f. Severance Arrangements

The Special Master has concluded that an increase in the amounts payable under
these arrangements would be inconsistent with the principle that compensation should be
performance-based, id. § 30.16(b)(1)(iv), and that payments should be appropriately
allocated among the elements of compensation, id. § 30.16(b)(1)(iii). Accordingly, for
the compensation structures described in Exhibits I and IT, to be consistent with the
Public Interest Standard, the Company must ensure that 2009 compensation structures for
these executives do not result in an increase in the amounts payable pursuant to these
arrangements.

3. Departing Employees

Chrysler has also proposed that three Covered Employees whose employment will
terminate prior to December 31, 2009, should receive only continuation of their existing
cash salaries until their date of departure. With respect to two of those employees, the
Special Master has determined that cash salaries through the date of the termination of
employment, and payment of up to $25,000 in perquisites and “other” compensation are
consistent with the Public Interest Standard. No other payments to these employees of
any kind would be consistent with the Public Interest Standard. Any exceptions to this
limitation will require that the Company provide to the Office of the Special Master an
independent justification for the payment that is satisfactory to the Special Master.

With respect to the third Covered Employee, who has an annual cash salary of
$2,583,336, the Special Master has determined that, in light of “compensation earned,
accrued, or paid” to this employee in 2009, id. § 30.16(a)(3), the payment of any
additional cash after the date of this Determination Memorandum would be inconsistent
with the Public Interest.

V. CORPORATE GOVERNANCE

As noted in Part IV above, the Rule requires the Special Master to consider the
extent to which compensation structures are “performance-based over a relevant
performance period,” 31 C.F.R. § 30.16(b)(1)(iv). In light of the importance of this
principle, the Company must take certain additional corporate governance steps,
including those required by the Rule, to ensure that the compensation structures for the
Covered Employees, and the amounts payable or potentially payable under those
structures, are consistent with the Public Interest Standard.

A. Requirements Relating to Compensation Structures

In order to ensure that objective compensation performance criteria are
“measurable, enforceable, and actually enforced if not met,” id. § 30.16(b)(1)¢iv), long-
term incentive awards may not vest unless the Company’s compensation committee
determines that the applicable level of performance—as measured against objective
performance criteria that the compensation committee has developed and reviewed in

AlO


ANNEX A
DETERMINATION MEMORANDUM

I. INTRODUCTION

The Emergency Economic Stabilization Act of 2008, as amended by the
American Recovery and Reinvestment Act of 2009 (“EESA”), requires the Secretary of
the Treasury to establish standards related to executive compensation and corporate
governance for financial institutions receiving financial assistance under the Troubled
Asset Relief Program (“TARP”). Through the Department of the Treasury’s Interim
Final Rule on TARP Standards for Compensation and Corporate Governance (the
“Rule”), the Secretary delegated to the Office of the Special Master for TARP Executive
Compensation (the “Office of the Special Master” or “the Office”) responsibility for
reviewing compensation structures of certain employees at financial institutions that
received exceptional financial assistance under the TARP (“Exceptional Assistance
Recipients”). 31 C.F.R. § 30.16(a); id. § 30.16(a)(3). For these employees, the Special
Master must determine whether the compensation structure will or may result in
payments “inconsistent with the purposes of section 111 of EESA or TARP, or [is]
otherwise contrary to the public interest.” Id.

Chrysler Group, LLC (“Chrysler” or the “Company”), one of seven Exceptional
Assistance Recipients, has submitted to the Special Master proposed compensation.
structures (the “Proposed Structures”) for review pursuant to Section 30.16(a)(3) of the
Rule. These compensation structures apply to five employees that the Company has
identified as senior executive officers (the “Senior Executive Officers,” or “SEOs”) for
purposes of the Rule, and 20 employees the Company has identified as among the most
highly compensated employees of the Company for purposes of the Rule (the “Most
Highly Compensated Employees,” and, together with the SEOs, the “Covered
Employees”).

The Special Master has completed the review of the Company’s Proposed
Structures for the Covered Employees pursuant to the principles set forth in the Rule. /d.
§ 30.16(b)(1). This Determination Memorandum sets forth the determinations of the
Special Master, pursuant to Section 30.16(a)(3) of the Rule, with respect to the Covered
Employees.

II. BACKGROUND

On June 15, 2009, the Department of the Treasury (“Treasury”) promulgated the
Rule, creating the Office of the Special Master and delineating its responsibilities.
Immediately following that date, the Special Master, and Treasury employees working in
the Office of the Special Master, conducted extensive discussions with Chrysler officials.
During these discussions, the Office of the Special Master informed Chrysler about the
nature of the Office’s work and the authority of the Special Master under the Rule. These

Al


EXHIBIT
COVERED EMPLOY

2009 Compensation

Company Name: Chrysler Group LLC

Stock Salary
(Performance based: | Long-Term Restricted Stock
The stock vests at grant | (Performance based: Awarded
and is redeemable in 1d on achievement of
three equal, annual | objective performance goabs.
Cash Salary _| installments beginning on | Vests a

3 years of ser

Total Direct
Compensation
(Cash salary paid to
¢ plus two months at
new run rate + stock

(Rate going | the 2nd anniversary of | Transferability dependent on | salary + long-term
Employee ID forward.) grant.) TARP repayment.) restricted stock.)

