<PAGE>
 
                                                                    EXHIBIT 10.1


                              EMPLOYMENT AGREEMENT
                              --------------------



         AGREEMENT made as of August 26, 1996, by and between L.A. GEAR, INC., a
California corporation (the "Company"), and Bruce W. MacGregor (the "Employee").

         WHEREAS, the Company desires to retain the exclusive services of
Employee and Employee desires to be employed by the Company for the term of this
Agreement;

         NOW, THEREFORE, in consideration of the premises and of the mutual
covenants contained herein, the parties hereto agree as follows:

         1.   Duties.
              ------ 

              (a) The Employee shall serve as Senior Vice President--Product
Marketing, of the Company or such other position as may be agreed between the
Employee and the Company, and shall perform such duties, services and
responsibilities as are consistent with such position including, but not limited
to, the management and direction of all facts of the Company's marketing and
product development.  The Employee's duties, services and responsibilities will
be performed under the overall supervision of the President and Chief Operating
Officer of the Company (or such other executive officer as may be designated by
the President and Chief Operating Officer) and consistent with the policies of
the Board of Directors of the Company (the "Board of Directors").

              (b) During the Employment Term, the Employee shall devote his full
business time, attention and skill to the performance of such duties, services
and responsibilities, and will use his best efforts to promote the interests of
the Company.  The Employee will not, without the prior written approval of the
Board of Directors, engage in any other business activity which would interfere
with the performance of his duties, services and responsibilities hereunder or
which is in violation of policies established from time to time by the Company.
Employee agrees that he will be in the Company's Santa Monica headquarters on a
regular basis during Monday through Thursday of every week (unless he is
required to travel for business purposes to other locations and except in the
case of planned vacations) and will be in the Santa Monica headquarters on
Fridays on an as-needed basis for meetings or to attend to other necessary
business matters.  On those Fridays that Employee is not in the office, he will
continue to devote his full business time and attention to his services to the
Company, and will be available by telephone as necessary.

 
<PAGE>
 
         2.   Term.
              ---- 

         (a)  The term of employment of the Employee hereunder shall commence as
of August 26, 1996 (the "Commencement Date") and shall continue in full force
and effect until August 25, 1997, unless earlier terminated as provided herein
(the "Employment Term"). The term of this Agreement shall be coincident with the
Employment Term.

         (b)  On the six-month anniversary of the date hereof, and on each six-
month anniversary thereafter, the Employment Term shall be extended by six
months, on the same terms and conditions contained herein, unless the Company
delivers written notice to the Employee on or prior to such six month
anniversary date of its intention not to extend the then-current Employment
Term, in which case the Employment Term and this Agreement shall expire on the
then-current date of expiration of the Employment Term.

         3.   Compensation.  In consideration of the performance by the Employee
              ------------                                                      
of the Employee's obligations during the Employment Term (including any services
as an officer, director, employee, member of any committee of the Company or any
of its subsidiaries, or otherwise), the Company will during the Employment Term
pay the Employee a salary (the "Salary") at an annual rate of not less than
$225,000.

         During the Term, Employee will be eligible to participate in the
management bonus plan based on excess return of capital (the "EVA Bonus Plan")
adopted by the Company.  To the extent Employee was employed by the Company
hereunder for not less than six months during a fiscal year and Employee's
employment is terminated during such fiscal year, the Company, in its sole
discretion, may pay the Employee a cash bonus in an amount to equal to 40% of
Employee's base salary.

         The Salary shall be payable in accordance with the normal payroll
practices of the Company then in effect.  The Salary, and all bonuses or other
forms of compensation paid to the Employee hereunder, shall be subject to all
applicable taxes required to be withheld by the Company pursuant to federal,
state or local law.  The Employee shall be solely responsible for income taxes
imposed on the Employee by reasons of any cash or non-cash compensation and
benefits provided hereunder.

