<PAGE>
 
                                                                    EXHIBIT 10.1
                                                                    ------------





                             ARCO CHEMICAL COMPANY

                         1998 LONG-TERM INCENTIVE PLAN

To record the adoption of the ARCO Chemical Company 1998 Long-Term Incentive
Plan, effective as of February 19, 1998, the undersigned, being duly authorized
to act on behalf of ARCO Chemical Company has executed this plan document at
Newtown Square, Pennsylvania on the 10th day of April, 1998.


ATTEST:                                     ARCO CHEMICAL COMPANY


BY: /s/ Valerie Harrison Perry              BY: /s/ Francis W. Welsh
    --------------------------------           ------------------------------
                                               Francis W. Welsh
                                               Vice President - Human Resources
<PAGE>
 
                             ARCO CHEMICAL COMPANY

                         1998 LONG-TERM INCENTIVE PLAN

                               TABLE OF CONTENTS
<TABLE>
<CAPTION>

<S>                          <C>                                                                            <C>
ARTICLE I                    GENERAL PROVISIONS...........................................................    2
Section 1.                   Purpose of the Plan..........................................................    2
Section 2.                   Overview of the Plan.........................................................    2
Section 3.                   Definitions..................................................................    3
Section 4.                   Administration of the Plan...................................................    5

ARTICLE II                   STOCK OPTIONS................................................................    7
Section 1.                   Grant of Stock Options.......................................................    7
Section 2.                   Terms and Conditions of Stock Options........................................    7

ARTICLE III                  RESTRICTED STOCK.............................................................   10
Section 1.                   Grant of Contingent Restricted Stock.........................................   10
Section 2.                   Conversion of Contingent Restricted Stock into Performance-Based
                               Restricted Stock...........................................................   10
Section 3.                   The End of the Performance Period............................................   12
Section 4.                   The Performance Supplement...................................................   12
Section 5.                   Termination of Employment Prior to Completion of Performance Period..........   14
Section 6.                   Vesting of Performance-Based Restricted Stock................................   16
Section 7.                   Change of Control............................................................   17

ARTICLE IV                   MISCELLANEOUS PROVISIONS.....................................................   19
Section 1.                   Option and Restricted Stock Limits...........................................   19
Section 2.                   Adjustment in Terms of Award.................................................   19
Section 3.                   Governmental Regulations.....................................................   20
Section 4.                   No Guaranty of Employment....................................................   20
Section 5.                   Relation to Benefit Plans....................................................   21
Section 6.                   Assignment or Transfer.......................................................   21
Section 7.                   Rights as Stockholder........................................................   21
Section 8.                   Withholding Taxes............................................................   22
Section 9.                   Amendment and Discontinuance of the Plan.....................................   22
Section 10.                  Effective Date...............................................................   23
Section 11.                  Term of Plan.................................................................   23
Section 12.                  Miscellaneous................................................................   23
</TABLE>
                                       i
<PAGE>
 
                                    ARTICLE I

                               GENERAL PROVISIONS


 SECTION 1.    PURPOSE OF THE PLAN

               The purpose of the Plan is to provide a select group of Company
executives and other key employees with specific incentives to work for long-
range value creation for the Company's stockholders and to enable the Company to
attract, retain, and motivate employees of superior capability.

 SECTION 2.    OVERVIEW OF THE PLAN

               The Plan encourages the creation of stockholder value over the
long-term by measuring Return on Capital Managed (RCM) and Total Stockholder
Return (TSR), and compensating executives and other key employees for
differential performance. The Plan has two components:

               The Performance Share Plan (PSP) measures the Company's RCM
generation and consists of a series of cumulative RCM goals for each Performance
Period. Under the PSP, the recipients of awards of Contingent Restricted Stock
become entitled to shares of Performance-Based Restricted Stock upon the
achievement of RCM performance objectives during the Performance Period. Once
all successive RCM objectives are achieved (or at the end of a period specified
by the Subcommittee, if earlier), the prevailing Performance Period ends and a
new period begins.

               The Stock Option Plan (SOP) provides for grants of non-qualified
stock options of the Company at the Fair Market Value of a share of Common Stock
of the Company on the date of grant.

               Typically, approximately one-half of each participant's Long-Term
Incentive Target Value will be delivered by the PSP, and one-half will be
delivered by the SOP.