TRPOOL $0 so $0 $0
TRPOO2 $500,000 $34,001 $102,002 $644.336
FFRPOOS 30 30 30 $2.150,000
TRPOOS $485.000 $197.253 $0 $694.756
|ERPOOS $485,000 $105,000 $107,002 $626,175
PTRPOOS $435.000 $84.000 $102,002 $620,175
[TRPOOT $440.00 $29,334 $88,002 $503,169
[FRPOOS $435,000 $29,001 $87,002 $463.503
/TRPOO9 $410,000 $27.334 $82,002 $490.169
ITRPOLO $410,000. 327.334 $82,002 $511,003
FTRPOL $410,000 $27.334 $82,002 SS11,003
FTRPOI2 $405,000. $27,000 $81,001 $508.835
FTRPOIS $400,000 $0 $0. $391,667
PTRPOI4 $479.300 $25,667 $77,002 $503,393
TROIS $370,000 $0 $0. $365,833
TRPOI6 $335,000 $2364 $67,002 $416,003
PTRPOIT 33.15.00. $21,000. 863.001 $394,835
TRPOIR, $315,000 $21,000 $63.001 $357.34
TRPOID $310.700. $20.74 $62,141 $389,388
PTRPO2O $310,000 $20.667 $62.02 $380,169
TRPO2I $295,000, $19.667 $59.00) $369.501
PRPOD2 $290,000 $19,334 $5801 S334018.
PTRPO2S $280,000 $18,667 $56,001 $350501
PRPOD4 $280,000 $18.67 $56,001 $350.50)
PFRPO2S $310,000 $20,667 $62,002 $359336

Comparison of 2009 Compensation to Prior Years: 2007 & 2008 Compensation

2008 Cash decreased by $1.5M or 17.9%
Total Direct Compensation increasedby $2.1M or

2007 Cash increased by 80.9M or 14.0%
Total Direct Compensation increased by $4.5M or 72.3%

Note: I: Amounts reflected in this Exhibit do not inctude amounts the Company has asserted to be payable pursuant to legally

binding rights under valid employment contracts. see 31 CER. § 30.10(e¥2).

Note: 2: The total number of Covered Employees may be less than 25 because of terminations, departures and retirements

atier Jamuary 1, 2009,

El



c. Annual Long-Term Incentive Awards

Chrysler proposed that these Covered Employees be eligible for annual long-term
incentive awards equal to one third of total compensation received from and after
September 1, 2009, with total potential values ranging from $56,001 to $122,002.
Awards would be paid in the form of “long-term restricted stock” with 25% vesting after
two years of service and 75% vesting on the later to occur of the second anniversary of
the grant date or a public offering by the Company. Actual payment would be made in
25% installments for each 25% repayment of the Company’s TARP obligations.

d. “Other”? Compensation and Perquisites

Chrysler proposed payments of “other” compensation, as well as perquisites, to
the Covered Employees. These proposed payments varied in value.

e. Non-Qualified Deferred Compensation

Chrysler also proposed that certain Covered Employees receive compensation in
the form of accruals under a “non-qualified deferred compensation” plan.

B. Determinations of the Special Master

The Special Master has reviewed the Proposed Structures in detail by application
of the principles set forth in the Rule and described in Part III above. In light of this
review and analysis, the Special Master has determined that both the structural design of
Chrysler’s proposals and the amounts potentially payable to Covered Employees under
the proposals would be inconsistent with the Public Interest Standard and, therefore,
require modification.

The Special Master has determined, in light of the considerations that follow, that
the compensation structures described in Exhibits I and I to this Determination
Memorandum will not, by virtue of either their structural design or the amounts
potentially payable under them, result in payments inconsistent with the Public Interest
Standard.

1. Chief Executive Officer

Because they are provided by a minority shareholder of the company, the
proposals for Chrysler's CEO and amounts potentially payable under such structures,
which would generally be subject to the Special Master’s review and analysis, are instead
outside the Special Master’s purview. As a result, the Special Master has made no
determination as to whether any payments made or proposed to be made to Chrysler's
CEO are consistent with the Public Interest Standard. 31 C.F.R. § 30.1.

A6


(which includes information from a survey on the pay of highly compensated
employees);

¢ Consultation with Lucian A. Bebchuk, a world-renowned expert in executive
compensation and the William J. Friedman and Alicia Townsend Friedman
Professor of Law, Economics, and Finance and Director of the Program on
Corporate Governance at Harvard Law School; and

¢ Consultation with Kevin J. Murphy, a world-renowned expert in executive
compensation and the Kenneth L. Trefftzs Chair in Finance in the department of
finance and business economics at the University of Southern California’s
Marshall School of Business.