         In addition to the payment of Salary, (a) the Company shall grant to
the Employee on the date of the first Board of Directors meeting following the
Commencement Date (the "Grant Date") non-qualified stock options to purchase an
aggregate of 70,000 shares of the Company's Common Stock, no par value per share
("Common Stock"), 30,000 of which options will vest on the one-year anniversary
of the Grant Date, 20,000 of which will vest on the two-year anniversary of the
Grant Date, and 20,000 of which will vest on the three-year anniversary of the
Grant Date.  All of such options will be subject to the terms and conditions set
forth in the Non-Qualified Stock Option Agreement attached hereto as Exhibit A

                                       2
<PAGE>
 
(the "Option Agreement"), and (b) the Employee shall be entitled to participate
in any employee benefit plans then in effect for similarly situated employees to
the extent the Employee meets the eligibility requirements for any such plan;
provided, however, that nothing in this paragraph shall require the Company to
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provide health or medical insurance benefits to the Employee or any dependent of
the Employee with respect to any condition existing prior to the commencement of
the Employee's employment by the Company except as covered by the Company's
health and medical insurance plans sponsored for employees in general.

         The Employee shall be entitled to three weeks vacation (in addition to
the usual national holidays) per year, which vacation shall be accrued ratably
during each year during which the Employee serves hereunder, subject to the
limitations set forth in this paragraph.  Any accrued but unused vacation may be
carried forward into subsequent years; provided, however that accrued but unused
                                       --------  -------                        
vacation available to the Employee may not, at any time, exceed a total of six
weeks.  Vacation shall not be earned at any time that accrued but unused
vacation totals six weeks and shall not resume to be earned until accrued but
unused vacation again declines below six weeks.  Such vacation shall be taken at
such time or times as may be agreed between the Employee and the Company.

         If (i) the Employee is absent from work for 180 calendar days in any
twelve-month period by reason of illness or incapacity (whether physical or
otherwise) or (ii) the Company reasonably determines that the Employee is unable
to perform his duties, services and responsibilities hereunder by reason of
illness or incapacity (whether physical or otherwise) for a total of 180
calendar days in any twelve-month period during the Employment Term
("Disability"), the Company shall not be obligated to pay the Employee any
compensation (Salary or bonus) for any period in excess of such 180 days;
furthermore, any such payments shall be reduced by any amount the Employee is
entitled to receive as a result of such disability under any plan provided
through the Company or under state or federal law.

         During the first year of his Employment Term only, the Company will pay
for one round trip coach airfare ticket between Los Angeles and Portland for
Employee each week (which ticket may be used by Employee or any member of his
immediate family, but which may not be sold).  Such tickets will be purchased
through the Company's travel agency and Employee will use his best efforts to
facilitate the purchase of such tickets under the most favorable rates
available, including but not limited to by providing as much notice as possible
of travel plans.

         The Company will also reimburse Employee the expenses for a furnished
apartment in the Santa Monica vicinity (the "Apartment") during the first year
of his Employment Term only, the selection of which shall be in the sole
discretion of the Company and the lease payments for which will be made directly
by Employee and reimbursed by the Company (the "Lease Reimbursements").  The
lease for the Apartment will be in Employee's 

                                       3
<PAGE>
 
name. At the request of Employee, the Company shall advance Employee such amount
as may be necessary to cover the security deposit charged for the Apartment,
with such advance to be payable by Employee within ten (10) business days after
vacating the Apartment (except as specified below). In addition, the Company
shall, on a monthly basis, gross up the monthly Lease Reimbursements in an
amount necessary to pay Employee's taxes on such Lease Reimbursements based on
the standard supplemental wage percentage method established by the Internal
Revenue Service and state taxing authority. In the event that Employee's
employment with the Company is terminated pursuant to Sections 4(a)(ii), (iv),
(v) or (vi) hereunder prior to the expiration of the initial six month lease
term on the Apartment, the Company agrees that it will use its best efforts to
have the lease for the Apartment assigned to the Company, and will pay the
balance of the lease payments from the date of termination to the expiration of
the term and Employee will not be liable therefor. In the event the lease is
assigned to L.A. Gear, MacGregor shall only be required to repay the security
deposit advance to the extent the Company does not receive the full security
deposit from the Apartment landlord upon termination of the Apartment lease.