                                       2
<PAGE>
 
SECTION 3.     DEFINITIONS

          As used herein, the following terms shall have the following meanings:

a.        "Affiliate" means any entity directly or indirectly controlled by,
     controlling or under common control with the Company.

b.        "Board" and "Board of Directors" mean the Board of Directors of the
     Company.

c.        "Change of Control" means a change of control as defined in the 
     Change of Control Plan.

d.        "Change of Control Plan" means the ARCO Chemical Company Change of
     Control Plan as adopted by the Compensation Committee of the Board of
     Directors on February 19, 1998 and as amended from time to time.

e.        "Code" means the Internal Revenue Code of 1986, as amended.

f.        "Common Stock" means the common stock of the Company, having par value
     of $1.00 per share.

g.        "Company" means ARCO Chemical Company.

h.        "Comparison Group" means the S&P Chemicals group, as defined or
     redefined by Standard & Poors, or such other comparison group of peer
     companies as the Subcommittee may designate for a Performance Period.

i.        "Contingent Restricted Stock" means a contingent grant of shares,
     under the terms and conditions set forth in Article III, Section 1, that
     has no indicia of ownership of Common Stock, that is granted in connection
     with a Performance Period and that may be converted to an award of
     Performance-Based Restricted Stock, following the achievement of
     Performance Objectives under the terms and conditions set forth in Article
     III, Section 2.

j.        "Eligible Employee" means a member of a select group of executives or
     other key employees of the Company who, in the sole discretion of the
     Subcommittee, are in a position to contribute significantly to long-term
     stockholder value creation.

k.        "Employment" means continuous service with the Company from the most
     recent date of hire.

l.        "Exchange Act" means the Securities Exchange Act of 1934, as amended.

m.        "Fair Market Value" or "FMV" of a share of Common Stock means the mean
     of the highest and lowest sale prices, or the closing sale price, of a
     share of Common Stock, whichever is higher, on the date in question as
     reported on the composite tape for issues listed on the New York Stock
     Exchange. If no transaction was reported on the composite tape for the
     Common Stock on such 

                                       3
<PAGE>
 
     date, the FMV shall be computed using the prices reported on the nearest
     trading day preceding the date in question. If the Common Stock should not
     then be listed or admitted to trading on such Exchange, FMV shall be the
     mean of the closing bid and asked prices on the date in question as
     furnished by any member firm of the New York Stock Exchange selected from
     time to time by the Subcommittee for that purpose.

n.        "Long-Term Incentive Target Value" and "LTI Target Value" mean the
     dollar value of all restricted stock and stock options to be granted to an
     Eligible Employee.

o.        "Performance-Based Restricted Stock" means shares of Common Stock that
     have been converted from Contingent Restricted Stock and that remain
     subject to restriction on transfer and assignment and to other conditions
     during the applicable Restriction Period.

p.        "Performance Objective" means a specified level of Company
     performance, measured by cumulative RCM achievement.

q.        "Performance Period" means the period of time established by the
     Subcommittee at the time of a grant of Contingent Restricted Stock over
     which the Company's RCM performance will be measured and Performance-Based
     Restricted Stock may be earned.

r.        "Performance Ranking" means the ranking of the Company in Total 
     Stockholder Return as measured among the Comparison Group over the 
     applicable Performance Period.

s.        "Performance Supplement" means the share multiplier that may be
     applied to the shares of Performance-Based Restricted Stock at the end of a
     Performance Period.

t.        "Plan" means the ARCO Chemical Company 1998 Long-Term Incentive Plan,
     including any amendments hereof and rules and regulations hereunder.

u.        "Restricted Stock Target Value" means the target dollar value of
     Contingent Restricted Stock to be awarded to an Eligible Employee.

v.        "Restriction Period" means the period of time specified by the
     Subcommittee during which the restriction and forfeiture conditions of
     Performance-Based Restricted Stock apply.

w.        "Retirement Plan" means a retirement plan of the Company that provides
     a retirement allowance to an Eligible Employee, other than a Section 401(k)
     plan or other savings plan, as determined by the Subcommittee.

x.        "Return on Capital Managed" and "RCM" mean the financial measure equal
     to the difference between net operating profit after tax (NOPAT) and a
     capital charge, where the capital charge equals average capital multiplied
     by the Company's weighted average cost of capital rate, as determined by
     the Subcommittee.