The Special Master considered these views, in light of the statutory and regulatory
standards described in Part IIT below, when evaluating the Company’s proposed
compensation structures for the Covered Employees for 2009.

III. STATUTORY AND REGULATORY STANDARDS

The Rule requires that the Special Master determine for each of the Covered
Employees whether Chrysler’s proposals, including amounts payable or potentially
payable under the compensation structure, “will or may result in payments that are
inconsistent with the purposes of section 111 of EESA or TARP, or [is] otherwise
contrary to the public interest.” 31 C.F.R. § 30.16(a)(3) (as applied to Covered
Employees of Exceptional Assistance Recipients, the “Public Interest Standard”).
Regulations promulgated pursuant to the Rule require that the Special Master consider six
principles when making these compensation determinations:

(1) Risk. The compensation structure should avoid incentives which encourage
executive officers and employees to take unnecessary or excessive risks that could
threaten the value of the exceptional assistance recipient, including incentives that
reward employees for short-term or temporary increases in value or performance;
or similar measures that may undercut the long-term value of the exceptional
assistance recipient. Compensation packages should be aligned with sound risk
management. /d. § 30.16(b)(1)(i).

(2) Taxpayer return. The compensation structure and amount payable should reflect
the need for the exceptional assistance recipient to remain a competitive
enterprise, to retain and recruit talented employees who will contribute to the
recipient's future success, so that the Company will ultimately be able to repay its
TARP obligations. /d. § 30.16(b)(1)(ii).

(3) Appropriate allocation. The compensation structure should appropriately allocate
the components of compensation such as salary and short-term and long-term
performance incentives, as well as the extent to which compensation is provided
in cash, equity, or other types of compensation such as executive pensions, or
other benefits or perquisites, based on the specific role of the employee and other

A3


discussions continued for a period of months, during which the Special Master and
Chrysler explored potential compensation structures for the Covered Employees.

The Rule requires that each Exceptional Assistance Recipient submit proposed
compensation structures for each Senior Executive Officer and Most Highly
Compensated Employee no later than August 14, 2009. 31 C.F.R. § 30.16(a)(3). On July
20, 2009, the Special Master requested from each Exceptional Assistance Recipient,
including Chrysler, certain data and documentary information necessary to facilitate the
Special Master’s review of the Company’s compensation structures. The request
required Chrysler to submit data describing its proposals, and the payments that would
result from the Proposed Structures, concerning each Covered Employee.

In addition, the Rule authorizes the Special Master to request information from an,
Exceptional Assistance Recipient “under such procedures as the Special Master may
determine.” Id. § 30.16(d). Chrysler was required to submit competitive market data
indicating how the amounts payable under Chrysler’s Proposed Structures relate to the
amounts paid to persons in similar positions or roles at similar entities. Chrysler was also
required to submit a range of documentation, including information related to proposed
performance metrics, internal policies designed to curb excessive risk, and certain
previously existing compensation plans and agreements.

Chrysler submitted this information to the Office of the Special Master on August
14, 2009. Following a preliminary review of the submission, and the submission of
certain additional information, on August 31, 2009, the Special Master determined that
Chrysler’s submission was substantially complete for purposes of the Rule. Id. §
30.16(a)(3). The Office of the Special Master then commenced a formal review of
Chrysler’s proposal for the Covered Employees. The Rule provides that the Special
Master is required to issue a compensation determination within 60 days of a
substantially complete submission. /d. § 30.16(a)(3).

The Office of the Special Master’s review of the Company’s proposals was aided
by analysis from a number of internal and external sources, including:

e Treasury personnel detailed to the Office of the Special Master, including
executive compensation specialists with significant experience in reviewing,
analyzing, designing and administering executive compensation plans, and
attorneys with experience in matters related to executive compensation;

¢ Competitive market data provided by the Company in connection with its
submissions to the Office of the Special Master;

e External information on comparable compensation structures extracted from the
U.S. Mercer Benchmark Database-Executive;

e External information on comparable compensation structures extracted from

Equilar’s Executivelnsight database (which includes information drawn from
publicly filed proxy statements) and Equilar’s Top 25 Survey Summary Report

A2


EXHIBIT II
TERMS AND CONDITIONS OF PAYMENTS AND STRUCTURES
CONSISTENT WITH THE PUBLIC INTEREST STANDARD

The following general terms and conditions shall govern the compensation
structures described in Exhibit I. The Special Master’s determination that those
structures are consistent with the Public Interest Standard is qualified in its entirety by the
Company’s adherence to these terms and conditions.

© Cash base salary. Cash base salaries reflect the go-forward rate for the employee
effective as of November 1, 2009. Compensation paid in the form of cash base
salary prior to that date in accordance with the terms of employment as of June
14, 2009 shall be permitted unless otherwise noted. 31 C.F.R. § 30.16(a)(3)(iii).