         Additionally, after one full year of employment under this Employment
Agreement, the Company will reimburse the Employee for reasonable out-of-pocket
moving costs and expenses incurred by the Employee in connection with a move of
the personal property of the Employee and his immediate family from their
present home to a new residence located in the Los Angeles, California greater
metropolitan area (the "Relocation"), in accordance with the Company's then-
current Relocation Policy (the "Relocation Policy") and upon receipt of
appropriate accounting therefor, in accordance with the usual practices of the
Company.
 
         4.   Termination.
              ----------- 

              (a)  Except as otherwise provided in this Agreement, the
employment of the Employee hereunder and the Employment Term shall terminate
upon the earliest to occur of the dates specified below:

              (i)  the close of business on the date of expiration of the
Employment Term;

              (ii)  the close of business on the date of the Employee's death;

              (iii) the close of business on the day on which the Company shall
have delivered to the Employee a written notice of the Company's election to
terminate his employment for "Cause" (as defined in Section 4(c) hereof);

              (iv)  the close of business on the day on which the Company shall
have delivered to the Employee a written notice of the Company's election to
terminate his employment because of Disability;

                                       4
<PAGE>
 
              (v)   the close of business on the day following the date on which
the Board of Directors or Executive Committee of the Board of Directors shall
have adopted a resolution terminating the employment of the Employee hereunder
and such termination is not for death, Cause or Disability; or

              (vi)  the close of business on an early termination date mutually
agreed to in writing by the Company and the Employee.

              (b) Any purported termination by the Company or by the Employee
pursuant to Section 4(a) hereof shall be communicated by written "Notice of
Termination" to the other.  For purposes of this Agreement, a "Notice of
Termination" shall mean a written notice which indicates the specific
termination provision in this Agreement relied upon and which sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Employee's employment under the provision so indicated.  For
purposes of this Agreement, no such purported termination shall be effective
without delivery of such Notice of Termination.

              (c) For purposes of this Agreement, termination of employment for
"Cause" shall mean termination based on (i) the Employee's breach of this
Agreement, (ii) conviction of the Employee for (x) any crime constituting a
felony in the jurisdiction in which committed, (y) any crime involving moral
turpitude (whether or not a felony), or (z) any other criminal act against the
Company involving dishonesty or willful misconduct intended to injure the
Company (whether or not a felony), (iii) substance abuse by the Employee, (iv)
the failure or refusal of the Employee to follow the lawful and proper
directives of the Board of Directors (or of any superior officer of the Company
having direct supervisory authority over the Employee), or (v) willful
malfeasance or gross misconduct by the Employee which discredits or damages the
Company.

              (d) In the event of termination of this Agreement, for whatever
reason, the Employee agrees to cooperate with the Company and to be reasonably
available to the Company with respect to continuing and/or future matters
arising out of the Employee's employment or any other relationship with the
Company, whether such matters are business-related, legal or otherwise.  The
Company agrees to reimburse the Employee for the Employee's reasonable travel
expenses incurred in complying with the terms of this paragraph upon delivery by
the Employee to the Company of valid receipts for such expenses.  The Company
further agrees to reimburse the Employee at his then-current salary for time
spent by the Employee in complying with the provisions hereof, but only to the
extent that the Employee is not paid a salary by his then-current employer
during such time.  Such reimbursement shall be made upon delivery by the
Employee to the Company of valid documentation reflecting such non-payment.  The
provisions of this paragraph shall survive termination of this Agreement.

