<PAGE>
 
                                                              EXHIBIT 10(ii)(aj)



                          J. C. PENNEY COMPANY, INC.
                            MIRROR SAVINGS PLAN II



                       Adopted effective January 1, 1999
<PAGE>
 
                           J. C. PENNEY COMPANY, INC.

                         MIRROR SAVINGS PLAN I (or II)


                                  INTRODUCTION
                                  ------------


     The J. C. Penney Company, Inc. Mirror Savings Plan I (or II) ("Plan") was
adopted effective January 1, 1999 as part of a program to redesign the Company's
qualified and non-qualified savings plans to optimize the retirement savings
opportunities for Associates.

     The Plan is maintained by the Company on an unfunded basis primarily for
the purpose of providing deferred compensation to a select group of management
or highly compensated employees.

     Merged into the Plan effective January 1, 1999 were the J. C. Penney
Company, Inc. 1995 Deferred Compensation Plan and the Annual Benefit Limit Make-
Up Accounts as of December 31, 1998 under the J. C. Penney Company, Inc. Benefit
Restoration Plan and the Thrift Drug, Inc. Benefit Restoration Plan.  On and
after January 1, 1999 the J. C. Penney Company, Inc. 1995 Deferred Compensation
Plan is no longer in existence.
                                                                       (Plan II)
<PAGE>
 
                           J. C. PENNEY COMPANY, INC.
                         MIRROR SAVINGS PLAN I (or II)



                               TABLE OF CONTENTS
                               -----------------


Article                                                        Page
-------                                                        ----

ARTICLE ONE    DEFINITIONS.....................................  1

ARTICLE TWO    ELIGIBILITY AND PARTICIPATION...................  4

     2.01  Eligibility Determined for Each Plan Year...........  4
     2.02  Eligible Associate..................................  4
     2.03  Participation.......................................  4
     2.04  Election to Defer...................................  5
     2.05  Deferral Amounts....................................  5
     2.06  Investment Elections................................  6

ARTICLE THREE  BENEFITS........................................  7

     3.01  Establishment of Accounts...........................  7
     3.02  Personal Accounts...................................  7
     3.03  Company Accounts....................................  7
     3.04  Mirror Company Matching Contributions...............  8
     3.05  Partial-Year Mirror Company Matching Contributions..  9
 
ARTICLE FOUR   TRANSFERS....................................... 10

     4.01  Personal Accounts................................... 10
     4.02  Company Accounts.................................... 10

ARTICLE FIVE   VESTING......................................... 11

     5.01  Personal Accounts................................... 11
     5.02  Company Accounts.................................... 11
     5.03  Forfeitures......................................... 11
 
ARTICLE SIX    TYPE OF PLAN.................................... 12

     6.01  Top Hat Plan........................................ 12
     6.02  No Funding.......................................... 12
<PAGE>
 
ARTICLE SEVEN  DISTRIBUTIONS................................... 13
 
     7.01  Normal Form of Payment.............................. 13
     7.02  Separation from Service............................. 13
     7.03  Death............................................... 13
     7.04  Alternate Form of Payment........................... 13
     7.05  Hardship Distribution............................... 14
     7.06  Fund-Specific Installments or Hardship Distributions.15
     7.07  Form of Payments.................................... 15
     7.08  Change of Control................................... 15
     7.09  Reemployed Participants............................. 16
 
ARTICLE EIGHT  AMENDMENT AND TERMINATION....................... 18

     8.01  Plan Amendment...................................... 18
     8.02  Plan Termination.................................... 18
     8.03  Automatic Plan Termination.......................... 18
 
ARTICLE NINE   MISCELLANEOUS................................... 19

     9.01  Plan Administration................................. 19
     9.02  Plan Expenses....................................... 19
     9.03  Effect on Other Benefits............................ 20
     9.04  No Guarantee of Employment.......................... 20
     9.05  Disclaimer of Liability............................. 20
     9.06  Severability........................................ 20
     9.07  Successors.......................................... 20
     9.08  Governing Law....................................... 20
     9.09  Construction........................................ 21
     9.10  Taxes............................................... 21
     9.11  Non-Assignability................................... 21
     9.12  Claims Procedure.................................... 21
 
<PAGE>
 
                                  ARTICLE ONE

                                  DEFINITIONS


     As used herein, the following words and phrases have the following
respective meanings unless the context clearly indicates otherwise:

1.01 Active Participant: A Participant who defers part of his Compensation for a
     ------------------                                                         
Plan Year (or part thereof) pursuant to an Election to Defer that satisfies the
requirements of Section 2.04.

1.02 Associate:  Any person who is classified as an associate and employed by an
     ---------                                                                  
Employer if the relationship between the Employer and such person constitutes
the legal relationship of employer and employee.

1.03 Beneficiary: The person or persons designated by the Participant on a
     -----------                                                          
beneficiary form required by the Company for this purpose to receive benefits
payable under the Plan because of the Participant's death.

1.04 Code:  The Internal Revenue Code of 1986, as amended from time to time.
     ----                                                                   

1.05 Company:  J. C. Penney Company, Inc., a Delaware corporation, or its
     -------                                                             
successor(s).

1.06 Company Account: A phantom account established in accordance with Article
     ---------------                                                          
Three to which Mirror Company Matching Contributions plus earnings are credited.