¢ Stock salary. Rates of stock salary grants reflect full-year values. Because this is
a new compensation element, the amounts are payable on a nunc pro tunc basis
effective January 1, 2009. Stock salary must be determined as a dollar amount
through the date salary is earned, be accrued at the same time or times as the
salary would otherwise be paid in cash, and vest immediately upon grant, with the
number of units based on the fair market value on the date of award. Stock
granted as stock salary may only be redeemed in three equal, annual installments
beginning on the second anniversary of grant, with each installment redeemable
one year early if TARP obligations are repaid.

e Long-term restricted stock. Long-term restricted stock may be granted upon the
achievement of specified, objective performance criteria that have been developed
and reviewed in consultation with the Office of the Special Master and certified
by the Company’s compensation committee. Any such stock may vest only if the
employee remains employed by the Company on the third anniversary of grant
(or, if earlier, upon death or disability). The stock shall be transferable only in
25% increments for each 25% of TARP obligations repaid by the Company.

¢ Other compensation and perquisites. No more than $25,000 in total other
compensation and perquisites may be provided to any Covered Employee, absent
exceptional circumstances for good cause shown, as defined by pertinent SEC
regulations.

© Supplemental executive retirement plans and non-qualified deferred
compensation plans. Following the date of the Determination Memorandum, no
additional amounts may be accrued under supplemental executive retirement
plans, and no Company contributions may be made to other “non-qualified
deferred compensation” plans, as defined by pertinent SEC regulations.

© Qualified Plans. For the avoidance of doubt, the Special Master has determined
that participation by the Covered Employees in tax-qualified retirement. health
and welfare, and similar plans is consistent with the Public Interest Standard.


TV. COMPENSATION STRUCTURES AND PAYMENTS

A. Chrysler Proposals

Chrysler provided the Office of the Special Master with detailed information
concerning its proposals for the Covered Employees, including amounts potentially
payable under the compensation structure for each Covered Employee.

Chrysler supported its proposal with detailed assessments of each Covered
Employee’s tenure and responsibilities at the Company and historical compensation
structure. The submission also included market data that, according to the Company,
indicated that the amounts potentially payable to each employee were comparable to the
compensation payable to persons in similar positions or roles at a “peer group” of entities
selected by the Company.

1. Chief Executive Officer

Chrysler’s chief executive officer (the “CEO”) also serves as the chief executive
officer of Fiat S.p.A, a minority shareholder of the Company. Fiat, according to the
Company’s submission, has and will continue to provide for the CEO’s 2009
compensation, and Chrysler has not proposed to pay him any compensation whatsoever
in 2009.

2. Covered Employees Generally

Chrysler’s proposals for this group of Covered Employees, (which excludes the
CEO and three departing employees, who are covered separately below), ranged from
$311,503 to $719,340 and consisted of three primary components—cash salaries, stock
salaries, and annual long-term incentive awards—plus additional payments in the form of
“non-qualified deferred compensation” accruals, perquisites, and “other” compensation.

a. Cash Salary

Chrysler proposed increasing the cash salary of these Covered Employees to
annualized amounts ranging from $276,672 to $603,000. The Company’s proposal
asserted that cash salaries at such levels could be justified by reference to the
compensation of persons in similar positions or roles at similar entities.

b. Stock Salary

Chrysler proposed that these Covered Employees receive 20% of their total
ries going forward as stock salary, in annualized amounts ranging from $56,000 to
$122,000 on an annual basis. On each regular payroll date, Covered Employees would
earn fully vested “deferred phantom units,” each representing an equal portion of the
Company’s equity, which would then settle in two tranches of 50% each on the second
and third anniversaries of the grant date, respectively.

sa

AS


DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220

October 22, 2009

Ms. Nancy Rae

Executive Vice President, Human Resources
Chrysler Group, LLC

1000 Chrysler Drive

CIMS 485-08-96

Auburn Hills, MI 48326-2766

Re: — Proposed Compensation Payments and
Structures for Senior Executive Officers and
Most Highly Compensated Employees

Dear Ms. Rae:

Pursuant to the Department of the Treasury’s Interim Final Rule on TARP
Standards for Compensation and Corporate Governance, the Office of the Special Master
has completed its review of your 2009 compensation submission on behalf of the senior
executive officers and certain most highly compensated employees of Chrysler Group,
LLC (“Chrysler”). Attached as Annex A is a Determination Memorandum (accompanied
by Exhibits I and HD) providing the determinations of the Special Master with respect to
2009 compensation for those employees. 31 C.F.R. § 30.16(a)(3).

