Exhibit 10.1



 






Exhibit 10.1




CONFIDENTIAL









2006 Incentive Plan





 









 








CONFIDENTIAL




Somaxon Pharmaceuticals, Inc.




2006 Incentive Plan



The Somaxon Pharmaceuticals, Inc. (Somaxon) 2006 Incentive Plan (the “Plan”) is designed to offer
incentive compensation to eligible Employees by rewarding the achievement of corporate goals and
specifically measured individual goals that are consistent with and support overall corporate
goals. The Plan will create an environment which will focus Employees on the achievement of
objectives. Since cooperation between departments and Employees will be required to achieve
corporate objectives that represent a significant portion of the Plan, the Plan should help foster
improved teamwork and a more cohesive management team.




Purpose of the Plan




The Plan is designed to:





	•	 	Provide an incentive program to achieve overall corporate objectives and to enhance shareholder value
	 
	•	 	Reward those individuals who significantly impact corporate results
	 
	•	 	Encourage increased teamwork among all disciplines within the Company
	 
	•	 	Incorporate an incentive program in the Somaxon overall compensation program to help attract and retain Employees
	 
	•	 	Incentivize eligible Employees to remain employed by Somaxon throughout the Plan year and until the time incentive
awards are paid





Plan Governance



The Plan will be governed by the Compensation Committee of the Board of Directors. The President
and CEO of Somaxon will be responsible for administration of the Plan. The Compensation Committee
of the Board will be responsible for approving any compensation or incentive awards to officers of
the Company.




Eligibility



All full time (40 hours/week) exempt Employees Level 6 (Manager) or higher are eligible to
participate in the Plan. To receive an incentive award, a participant: (a) must have been in an
eligible position for at least three (3) consecutive months prior to the end of the Plan year and
remain employed through the end of the Plan year and until incentive awards are paid; and (b) must
not be on probation at the time bonus determinations are made.




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Section 1: Bonus Incentive Awards (“Bonus”)




Form of Incentive Award Payments



Incentive award payments may be made in cash, through the issuance of stock or stock options, or by
a combination of cash, stock and/or stock options, at the discretion of the Company’s Compensation
Committee, subject to the approval of the Company’s Board of Directors. In the event that the
Compensation Committee and the Board of Directors elect to pay incentive awards in stock or stock
options, the Compensation Committee, in its sole discretion, will make a determination of the
number of shares of stock or stock options to be issued to each Plan participant based, in part,
upon each participant’s Corporate and Individual Performance, as described below. The issuance of
stock and stock options may also be subject to the approval of the Company’s stockholders, and any
stock options issued will be subject to the terms and conditions of the Company’s 2005 Equity
Incentive Award Plan, as amended from time to time by the Company.




Corporate and Individual Performance



Prior to the beginning of the Plan year, the President and CEO will present to the Board of
Directors a list of the overall corporate objectives for the coming year, which are subject to
approval by the Board. All participants in the Plan will then develop a list of key individual
objectives, which must be approved by the responsible Vice President and by the President and CEO.



The Plan calls for incentive awards based on the achievement of annual corporate and individual
objectives that have been approved as indicated above.



The relative weight between corporate and individual performance factors may vary based on the
individual’s level within the organization. The weighting will be reviewed annually and may be
adjusted, as necessary or appropriate. The weighting for 2006 will be as follows:




	 	 	 	 	 	 	 	 	 
	 	 	Corporate	 	 	Individual	 
	President
and CEO (Grade 12)
	 	 	100	%	 	 	 	 
	Vice Presidents/Executive Directors (Grades 10-11)
	 	 	75	%	 	 	25	%
	All Others (Grades 1-9)
	 	 	50	%	 	 	50	%






Bonus Percentage



Incentive Awards will be determined by applying a “bonus percentage” to the base salary of
participants in the Plan. The following bonus percentages will be used for this purpose:




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	Grade Level	 	Position Title	 	Bonus Percentage
	12

	 	President & CEO
	 	 	40	%
	10 — 11

	 	Officers, Sr. VP, CMO, VP
	 	 	30	%
	8 — 9

	 	Sr. Director, Director
	 	 	20	%
	6 — 7

	 	Sr. Manager, Manager
	 	 	15	%






Performance Measurement



The following scale will be used to determine the actual award multiplier for incentive award
calculations based upon measurement of corporate and individual performance versus objectives.
Separate payment multipliers will be established for both the individual and the corporate
components of each award. The same payment multiplier for the corporate component of each
participant’s annual award shall be used for all Plan participants in any given year. The award
multiplier for the corporate component shall be determined by the Board of Directors.




	 	 	 	 	 	 	 
	 	 	Performance Category	 	Award Multiplier
	1.

	 	Performance for the year met or exceeded objectives
or was excellent in view of prevailing conditions
	 	 	75% — 150	%
	 
	 	 	 	 	 	 
	2.

	 	Performance generally met the year’s objectives or
was very acceptable in view of prevailing conditions
	 	 	50% — 75	%
	 
	 	 	 	 	 	 
	3.