                                       4
<PAGE>
 
y.        "Stock Option Target Value" means the target dollar value of Stock
     Options to be awarded to an Eligible Employee.

z.        "Stock Options" means options to purchase Common Stock under the terms
     and conditions set forth in Article II of the Plan.

aa.       "Subcommittee" means the Long-Term Incentive Plan Administration
     Subcommittee of the Compensation Committee of the Board of Directors.

bb.       "Total Stockholder Return" and "TSR" mean the sum of the dividends
     and appreciation or depreciation of the price of a share of Common Stock
     over an applicable Performance Period.

SECTION 4.    ADMINISTRATION OF THE PLAN

a.            The Plan shall be administered by the Subcommittee. The
     Subcommittee shall have full power and authority to interpret the Plan, to
     adopt such rules and regulations as it may from time to time deem necessary
     for the effective operation of the Plan, to make factual determinations, to
     correct any defects in the Plan, to reconcile any inconsistencies, to
     supply any omissions and generally to act upon all matters relating to
     awards under the Plan. Without limiting the foregoing, the Subcommittee may
     (i) establish such vesting and other conditions with respect to awards
     under the Plan as it deems appropriate, (ii) accelerate the vesting and
     exercisability of any or all outstanding Stock Options and Performance-
     Based Restricted Stock at any time for any reason, (iii) provide that Stock
     Options may be transferable to family members, trusts of which family
     members are the only beneficiaries or partnerships or other entities of
     which family members are the only owners, on such terms as the Subcommittee
     deems appropriate, (iv) establish such terms for awards as may be
     appropriate to comply with applicable foreign laws, and (v) take any other
     actions consistent with the terms of the Plan. Any determination,
     interpretation, construction, or other action made or taken pursuant to the
     provisions of the Plan by or on behalf of the Subcommittee shall be final,
     binding, and conclusive for all purposes and upon all persons including,
     without limitation, the Company, the Company's stockholders and Eligible
     Employees, and their respective successors in interest.

b.             It is intended that the Subcommittee consist of "outside
     directors" as defined under Section 162(m) of the Code, and related
     Treasury regulations, and "non-employee directors" as defined under Rule
     16b-3 under the Exchange Act.

                                       5
<PAGE>
 
c.             All grants under the Plan shall be subject to the terms and
     conditions set forth herein and to such other terms and conditions
     consistent with this Plan as the Subcommittee deems appropriate and as are
     specified in writing by the Subcommittee to the individual in a grant
     instrument or an amendment to the grant instrument. The Subcommittee shall
     approve the form and provisions of each grant instrument.

                                       6
<PAGE>
 
                                  ARTICLE II

                                 STOCK OPTIONS


 SECTION 1.    GRANT OF STOCK OPTIONS

               The Subcommittee may make grants of Non-Qualified Stock Options
to Eligible Employees in such amounts, at such times and upon such terms as the
Subcommittee deems appropriate.

 SECTION 2.    TERMS AND CONDITIONS OF STOCK OPTIONS

               All Stock Options granted under the Plan shall be subject to the
following terms and conditions:

a.             Option Price. The option price per share with respect to each
     Stock Option shall be fixed by the Subcommittee, but shall not be less than
     the Fair Market Value of the Common Stock on the date the Stock Option is
     granted.

b.             Period of Option. A Stock Option shall expire and all rights
     thereunder shall end at the expiration of such period (not exceeding ten
     years) after the date the Stock Option is granted as shall be fixed by the
     Subcommittee at the time it grants the Stock Option.

c.             Exercise of Option. The Subcommittee may establish such vesting
     dates and other conditions on the exercise of Stock Options as the
     Subcommittee deems appropriate. Stock Options may be exercised during the
     term of the Options at any time after the vesting dates specified by the
     Subcommittee, subject to the provisions of Subsection 2(d) of this Article
     II and Section 7 of Article III. 