                                       5
<PAGE>
 
         5.   Termination Payments.  If the Employee's employment with the
              --------------------                                        
Company terminates for any reason, the Company will pay the Employee any portion
of the Salary accrued hereunder on or prior to the date of termination but not
paid.  Subject to the last sentence of the following paragraph, if the
Employee's employment with the Company terminates pursuant to Section 4(a)(v),
the Company will continue to pay the Employee an amount equal to the Employee's
Salary (at the salary rate in effect on the date of termination of the
Employee's employment hereunder) for the remainder of the term of this
Agreement.

         Except as otherwise provided in any stock option agreement between the
Company and the Employee in effect at the time of the termination of the
Employee's employment, the foregoing payments upon termination shall constitute
the exclusive payments due the Employee upon termination under this Agreement,
but shall have no effect on any benefits which may be due the Employee under any
plan of the Company which provides benefits after termination of employment.
The Employee shall not be required to mitigate the foregoing amounts payable
upon termination of this Agreement by seeking other employment or otherwise,
provided, however, that the foregoing payments shall be reduced or mitigated by
--------  -------                                                              
virtue of any cash compensation (including any deferred portion thereof)
received or earned by the Employee from any other employer, or from personal
services rendered by the Employee to a third party as an independent contractor,
during the period commencing on the date of termination of this Agreement and
ending on the date on which the Employment Term had been scheduled to expire.

         6.   Employee Covenants.
              ------------------ 

              (a) Unauthorized Disclosure.  The Employee agrees and understands
                  -----------------------
that in the Employee's position with the Company, the Employee will be exposed
to and receive information relating to the confidential affairs of the Company,
including but not limited to technical information, business and marketing
plans, strategies, customer information, other information concerning the
Company's products, promotions, development, financing, expansion plans,
business policies and practices, and other forms of information considered by
the Company to be confidential and in the nature of trade secrets. Except to the
extent that the proper performance of the Employee's duties, services and
responsibilities hereunder may require disclosure, and except as such
information (i) was known to the Employee prior to his employment by the Company
or (ii) was or becomes generally available to the public other than as a result
of a disclosure by the Employee in violation of the provisions of this Section
6(a), the Employee agrees that during the Employment Term and thereafter the
Employee will keep such information confidential and not disclose such
information, either directly or indirectly, to any third person or entity
without the prior written consent of the Company. This confidentiality covenant
has no temporal, geographical or territorial restriction. Upon termination of
this Agreement, the Employee will promptly supply to the Company all property,
keys, notes, memoranda, writings, lists, files, reports, customer lists,
correspondence, tapes, disks, cards, surveys, maps, logs, machines, technical
data or any other tangible product or document which

                                       6
<PAGE>
 
has been produced by, received by or otherwise submitted to the Employee during
or prior to the Employment Term. Any material breach of the terms of this
paragraph shall be considered Cause.

          (b) Inventions.  (i) The Employee agrees that any and all inventions,
              ----------                                                       
discoveries, improvements, processes, business application software, patents,
copyrights and trademarks made, developed, discovered or acquired by him during
the Employment Term, solely or jointly with others or otherwise and which relate
to the business of the Company and all knowledge possessed by the Employee
relating thereto (collectively, the "Inventions"), shall be fully and promptly
disclosed to the Board of Directors and to such person or persons as the Board
of Directors shall direct and shall be the sole and absolute property of the
Company and the Company shall be the sole and absolute owner thereof.  The
Employee agrees that he will at all times keep all of the same secret from
everyone except the Company and such persons as the Board of Directors may from
time to time direct.  The Employee shall, as requested by the Company at any
time and from time to time, whether prior to or after the expiration of the
Employment Term, execute and deliver to the Company any instruments deemed
necessary by the Company to effect disclosure and assignment of the Inventions
to the Company or its designees and any patent applications (United States or
foreign) and renewals with respect thereto, including any other instruments
deemed necessary by the Company for the prosecution of patent applications or
the acquisition of letters patent.

