pay component, including the right to
participate in any other bonus or incentive plan of the Company, and any other
conflicting terms of your [Employment Agreement]
[Offer Letter] with the Company dated ____________________ (your “Current
Agreement”).  By signing below, you
agree to waive any rights, and release the Company from any claims, related to
any bonus or incentive payments that arise under your Current Agreement or
under any bonus or incentive plan of the Company other than the Plan.  By signing below, you also acknowledge that
participation in the Plan does not guaranty the payment of any bonus or
issuance of any option grant to you under the Plan.



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Should
you have questions regarding this Amendment, please do not hesitate to contact
me.


	
  

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  [Name], [Title]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  ACCEPTED AND
  AGREED:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  [Employee
  Name]

  	
   

  
	
   

  	
   

  
	
  Date:

  	
   

  	
   

  
			



 



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