The Interim Final Rule requires the Special Master to determine whether the
compensation structure for each senior executive officer and certain most highly
compensated employees “will or may result in payments inconsistent with the purposes
of section 111 of EESA or TARP, or [is] otherwise contrary to the public interest.” Jd.
§ 30.16(a)(3). The Special Master has determined that, to satisfy this standard, 2009
compensation for Chrysler’s senior executive officers and certain most highly
compensated employees generally must comport with the following standards:

e There can be no guarantee of any “bonus” or “retention” awards among the
compensation structures approved by the Special Master.

e Rather than cash, a significant portion of each individual’s base salary will be
paid in the form of stock. This stock will immediately vest, in accordance with
the Interim Final Rule, but will only be redeemable in three equal, annual
installments beginning on the second anniversary of grant, with each installment
redeemable one year earlier if Chrysler repays its TARP obligations.


short-term results instead of long-term value creation by paying excessive benefits to
employees for short-term increases in share price. See Id. § 30.16(b)(1)(i). Under the
Company’s proposal, 50% of stock salary would be redeemable by the employee after
two years and the remaining 50% of stock salary would be redeemable after three years,
which the Special Master has concluded is an insufficient holding period to provide an
appropriate long-term incentive and could result in payments that would be inconsistent
with the Public Interest Standard. Accordingly, as described in Exhibits I and II, the
compensation structures the Special Master has determined to be consistent with the
Public Interest Standard require that stock salary become redeemable in three equal,
annual installments beginning on the second anniversary of grant, with each installment
redeemable one year earlier if Chrysler repays its TARP obligations.

ec. Annual Long-Term Incentive Awards

The Special Master reviewed Chrysler’s proposed annual long-term incentive
awards in light of the principle that performance-based compensation should be based on
“performance metrics [that are] measurable, enforceable, and actually enforced if not
met.” Jd. § 30.16(b)(1)(iv). Although Chrysler’s proposal for the vesting condition for
75% of the annual-incentive awards was based on a substantial goal related to the
performance of the Company, id., 25% of the awards required only continued
employment for two years. A two-year service requirement does not provide Covered
Employees with tailored metrics that encompass individual performance. /d. In
addition, in light of recently adopted international standards providing that incentive
compensation should be payable over a period of three years and the Rule’s requirement
that performance-based compensation be payable “over a relevant performance period,”
id., the Special Master has concluded that awards of long-term restricted stock should not
vest unless the employee remains employed through the third anniversary of grant.

As described in Exhibits I and I, the structures the Special Master has
determined to be consistent with the Public Interest Standard include an annual long-term
incentive award payable only upon the achievement of specified, objective performance
criteria that have been developed and reviewed in consultation with the Office of the
Special Master, and that will not vest unless the employee remains employed until the
third anniversary of grant. In addition, as required by the Rule, these awards may only be
redeemed in 25% installments for each 25% of Chrysler’s TARP obligations that are
repaid.

d. “Other” Compensation and Perquisites

Chrysler proposed payments of “other”? compensation, as well as perquisites, to
the Covered Employees. The Special Master has concluded that, absent special
justification, employees—not the Company—generally should be responsible for paying
personal expenses, and that significant portions of compensation structures should not be
allocated to such perquisites and “other” compensation. See id. §30.16(b)(1 (iii).

The Rule requires that each Exceptional Assistance Recipient annually disclose to
Treasury any perquisites where the total value for any Senior Executive Officer or Most

A8&


2. Covered Employees Generally

a. Cash Salary

The Special Master reviewed the cash salary proposals in light of the principle
that compensation structures should generally be comparable to “compensation structures
and amounts for persons in similar positions or roles at similar entities.” Jd.

§ 30.16(b)(1)(v). The Special Master has concluded generally that cash salaries for
employees at Exceptional Assistance Recipients, cash salaries should generally target the
50th percentile because such levels of cash salaries balance the need to attract and retain
talent with the need for compensation structures that reflect the circumstances of
Exceptional Assistance Recipients

The Special Master made use of the resources described in Part IT and concluded
that Chrysler’s proposal would generally deliver cash salaries that would place the
Covered Executives at or below the 50th percentile of compensation provided to persons
in similar positions or roles at similar entities.

In addition, because cash salaries do not create incentives for employees to pursue
long-term value creation or financial stability, the amount of cash salary provided to a
Covered Employee must be considered in comparison to the portion of compensation that
is “performance-based over a relevant performance period.” Jd. § 30.16(b)(1)(iv). The
Special Master has concluded that the portion of the Covered Employee’s compensation
that is not performance-based and should instead be allocated to cash salary should in
most cases not exceed $500,000. See id. § 30.16(b)(1)(iii).

As described in further detail in Exhibits I and IT, the cash salaries that the
Special Master has determined to be consistent with the Public Interest Standard compare
appropriately to those paid to persons in similar positions or roles at similar entities, and
are generally less than $500,000.

b. Stock Salary

The Special Master reviewed the amount of stock salary Chrysler proposed to pay
the Covered Employees. This review was analogous to the comparative review of
proposed cash salaries, described above. The Special Master determined that Chrysler’s
stock salary proposal would convey amounts of equity compensation in 2009 that would
place the Covered Employees at or below the 50th percentile of compensation provided
to persons in similar positions or roles at similar entities. These amounts are described in
further detail in Exhibits I and I.

The Special Master also reviewed the structure of Chrysler’s stock salary
proposal. The Rule requires that the Special Master consider whether an appropriate
portion of an employee’s compensation is allocated to long-term incentives /d. §
30.16(b)(1)(iii). Stock salary that can be liquidated too soon would not be performance-
based over the relevant performance period to provide such a long-term incentive. See
Id. § 30.16(b)(1)(iv). Instead, such stock salary could incentivize employees to pursue

AT


relevant circumstances, including the nature and amount of current compensation,
deferred compensation, or other compensation and benefits previously paid or
awarded. /d. § 30.16(b)(1)(iii).