                                       7
<PAGE>
 
d.   Termination of Employment.

     i. If a participant's Employment terminates for any of the following
        reasons, but not for cause, the participant's Stock Options that are not
        vested shall continue to vest according to the applicable vesting
        schedule as if the participant's Employment with the Company had
        continued, and the participant (or his or her estate or distributee, in
        the event of death) may retain his or her outstanding Stock Options for
        the balance of the Option term:

        1. Death,

        2. Total and permanent disability,

        3. Termination of Employment with a right to an immediate
           retirement allowance under a Retirement Plan of the Company,

        4. Termination of employment as a result of a Change of Control,
           as described in Subsection (v) below, or

        5. Any other termination of Employment in connection with which the
           Subcommittee, in its sole discretion, determines that the
           participant's Stock Options shall not be canceled.

    ii. If a participant's Employment terminates for one of the following
        reasons, but not for cause (and under circumstances not covered by
        Subsection (i) above), the participant may retain his or her vested
        Stock Options for the balance of the Option term, and the
        participant's non-vested Stock Options shall be canceled, unless the
        Subcommittee determines otherwise:
        
        1. Resignation with the approval of the Company, or
        
        2. Reduction in force.

   iii. If a participant's Employment terminates for cause or for any other
        reason not described in Subsection (i) or (ii) above, all of the
        participant's vested and non-vested Stock Options shall be canceled,
        unless the Subcommittee determines otherwise. 

                                       8
<PAGE>
 
   iv.  If a participant transfers employment to an Affiliate, the participant's
        Stock Options shall not be canceled, and the participant's Stock Options
        shall continue to vest during the participant's employment with the
        Company and its Affiliates. If the participant's employment with the
        Company and its Affiliates subsequently terminates under circumstances
        that would require cancellation of the Stock Options pursuant to
        Subsection (ii) or (iii) above, the applicable Stock Options shall be
        canceled.

    v.  For purposes of the Plan, a "termination of Employment as a result of a
        Change of Control" shall be considered to occur if a participant's
        employment terminates under circumstances that entitle the participant
        to receive plan benefits under the Change of Control Plan.

e.  Payment for Shares. Every share purchased through the exercise of a Stock
Option shall be paid for in full, in cash, within ten business days following
the time of exercise, or, if the Subcommittee so permits, in shares of Common
Stock valued at their Fair Market Value on the date on which such Stock Option
is exercised, or in a combination of cash and such shares. The participant may
exercise a Stock Option through a broker.

                                       9
<PAGE>
 
                                  ARTICLE III

                                RESTRICTED STOCK



SECTION 1.    GRANT OF CONTINGENT RESTRICTED STOCK

a.            At the commencement of each Performance Period, the Subcommittee
     may grant Contingent Restricted Stock to Eligible Employees in an amount
     approximately equal to the Eligible Employee's Restricted Stock Target
     Value as established by the Subcommittee. The Subcommittee may also make
     such other grants of Contingent Restricted Stock to Eligible Employees as
     it deems appropriate.

b.            Contingent Restricted Stock is only the potential right of an
     Eligible Employee to receive Performance-Based Restricted Stock. Contingent
     Restricted Stock is not vested and cannot vest. It can be converted, if
     earned, into Performance-Based Restricted Stock in accordance with Section
     2 of this Article. Contingent Restricted Stock is non-transferable and may
     not be pledged or otherwise encumbered.

SECTION 2.   CONVERSION OF CONTINGENT RESTRICTED STOCK INTO PERFORMANCE-BASED
             RESTRICTED STOCK

a.           At the commencement of each Performance Period, the Subcommittee
     will establish, in its sole discretion, the term of the Performance Period,
     the RCM Performance Objectives for the Performance Period, the methodology
     to be used to compute RCM, and the other terms of the Contingent Restricted
     Stock grants and Performance-Based Restricted Stock grants. The
     Subcommittee will establish the methodology to be used to compute RCM,
     based on the methodology used by the Company to compute RCM for other
     corporate purposes. The Subcommittee may establish a basic Performance
     Period (for example, four years) and an extended period (for example, six
     years), in which case the Performance Objectives may be attained at any
     time during the extended period. However, the Performance Supplement, if
     any, as described in Section 4 of this Article will only be payable if the
     Performance Objectives are attained during the basic Performance Period.

