<PAGE>

                                                              Exhibit 10(ii)(aw)

                       INCENTIVE COMPENSATION AGREEMENT
                       --------------------------------

     INCENTIVE COMPENSATION AGREEMENT (this "Agreement") dated as of January 2,
2001 by and between Gary L. Davis (the "Executive") and J.C. Penney Company,
Inc. (the "Company").

     WHEREAS, the Executive and the Company entered into a Succession Severance
Agreement, dated as of the date set forth on Appendix A hereto (as amended, the
"Succession Agreement"); and

     WHEREAS, the Executive, desiring to continue in the employment of the
Company, has agreed to cancel the Succession Agreement in exchange for the
incentive compensation and other benefits set forth herein, and

     WHEREAS, the Company also desires that the Executive continue in the employ
of the Company;

     NOW THEREFORE, in consideration of the representations, covenants and
mutual promises set forth in this Agreement (the sufficiency of which is hereby
acknowledged) and intending legally to be bound, it is hereby agreed as follows:

1)  Termination of Succession Agreement. Effective as of the date hereof, the
    -----------------------------------
    Succession Agreement is terminated and cancelled and shall be of no further
    force and effect and the Company and the Executive shall have no further
    rights or obligations under such agreement.

2)  Incentive Compensation Payments. In consideration of the termination of the
    -------------------------------
    Succession Agreement and the execution of this Agreement, the Executive
    shall be entitled to the compensation and benefits set forth in this Section
    2.

    a)  Restricted Stock Unit Grant. As of the date hereof, the Executive is
        ---------------------------
        hereby granted the number of restricted stock units (the "Restricted
        Stock Units") set forth on Appendix A hereto (the "Restricted Stock Unit
        Grant"), pursuant to the Company's 1997 Equity Compensation Plan (the
        "Plan"). Subject to the provisions hereof, the Restricted Stock Units
        shall become fully vested on December 31, 2003. Notwithstanding the
        foregoing, the Restricted Stock Units shall become fully vested on the
        date on which there occurs an "Acceleration Event" (as hereinafter
        defined). An Acceleration Event shall occur on such date, prior to
        December 31, 2003, as the Executive's employment with the Company
        terminates by reason of death or "Disability"
<PAGE>

        (as hereinafter defined), termination by the Company without Cause (as
        hereinafter defined), the Executive's retirement on or following the
        date set forth on Appendix A hereto, a termination of employment by the
        Executive for Good Reason (as hereinafter defined) or upon a change of
        control of the Company, as defined in the 1997 Equity Compensation Plan.
        Upon any other termination of the Executive's employment prior to
        December 31, 2003, the Restricted Stock Units shall be forfeited.
        Except as set forth herein, the terms and conditions applicable to the
        Restricted Stock Units shall be governed by the terms of the Plan and
        the standard agreement evidencing the grant of Restricted Stock Units
        pursuant to the Plan. As soon as practicable following the date upon
        which the Restricted Stock Units become fully vested (the "Vesting
        Date"), the Company shall issue to the Executive, in cancellation of the
        Restricted Stock Units, a number of shares of Company common stock equal
        to the number of Restricted Stock Units. Notwithstanding the foregoing,
        the Executive may elect to defer the receipt of such common stock until
        a date after December 31, 2003, provided that such election is made at
        least six months prior to the Vesting Date. Any such deferral shall be
        evidenced by a deferral agreement entered into by the Executive and the
        Company.

    b)  Stock Option Grant. As of the date hereof, the Executive is hereby
        ------------------
        granted a non-qualified stock option to purchase 50,000 shares of
        Company common stock (the "Option") pursuant to the Plan. The Option
        shall have a maximum term of ten years from the date hereof and shall
        have the per share exercise price set forth on Appendix A hereto.
        Subject to the provisions hereof, the Option shall vest and become
        exercisable on December 31, 2003. Notwithstanding the foregoing, the
        Option shall become fully vested and exercisable if, prior to December
        31, 2003, there occurs an Acceleration Event with respect to the
        Executive. Upon any termination of the Executive's employment prior to
        December 31, 2003, other than pursuant to an Acceleration Event, the
        Option shall be forfeited and in the event of a termination of the
        Executive's employment for Cause at any time prior to the expiration of
        the Option term, the unexercised portion of the Option shall be
        immediately forfeited. Following any termination of the Executive's
        employment after December 31, 2003, other than a termination for Cause,
        the Option shall remain exercisable for one year (but not beyond the
        expiration of the Option's term). The terms and conditions applicable to
        the Option shall otherwise be governed by the terms of the Plan and the
        standard agreement evidencing the grant of an Option pursuant to the
        Plan.