1.07 Compensation: The total cash remuneration paid to an Associate by his
     ------------                                                         
Employer, that qualifies as wages as the term wages is defined in Code section
3401(a), determined without regard to any reduction for workers' compensation
and state disability insurance reimbursements, and all other compensation
payments for which his Employer is required to furnish the Associate a written
statement under Code sections 6041(d), 6051(a)(3) and 6052, reduced by any
extraordinary items of special pay.

     In addition, Compensation includes any contributions made by the
Associate's Employer on behalf of the Associate pursuant to a deferral election
under any employee benefit plan containing a cash or deferred arrangement under
Section 401(k) of the Code, and any amounts that would have been received as
cash but for an election to receive benefits under a cafeteria plan meeting the
requirements of Section 125 of the Code.

     Compensation also includes eligible cash incentive payments in the year
paid to the Associate, and amounts deferred by the Active Participant pursuant
to Section 2.05 of the Plan.

                                       1
<PAGE>
 
     Compensation for a Plan Year shall be determined without regard to the
limitations on annual compensation under Section 401(a)(17) of the Code.

     An Associate who is in the service of the armed forces of the United States
during any period in which his reemployment rights are guaranteed by law will be
considered to have received the same rate of Compensation during his absence
that he was receiving immediately prior to his absence, provided he returns to
employment with an Employer  within the time such rights are guaranteed.

1.08 Eligible Associate: An Associate who has satisfied the eligibility
     ------------------                                                
requirements of the Plan for a Plan Year in accordance with Section 2.02.

1.09 Employer: The Company and any subsidiary company or affiliate of the
     --------                                                            
Company that is a Participating Employer as defined in Article I of the Savings
Plan.

1.10 ERISA: The Employee Retirement Security Act of 1974, as amended from time
     -----                                                                    
to time.

1.11 Exchange Act: The Securities Exchange Act of 1934, as amended from time to
     ------------                                                              
time.

1.12 Human Resources Committee: The Human Resources Committee of the Management
     -------------------------                                                 
Committee of the Company.

1.13 Mirror Company Matching Contributions: The phantom amounts deemed to be
     -------------------------------------                                  
contributed by the Company for each Plan Year as determined under Section 3.04.

1.14 Mirror Investment Funds: Phantom funds established as book reserve entries
     -----------------------                                                   
in the books and records of the Company to which a Participant's deferral
amounts under the Plan are credited based on the investment elections of the
Participant.  The investment returns of such funds shall be assumed to match the
returns of the same investment funds available to participants under the Savings
Plan which are currently:

     (1)  Interest Income Fund;
     (2)  Conservative Fund;
     (3)  Moderate Fund;
     (4)  Aggressive Fund; and
     (5)  Penney Common Stock Fund.

1.15 Participant: An Eligible Associate who participates in the Plan in
     -----------                                                       
accordance with Article Two, and who has not yet received a distribution of the
entire amount of his vested benefits under the Plan.

1.16 Personal Account: A phantom account established in accordance with Article
     ----------------                                                          
Three to which a Participant's deferral amounts plus earnings are credited.

                                       2
<PAGE>
 
1.17 Benefit Plans Review Committee: The Benefit Plans Review Committee of the
     ------------------------------                                           
Board of Directors of the Company.

1.18 Plan: The J. C. Penney Company, Inc. Mirror Savings Plan I (or II),
     ----                                                               
effective January 1, 1999, as amended from time to time.

1.19 Savings Plan: The J. C. Penney Company, Inc. Savings, Profit-Sharing and
     ------------                                                            
Stock Ownership Plan, as amended from time to time.

1.20 Separation from Service: The termination of employment of an Eligible
     -----------------------                                              
Associate or a Participant because of retirement, resignation, discharge,
disability or death.

1.21 Valuation Date: With respect to all Mirror Investment Funds, each day of a
     --------------                                                            
calendar year on which the New York Stock Exchange is open.

     With respect to transactions or distributions initiated by a Participant or
Beneficiary, (a) the date of receipt by the Plan Administrator of the request if
it is received prior to the close of the New York Stock Exchange, or (b) the
next trading day if the request is received after the close of the New York
Stock Exchange.

     With respect to distributions not initiated by a Participant, the date the
distribution is processed.

                                       3
<PAGE>
 
                                  ARTICLE TWO

                         ELIGIBILITY AND PARTICIPATION



2.01 Eligibility Determined for Each Plan Year
     -----------------------------------------

     The eligibility of each Associate to participate in the Plan as an Active
Participant is determined for each Plan Year based on the preceding Plan Year in
accordance with Section 2.02 below.  Eligibility for, or participation in, the
Plan for a Plan Year does not give an Associate the right to defer part of his
Compensation under the Plan for any other Plan Year.

2.02 Eligible Associate
     ------------------

     An Associate shall be eligible to participate in the Plan as an Active
Participant for a Plan Year if the Associate for the preceding Plan Year had:

     (1)  Satisfied the eligibility requirements of the Savings Plan; and

     (2)  Earnings in excess of $80,000 (as adjusted in accordance with Section
          414(q)(1) of the Code) and less than $100,000 based on his actual
          Compensation through October 31 of such year plus his projected
          earnings from November 1 through December 31 of such year determined
          by using his Base Salary (as defined below) in effect on October 31 of
          such year. (Plan I)

     (3)  Earnings of at least $100,000 based on his actual Compensation through
          October 31 of such year plus his projected earnings from November 1
          through December 31 of such year determined by using his Base Salary
          (as defined below) in effect on October 31 of such year.     (Plan II)

     Base Salary shall mean the aggregate amount of regular wages due and
payable to an Eligible Associate in that Plan Year or calendar year designated
by his Employer as the Eligible Associate's monthly pay as reflected on the
Employer's personnel records, including any such amounts otherwise due and
payable with respect to which his Election to Defer applies hereunder.