                                       10
<PAGE>
 
b.           The Subcommittee will establish the Performance Objectives and the
     terms of the Contingent Restricted Stock grants and Performance-Based
     Restricted Stock grants in writing either before the beginning of the
     Performance Period or during a period ending no later than the earlier of
     (i) 90 days after the beginning of the Performance Period or (ii) the date
     on which 25% of the Performance Period has been completed, or such other
     date as may be required or permitted under Section 162(m) of the Code. It
     is intended that the Performance Objectives and terms of the Contingent
     Restricted Stock and Performance-Based Restricted Stock shall satisfy the
     requirements for "qualified performance-based compensation" under Section
     162(m) of the Code for employees covered by Section 162(m), including the
     requirement that the achievement of the Performance Objectives be
     substantially uncertain at the time the Performance Objectives are
     established and the Performance Objectives be established in such a way
     that a third party with knowledge of the relevant facts could determine
     whether and to what extent the Performance Objectives have been met. Except
     for the Performance Supplement (which shall be calculated based on the
     formula in Section 4 of this Article III), the Subcommittee shall not have
     discretion to increase the amount of compensation that is payable upon
     achievement of the Performance Objectives.

c.           RCM performance will be measured quarterly or on another schedule
     established by the Subcommittee to determine whether the Performance
     Objectives have been achieved.  If specified Performance Objectives are
     achieved, the appropriate portion of Contingent Restricted Stock will be
     converted to Performance-Based Restricted Stock effective as of the date on
     which the Subcommittee determines that the Performance Objectives have been
     achieved.

d.           The Subcommittee will review the RCM performance of the Company
     according to its pre-established schedule and will certify in writing that
     the Performance Objectives have been met and that conversion is authorized
     before Contingent Restricted Stock is converted into Performance-Based
     Restricted Stock.

e.           The Subcommittee shall have the right, in its discretion, to
     modify, amend, or otherwise adjust the Performance Objectives or terminate
     a Performance Period, subject to compliance with the requirements of
     Section 162(m) with respect to awards covered by that Section, if it
     determines an adjustment or termination would be consistent with the
     objectives of the Plan, taking into account the interests of the
     participants and the stockholders of the Company. The Subcommittee may
     consider, without limitation, accounting changes which substantially affect
     the determination of the Performance Objectives, changes in applicable laws
     or regulations which affect the Performance Objectives, corporate
     reorganizations, including spin-offs or other distributions of assets or
     stock, or other material events which the Subcommittee determines require
     an adjustment to the Performance Objectives or termination of a Performance
     Period.

                                       11
<PAGE>
 
f.           Notwithstanding the foregoing, the Subcommittee may make Contingent
Restricted Stock and Performance-Based Restricted Stock grants that are not
intended to satisfy the requirements for "qualified performance-based
compensation," in which case the requirements of Subsection (b) above shall not
apply to such grants.

 SECTION 3.    THE END OF THE PERFORMANCE PERIOD

a.             A Performance Period ends at the earlier of the following:

               i.   The time when all the pre-established Performance Objectives
                    have been achieved, or

               ii.  The end of the Performance Period (including for this
                    purpose any extended period as described in Section 2(a) of
                    this Article).

b.             At the end of a Performance Period (including for this purpose
               any extended period as described in Section 2(a) of this
               Article), the following shall occur:

               i.   The portion of the initial grant of Contingent Restricted
                    Stock that has not been earned and converted into
                    Performance-Based Restricted Stock shall be canceled.

               ii.  The Performance Supplement may be applied, as described in
                    Section 4 of this Article, if all the Performance Objectives
                    were met within the basic Performance Period as described in
                    Section 2(a) of this Article, and

               iii. If the Subcommittee so determines, a new Performance Period
                    shall begin, including the award of an initial grant of
                    Contingent Restricted Stock applicable to the new
                    Performance Period to Eligible Employees in accordance with
                    this Article.

 SECTION 4.    THE PERFORMANCE SUPPLEMENT

a.             If all the Performance Objectives are met within the basic
     Performance Period (excluding any extended period as described in Section
     2(a) of this Article), immediately following the end of such Performance
     Period the Subcommittee shall apply the Performance Supplement. The
     Performance Supplement is a share multiplier between 0% and 50% used to
     supplement the shares of Performance-Based Restricted Stock previously
     earned and awarded to Eligible Employees under the Plan for the immediately
     concluded Performance Period in recognition of the Company's superior
     stockholder value creation.