                                       2
<PAGE>

    c)  Bonus Payment. With respect to the Company's 2000 fiscal year, unless
        -------------
        the Executive is terminated for Cause prior to the payment date, the
        Executive shall receive a minimum cash bonus pursuant to the Company's
        EVAPP and 1989 Management Incentive Compensation Plan plans equal to 50%
        of the Executive's target award level for such year.

    d)  Make-Whole Payment. Except as otherwise provided herein, during the
        ------------------
        20-day period ending upon the earlier of(i) December 31, 2003 or (ii)
        the date upon which the Option becomes fully vested and exercisable
        (such earlier date being referred to hereinafter as the "Election
        Date"), the Executive shall be entitled to elect irrevocably to receive
        the Make-Whole Payment (as hereinafter defined). For purposes of this
        Section 2(d), the Make-Whole Payment shall equal the amount (if any) by
        which the Minimum Payout (as set forth on Appendix A hereto) exceeds the
        aggregate fair market value (as defined in the Plan) of the shares of
        Company common stock represented by the Restricted Stock Unit Grant,
        measured as of the Election Date. The Executive shall not be entitled to
        elect to receive the Make-Whole Payment if, prior to the Election Date,
        the Executive's employment with the Company is terminated other than
        pursuant to an Acceleration Event or the Executive has exercised any
        portion of the Option. An election by the Executive to receive the Make-
        Whole Payment shall result in the immediate cancellation of the Option
        and the Executive agrees that he will have no further rights with
        respect to the Option following such election.

    e)  Pension Guarantee. Following (i) any termination of Executive's
        -----------------
        employment by the Company other than a termination for Cause, (ii) a
        termination of employment by the Executive for Good Reason or (iii) a
        termination of employment by the Executive for any reason after the
        retirement date noted on Appendix A, the Company agrees to pay the
        Executive an additional monthly pension supplement if, and to the extent
        that, the aggregate monthly pension payments (expressed as a life
        annuity commencing at age 60) for which the Executive is eligible
        pursuant to the Company's qualified and non-qualified pension plans (the
        JCPenney Pension Plan, Supplemental Retirement Plan, and Benefits
        Restoration Plan) following such termination are less than the monthly
        pension payment set forth on Appendix A hereto. The payment to the
        Executive of the pension supplement described in the preceding sentence
        shall commence immediately upon termination of the Executive's
        employment in a manner which qualifies the Executive for the pension
        supplement.

                                       3
<PAGE>

3)  Certain Definitions. For purposes of this Agreement only (i) "Cause" means
    -------------------
    that the Executive (A) has been convicted of a felony involving theft or
    moral turpitude, or (B) has engaged in conduct that constitutes willful
    gross neglect or willful gross misconduct with respect to his employment
    duties, which, in either case, results in, or can reasonably be expected to
    result in, material economic harm to the Company, (ii) "Disability" means
    that the Executive is disabled within the meaning of the Company's long-term
    disability policy and (iii) the Executive shall be entitled to terminate his
    employment for "Good Reason" within thirty days following (a) any reduction
    in the Executive's current base salary or (b) any reduction in the aggregate
    annual bonus opportunity available to the Executive under the Company's
    incentive bonus plans and arrangements (except for across-the-board
    reductions in annual bonus opportunity similarly affecting all senior
    executives of the Company).

4)  Tax Withholding. The Company may withhold from amounts or benefits due or
    ---------------
    shares issuable hereunder to the Executive such amounts as are required to
    satisfy applicable withholding obligations.

5)  Successors. This Agreement is personal to the Executive and, without the
    ----------
    prior written consent of the Company, shall not be assignable by the
    Executive otherwise than by will or the laws of descent and distribution.
    This Agreement shall inure to the benefit of and be enforceable by the
    Executive's legal representatives. This Agreement shall inure to the benefit
    of and be binding upon the Company and its successors and assigns. The
    Company shall require any successor (whether direct or indirect, by
    purchase, merger, consolidation or otherwise) to all or substantially all of
    the business and/or assets of the Company expressly to assume and agree to
    perform this Agreement in the same manner and to the same extent that the
    Company would have been required to perform it if no such succession had
    taken place. As used in this Agreement, the "Company" shall mean both the
    Company as defined above and any such successor that assumes and agrees to
    perform this Agreement, by operation of law or otherwise.

6)  Miscellaneous.
    -------------

    a)  The Executive and the Company agree that nothing contained in this
        Agreement shall confer any rights to continued employment upon the
        Executive or alter the Executive's status as an "at-will" employee of
        the Company.