2.03 Participation
     -------------

     An Eligible Associate for a Plan Year shall participate in the Plan for
that Plan Year as an Active Participant by making a timely Election to Defer in
accordance with Section 2.04 below.  An Eligible Associate who fails to satisfy
the requirements of Section 2.04 below shall not be allowed to make an Election
to Defer and shall not be an Active Participant for that Plan Year.

                                       4
<PAGE>
 
     A Participant who is not an Active Participant for a Plan Year shall
continue to participate in the Plan in all respects except that such Participant
shall not have the right to defer part of his Compensation under the Plan for
that Plan Year, and shall not be entitled to a Mirror Company Matching
Contribution (as determined under Section 3.04) for that Plan Year.

2.04 Election to Defer
     -----------------

     An Eligible Associate for a Plan Year may elect to defer a percentage (as
described in Section 2.05 below) of his Compensation for such Plan Year.

     The Election to Defer for a Plan Year must be made in a manner approved by
the Plan Administrator and must be received by the Plan Administrator by
December 31 of the preceding Plan Year (or, in the case of the first Plan Year,
received by December 31, 1998).  An Eligible Associate may change his Election
to Defer by filing a new Election to Defer with the Plan Administrator by the
applicable deadline.

     An Active Participant cannot change his Election to Defer during a Plan
Year for that Plan Year.  An Active Participant may terminate his Election to
Defer during a Plan Year for that Plan  Year but shall not be permitted to make
another Election to Defer for that Plan Year.  Such termination shall be
effective as of the next available payroll period following receipt of the
termination by the Plan Administrator.

     An Election to Defer also shall terminate if:

     (1) the Eligible Associate or Participant has a Separation from Service
with an Employer, or

     (2) the Plan is terminated, or

     (3) upon a Change of Control that occurs before the date that payment of
Compensation would have been made if not deferred.

2.05 Deferral Amounts
     ----------------

     An Active Participant for a Plan Year may defer up to 14% of his
Compensation for that Plan Year.  All deferral amounts shall be in whole
percentages and made by payroll deduction.

                                                                        (Plan I)


     An Active Participant for a Plan Year may defer (a) up to 14% of his
Compensation in that Plan Year up to the Earnings Dollar Limit (as defined
below), and (b) up to 75% of his Compensation in that Plan Year that exceeds the
Earnings Dollar Limit.  All deferral amounts shall be in whole percentages and
made by payroll deduction.

                                       5
<PAGE>
 
                                                                       (Plan II)

     The Earnings Dollar Limit of an Active Participant for a Plan Year shall be
$160,000, as adjusted for cost-of-living increases in accordance with Section
401(a)(17) of the Code.

                                                                       (Plan II)



2.06 Investment Elections
     --------------------

     A Participant shall complete an election, in the manner determined by the
Plan Administrator, requesting that all of his future deferral amounts (in whole
percentages) be applied to the purchase for him, as of the earliest practicable
Valuation Date after such amounts are deferred, of units in his Personal
Accounts within any one or more of the Mirror Investment Funds in each case at a
price equal to the value of such units as of such Valuation Date.

     Such election initially must be made prior to the commencement of his
participation in the Plan and may be changed at any time during the Plan Year.
Each such election or change in election shall be effective as soon as
administratively feasible following receipt by the Plan Administrator or its
delegate of the Participant's election.

     In the event that no timely investment election by the Participant is on
file with the Plan Administrator, such Participant shall be deemed to have
elected that all deferral amounts shall be applied to the purchase for him of
units in the Personal Account within the Mirror Investment Fund that is the
Interest Income Fund.

                                       6
<PAGE>
 
                                 ARTICLE THREE

                                    BENEFITS



3.01 Establishment of Accounts
     -------------------------

     A Personal Account and a Company Account within each Mirror Investment Fund
shall be established for each Participant in the Plan as if assets were invested
in a trust.  All amounts credited to the Personal Accounts and Company Accounts
of a Participant shall at all times be held in the Company's general funds as
part of the Company's general assets, unless a trust is established pursuant to
Section 7.08.

     The value, including gains and losses, of such accounts and funds shall be
determined by the Plan Administrator in the same manner that the value is
determined under the Savings Plan.    As of each Valuation Date, the net asset
value of a unit shall equal the net asset value of a unit as determined under
the Savings Plan.

     No funds shall be allocated by the Company to any Personal Account, Company
Account, Mirror Investment Fund, Mirror Company Matching Contribution, or
Partial-Year Mirror Company Matching Contribution under the Plan.

3.02 Personal Accounts
     -----------------

     All amounts deferred by an Active Participant pursuant to Article Two shall
be credited to his Personal Accounts within his Mirror Investment Funds
specified in his investment election.