                                       12
<PAGE>
 
b.             To determine the Performance Supplement, the Total Stockholder
     Return during the elapsed Performance Period for the Company and for each
     company in the Comparison Group is measured. The TSR values are then
     ranked. Using the following table as an example, the Performance Supplement
     is determined as follows:


               Company TSR
             Rank Relative to               Performance 
             Comparison Group               Supplement
             ----------------               -----------
                    1                           50%
                    2                           40%
                    3                           30%
                    4                           20%
                    5                           10%
                   6-11                          0%

               The Performance Supplement will be calculated based on linear
     interpolation of the Company's TSR between the company ranked number 1
     (100/th/ percentile, with a Performance Supplement of 50%) and the company
     ranked at the median (50/th/ percentile, with a Performance Supplement of
     0%).  If the number of companies in the Comparison Group is different from
     the number used in the foregoing table, the percentages between 50% and 0%
     will be adjusted to take into account the number of companies in the
     Comparison Group.

c.             If the TSR value for one or more companies from the Comparison
     Group is within one percentage point of the TSR value for the Company, the
     Performance Supplement percentages for such companies will be averaged with
     the Company's percentage to determine the Performance Supplement.

d.             For each Eligible Employee, the Performance Supplement is
     multiplied by the number of shares of Contingent Restricted Stock that were
     earned and converted into Performance-Based Restricted Stock during the
     Performance Period, resulting in the grant of additional shares of
     Performance-Based Restricted Stock. The additional shares of Performance-
     Based Restricted Stock will be granted to the Eligible Employee as soon as
     practical after calculation and certification by the Subcommittee and will
     begin to vest according to the same schedule as other Performance-Based
     Restricted Stock as determined by the Subcommittee (for example, fifty
     percent on the first anniversary of the grant of 

                                       13
<PAGE>
 
     the Performance-Based Restricted Stock pursuant to the Performance
     Supplement and fifty percent on the second anniversary of the grant).

 SECTION 5.    TERMINATION OF EMPLOYMENT PRIOR TO COMPLETION OF PERFORMANCE
               PERIOD

a.             If, prior to the end of a Performance Period, a participant who
     has been granted Contingent Restricted Stock terminates Employment for one
     of the following reasons, but not for cause, the participant shall be
     entitled to receive a pro rata share (as described below) of Performance-
     Based Restricted Stock for the Performance Period:

          i.   Death,
         
          ii.  Total and permanent disability,
         
          iii. Termination of Employment with a right to an immediate retirement
               allowance under a Retirement Plan of the Company, or

          iv.  Any other termination of Employment in connection with which the
               Subcommittee, in its sole discretion, determines that the
               participant should receive a pro rata share of Performance-Based
               Restricted Stock.

     Such a participant will be entitled to receive a conversion of the
     participant's Contingent Restricted Stock for the Performance Period into
     Performance-Based Restricted Stock as follows:
          
          i.   If and when the Performance Objectives are attained during the
               Performance Period, the participant shall be entitled to receive
               a conversion of the participant's Contingent Restricted Stock as
               if the participant had continued in Employment, provided that the
               total number of shares of Performance-Based Restricted Stock that
               the participant may receive during the Performance Period
               (including any shares previously received) shall not exceed the
               maximum amount described in subsection (ii) below. The remaining
               shares of Contingent Restricted Stock, if any, shall be
               forfeited.

          ii.  The maximum number of shares of Performance-Based Restricted
               Stock that the participant may receive during the Performance
               Period (excluding any Performance Supplement under subsection
               (iii) below) shall be the number of shares of Contingent
               Restricted Stock awarded to the participant for the Performance
               Period, multiplied by a fraction, the numerator of which is the
               number of full months during which the participant was employed
               during the Performance Period and the denominator of which is the
               number of 

                                       14
<PAGE>
 
               months in the Performance Period (for this purpose, the
               Performance Period shall be the basic Performance Period as
               described in Section 2(a) of this Article III, unless the
               participant's termination occurs within the extended period
               described in that Section). However, if the number of shares of
               Performance-Based Restricted Stock previously received by the
               participant before his or her termination of Employment exceeds
               the maximum number of shares computed above, the participant
               shall not be required to return any such shares to the Company.

          iii. In addition to the foregoing, at the end of the Performance
               Period, if a Performance Supplement is payable for the
               Performance Period, the participant will be entitled to receive a
               Performance Supplement with respect to the Performance-Based
               Restricted Stock earned and awarded to the participant for the
               Performance Period.

          iv.  Any Performance-Based Restricted Stock received by a participant
               after termination of employment shall vest according to the
               vesting schedule established by the Subcommittee pursuant to
               Section 6 of this Article III as if the participant's Employment
               with the Company had continued.