                                       4
<PAGE>

    b)  This Agreement may not be altered, amended, or modified except by
        written instrument executed by the Company and the Executive. A waiver
        of any term, covenant, agreement or condition contained in this
        Agreement shall not be deemed a waiver of any other term, covenant,
        agreement or condition and any waiver of any default in any such term,
        covenant, agreement or condition shall not be deemed a waiver of any
        later default thereof or of any other term, covenant, agreement or
        condition.

    c)  This Agreement may be executed in several counterparts, each of which
        shall be deemed to be an original, but all of which together will
        constitute one and the same instrument.

    d)  This Agreement (including Appendix A hereto) forms the entire agreement
        between the parties hereto with respect to with respect to the subject
        matter contained in the Agreement. This Agreement shall supersede all
        prior agreements, promises, and representations regarding severance or
        other payments contingent upon termination of employment, whether in
        writing or otherwise, including, without limitation, the Succession
        Agreement. The Executive agrees that, in the event that the Executive's
        employment with the Company terminates pursuant to an Acceleration
        Event, the Executive shall not be entitled to severance payments under
        any severance plan, program or arrangement maintained by the Company,
        notwithstanding anything to the contrary in any such plan, program or
        arrangement.

    e)  All notices and other communications under this Agreement shall be in
        writing and shall be given by hand delivery to the other party or by
        registered or certified mail, return receipt requested, postage prepaid,
        addressed as follows:

                (a) If to the Executive:

                (b) To the address set forth on Appendix A hereto

                (c) If to the Company:

                (d) J. C. Penney Company, Inc.
                (e) 6501 Legacy Drive
                (f) Plano, Texas 75024-3699
                (g) Attention: Director of Human Resources and Administration

                                       5
<PAGE>

        ii)  or to such other address as either party furnishes to the other in
             writing in accordance with this paragraph (e) of Section 6. Notices
             and communications shall be effective when actually received by the
             addressee.

    f)  Notwithstanding anything to the contrary contained herein, in connection
        with any termination of the Executive's employment or in connection with
        the payment of benefits under Section 2(d) hereof, the Executive and the
        Company agree to execute a customary mutual release from liability and
        it is understood that the payment of benefits pursuant to Section 2(d)
        or 2(e) hereof, as applicable, are conditioned upon the execution of
        such release.

    g)  All disputes arising under, related to, or in connection with this
        Agreement shall be settled by expedited arbitration conducted before a
        panel of three arbitrators sitting in Dallas, Texas, in accordance with
        the rules of the American Arbitration Association then in effect. The
        decision of the arbitrators in that proceeding shall be binding on the
        Company and the Executive. Judgment may be entered on the award of the
        arbitrators in any court having jurisdiction. All expenses of such
        arbitration, including legal fees, shall be borne by the non-prevailing
        party in such arbitration.

    h)  The captions of this Agreement are not part of the provisions hereof and
        shall not have any force or effect.

    i)  The provisions of this Agreement shall be interpreted and construed in
        accordance with the laws of the State of Texas, without regard to its
        choice of law principles.

                                      6
<PAGE>

        IN WITNESS WHEREOF, the parties have executed this Agreement as of the
dates specified below.


                                        J.C. PENNEY COMPANY, INC.


                                        /s/ Allen Questrom
                                        ---------------------------------
                                        Name:  Allen Questrom
                                        Title: Chief Executive Officer



                                        /s/ Gary L. Davis
                                        ---------------------------------
                                        Gary L. Davis









                                       7
<PAGE>

                                  Appendix A

Date of Succession Agreement           May 18, 2000

Restricted Stock Units                 96,406

Approved Retirement Date               June 30, 2002

Option Exercise Price                  $10.85 per share

Minimum Payout                         $2,092,008

Succession Agreement Pension           $30,746.97

Executive's Address:                   [intentionally omitted]

                                       8
<PAGE>

                       INCENTIVE COMPENSATION AGREEMENT
                       --------------------------------

     INCENTIVE COMPENSATION AGREEMENT (this "Agreement") dated as of January 2,
2001 by and between Charles R. Lotter (the "Executive") and J.C. Penney Company,
Inc. (the "Company").

     WHEREAS, the Executive and the Company entered into a Succession Severance
Agreement, dated as of the date set forth on Appendix A hereto (as amended, the
"Succession Agreement"); and

     WHEREAS, the Executive, desiring to continue in the employment of the
Company, has agreed to cancel the Succession Agreement in exchange for the
incentive compensation and other benefits set forth herein, and

     WHEREAS, the Company also desires that the Executive continue in the employ
of the Company;

     NOW THEREFORE, in consideration of the representations, covenants and
mutual promises set forth in this Agreement (the sufficiency of which is hereby
acknowledged) and intending legally to be bound, it is hereby agreed as follows:

1)  Termination of Succession Agreement. Effective as of the date hereof, the
    -----------------------------------
    Succession Agreement is terminated and cancelled and shall be of no further
    force and effect and the Company and the Executive shall have no further
    rights or obligations under such agreement.