(4) Performance-based compensation. An appropriate portion of the compensation
should be performance-based over a relevant performance period. Performance-
based compensation should be determined through tailored metrics that
encompass individual performance and/or the performance of the Exceptional
Assistance Recipient or a relevant business unit taking into consideration specific
business objectives. Performance metrics may relate to employee compliance
with relevant corporate policies. In addition, the likelihood of meeting the
performance metrics should not be so great that the arrangement fails to provide
an adequate incentive for the employee to perform, and performance metrics
should be measurable, enforceable, and actually enforced if not met. Jd. §
30.16(b)(1)(iv).

(5) Comparable structures and payments. The compensation structure, and amount
payable where applicable, should be consistent with, and not excessive taking into
account, compensation structures and amounts for persons in similar positions or
roles at similar entities that are similarly situated, including, as applicable, entities
competing in the same markets and similarly situated entities that are financially
distressed or that are contemplating or undergoing reorganization. Id. §
30.16(b)(1)(v).

(6) Employee contribution to TARP recipient value. The compensation structure and
amount payable should reflect the current or prospective contributions of an
employee to the value of the exceptional assistance recipient, taking into account
multiple factors such as revenue production, specific expertise, compliance with
company policy and regulation (including risk management), and corporate
leadership, as well as the role the employee may have had with respect to any
change in the financial health or competitive position of the recipient. Id. §
30.16(b)(1)(vi).

The Rule provides that the Special Master shall have discretion to determine the
appropriate weight or relevance of a particular principle depending on the facts and
circumstances surrounding the compensation structure or payment for a particular
employee. Id. § 30.16(b). To the extent two or more principles may appear inconsistent
in a particular situation, the Rule requires that the Special Master exercise his discretion
in determining the relative weight to be accorded to each principle. Id.

The Rule provides that the Special Master may, in the course of applying these
principles, take into account other compensation structures and other compensation
earned, accrued, or paid, including compensation and compensation structures that are
not subject to the restrictions of section 111 of EESA. For example, the Special Master
may consider payments obligated to be made by the Company pursuant to certain legally
binding rights under valid written employment contracts entered into prior to enactment
of the statute and the accompanying Rule. /d. § 30.16(a)(3).

A4


Pursuant to the Interim Final Rule, Chrysler may, within 30 days of the date
hereof, request in writing that the Special Master reconsider the determinations set forth
in the Determination Memorandum. If the Chrysler does not request reconsideration
within 30 days, these initial determinations will be treated as final determinations. Id.

§ 30.16(c)(1).

Very Aly yours,

€.

Kenneth R. Feinberg
Office of the Special Master
for TARP Executive Compensation

Attachments

ce: Holly E. Leese, Esquire
Lawrence Cagney, Esquire


consultation with the Office of the Special Master—has been met. This determination
must be certified by the compensation committee to the Office of the Special Master or,
subject to the approval of the Special Master, in such other manner as is determined by
the compensation committee.

In addition, as noted in Part IV, above and described in Exhibits I and IT, the
structures determined by the Special Master to be consistent with the Public Interest
Standard include grants of stock in the Company. It is critical that these compensation
structures achieve the Rule’s objective of “appropriate|ly] allocat[ing] the components of
compensation [including] long-term incentives, as well as the extent to which
compensation is provided in...equity,” id. § 30.16(b)(ii).

The Company must have in effect a policy that would prohibit an employee from
engaging in hedging, derivative or other transactions that have an economically similar
effect that would undermine the incentives created by the compensation structures set
forth in Exhibits I and II. Such transactions would be contrary to the principles set forth
in the Rule.

B. Additional Requirements

In addition to the requirements set forth above, pursuant to the requirements of the
Rule, the Company is required to institute the following corporate governance reforms:

(1) Compensation Committee; Risk Review. Chrysler must maintain a compensation
committee comprised exclusively of independent directors. Every six months, the
committee must discuss, evaluate, and review with the Company’s senior risk
officers any risks that could threaten the value of the Company. In particular, the
committee must meet every six months to discuss, evaluate, and review the terms
of each employee compensation plan to identify and limit the features in (1) SEO
compensation plans that could lead SEOs to take unnecessary and excessive risks
that threaten the value of the Company; (2) SEO or other employee compensation
plans that could encourage behavior focused on short-term results and not on
long-term value creation; and (3) employees’ compensation plans that could
encourage the manipulation of the Company’s reported earnings to enhance the
compensation of any of the employees. id. § 30.4; id. § 30.5.

(2) Disclosure with Respect to Compensation Consultants. The compensation
committee must disclose to Treasury an annual narrative description of whether
the Company, its Board of Directors, or the committee has engaged a
compensation consultant during the past three years. If so, the compensation
committee must detail the types of services provided by the compensation
consultant or any affiliate, including any “benchmarking” or comparisons
employed to identify certain percentile levels of compensation. /d. § 30.1 1(c).