              (ii)  Reference is hereby made to Appendix A to this Agreement
reprinting the text of Sections 2870 through 2872 of the California Labor Code.
Execution of this Agreement by the Employee shall confirm that the Employee has
received and read such Appendix A.  The provisions of this Section 6(b) shall
not apply to any invention which qualifies fully under the provisions of Section
2870 of the California Labor Code.

          (c) Non-competition.  By and in consideration of the Company's
              ---------------                                           
entering into this Agreement and the Salary and benefits to be provided by the
Company hereunder, and further in consideration of the Employee's exposure to
the proprietary information of the Company, the Employee agrees that the
Employee will not, during the Employment Term, directly or indirectly own,
manage, operate, join, control, be employed by, or participate in the ownership,
management, operation or control of or be connected in any manner, including but
not limited to holding the positions of shareholder, director, officer,
consultant, independent contractor, employee, partner, or investor, with any
Competing Enterprise.  For purposes of this paragraph, the term "Competing
Enterprise" shall mean any person, corporation, partnership or other entity
engaged in the design and marketing of athletic and casual footwear and/or
related apparel products and accessories.  The prohibition of this clause (c)
shall not be deemed to prevent Employee from (i) retaining ownership of the 410
shares of common stock of Pan Pacific Designs, Inc., held by Employee on the
date hereof, and (ii) owning 2% or less of any class of equity securities of an
entity that has a class of equity securities registered under Section 12 of the
Securities Exchange Act of 1934, as amended.

                                       7
<PAGE>
 
          (d) Non-solicitation.  During the Employment Term and for a period of
              ----------------                                                 
one year thereafter, the Employee shall not interfere with the Company's
relationship with, or endeavor to entice away from the Company, any person who
at any time during the Employment Term was an employee or customer of the
Company or otherwise had a material business relationship with the Company.

          (e) Remedies.  The Employee agrees that any breach of the terms of
              --------                                                      
this Section 6 would result in irreparable injury and damage to the Company for
which the Company would have no adequate remedy at law; the Employee therefore
also agrees that in the event of said breach or any threat of breach, the
Company shall be entitled to an immediate injunction and restraining order to
prevent such breach and/or threatened breach and/or continued breach by the
Employee and/or any and all persons and/or entities acting for and/or with the
Employee, without having to prove damages, in addition to any other remedies to
which the Company may be entitled at law or in equity.  The terms of this
paragraph shall not prevent the Company from pursuing any other available
remedies for any breach or threatened breach hereof, including but not limited
to the recovery of damages from the Employee.

         The provisions of subsections (a), (b), (d) and (e) of this Section 6
shall survive any termination of this Agreement and the Employment Term.  The
existence of any claim or cause of action by the Employee against the Company,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by the Company of the covenants and agreements of
this Section 6.

          (f) "Company".  For the purposes of this Section 6 only, the term
              ---------                                                    
"Company" shall mean, collectively, L.A. Gear, Inc., a California corporation,
and its successors, assigns and nominees, and all individuals, corporations and
other entities that directly, or indirectly through one or more intermediaries,
control or are controlled by or are under common control with any of the
foregoing.

          7.  Notices.  Any notice or other communication required or
              ------- 
permitted hereunder shall be in writing and shall be deemed to have been given
(i) if personally delivered, when so delivered, or (ii) if mailed, three (3)
business days after having been placed in the United States mail, registered or
certified, postage prepaid, addressed to the party to whom it is directed at the
address set forth below:

                                       8
<PAGE>
 
         If to the Company:

         L.A. Gear, Inc.
         2850 Ocean Park Boulevard
         Santa Monica, California 90405
         Attention:  President


         With a copy to:

         L.A. Gear, Inc.
         2850 Ocean Park Boulevard
         Santa Monica, California 90405
         Attention:  Legal Dept. - Office of General Counsel

         If to the Employee:

         Bruce W. MacGregor
         13515 Streamside Drive
         Lake Oswego, Oregon  97035
 

         8.   Binding Effect/Assignment.  This Agreement shall inure to the
              -------------------------                                    
benefit of and be binding upon the parties hereto and their respective heirs,
executors, personal representatives, estates, successors (including, without
limitation, by way of merger) and assigns.  Notwithstanding the provisions of
the immediately preceding sentence, the Employee shall not assign all or any
portion of this Agreement without the prior written consent of the Company.