2)  Incentive Compensation Payments. In consideration of the termination of the
    -------------------------------
    Succession Agreement and the execution of this Agreement, the Executive
    shall be entitled to the compensation and benefits set forth in this Section
    2.

    a)  Restricted Stock Unit Grant. As of the date hereof, the Executive is
        ---------------------------
        hereby granted the number of restricted stock units (the "Restricted
        Stock Units") set forth on Appendix A hereto (the "Restricted Stock Unit
        Grant"), pursuant to the Company's 1997 Equity Compensation Plan (the
        "Plan"). Subject to the provisions hereof, the Restricted Stock Units
        shall become fully vested on December 31, 2003. Notwithstanding the
        foregoing, the Restricted Stock Units shall become fully vested on the
        date on which there occurs an "Acceleration Event" (as hereinafter
        defined). An Acceleration Event shall
<PAGE>

        occur on such date, prior to December 31, 2003, as the Executive's
        employment with the Company terminates by reason of death or
        "Disability" (as hereinafter defined), termination by the Company
        without Cause (as hereinafter defined), the Executive's retirement on or
        following the date set forth on Appendix A hereto, a termination of
        employment by the Executive for Good Reason (as hereinafter defined) or
        upon a change of control of the Company, as defined in the 1997 Equity
        Compensation Plan. Upon any other termination of the Executive's
        employment prior to December 31, 2003, the Restricted Stock Units shall
        be forfeited. Except as set forth herein, the terms and conditions
        applicable to the Restricted Stock Units shall be governed by the terms
        of the Plan and the standard agreement evidencing the grant of
        Restricted Stock Units pursuant to the Plan. As soon as practicable
        following the date upon which the Restricted Stock Units become fully
        vested (the "Vesting Date"), the Company shall issue to the Executive,
        in cancellation of the Restricted Stock Units, a number of shares of
        Company common stock equal to the number of Restricted Stock Units.
        Notwithstanding the foregoing, the Executive may elect to defer the
        receipt of such common stock until a date after December 31, 2003,
        provided that such election is made at least six months prior to the
        Vesting Date. Any such deferral shall be evidenced by a deferral
        agreement entered into by the Executive and the Company.

    b)  Stock Option Grant. As of the date hereof, the Executive is hereby
        ------------------
        granted a non-qualified stock option to purchase 50,000 shares of
        Company common stock (the "Option") pursuant to the Plan. The Option
        shall have a maximum term of ten years from the date hereof and shall
        have the per share exercise price set forth on Appendix A hereto.
        Subject to the provisions hereof, the Option shall vest and become
        exercisable on December 31, 2003. Notwithstanding the foregoing, the
        Option shall become fully vested and exercisable if, prior to December
        31, 2003, there occurs an Acceleration Event with respect to the
        Executive. Upon any termination of the Executive's employment prior to
        December 31, 2003, other than pursuant to an Acceleration Event, the
        Option shall be forfeited and in the event of a termination of the
        Executive's employment for Cause at any time prior to the expiration of
        the Option term, the unexercised portion of the Option shall be
        immediately forfeited. Following any termination of the Executive's
        employment after December 31, 2003, other than a termination for Cause,
        the Option shall remain exercisable for one year (but not beyond the
        expiration of the Option's term). The terms and conditions applicable to
        the Option shall

                                       2

<PAGE>

        otherwise be governed by the terms of the Plan and the standard
        agreement evidencing the grant of an Option pursuant to the Plan.

    c)  Bonus Payment. With respect to the Company's 2000 fiscal year, unless
        -------------
        the Executive is terminated for Cause prior to the payment date, the
        Executive shall receive a minimum cash bonus pursuant to the Company's
        EVAPP and 1989 Management Incentive Compensation Plan plans equal to 50%
        of the Executive's target award level for such year.

    d)  Make-Whole Payment. Except as otherwise provided herein, during the
        ------------------
        20-day period ending upon the earlier of (i) December 31, 2003 or (ii)
        the date upon which the Option becomes fully vested and exercisable
        (such earlier date being referred to hereinafter as the "Election
        Date"), the Executive shall be entitled to elect irrevocably to receive
        the Make-Whole Payment (as hereinafter defined). For purposes of this
        Section 2(d), the Make-Whole Payment shall equal the amount (if any) by
        which the Minimum Payout (as set forth on Appendix A hereto) exceeds the
        aggregate fair market value (as defined in the Plan) of the shares of
        Company common stock represented by the Restricted Stock Unit Grant,
        measured as of the Election Date. The Executive shall not be entitled to
        elect to receive the Make-Whole Payment if, prior to the Election Date,
        the Executive's employment with the Company is terminated other than
        pursuant to an Acceleration Event or the Executive has exercised any
        portion of the Option. An election by the Executive to receive the Make-
        Whole Payment shall result in the immediate cancellation of the Option
        and the Executive agrees that he will have no further rights with
        respect to the Option following such election.

    e)  Pension Guarantee. Following (i) any termination of Executive's
        -----------------
        employment by the Company other than a termination for Cause, (ii) a
        termination of employment by the Executive for Good Reason or (iii) a
        termination of employment by the Executive for any reason after the
        retirement date noted on Appendix A, the Company agrees to pay the
        Executive an additional monthly pension supplement if, and to the extent
        that, the aggregate monthly pension payments (expressed as a life
        annuity commencing at age 60) for which the Executive is eligible
        pursuant to the Company's qualified and non-qualified pension plans (the
        JCPenney Pension Plan, Supplemental Retirement Plan, and Benefits
        Restoration Plan) following such termination are less than the monthly
        pension payment set forth on Appendix A hereto. The payment to the
        Executive of the pension supplement described in the

                                       3
<PAGE>

        preceding sentence shall commence immediately upon termination of the
        Executive's employment in a manner which qualifies the Executive for the
        pension supplement.

