<PAGE>
 
                            AM GENERAL CORPORATION
                            105 North Niles Avenue
                             South Bend, IN 46617

                                                     May 1, 1997

Mr. Paul J. Cafiero
17549 Irongate Court
Granger, IN 46530


     RE:  NET WORTH PARTICIPATION AGREEMENT

Dear Mr. Cafiero:

     This will confirm the understanding of AM General Corporation (the 
"Company"), with you with respect to your Cumulative Net Income Participation, 
intended to constitute additional incentive compensation to you:

     1.   Vesting. On October 31, 2000, provided that you have been continuously
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in the employ of the Company from the date hereof through that date, you shall 
receive a credit of six-tenths of one percent (.6%) and on October 31 in each of
the years 2001 and 2002, and subject to the same proviso you shall receive an 
additional credit of two-tenths of one percent (.2%), for a maximum credit if 
you remain in the employ of the Company continuously through October 31, 2002, 
of one percent (1%) ("Maximum Credit"). Except as provided in paragraph 4, you 
shall not receive any credit unless you remain in the employ of the Company from
the date hereof continually until October 31, 2000, and thereafter you shall not
receive credit for any partial year, unless your employment terminates due to 
death or total disability, in which case you receive full credit of two-tenths 
of one percent (.2%) for the year in which such termination takes place.

     2.   Cumulative Net Income Participation Benefit. Upon the termination of 
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your employment by the Company, other than for cause, after October 31, 2000, or
your death or 
<PAGE>
 
Mr. Paul J. Cafiero
May 1, 1997
Page 2


total disability while in our employment after the date hereof and before 
November 1, 2000, you (or your designee or estate) shall be entitled to a 
payment ("Payment") equal to the product of (a) the total percentage credited to
you under paragraph 1 or paragraph 4 (a maximum of 1%) multiplied by (b) the 
"cumulative consolidated net income of the Company available to its Common 
Stock, from the date hereof through the end of its fiscal quarter immediately 
preceding the date of your termination. If there is no positive "cumulative 
consolidated net income" there shall be no payment. The determination of the 
independent public accountants for the Company as to the cumulative consolidated
net income, made in accordance with generally accepted accounting principles, 
consistently applied, shall be conclusive, provided that (a) there shall be 
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added back for each accounting period the net increase (non-cash charge), after 
tax benefits, in the Company's liability for so-called "other post-employment 
benefits" for such period, and (b) there shall be deducted from net income for 
each period the amount paid as dividends on the Common Stock of the Company 
during such period. If you shall voluntarily leave your employment before 
October 31, 2000, or if your employment shall be terminated for cause at any 
time, you shall not receive any Payment.

     3.   Dividend Participation.  If while you are employed by the Company, the
          ----------------------
Company shall pay any cash dividend on its Common Stock, then the Company shall 
make a cash payment to you equal to the total amount of the cash dividend 
multiplied by your Maximum Credit.

     4.   Early Termination of Employment because of Disability or Death.  If 
          --------------------------------------------------------------
your
<PAGE>
 
Mr. Paul J. Cafiero
May 1, 1997
Page 3

employment shall be terminated prior to November 1, 2000 because of your total 
disability or death, the Payment shall equal the product of six-tenths of one 
percent (.6%) multiplied by a fraction the numerator of which shall be the 
number of full months which shall have elapsed between the date hereof and the 
date of termination of your employment and the denominator of which shall be 42,
and multiplied again by the "cumulative consolidated net income" determined as 
at the end of the fiscal quarter immediately preceding your date of termination.

     5.   Payment. The Payment shall be payable to you (or your designee or 
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estate) in 40 equal quarterly installments, without interest, commencing three 
(3) months after the termination of your employment, and at 3-month intervals 
thereafter. The period during which the payments will be made is herein called 
the "Payment Period".