     All phantom amounts credited to a Participant in his account as of December
31, 1998 under the J. C. Penney Company, Inc. 1995 Deferred Compensation Plan
shall be transferred and credited as of January 1, 1999 to his Personal Account
within the Mirror Investment Fund that is the Interest Income Fund.
                                                                       (Plan II)


3.03 Company Accounts
     ----------------

     An amount deemed to be a Mirror Company Matching Contribution for a full
year (as determined under Section 3.04 below) shall be credited to the Company
Account of each Active Participant for a Plan Year as of the date a Company
matching contribution is allocated to the accounts of participants under the
Savings Plan for that Plan Year.

     An Active Participant must be in the active employ of an Employer on
December 31 of the Plan Year to receive credit for a Mirror Company Matching
Contribution for that Plan Year; provided, however, that an Active Participant
who had a Separation from Service before December 31 of said year shall receive
credit for a Partial-Year Mirror Company Matching Contribution (as determined
under Section 3.05 below) if he qualified 

                                       7
<PAGE>
 
for a partial-year Company matching contribution under the Savings Plan for such
year.

     A Mirror Company Matching Contribution for a full year shall be deemed to
be invested in his Company Account within the Mirror Investment Fund that is the
Penney Common Stock Fund.  A Partial-Year Mirror Company Matching Contribution
shall be deemed to be invested in his Company Accounts within his Mirror
Investment Funds in accordance with the Participant's investment election for
his Personal Accounts under this Plan.

     All phantom amounts credited to a Participant in his Annual Benefit Limit
Make-Up Account  as of December 31, 1998 under the J. C. Penney Company, Inc.
Benefit Restoration Plan or the Thrift Drug, Inc. Benefit Restoration Plan shall
be transferred and credited as of January 1, 1999 to his Company Account within
the Mirror Investment Fund that is the Interest Income Fund.
                                                                       (Plan II)

     Any amount of Company contributions credited to the Participant's Company
account under the Savings Plan and subsequently cancelled so that said plan
could satisfy the average contribution percentage test (as described in the
Savings Plan) shall be credited to his Company Account within the Mirror
Investment Fund that is the Penney Common Stock Fund in the year paid.

     All amounts credited to the Company Accounts of a Participant shall be
subject to the vesting provisions of Article Five.

3.04 Mirror Company Matching Contribution
     ------------------------------------

     The Mirror Company Matching Contribution for an Active Participant is  an
amount determined by subtracting (b) from (a) below where:

     (a) Is the lesser of (c) or (d) below multiplied by the Company matching
contribution rate as determined under the Savings Plan for such year;

     (b) Is the amount of the Company's matching contribution for a full year
actually allocated to the Active Participant's account under the Savings Plan
for such year;

     (c) Is 6% multiplied by the Active Participant's Compensation for such year
determined without regard to the limitations (i) on annual additions under
Section 415(c)(1) of the Code, and (ii) on annual compensation under Section
401(a)(17) of the Code;

     (d) Is the amount of the Active Participant's deposits under the Savings
Plan for the Plan Year plus the amounts deferred by the Active Participant
pursuant to Article Two for such year.

                                       8
<PAGE>
 
3.05 Partial-Year Mirror Company Matching Contribution
     -------------------------------------------------

     The Partial-Year Mirror Company Matching Contribution is an amount
determined by subtracting (b) from (a) below where:

     (a) Is the lessor of 50% of (c) below or 50% of (d) below multiplied by the
Company matching contribution rate as determined under the Savings Plan for such
year;

     (b) Is the amount of the Company's matching contribution for a partial year
actually allocated to the Active Participant's account under the Savings Plan
for such year;

     (c) Is 6% multiplied by the Active Participant's Compensation (as
determined below) for such year determined without regard to the limitations on
(i) annual additions under Section 415 (c)(i) of the Code, and (ii) annual
compensation under Section 401(a)(17) of the Code;

     (d) Is the amount of the Active Participant's deposits under the Savings
Plan for the Plan Year plus the amounts deferred by the Active Participant
pursuant to Article Two for such year.

     Compensation for the purpose of (c) above shall mean the Active
Participant's actual Compensation (other than eligible cash incentive payments)
received during the Plan Year plus 1/12 of such eligible cash incentive payments
received during the Plan Year multiplied by the number of months (including
partial months) during which the Active Participant was in the active employ of
his Employer.

                                       9
<PAGE>
 
                                 ARTICLE FOUR

                                   TRANSFERS


4.01 Personal Accounts
     -----------------

     A Participant may elect, once in each calendar month of the Plan Year, to
transfer an amount (in whole percentages) equal to the value of all or part of
his units in his Personal Accounts within any one or more of the Mirror
Investment Funds to another one or more of his Personal Accounts within the
Mirror Investment  Funds.  The value of such units shall be determined as of the
Valuation Date.  A transfer is effective only if made in the manner determined
by the Plan Administrator.

4.02 Company Accounts
     ----------------

     A Participant who has attained age 55 and is 100% vested in his Company
Accounts under the Plan may elect, once in each calendar month of the Plan Year,
to transfer an amount (in whole percentages) equal to the value of all or part
of his units in his Company Accounts within any one or more of the Mirror
Investment Funds to another one or more of his Company Accounts within the
Mirror Investment Funds.  The value of such units shall be determined as of the
Valuation Date.  A transfer is effective only if made in the manner determined
by the Plan Administrator.

     Notwithstanding any other provision of the Plan, a Participant who wishes
to make transfers from both his Personal Accounts and Company Accounts during
the same month, must do so as part of the same transaction.