3)  Certain Definitions. For purposes of this Agreement only (i) "Cause" means
    -------------------
    that the Executive (A) has been convicted of a felony involving theft or
    moral turpitude, or (B) has engaged in conduct that constitutes willful
    gross neglect or willful gross misconduct with respect to his employment
    duties, which, in either case, results in, or can reasonably be expected to
    result in, material economic harm to the Company, (ii) "Disability" means
    that the Executive is disabled within the meaning of the Company's long-term
    disability policy and (iii) the Executive shall be entitled to terminate his
    employment for "Good Reason" within thirty days following (a) any reduction
    in the Executive's current base salary or (b) any reduction in the aggregate
    annual bonus opportunity available to the Executive under the Company's
    incentive bonus plans and arrangements (except for across-the-board
    reductions in annual bonus opportunity similarly affecting all senior
    executives of the Company).

4)  Tax Withholding. The Company may withhold from amounts or benefits due or
    ---------------
    shares issuable hereunder to the Executive such amounts as are required to
    satisfy applicable withholding obligations.

5)  Successors. This Agreement is personal to the Executive and, without the
    ----------
    prior written consent of the Company, shall not be assignable by the
    Executive otherwise than by will or the laws of descent and distribution.
    This Agreement shall inure to the benefit of and be enforceable by the
    Executive's legal representatives. This Agreement shall inure to the benefit
    of and be binding upon the Company and its successors and assigns. The
    Company shall require any successor (whether direct or indirect, by
    purchase, merger, consolidation or otherwise) to all or substantially all of
    the business and/or assets of the Company expressly to assume and agree to
    perform this Agreement in the same manner and to the same extent that the
    Company would have been required to perform it if no such succession had
    taken place. As used in this Agreement, the "Company" shall mean both the
    Company as defined above and any such successor that assumes and agrees to
    perform this Agreement, by operation of law or otherwise.

                                       4
<PAGE>

6)  Miscellaneous.
    -------------

    a)  The Executive and the Company agree that nothing contained in this
        Agreement shall confer any rights to continued employment upon the
        Executive or alter the Executive's status as an "at-will" employee of
        the Company.

    b)  This Agreement may not be altered, amended, or modified except by
        written instrument executed by the Company and the Executive. A waiver
        of any term, covenant, agreement or condition contained in this
        Agreement shall not be deemed a waiver of any other term, covenant,
        agreement or condition and any waiver of any default in any such term,
        covenant, agreement or condition shall not be deemed a waiver of any
        later default thereof or of any other term, covenant, agreement or
        condition.

    c)  This Agreement may be executed in several counterparts, each of which
        shall be deemed to be an original, but all of which together will
        constitute one and the same instrument.

    d)  This Agreement (including Appendix A hereto) forms the entire agreement
        between the parties hereto with respect to with respect to the subject
        matter contained in the Agreement. This Agreement shall supersede all
        prior agreements, promises, and representations regarding severance or
        other payments contingent upon termination of employment, whether in
        writing or otherwise, including, without limitation, the Succession
        Agreement. The Executive agrees that, in the event that the Executive's
        employment with the Company terminates pursuant to an Acceleration
        Event, the Executive shall not be entitled to severance payments under
        any severance plan, program or arrangement maintained by the Company,
        notwithstanding anything to the contrary in any such plan, program or
        arrangement.

    e)  All notices and other communications under this Agreement shall be in
        writing and shall be given by hand delivery to the other party or by
        registered or certified mail, return receipt requested, postage prepaid,
        addressed as follows:

                (a)  If to the Executive:

                (b)  To the address set forth on Appendix A hereto

                                       5
<PAGE>

                (c) If to the Company:

                (d) J. C. Penney Company, Inc.
                (e) 6501 Legacy Drive
                (f) Plano, Texas 75024-3699
                (g) Attention: Director of Human Resources and Administration

        ii)  or to such other address as either party furnishes to the other in
             writing in accordance with this paragraph (e) of Section 6. Notices
             and communications shall be effective when actually received by the
             addressee.

    f)  Notwithstanding anything to the contrary contained herein, in connection
        with any termination of the Executive's employment or in connection with
        the payment of benefits under Section 2(d) hereof, the Executive and the
        Company agree to execute a customary mutual release from liability and
        it is understood that the payment of benefits pursuant to Section 2(d)
        or 2(e) hereof, as applicable, are conditioned upon the execution of
        such release.