	 	Performance for the year met some, but not all, objectives
	 	 	25% — 50	%
	 
	 	 	 	 	 	 
	4.

	 	Performance for the year was not acceptable in view of
prevailing conditions
	 	 	         0%	 






Calculation of Cash Incentive Award



The example below shows sample cash incentive award calculations under the Somaxon
compensation and Incentive Plan. First, a total bonus potential is calculated by multiplying the
Employee’s base salary by the bonus percentage. This dollar figure is then divided between its
corporate component and its individual component based on the performance factor mix for that
specific position. This calculation establishes specific dollar potential awards for the
performance period for both the individual and corporate components of the award.



At the end of the performance period, corporate and individual award multipliers will be
established using the criteria described above. The corporate award multiplier, which is based on
overall corporate performance, is used to calculate corporate performance awards for all Plan
participants. This is accomplished by multiplying the bonus percentage established for each
individual at the beginning




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CONFIDENTIAL



of the performance period by the actual corporate award multiplier. The individual award
multiplier, which is based on an individual’s performance against objectives, is used in the same
way to calculate the actual individual performance award.




	 	 	 	 	 	 	 	 	 	 	 
	Example:	 	Cash Award Calculation	 	 	 	 	 	 
	 	 	Position:	 	 	 	 	 	Manager
	 

	 	Base Salary:
	 	 	 	 	 	$	75,000	 
	 

	 	Bonus percentage:
	 	 	 	 	 	 	10	%
	 

	 	Potential bonus dollars:
	 	 	 	 	 	$	7,500	 
	 
	 	 	 	 	 	 	 	 	 	 
	 	 	Potential bonus components (based on performance factor mix):
	 	 	Potential corporate performance bonus (50%):	 	$	3,750	 
	 	 	Potential individual performance bonus (50%):	 	$	3,750	 
	 
	 	 	 	 	 	 	 	 	 	 
	 

	 	Actual Cash Award Calculation	 	 	 	 	 	 	 	 
	 	 	 
	 	 	Assumed payment multipliers based on assessment of corporate and individual
performance:
	 	 	Corporate multiplier	 	75%-performance generally met year’s objectives
	 	 	Individual multiplier	 	125%-performance generally exceeded objectives
	 

	 	Cash Award:	 	 	 	 	 	 	 	 
	 

	 	Corporate component
	 	$	2,812	 	 	 	($3,750 x 75	%)
	 

	 	Individual component
	 	$	4,687	 	 	 	($3,750 x 12	5%)






Payment of the Incentive Award



Payment of incentive awards will be made as soon as practicable after the end of the Plan year but
not before the completion and issuance of the Company’s year-end audited Financial Statements.
Incentive award calculations will be based on the participant’s base salary earned during the year
ending December 31, 2006. Participants’ entitlement to an incentive award under this Plan does not
vest until the awards are actually paid.



Participants who have been in an eligible position for less than a year, but who hold an eligible
position for at least three months prior to the end of the Plan year and remain continuously
employed through the end of the Plan year, will receive a pro-rata bonus based on the portion of
the Plan year they hold an eligible position. Participants promoted during the year from one
“Bonus percentage” level to another will have their
Incentive Award calculated using their base salary earned during the year ending December 31, 2006. Providing the promotion occurred prior to October
1, 2006, the calculation will be pro-rated, based on the number on months at each Bonus Percentage
level. If the promotion occurred after October 1, 2006, the entire calculation will be based on
the Bonus Percentage applicable prior to the promotion. Other than as stated above, incentive
awards will not be prorated for partial year service.




Termination



A Plan participant whose employment terminates voluntarily prior to the payment of the incentive
awards, will not be eligible to receive an incentive award.




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Continued employment until payment of the incentive award is a condition of vesting. If a
participant’s employment is terminated involuntarily during the calendar year, or prior to payment
of awards, it will be at the absolute discretion of the Company whether or not an award payment is
made.



Board of Director’s Absolute Right to Alter or Abolish the Plan



The Somaxon Board of Directors reserves the right in its absolute discretion to abolish the Plan at
any time or to alter the terms and conditions under which incentive compensation will be paid.
Such discretion may be exercised any time before, during, and after the Plan year is completed. No
participant shall have any vested right to receive any compensation hereunder until actual delivery
of such compensation.



Employment Duration/Employment Relationship



This Plan does not, and Somaxon’s policies and practices in administering this Plan do not,
constitute an express or implied contract or other agreement concerning the duration of any
participant’s employment with the Company. The employment relationship of each participant is “at
will” and may be terminated at any time by Somaxon or by the participant, with or without cause.





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CONFIDENTIAL




Somaxon Pharmaceuticals, Inc.




2006 Incentive Plan




This is to acknowledge that I have received a copy of the 2006 Incentive Plan.




	 	 	 	 	 	 	 
	Name:

	 	 	 	Date:	 	 
	 

	 	 
	 	 	 	 
	 

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     Please return signed copy Meg McGilley.