                                       10
<PAGE>
 
                                  ARTICLE FIVE

                                    VESTING


5.01 Personal Accounts
     -----------------

     A Participant shall be 100% vested in the value of his Personal Accounts
within his Mirror Investment Funds at all times without regard to whether he is
a Participant in the Plan for any future Plan Year.

5.02 Company Accounts
     ----------------

     A Participant shall be vested in the value of his Company Accounts within
his Mirror Investment Funds in the same vesting percentage attributable to the
value of his Company accounts under the Savings Plan based on his full years of
service (as defined in the Savings Plan) in accordance with the following table:


          Full years of service      Vested Percentage
          ---------------------      -----------------

          Less than 1                           0%
          1                                     20%
          2                                     40%
          3                                     60%
          4                                     80%
          5 or more                             100%


5.03 Forfeitures
     -----------

     A Participant who is less than 100% vested in the value of his Company
Accounts as of his Separation from Service shall forfeit the non-vested value of
his Company Accounts.  In the event the Participant subsequently is reemployed
by an Employer within 5 years, the amount forfeited (without earnings) hereunder
shall be restored to his Company Accounts only if his amount forfeited under the
Savings Plan is restored to his Savings Plan Company accounts.  The restoration
of forfeitures under the Plan shall be made in the same manner as the
restoration of forfeitures under the Savings Plan.

                                       11
<PAGE>
 
                                 ARTICLE SIX

                                 TYPE OF PLAN


6.01 Top Hat Plan
     ------------

     The Plan is intended to be a "pension plan" as defined in ERISA and is
maintained by the Company on an unfunded basis primarily for the purpose of
providing deferred compensation to a select group of management or highly
compensated employees. As such, the Plan is intended to be construed so as not
to provide income to any Participant or Beneficiary for purposes of the Internal
Revenue Code  prior to actual receipt of benefit payments under the Plan.

     In the event that it should subsequently be determined by statute or by
regulation or ruling that the Plan is not "a plan which is unfunded and is
maintained primarily for the purpose of providing deferred compensation for a
select group of management or highly compensated employees" within the meaning
of sections 201(2), 301(a)(3), 401(a)(1), and 4021(b)(6) of ERISA and section
2520.104-24 of Chapter 29 of the Code of Federal Regulations, participation in
the Plan shall be restricted by the Plan Administrator to the extent necessary
to assure that it will be such a plan within the meaning of such sections.

     Notwithstanding any other provision of the Plan, if the benefits of a
Participant become taxable prior to distribution from the Plan, such amounts
shall be distributed as soon as practicable to the affected Participant.

6.02 No Funding
     ----------

     Plan benefits shall be payable solely from the general assets of the
Company. The Company shall not be required to, but may at its discretion,
segregate or physically set aside any funds or assets attributable to Plan
benefits. The Company shall retain title to and beneficial ownership of all
assets of the Company, including any assets which may be used to pay Plan
benefits.  The cost of the Plan shall be expensed and a book reserve shall be
maintained on the Company's financial statements.

     No Participant or Beneficiary shall be deemed to have, pursuant to the
Plan, any legal or equitable interest in any specific assets of the Company. To
the extent that any Participant or Beneficiary acquires any right to receive
Plan benefits, such right shall arise merely as a result of a contractual
obligation and shall be no greater than, nor have any preference or priority
over, the rights of any general unsecured creditor of the Company.

                                       12
<PAGE>
 
                                 ARTICLE SEVEN

                                 DISTRIBUTIONS


7.01 Normal Form of Payment
     ----------------------

     The normal form of payment of benefits under the Plan shall be 5
substantially equal installments payable in accordance with Section 7.02 below.

7.02 Separation from Service
     -----------------------

     A Participant who has a Separation from Service for a reason other than
death shall be entitled to receive the vested benefits in his Personal Accounts
and Company Accounts in 5 substantially equal annual installments.

     The first annual installment shall be paid in January following the year in
which occurs his Separation from Service.  Each annual installment thereafter
shall be paid in January of each year.  Payment dates shall be determined by the
Plan Administrator.

7.03 Death
     -----

     The Beneficiary of a Participant who (1) has a Separation from Service
because of death, or (2) dies while receiving Plan benefits shall be entitled to
receive the remaining annual installments to which the Participant was entitled
as of the date of death.  The first annual installment payable to the
Beneficiary shall be paid in January following the Participant's date of death,
or, if later, after satisfactory proof of death is received by the Plan
Administrator.  Each annual installment thereafter shall be paid in January of
each year.  Payment dates shall be determined by the Plan Administrator.

     A single-sum distribution shall be paid to the estate of the Participant if
as of the date of death (1) no valid beneficiary designation by the Participant
is on file with the Plan Administrator, or (2) the Beneficiary has predeceased
the Participant.

     A single-sum distribution shall be paid to the estate of the Beneficiary if
the Beneficiary dies before receiving all benefits to which he was entitled
under the Plan.

7.04 Alternate Form of Payment
     -------------------------

     A Participant entitled to receive benefits under Section 7.02 above may
make an irrevocable election to receive (1) not more than 15 substantially equal
annual installments, or (2) a single-sum distribution.  The election must be
made prior to the Participant's Separation from Service in a manner authorized
by the Plan Administrator.  If no election

                                       13
<PAGE>
 
has been made by the Participant, benefits shall be paid in the normal form of
payment in accordance with Section 7.02 above.