    g)  All disputes arising under, related to, or in connection with this
        Agreement shall be settled by expedited arbitration conducted before a
        panel of three arbitrators sitting in Dallas, Texas, in accordance with
        the rules of the American Arbitration Association then in effect. The
        decision of the arbitrators in that proceeding shall be binding on the
        Company and the Executive. Judgment may be entered on the award of the
        arbitrators in any court having jurisdiction. All expenses of such
        arbitration, including legal fees, shall be borne by the non-prevailing
        party in such arbitration.

    h)  The captions of this Agreement are not part of the provisions hereof and
        shall not have any force or effect.

    i)  The provisions of this Agreement shall be interpreted and construed in
        accordance with the laws of the State of Texas, without regard to its
        choice of law principles.

                                       6
<PAGE>


        IN WITNESS WHEREOF, the parties have executed this Agreement as of the
dates specified below.


                                        J.C. PENNEY COMPANY, INC.


                                        /s/ Allen Questrom
                                        --------------------------------
                                        Name:  Allen Questrom
                                        Title: Chief Executive Officer



                                        /s/ Charles R. Lotter
                                        --------------------------------
                                        Charles R. Lotter











                                       7

<PAGE>

                                  Appendix A

Date of Succession Agreement         May 18, 2000

Restricted Stock Units               125,050

Approved Retirement Date             June 30, 2002

Option Exercise Price                $10.85 per share

Minimum Payout                       $2,713,566

Succession Agreement Pension         $27,193.86

Executive's Address:                 [intentionally omitted]

                                       8
<PAGE>

                       INCENTIVE COMPENSATION AGREEMENT
                       --------------------------------

     INCENTIVE COMPENSATION AGREEMENT (this "Agreement") dated as of January 2,
2001 by and between Michael W. Taxter (the "Executive") and J.C. Penney Company,
Inc. (the "Company").

     WHEREAS, the Executive and the Company entered into a Succession Severance
Agreement, dated as of the date set forth on Appendix A hereto (as amended, the
"Succession Agreement"); and

     WHEREAS, the Executive, desiring to continue in the employment of the
Company, has agreed to cancel the Succession Agreement in exchange for the
incentive compensation and other benefits set forth herein, and

     WHEREAS, the Company also desires that the Executive continue in the
employ of the Company;

     NOW THEREFORE, in consideration of the representations, covenants and
mutual promises set forth in this Agreement (the sufficiency of which is hereby
acknowledged) and intending legally to be bound, it is hereby agreed as follows:

1)  Termination of Succession Agreement. Effective as of the date hereof, the
    -----------------------------------
    Succession Agreement is terminated and cancelled and shall be of no further
    force and effect and the Company and the Executive shall have no further
    rights or obligations under such agreement.

2)  Incentive Compensation Payments. In consideration of the termination of the
    -------------------------------
    Succession Agreement and the execution of this Agreement, the Executive
    shall be entitled to the compensation and benefits set forth in this Section
    2.

    a)  Restricted Stock Unit Grant. As of the date hereof, the Executive is
        ---------------------------
        hereby granted the number of restricted stock units (the "Restricted
        Stock Units") set forth on Appendix A hereto (the "Restricted Stock Unit
        Grant"), pursuant to the Company's 1997 Equity Compensation Plan (the
        "Plan"). Subject to the provisions hereof, the Restricted Stock Units
        shall become fully vested on December 31, 2003. Notwithstanding the
        foregoing, the Restricted Stock Units shall become fully vested on the
        date on which there occurs an "Acceleration Event" (as hereinafter
        defined). An Acceleration Event shall occur on such date, prior to
        December 31, 2003, as the Executive's employment with the Company
        terminates by reason of death or "Disability"
<PAGE>

        (as hereinafter defined), termination by the Company without Cause (as
        hereinafter defined), the Executive's retirement on or following the
        date set forth on Appendix A hereto, a termination of employment by the
        Executive for Good Reason (as hereinafter defined) or upon a change of
        control of the Company, as defined in the 1997 Equity Compensation Plan.
        Upon any other termination of the Executive's employment prior to
        December 31, 2003, the Restricted Stock Units shall be forfeited.
        Except as set forth herein, the terms and conditions applicable to the
        Restricted Stock Units shall be governed by the terms of the Plan and
        the standard agreement evidencing the grant of Restricted Stock Units
        pursuant to the Plan. As soon as practicable following the date upon
        which the Restricted Stock Units become fully vested (the "Vesting
        Date"), the Company shall issue to the Executive, in cancellation of the
        Restricted Stock Units, a number of shares of Company common stock equal
        to the number of Restricted Stock Units. Notwithstanding the foregoing,
        the Executive may elect to defer the receipt of such common stock until
        a date after December 31, 2003, provided that such election is made at
        least six months prior to the Vesting Date. Any such deferral shall be
        evidenced by a deferral agreement entered into by the Executive and the
        Company.