         9.   Entire Agreement.  This Agreement sets forth the entire
              ----------------                                       
understanding of the parties hereto with respect to the subject matter hereof
and supersedes all prior agreements, written or oral, between them as to such
subject matter.  This Agreement may not be amended, nor may any provision hereof
be modified or waived, except by an instrument in writing duly signed by the
party to be charged.

         10.  Severability.  If any provision of this Agreement, or any
              ------------                                             
application thereof to any circumstances, is invalid, in whole or in part, such
provision or application shall to that extent be severable and shall not affect
other provisions or applications of this Agreement.

         11.  Governing Law.  This Agreement shall be governed by and construed
              -------------                                                    
in accordance with the internal laws of the State of California, without
reference to the principles of conflict of laws.

                                       9
<PAGE>
 
         12.  Modifications and Waivers.  No provisions of this Agreement may be
              -------------------------                                         
modified, altered or amended except by an instrument in writing executed by the
parties hereto.  No waiver by either party hereto of any breach by the other
party hereto of any provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions at the time
or at any prior or subsequent time.

         13.  Headings.  The headings contained herein are solely for the
              --------                                                   
purposes of reference, are not part of this Agreement and shall not in any way
affect the meaning or interpretation of this Agreement.

         14.  Counterparts.  This Agreement may be executed in two or more
              ------------                                                
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.

         IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by authority of its Board of Directors, and the Employee has hereunto
set his hand, as of the day and year first above written.

                             L.A. GEAR, INC.


                             By:  /s/ William Benford
                                 ---------------------------
                                 William L. Benford
                                 President
 


                                  /s/ Bruce W. MacGregor
                                 --------------------------
                                 Bruce W. MacGregor
                                 (Employee)

                                       10
<PAGE>
 
                                                                      Appendix A


                            NOTIFICATION TO EMPLOYEE

         Set forth below is the text of Sections 2870, 2871 and 2872 of the
California Labor Code, as published in West's Ann. Cal.Labor Code (1989) and
West's Ann. Cal.Labor Code (1994 Supp.):

(S) 2870.  EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RIGHTS

           (a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:

              (1) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer; or

              (2) Result from any work performed by the employee for the
employer.

           (b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.

(S) 2871.  CONDITIONS OF EMPLOYMENT OR CONTINUED EMPLOYMENT; DISCLOSURE OF
           INVENTIONS

           No employer shall require a provision made void and unenforceable by
Section 2870 as a condition of employment or continued employment.  Nothing in
this article shall be construed to forbid or restrict the right of an employer
to provide in contracts of employment for disclosure, provided that any such
disclosures be received in confidence, of all of the employee's inventions made
solely or jointly with others during the term of his or her employment, a review
process by the employer to determine such issues as may arise, and for full
title to certain patents and inventions to be in the United States, as required
by contracts between the employer and the United States or any of its agencies.

                                       11
<PAGE>
 
(S) 2872.  NOTICE TO EMPLOYEE; BURDEN OF PROOF

         If an employee agreement entered into after January 1, 1980, contains a
provision requiring the employee to assign or offer to assign any of his or her
rights in any invention to his or her employer, the employer must also, at the
time the agreement is made, provide a written notification to the employee that
the agreement does not apply to an invention which qualifies fully under the
provisions of Section 2870.  In any suit or action arising thereunder, the
burden of proof shall be on the employee claiming the benefits of its
provisions.

                                       12