     The first annual installment or single-sum distribution shall be paid in
January following the year in which occurs his Separation from Service;
provided, however, that the first annual installment or single-sum distribution
shall not be paid until the January following the expiration of at least one
calendar year after the year in which the Participant's election is made.  Each
annual installment thereafter shall be paid in January of each year.

     A Participant also may make an irrevocable election to defer payment of the
first installment or single-sum distribution to January of a later year provided
the election is made prior to the Participant's Separation from Service in a
manner authorized by the Plan Administrator.  If no election has been made by
the Participant, benefits shall commence in accordance with Section 7.02 or
Section 7.04 above, whichever is applicable.

     A Participant who elects both to change the normal form of payment and to
defer payment must make the elections at the same time.

7.05 Hardship Distribution
     ---------------------

     A Participant or Beneficiary entitled to vested benefits under the Plan may
request a single-sum distribution to satisfy a severe financial hardship
resulting from an unforseen event or emergency (as defined below) beyond his
control.  The distribution shall be limited to the amount necessary to satisfy
the severe financial hardship (including any applicable federal, state or local
taxes attributable to such distribution), and shall not exceed the current value
of vested benefits payable to or on behalf of the Participant or Beneficiary.

     An unforseen event or emergency may include, but is not limited to, a
sudden and unexpected illness or accident of the Participant or Beneficiary or
his dependent, loss of his property due to casualty, or other similar
extraordinary and unforeseeable circumstances  arising as the result of events
beyond his control, but shall not include the purchase of his home or the
college expenses of his child.

     The determination of the existence of a severe financial hardship and the
approval of a hardship distribution shall be made by the Director of Personnel
(or his successor by title or position) or his delegate except as provided
below.  Approval shall be given only if, taking into account all of the facts
and circumstances, continued deferral of benefits or adherence to the Plan's
payment schedule would result in a severe financial hardship to the Participant
or Beneficiary.  Approval shall not be granted if such hardship is or may be
relieved through insurance, by liquidation of his assets (to the extent such
liquidation would not itself cause severe financial hardship), or by terminating
his Election to Defer.

                                       14
<PAGE>
 
     With respect to a Participant who is a member of the Management Committee
of the Company or a Participant who is subject to Section 16(b) of the Exchange
Act, the determination of the existence of a severe financial hardship and the
approval of the hardship distribution shall be made by the Benefit Plans Review
Committee.

     In the case of a Participant or Beneficiary who receives a partial hardship
distribution while receiving benefit payments, the regular payment schedule of
the Participant or Beneficiary shall continue following such distribution.

7.06 Fund-Specific Installments or Hardship Distributions
     ----------------------------------------------------

     The payment to a Participant or Beneficiary of installments or a hardship
distribution shall reduce the value of his accounts in his Mirror Investment
Fund(s) as designated by the Participant or Beneficiary.  In the event the
Participant or Beneficiary fails to designate the Mirror Investment Funds from
which payment is to be made, the value of his Mirror Investment Funds shall be
reduced on a pro-rata basis.

7.07 Form of Payments
     ----------------

     Payment of all benefits from the Plan shall be made only by check.  No
payments of Company stock shall be permitted.

7.08 Change of Control
     -----------------

     At the time of commencement of participation in the Plan, a Participant may
make an irrevocable election to have his Plan benefits paid in a single-sum
immediately upon a Change of Control (as hereafter defined).  If the Participant
makes such an election as described above, his vested Plan benefits shall be
paid in a single-sum upon a Change of Control.

     If the Participant does not make such an election, then, upon a Change of
Control, assets of the Company in an amount sufficient to pay benefits then due
under the Plan shall immediately be transferred to a grantor trust to be
established by the Company for the purpose of paying benefits hereunder, and the
Personal Account and Company Account shall thereafter be paid to the Participant
from such trust in accordance with the terms of the Plan; provided that at the
time of such Change of Control, the Participant may make an irrevocable election
to have his Plan benefits paid in a single-sum immediately, in which event the
Participant's benefits shall be reduced by 10% as a penalty for early
withdrawal, and the Participant shall receive a single-sum payment of only 90%
of his benefits otherwise payable under the Plan.  On each anniversary date of
the date of a Change of Control, the Company shall transfer to the grantor trust
an amount necessary to pay all benefits accrued under the Plan during the
preceding twelve months.

                                       15
<PAGE>
 
     For purposes of this Section 7.08, a Change of Control shall be deemed to
have occurred if:

     (1) at any time during any 24-month period, at least a majority of the
Board of Directors of the Company does not consist of Continuing Directors
(meaning directors of the Company at the beginning of such 24-month period and
directors who subsequently became such, and whose election, or nomination for
election, by the Company's stockholders, was approved by a majority of the then
Continuing Directors); or

     (2) at any time during any 12-month period, the Company's directors in
office at the beginning of such 12-month period cease to constitute at least a
majority of the Board of Directors (disregarding any vacancy occurring during
such period by reason of death or disability, but deeming any individual whose
election, or nomination for election, by the Company's stockholders, to fill
such vacancy was approved by a majority of the directors in office immediately
prior to such vacancy, to have been in office at the beginning of such 12-month
period); or

     (3) any person or "group" (as determined for purposes of Rule 13D-G under
the Exchange Act or any successor regulation), except any majority-owned
subsidiary or any Company employee benefit plan or any trust or investment
manager thereunder, shall have acquired "beneficial ownership" (as determined
for purposes of Rule 13D-G under the Exchange Act or any successor regulation)
of shares of Company common stock having 20% or more of the voting power of all
outstanding shares of Company capital stock, unless such acquisition is approved
in advance by a majority of the Board of Directors in office immediately
preceding such acquisition; or

     (4) a merger or consolidation occurs to which the Company is a party,
whether or not the Company is the surviving corporation, in which outstanding
shares of Company common stock are converted into shares of stock or securities
of another company, partnership, or other entity (other than a conversion into
shares of voting common stock of the successor corporation or a holding company
or entity thereof) or other securities (of either the Company or another
company) or cash or other property (excluding payments made solely for
fractional shares); or,

     (5) the sale of all, or substantially all, of the Company's assets occurs.