    b)  Stock Option Grant. As of the date hereof, the Executive is hereby
        ------------------
        granted a non-qualified stock option to purchase 50,000 shares of
        Company common stock (the "Option") pursuant to the Plan. The Option
        shall have a maximum term of ten years from the date hereof and shall
        have the per share exercise price set forth on Appendix A hereto.
        Subject to the provisions hereof, the Option shall vest and become
        exercisable on December 31, 2003. Notwithstanding the foregoing, the
        Option shall become fully vested and exercisable if, prior to December
        31, 2003, there occurs an Acceleration Event with respect to the
        Executive. Upon any termination of the Executive's employment prior to
        December 31, 2003, other than pursuant to an Acceleration Event, the
        Option shall be forfeited and in the event of a termination of the
        Executive's employment for Cause at any time prior to the expiration of
        the Option term, the unexercised portion of the Option shall be
        immediately forfeited. Following any termination of the Executive's
        employment after December 31, 2003, other than a termination for Cause,
        the Option shall remain exercisable for one year (but not beyond the
        expiration of the Option's term). The terms and conditions applicable to
        the Option shall otherwise be governed by the terms of the Plan and the
        standard agreement evidencing the grant of an Option pursuant to the
        Plan.

                                       2
<PAGE>

    c)  Bonus Payment. With respect to the Company's 2000 fiscal year, unless
        -------------
        the Executive is terminated for Cause prior to the payment date, the
        Executive shall receive a minimum cash bonus pursuant to the Company's
        EVAPP and 1989 Management Incentive Compensation Plan plans equal to 50%
        of the Executive's target award level for such year.

    d)  Make-Whole Payment. Except as otherwise provided herein, during the
        ------------------
        20-day period ending upon the earlier of (i) December 31, 2003 or (ii)
        the date upon which the Option becomes fully vested and exercisable
        (such earlier date being referred to hereinafter as the "Election
        Date"), the Executive shall be entitled to elect irrevocably to receive
        the Make-Whole Payment (as hereinafter defined). For purposes of this
        Section 2(d), the Make-Whole Payment shall equal the amount (if any) by
        which the Minimum Payout (as set forth on Appendix A hereto) exceeds the
        aggregate fair market value (as defined in the Plan) of the shares of
        Company common stock represented by the Restricted Stock Unit Grant,
        measured as of the Election Date. The Executive shall not be entitled to
        elect to receive the Make-Whole Payment if, prior to the Election Date,
        the Executive's employment with the Company is terminated other than
        pursuant to an Acceleration Event or the Executive has exercised any
        portion of the Option. An election by the Executive to receive the Make-
        Whole Payment shall result in the immediate cancellation of the Option
        and the Executive agrees that he will have no further rights with
        respect to the Option following such election.

               e)  Pension Guarantee. Following (i) any termination of
                   ------- ---------
                  Executive's employment by the Company other than a termination
                  for Cause, (ii) a termination of employment by the Executive
                  for Good Reason or (iii) a termination of employment by the
                  Executive for any reason after December 31, 2003, the
                  Company agrees to pay the Executive an additional monthly
                  pension supplement if, and to the extent that, the aggregate
                  monthly pension payments (expressed as a life annuity
                  commencing at age 60) for which the Executive is eligible
                  pursuant to the Company's qualified and non-qualified pension
                  plans (the JCPenney Pension Plan, Supplemental Retirement
                  Plan, and Benefits Restoration Plan) following such
                  termination are less than the monthly pension payment set
                  forth on Appendix A hereto. The payment to the Executive of
                  the pension supplement described in the preceding sentence
                  shall commence immediately upon termination of the Executive's
                  employment in a manner which qualifies the Executive for the
                  pension supplement.

                                       3
<PAGE>

3)  Certain Definitions. For purposes of this Agreement only (i) "Cause" means
    -------------------
    that the Executive (A) has been convicted of a felony involving theft or
    moral turpitude, or (B) has engaged in conduct that constitutes willful
    gross neglect or willful gross misconduct with respect to his employment
    duties, which, in either case, results in, or can reasonably be expected to
    result in, material economic harm to the Company, (ii) "Disability" means
    that the Executive is disabled within the meaning of the Company's long-term
    disability policy and (iii) the Executive shall be entitled to terminate his
    employment for "Good Reason" within thirty days following (a) any reduction
    in the Executive's current base salary or (b) any reduction in the aggregate
    annual bonus opportunity available to the Executive under the Company's
    incentive bonus plans and arrangements (except for across-the-board
    reductions in annual bonus opportunity similarly affecting all senior
    executives of the Company).

4)  Tax Withholding. The Company may withhold from amounts or benefits due or
    ---------------
    shares issuable hereunder to the Executive such amounts as are required to
    satisfy applicable withholding obligations.