b.        If, prior to the end of a Performance Period, a participant who has
     been granted Contingent Restricted Stock terminates Employment for cause or
     for any other reason not described in Subsection (a) above, all Contingent
     Restricted Stock held on behalf of the participant shall be forfeited.

c.        If a participant transfers employment to an Affiliate, the participant
     will be entitled to receive a pro rata share of Performance-Based
     Restricted Stock for the Performance Period as described in Subsection (a)
     above. The participant's Performance-Based Restricted Stock shall vest
     during the participant's Employment with the Company and its Affiliates, as
     described in Section 6(f) of this Article III.

                                       15
<PAGE>
 
SECTION 6.     VESTING OF PERFORMANCE-BASED RESTRICTED STOCK

a.             The Subcommittee shall determine the vesting schedule for
     Performance-Based Restricted Stock at the beginning of the Performance
     Period. Unless the Subcommittee determines otherwise, Performance-Based
     Restricted Stock shall become vested fifty percent on the first anniversary
     and fifty percent on the second anniversary after its conversion from
     Contingent Restricted Stock, if the Eligible Employee remains in Employment
     during each period.

b.             Dividends accrue on shares of Performance-Based Restricted Stock
     during the vesting period and are invested in additional shares of
     Performance-Based Restricted Stock, which become vested simultaneously with
     the underlying shares.

c.             During the period in which Performance-Based Restricted Stock is
     not vested, such stock shall be non-transferable and may not be pledged or
     otherwise encumbered. Each certificate for a share of Performance-Based
     Restricted Stock shall contain a legend giving appropriate notice of the
     restrictions in the grant. The participant shall be entitled to have the
     legend removed from the stock certificate covering the shares when all
     restrictions on such shares have lapsed. The Subcommittee may determine
     that the Company will not issue certificates for shares of Performance-
     Based Restricted Stock until all restrictions on such shares have lapsed,
     or that the Company will retain possession of certificates for shares of
     Performance-Based Restricted Stock until all restrictions on such shares
     have lapsed.

d.             If a participant's Employment terminates for one of the following
     reasons, but not for cause, before a grant of Performance-Based Restricted
     Stock has vested, the participant's non-vested shares of Performance-Based
     Restricted Stock shall continue to vest according to the applicable vesting
     schedule as if the participant's Employment with the Company had continued:

          i.   Death,

          ii.  Total and permanent disability,

          iii. Termination of Employment with a right to an immediate retirement
               allowance under a Retirement Plan of the Company, or

          iv.  Any other termination of Employment in connection with which the
               Subcommittee, in its sole discretion, determines that the
               participant's Performance-Based Restricted Stock should continue
               to vest.

e.        If a participant terminates Employment within any vesting period
     following the grant of Performance-Based Restricted Stock for cause or for
     any other reason not described in Subsection (d) above, all of the
     participant's non-vested Performance-Based Restricted Stock shall be
     forfeited.

                                       16
<PAGE>
 
f.        If a participant transfers employment to an Affiliate, the
     participant's Performance-Based Restricted Stock shall not be forfeited and
     the participant's Performance-Based Restricted Stock shall continue to vest
     during the participant's employment with the Company and its Affiliates. If
     the participant's employment with the Company and its Affiliates
     subsequently terminates under circumstances that would require forfeiture
     of the Performance-Based Restricted Stock pursuant to Subsection (e) above,
     the participant's non-vested Performance-Based Restricted Stock shall be
     forfeited.


SECTION 7.     CHANGE OF CONTROL

 a.            In the event of a Change of Control, each participant's
     Contingent Restricted Stock for the next Performance Objective level shall
     be converted pro rata into Performance-Based Restricted Stock based on the
     Company's progress to the next Performance Objective level as of the date
     of the Change of Control. The Performance-Based Restricted Stock received
     upon such conversion shall be fully vested. The remaining shares of
     Contingent Restricted Stock, if any, shall be forfeited.

b.             Additionally, the Performance Supplement will be calculated and
     applied as of the effective date of the Change of Control, using the stock
     price on the effective date of the Change of Control, assuming the Change
     of Control occurs during the basic Performance Period (and not during an
     extended period as described in Section 2(a) of this Article). The
     Performance-Based Restricted Stock received pursuant to the Performance
     Supplement shall be fully vested.

c.             All Performance-Based Restricted Stock and Stock Options will
     become immediately vested upon the occurrence of a Change of Control.

d.             Upon a Change of Control where the Company is not the surviving
     corporation (or survives only as a subsidiary of another corporation),
     unless the Subcommittee determines otherwise, all outstanding Stock Options
     that are not exercised shall be assumed by, or replaced with comparable
     options by, the surviving corporation.