7.09 Reemployed Participants
     -----------------------

     If the Participant is reemployed, his scheduled payments under Section 7.02
or Section 7.04 shall cease and his election, if any, under Section 7.04 shall
be void.   The Participant may make a new election under Section 7.04 prior to
his subsequent Separation from Service that shall apply to any unpaid benefits
and to any additional benefits payable to or on behalf of the Participant
because of a subsequent Separation from Service.

                                       16
<PAGE>
 
     If no new election is made by the Participant, benefits shall be paid in
the normal form of payment in accordance with Section 7.02 above.

                                       17
<PAGE>
 
                                 ARTICLE EIGHT

                           AMENDMENT AND TERMINATION


8.01 Plan Amendment
     --------------

     The Benefit Plans Review Committee may amend the Plan at any time and from
time to time, without prior notice to any Participant or Beneficiary; provided,
however, that the Human Resources Committee also may make amendments that relate
primarily to the administration of the Plan, are applied in a uniform and
consistent manner to all Participants, and are reported to the Benefit Plans
Review Committee.

8.02 Plan Termination
     ----------------

     The Board of Directors of the Company may terminate or discontinue the Plan
at any time.  If the Plan is terminated, it shall be on such terms and
conditions as the Board of Directors of the Company shall deem appropriate.

8.03 Automatic Plan Termination
     --------------------------

     This Plan is expressly conditioned on the continued deferral of income tax
on amounts deferred by a Participant under the Plan until such amounts are
actually distributed to the Participant.  If, as a result of an adverse
determination by the Internal Revenue Service or a change in the tax laws or
applicable income tax regulations, amounts deferred by Participants under the
Plan become subject to income tax prior to the actual distribution of such
amounts, the Plan and each Election to Defer hereunder shall automatically
terminate as of the effective date of such change in the law without any formal
action by the Board of Directors to terminate the Plan.

                                       18
<PAGE>
 
                                 ARTICLE NINE

                                 MISCELLANEOUS


9.01 Plan Administration
     -------------------

     The Plan shall be administered under the direction of the Benefit Plans
Review Committee. Except as otherwise provided below, the Benefits
Administration Committee shall be considered the Plan Administrator for purposes
of ERISA.

     The Benefit Plans Review Committee may delegate all or some of the
responsibility for the administration of the Plan to the Human Resources
Committee or the Benefits Administration Committee in which case such Committee
shall assume such delegated power and authority in administering the Plan to
that extent; provided, however, that in no event shall the Human Resources
Committee or the Benefits Administration Committee have any power or authority
with respect to matters involving a Participant who is a member of the
Management Committee of the Company or a Participant who is subject to Section
16(b) of the Exchange Act.

     The Plan Administrator has the authority and discretion to construe and
interpret the Plan. As part of this authority, the Plan Administrator has the
discretion to resolve inconsistencies or ambiguities in the language of the
Plan, to supply omissions from or correct deficiencies in the language of the
Plan, and to adopt rules for the administration of the Plan which are not
inconsistent with the terms of the Plan. The Plan Administrator also has the
authority and discretion to resolve all questions of fact relating to any claim
for benefits as to any matter for which the Plan Administrator has
responsibility.  All determinations of the Plan Administrator are final and
binding on all parties.

     Each person considered to be a fiduciary with respect to the Plan shall
have only those powers and responsibilities as are specifically given that
person under this Plan. It is intended that each such person shall be
responsible for the proper exercise of his or her own powers and
responsibilities, and shall not be responsible for any act or failure to act of
any other person considered to be a fiduciary or any act or failure to act of
any person considered to be a non-fiduciary.

9.02 Plan Expenses
     -------------

     All Plan administration expenses incurred by the Company or the Plan
Administrator shall be paid by the Company.

                                       19
<PAGE>
 
9.03 Effect on Other Benefits
     ------------------------

     Participation in the Plan shall not reduce any welfare benefits or
retirement benefits offered by the Company, except that the amounts deferred
under the Plan and any Plan benefits shall not be considered "Compensation" for
purposes of the Savings Plan.

9.04 No Guarantee of Employment
     --------------------------

     Neither participation in the Plan nor any action taken under the Plan shall
confer upon a Participant any right to continue in the employ of an Employer or
affect the right of such Employer to terminate the Participant's employment at
any time.

9.05 Disclaimer of Liability
     -----------------------

     The Employer shall be solely responsible for the payment of Plan benefits
hereunder. The members of the Benefit Plans Review Committee and the Human
Resources Committee, and the officers, directors, employees, or agents of the
Company or any other Employer, shall not be liable for such benefits. Unless
otherwise required by law, no such person shall be liable for any action or
failure to act, except where such act or omission constitutes gross negligence
or willful or intentional misconduct.