(3) Disclosure of Perquisites. As noted in Part [V, Chrysler must provide to
Treasury an annual disclosure of any perquisite whose total value for Chrysler’s
fiscal year exceeds $25,000 for each of the Covered Employees. Chrysler must

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factual error or relevant new information not previously considered, and must
demonstrate that such error or lack of information resulted in a material error in the initial
determinations. If Chrysler does not request reconsideration within 30 days, the
determinations set forth herein will be treated as final determinations. 31 C.F.R.

§ 30.16(c)(1).

The foregoing determinations are limited to the compensation structures described
in Exhibits I and I, and shall not be relied upon with respect to any other employee. The
determinations are limited to the authority vested in the Special Master by Section
30.16(a)(3) of the Rule, and shall not constitute, or be construed to constitute, the
judgment of the Office of the Special Master or Treasury with respect to the compliance
of any compensation structure with any other provision of the Rule. Moreover, this
Determination Memorandum has relied upon, and is qualified in its entirety by, the
accuracy of the materials submitted by Chrysler to the Office of the Special Master, and
the absence of any material misstatement or omission in such materials.

Finally, the foregoing determinations are limited to the compensation structures
described herein, and no further compensation of any kind payable to any Covered
Employee without the prior approval of the Special Master would be consistent with the
Public Interest Standard.

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At least once every year, Chrysler’s compensation committee must provide to the
Department of the Treasury a narrative description identifying each compensation
plan for its senior executive officers, and explaining how the plan does not
encourage the senior executive officers to take unnecessary and excessive risks
that threaten Chrysler’s value.

These requirements are described in further detail in the attached Determination
Memorandum.

The Special Master’s review has been guided by a number of considerations,

including each of the principles articulated in the Interim Final Rule. Jd. § 30.16(b)(1).
The following principles were of particular importance to the Special Master in his
determinations with respect to Chrysler’s compensation structures:

Performance-based compensation. A substantial amount of approved
compensation depends on Chrysler’s performance, and ties the financial
incentives of Chrysler employees to the overall performance of the Company.
Portions of the salary paid to employees under these structures will be paid in the
form of stock; and, because the stock salary will become transferable only in three
equal, annual installments beginning on the second anniversary of the date the
stock salary is earned (with each installment redeemable one year earlier if
Chrysler repays its TARP obligations), the ultimate value realized by the
employee will depend on Chrysler’s performance over the long term. Guaranteed
amounts payable in cash, in contrast, are generally rejected. /d. § 30.16(b)(1)(iv).

Taxpayer return. The compensation structures approved by the Special Master
reflect the need for Chrysler to remain a competitive enterprise and, ultimately, to
be able to repay TARP obligations. The Special Master has determined that the
approved compensation structures are competitive when compared to those
provided to similarly situated employees of similarly situated companies.
Overall, the compensation structures generally provide for total compensation
packages that are well below the 50th percentile when compared to such other
executive officers and employees. /d. § 30.16(b)(1)(ii).


e Base salary paid in cash should not exceed $500,000 per year, except in
appropriate cases for good cause shown.

e Total compensation for each individual must both reflect the individual’s value to
Chrysler and be appropriate when compared with total compensation of persons
in similar positions or roles at similar entities, and should generally target the 50th
percentile of total compensation for such similarly situated employees.

e¢ Employees may be eligible to vest in long-term incentive awards if—and only
if—objective performance metrics developed and reviewed in consultation with
the Office of the Special Master are achieved. All such awards must be payable
in the form of restricted stock that will be forfeited unless the employee stays with
Chrysler for at least three years following grant and may only be redeemed in
25% installments for each 25% installments of Chrysler’s TARP obligations that
are repaid. Such long-term incentive awards may not exceed one-third of total
annual compensation.

e Any and all incentive compensation paid to employees will be subject to recovery
or “clawback” if the payments are based on materially inaccurate financial
statements or any other materially inaccurate performance metrics, or if the
employee is terminated due to misconduct that occurred during the period in
which the incentive was earned.

e Any and all “other” compensation and perquisites will not exceed $25,000 for
each employee (absent exceptional circumstances for good cause shown).

e No severance benefit to which an employee becomes entitled in the future may
take into account a cash salary increase, or any payment of stock salary, that the
Special Master has approved for 2009.

¢ No additional amounts in 2009 may be accrued under supplemental executive
retirement plans or credited by the Company to other “non-qualified deferred
compensation” plans after the date of the Determination Memorandum.

The Special Master has also determined that, in order for the approved
compensation structures to satisfy the standards of 31 C.F.R. § 30.16(a)(3), Chrysler must
adopt policies applicable to these employees as follows:

e The achievement of any performance objectives must be certified by the
Compensation and Leadership Committee of Chrysler's Board of Directors,
which is composed solely of independent directors. These performance
objectives must be reviewed and approved by the Office of the Special Master.

e The employees will be prohibited from engaging in any hedging, derivative or
other transactions that have an equivalent economic effect that would undermine
the long-term performance incentives created by the compensation structures.