5)  Successors. This Agreement is personal to the Executive and, without the
    ----------
    prior written consent of the Company, shall not be assignable by the
    Executive otherwise than by will or the laws of descent and distribution.
    This Agreement shall inure to the benefit of and be enforceable by the
    Executive's legal representatives. This Agreement shall inure to the benefit
    of and be binding upon the Company and its successors and assigns. The
    Company shall require any successor (whether direct or indirect, by
    purchase, merger, consolidation or otherwise) to all or substantially all of
    the business and/or assets of the Company expressly to assume and agree to
    perform this Agreement in the same manner and to the same extent that the
    Company would have been required to perform it if no such succession had
    taken place. As used in this Agreement, the "Company" shall mean both the
    Company as defined above and any such successor that assumes and agrees to
    perform this Agreement, by operation of law or otherwise.

6)  Miscellaneous.
    -------------

    a)  The Executive and the Company agree that nothing contained in this
        Agreement shall confer any rights to continued employment upon the
        Executive or alter the Executive's status as an "at-will" employee of
        the Company.

                                       4
<PAGE>

    b)  This Agreement may not be altered, amended, or modified except by
        written instrument executed by the Company and the Executive. A waiver
        of any term, covenant, agreement or condition contained in this
        Agreement shall not be deemed a waiver of any other term, covenant,
        agreement or condition and any waiver of any default in any such term,
        covenant, agreement or condition shall not be deemed a waiver of any
        later default thereof or of any other term, covenant, agreement or
        condition.

    c)  This Agreement may be executed in several counterparts, each of which
        shall be deemed to be an original, but all of which together will
        constitute one and the same instrument.

    d)  This Agreement (including Appendix A hereto) forms the entire agreement
        between the parties hereto with respect to with respect to the subject
        matter contained in the Agreement. This Agreement shall supersede all
        prior agreements, promises, and representations regarding severance or
        other payments contingent upon termination of employment, whether in
        writing or otherwise, including, without limitation, the Succession
        Agreement. The Executive agrees that, in the event that the Executive's
        employment with the Company terminates pursuant to an Acceleration
        Event, the Executive shall not be entitled to severance payments under
        any severance plan, program or arrangement maintained by the Company,
        notwithstanding anything to the contrary in any such plan, program or
        arrangement.

    e)  All notices and other communications under this Agreement shall be in
        writing and shall be given by hand delivery to the other party or by
        registered or certified mail, return receipt requested, postage prepaid,
        addressed as follows:

                (a) If to the Executive:

                (b) To the address set forth on Appendix A hereto

                (c) If to the Company:

                (d) J. C. Penney Company, Inc.
                (e) 6501 Legacy Drive
                (f) Plano, Texas 75024-3699
                (g) Attention: Director of Human Resources and Administration

                                       5
<PAGE>

        ii)  or to such other address as either party furnishes to the other in
             writing in accordance with this paragraph (e) of Section 6. Notices
             and communications shall be effective when actually received by the
             addressee.

    f)  Notwithstanding anything to the contrary contained herein, in connection
        with any termination of the Executive's employment or in connection with
        the payment of benefits under Section 2(d) hereof, the Executive and the
        Company agree to execute a customary mutual release from liability and
        it is understood that the payment of benefits pursuant to Section 2(d)
        or 2(e) hereof, as applicable, are conditioned upon the execution of
        such release.

    g)  All disputes arising under, related to, or in connection with this
        Agreement shall be settled by expedited arbitration conducted before a
        panel of three arbitrators sitting in Dallas, Texas, in accordance with
        the rules of the American Arbitration Association then in effect. The
        decision of the arbitrators in that proceeding shall be binding on the
        Company and the Executive. Judgment may be entered on the award of the
        arbitrators in any court having jurisdiction. All expenses of such
        arbitration, including legal fees, shall be borne by the non-prevailing
        party in such arbitration.

    h)  The captions of this Agreement are not part of the provisions hereof and
        shall not have any force or effect.

    i)  The provisions of this Agreement shall be interpreted and construed in
        accordance with the laws of the State of Texas, without regard to its
        choice of law principles.

                                       6
<PAGE>

        IN WITNESS WHEREOF, the parties have executed this Agreement as of the
dates specified below.

                                        J.C. PENNEY COMPANY, INC.


                                        /s/ Allen Questrom
                                        ---------------------------------
                                        Name: Allen Questrom
                                        Title: Chief Executive Officer



                                        /s/ Michael W. Taxter
                                        ---------------------------------
                                        Michael W. Taxter          1/8/01








                                       7
<PAGE>

                                  Appendix A

Date of Succession Agreement       May 18, 2000

Restricted Stock Units             96,775

Approved Retirement Date           June 30, 2011

Option Exercise Price              $10.85 per share

Minimum Payout                     $2,100,003

Succession Agreement Pension       $10,112.74

Executive's Address:               [intentionally omitted]

                                       8