     6.   Sale of Substantially all of the Company's Stock or Assets. If, while 
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you shall be employed by the Company (and whether before or after October 31, 
2000), all or substantially all the stock or assets of the Company shall be sold
to a person who is not an affiliate of Ira Leon Rennert, or if The Renco Group, 
Inc. sells a controlling interest in the Company, then, upon the closing of such
sale, your full 1% credit shall be deemed to be vested, and you shall be 
entitled to receive as payment in full of your participation, your pro rata 
share (1%) of the "net proceeds" of the sale available for the Company's Common 
Stock, in kind, on the same terms and conditions as the Company or its 
shareholder is being paid. "Net proceeds", for purposes hereof, shall mean the 
amount if any, by which the proceeds of the sale after deducting all expenses 
of the sale, an amount sufficient to redeem
<PAGE>
 
Mr. Paul J. Cafiero
May 1, 1997
Page 4


all outstanding Preferred Stock of the Company, and all liabilities retained by 
the seller exceeds the consolidated net worth applicable to the Common Stock of 
the Company on the date hereof. Except for such payment, neither you nor this 
Company shall have any further rights or liabilities hereunder.

     7.   Provision applicable if Company becomes publicly held.
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     (a)  If, while you are employed by the Company, the Company shall become 
publicly held (i.e., registers under Section 12 of the Securities Exchange Act 
               ----
of 1934), then, in lieu and satisfaction of all your other rights under this 
Agreement, The Renco Group, Inc. shall cause to be issued to you such number of 
shares of Common Stock to the Company as is equal to the product of (a) the 
total number of such shares outstanding immediately prior to the Company 
becoming public multiplied by (b) your Maximum Credit.

     (b)  If, while you are a stockholder of the Company, a public offering of 
Common Stock of the Company shall be registered under the Securities Act of 1966
(other than an offering solely for the account of the Company), then you shall 
be entitled to have your shares included therein in the same proportion and on 
the same terms as other selling stockholders.

     8.   Conditions Precedent. You shall comply with the following provisions 
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as a condition precedent to your right to receive Payments:

     (a)  For the purposed hereof, all confidential information about the 
business and affairs of the Company (including, without limitation, business 
plans, product design and specifications, financial, engineering, and marketing 
information and information about costs,
     
<PAGE>
 
Mr. Paul J. Cafiero
May 1, 1997
Page 5


manufacturing methods, names of suppliers and customers) constitute "Company 
Confidential Information." You acknowledge that for some years, you have been a 
senior executive of the Company, or a predecessor. You further acknowledge that 
you have in the past had, and will continue to have, access to and knowledge of 
Company Confidential Information, and that improper use of revelation of same by
you during or after the termination of your employment by the Company could 
cause serious injury to the business of the Company. Accordingly, you agree that
you will forever keep secret and inviolate all Company Confidential Information 
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which shall have come or shall hereafter come into your possession, and that you
will not disclose such Company Confidential Information to any other person.

     (b)  You agree that while you have the right to receive Payments hereunder,
you will not (whether as an officer, director, partner, proprietor, investor, 
associate, employee, consultant, adviser, public relations or advertising 
representative or otherwise), directly or indirectly, be engaged in the business
of manufacturing highly mobility multipurpose wheeled vehicles (all models now 
manufactured by the Company and all models which may be manufactured or planned 
for manufacture by the Company during your employment) within any part of the 
United States. For purposes of the preceding sentence, you shall be deemed to be
engaged in any business which any person for whom you shall perform services is 
engaged. Nothing herein contained shall be deemed to prohibit you from owning as
a passive investment, a security of any issuer which is not a supplier, vendor, 
customer or competitor of the Company.

     9.   Notices.  Any notices to be sent pursuant hereto shall be sent by 
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hand,
<PAGE>
 
Mr. Paul J. Cafiero
May 1, 1997
Page 6


certified or registered mail or overnight service to you, at the address
indicated above and the Company, c/o The Renco Group, Inc., 30 Rockefeller
Plaza, New York, New York 10112, to the attention of Ira Leon Rennert, or to any
other address which any of us may designate by notice in writing.

     Please confirm that the foregoing correctly sets forth our full agreement
with respect to your cumulative net income participation by signing and
returning the enclose copy of this letter.

                                             Very truly yours,
                                             AM GENERAL CORPORATION

                                             By:/s/ James A. Armour
                                                -------------------
                                                 James A. Armour
                                                 President and CEO 


Paragraph 7(a) agreed to:
THE RENCO GROUP, INC.


By [SIGNATURE ILLEGIBLE]


CONFIRMED AND AGREED TO:

/s/ Paul J. Cafiero
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Paul J. Cafiero