Highly Compensated Employee exceeds $25,000. An express justification for offering
these benefits must also be disclosed. Accordingly, as described in Exhibits I and IT, the
compensation structures the Special Master has determined to be consistent with the
Public Interest Standard provide no more than $25,000 in “other” compensation and
perquisites to each of these employees. Any exceptions to this limitation will require that
the Company provide to the Office of the Special Master an independent justification for
the payment that is satisfactory to the Special Master. To the extent that payments
exceeding this limitation have already been made to a Covered Employee in 2009, those
amounts should be promptly returned to the Company.

e. Non-Qualified Deferred Compensation

Chrysler also proposed that certain Covered Employees receive compensation in
the form of accruals under a “non-qualified deferred compensation” plan. In such plans,
employers periodically credit employees with an entitlement to post-retirement payments.
Over time, these credits accumulate and employees may become entitled to substantial
cash guarantees payable on retirement—in addition to any payments provided under
retirement plans maintained for employees generally.

The Special Master has concluded that the primary portion of a Covered
Employee’s compensation package should be allocated to compensation structures that
are “performance-based over a relevant performance period.” Id. § 30.16(b)(1)(iv).
Payments under the Company’s “non-qualified deferred compensation” plans do not
depend upon “individual performance and/or the performance of the [Company] or a
relevant business unit,” id.; instead, such accruals are simply guaranteed cash payments
from the Company in the future.

Covered Employees should fund their retirements using wealth accumulated
based on Company performance while they are employed, rather than being guaranteed
substantial retirement benefits by the Company regardless of Company performance
during and after their tenures. Accordingly, as described in Exhibits I and IT, the
compensation structures the Special Master has determined to be consistent with the
Public Interest Standard prohibit further 2009 accruals for Covered Employees under
supplemental retirement plans or Company credits to other “non-qualified deferred
compensation” plans following the date of this Determination Memorandum.

In addition, Chrysler proposed that amounts already accrued by the Covered
Employees in 2009 under executive retirement plans be paid out to the employees in
January 2010. Such payments would effectively constitute a short-term cash guarantee
that is not “performance-based over a relevant performance period,” 31 C.F.R.

§ 30.16(b)(1)(iv). The Special Master has determined that the proposed timing of the
payment of the existing retirement accruals is not consistent with the Public Interest
Standard and that modifying the existing retirement accruals to provide for payment on a
post-retirement basis would be consistent with the Public Interest Standard.

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provide a narrative description of the amount and nature of these perquisites, the
recipient of these perquisites, and a justification for offering these perquisites
(including a justification for offering the perquisite, and not only for offering the
perquisite with a value that exceeds $25,000). Id. § 30.11(b).

(4) Clawback. Chrysler must ensure that any incentive award paid to a Covered
Employee is subject to a clawback if the award was based on materially
inaccurate financial statements (which includes, but is not limited to, statements
of earnings, revenues, or gains) or any other materially inaccurate performance
metric criteria. Chrysler must exercise its clawback rights except to the extent
that it is unreasonable to do so. Id. § 30.8.

(5) Policy Addressing Excessive or Luxury Expenditures. Chrysler was required to
adopt an excessive or luxury expenditures policy, provide that policy to Treasury,
and post it on the Company’s website. If Chrysler’s board of directors makes any
material amendments to this policy, within ninety days of the adoption of the
amended policy, the board of directors must provide the amended policy to
Treasury and post the amended policy on its Internet website. /d. § 30.12.

(6) Prohibition on Tax Gross-Ups. Except as explicitly permitted under the Rule,
Chrysler is prohibited from providing (formally or informally) tax gross-ups to
any of the Covered Employees. /d. § 30.11(d).

(7) CEO and CFO Certification. Chrysler’s CEO and chief financial officer must
provide written certification of Chrysler’s compliance with the various
requirements of section [11 of EESA. The precise nature of the required
certification is identified in the Rule. /d. § 30.15 Appx. A.

VI. CONCLUSION

The Special Master has reviewed the Proposed Structures for the Covered
Employees for 2009 in light of the principles set forth at 31 C.F.R. § 30.16(b). On the
basis of that review, the Special Master has determined that the Proposed Structures
submitted by Chrysler require modification in order to meet the Public Interest Standard.

The Special Master has separately reviewed the compensation structures set forth
in Exhibits I and IT, in light of the principles set forth at 31 C.F.R. § 30.16(b). Pursuant
to the authority vested in the Special Master by the Rule, and in accordance with Section
30.16(a)(3) thereof, the Special Master hereby determines that the compensation
structures set forth in Exhibits [ and I, including the amounts payable or potentially
payable under such compensation structures, will not result in payments that are
inconsistent with the purposes of section 111 of EESA or the TARP, and will not
otherwise be contrary to the public interest.

Pursuant to the Interim Final Rule, Chrysler may, within 30 days of the date
hereof, request in writing that the Special Master reconsider the determinations set forth
in this Determination Memorandum. The request for reconsideration must specify a

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