9.06 Severability
     ------------

     If any provision of the Plan shall be held invalid or unenforceable, such
invalidity or unenforceability shall apply only to that provision, and shall not
affect or render invalid or unenforceable any other provision of the Plan. In
such event, the Plan shall be administered and construed as if such invalid or
unenforceable provision were not contained herein. If the application of any
Plan provision to any Participant or Beneficiary shall be held invalid or
unenforceable, the application of such provision to any other Participant or
Beneficiary shall not in any manner be affected thereby.

9.07 Successors
     ----------

     The Plan and any Election to Defer shall be binding on (i) the Company and
its successors and assigns, (ii) any Employer and its successors and assigns,
(iii) each Participant, (iv) each Beneficiary, and (v) the heirs, distributees,
and legal representatives of each Participant and Beneficiary.

9.08 Governing Law
     -------------

     Except to the extent that the Plan may be subject to the provisions of
ERISA, the Plan shall be construed and enforced according to the laws of the
State of Texas without giving effect to the conflict of laws principles thereof.
In the event limitations imposed by ERISA on legal actions do not apply, the
laws of the State of Texas shall apply, and a

                                       20
<PAGE>
 
cause of action under the Plan must be brought no later than four years after
the date the action accrues.

9.09 Construction
     ------------

     As used herein, the masculine shall include the feminine, the singular
shall include the plural, and vice versa, unless the context clearly indicates
otherwise. Titles and headings herein are for convenience only and shall not be
considered in construing the Plan. The words "hereof," "hereunder", and other
similar compounds of the word "here" shall mean and refer to the entire Plan and
not to any particular provision or Section.

9.10 Taxes
     -----

     Any taxes imposed on Plan benefits shall be the sole responsibility of the
Participant or Beneficiary. The Company shall deduct from Plan benefits any
federal taxes, state taxes, local taxes, or other taxes required to be withheld.
The Company shall, unless the Plan Administrator elects otherwise, withhold such
taxes at the applicable flat rate percentage. The Company shall also deduct from
any payment of Compensation, including any cash incentive payments, on the date
such payment would have been made if not deferred under this Plan Social
Security and Medicare taxes or other taxes required to be withheld on such date.

9.11 Non-Assignability
     -----------------

     Unless otherwise required by law, and prior to distribution to a
Participant or Beneficiary, Plan benefits shall not be subject to assignment,
transfer, sale, pledge, encumbrance, alienation, or charge by such Participant
or Beneficiary, and any attempt to do so shall be void.  Plan benefits shall not
be liable for or subject to garnishment, attachment, execution, or levy, or
liable for or subject to the debts, contracts, or liabilities of the Participant
or Beneficiary; provided, however, that the Company may offset from the payment
of any Plan benefits to a Participant or Beneficiary amounts owed by the
Participant to an Employer.

9.12 Claims Procedure
     ----------------

     If a Participant or Beneficiary ("claimant") does not receive the benefits
which the claimant believes he is entitled to receive under the Plan, the
claimant may file a claim for benefits with the Director of Personnel (or his
successor by title or position).  All claims must be made in writing and must be
signed by the claimant.  If the claimant does not furnish sufficient information
to determine the validity of the claim, the Director of Personnel will indicate
to the claimant any additional information which is required.

     Each claim will be approved or disapproved by the Director of Personnel
within 90 days following receipt of the information necessary to process the
claim.  In the event the Director of Personnel denies a claim for benefits in
whole or in part, the Director of

                                       21
<PAGE>
 
Personnel will notify the claimant in writing of the denial of the claim. Such
notice by the Director of Personnel will also set forth, in a manner calculated
to be understood by the claimant, the specific reasons for such denial, the
specific Plan provisions on which the denial is based, a description of any
additional material or information necessary to perfect the claim with an
explanation of why such material or information necessary, and an explanation of
the Plan's claim review procedure as set forth below. If no action is taken by
the Director of Personnel on or a claim within 90 days, the claim will be deemed
to be denied for purposes of the review procedure below.

     A claimant may appeal a denial of his or her claim by requesting a review
of the decision by the Plan Administrator.  An appeal must be submitted in
writing within six months after the denial and must (i) request a review of the
claim for benefits under the Plan, (ii) set forth all the grounds upon which the
claimant's request for review is based and any facts in support thereof, and
(iii) set forth any issues or comments which the claimant deems pertinent to the
appeal.

     The Plan Administrator will make a full and fair review of each appeal and
any written materials submitted in connection with the appeal.  The Plan
Administrator will act upon each appeal within 60 days after receipt thereof,
unless special circumstances require an extension of the time for processing, in
which case a decision will be rendered as soon as possible but not later than
120 days after the appeal is received.  The claimant will be given the
opportunity to review pertinent documents or materials upon submission of a
written request to the Plan Administrator, provided the Plan Administrator finds
the requested documents or materials pertinent to the appeal.  On the basis of
its review, the Plan Administrator will make an independent determination of the
claimant's eligibility for benefits under the Plan.

     The decision of the Plan Administrator on any claim for benefits will be
final and conclusive upon all parties thereto.  In the event the Plan
Administrator denies an appeal in whole or in part, the Plan Administrator will
give written notice of the decision to the claimant, which notice will set
forth, in a manner calculated to be understood by the claimant, the specific
reasons for such denial and specific reference to the pertinent Plan  provisions
on which the decision was based.

                                       22