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<PAGE>
 
e.             Notwithstanding anything in the Plan to the contrary, in the
     event of a Change of Control, no actions shall be taken under the Plan that
     would make the Change of Control ineligible for pooling of interests
     accounting treatment if, in the absence of such actions, the Change of
     Control would qualify for such treatment and the Company intends to use
     such treatment with respect to the Change of Control.

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<PAGE>
 
                                  ARTICLE IV

                            MISCELLANEOUS PROVISIONS



 SECTION 1.    OPTION AND RESTRICTED STOCK LIMITS

a.             The maximum number of shares of Common Stock for which Stock
     Options may be granted and which may be the subject of a grant of
     Performance-Based Restricted Stock (including, without limitation, awards
     pursuant to the conversion of Contingent Restricted Stock and awards
     pursuant to Performance Supplements) under the Plan is in the aggregate
     6,000,000 shares (subject to adjustment as described in Section 2 of this
     Article). The shares shall be made available from authorized Common Stock,
     issued or unissued, or from Common Stock issued and held in the treasury of
     the Company, as shall be determined by the Subcommittee. Shares of Common
     Stock subject to Stock Options that terminate, expire or are canceled
     without having been exercised, or shares of Performance-Based Restricted
     Stock that are canceled, may again be subject to grant under the Plan.

b.             No individual may be granted more than 300,000 shares of
     Performance-Based Restricted Stock (including, without limitation, awards
     pursuant to the conversion of Contingent Restricted Stock and awards
     pursuant to Performance Supplements) and/or Stock Options, regardless of
     the combination, in any calendar year.

 SECTION 2.    ADJUSTMENT IN TERMS OF AWARD

               In the event of a reorganization, recapitalization, stock split,
stock dividend, distribution of assets other than pursuant to a normal cash
dividend, combination of shares, merger, consolidation, rights offering, split-
up, split-off, spin-off or any other change in the corporate structure or shares
of the Company, the Subcommittee may, in its discretion, after consultation with
the Chairman of the Board and the President, make appropriate adjustments to
reflect such event in respect of (a) the limitations in Section 1 of this
Article IV, (b) the number of shares of Common Stock covered by, and the
exercise price per share applicable to, outstanding Stock Options, and (c) the
number of shares of Common Stock covered by outstanding awards of Contingent
Restricted Stock or Performance-Based Restricted Stock. In the event that the
Subcommittee, after consultation with the Chairman of the Board and the
President, determines that, because of a change (other than a Change of Control)
in the Company's 

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business, operations, corporate structure, capital structure, assets or manner
in which it conducts business, which it deems to be extraordinary and material,
the terms of awards theretofore made are no longer suitable to the objectives
which the Subcommittee sought to achieve when it made such awards, it may modify
the terms of any or all of such awards in such manner as it may decide is
advisable; provided, however, that no award may be modified in a manner which
would be inconsistent with Section 162(m) of the Code, with respect to awards
covered by Section 162(m), or the intent of Subsection 1(b) or Section 9 of this
Article, or which would result in an increase in the shares of Performance-Based
Restricted Stock.

 SECTION 3.    GOVERNMENTAL REGULATIONS

               The Plan and the grant and exercise of Stock Options and the
award of Contingent Restricted Stock and Performance-Based Restricted Stock
hereunder shall be subject to all applicable rules and regulations of
governmental or other authorities. With respect to persons subject to Section 16
of the Exchange Act, it is the intent of the Company that the Plan and all
transactions under the Plan comply with all applicable provisions of Rule 16b-3
or its successors under the Exchange Act. In addition, it is the intent of the
Company that the Plan and grants under the Plan to covered executives comply
with the applicable provisions of Section 162(m) of the Code, except as provided
in Section 2(f) of Article III. To the extent that any legal requirement of
Section 16 of the Exchange Act or Section 162(m) of the Code as set forth in the
Plan ceases to be required under Section 16 of the Exchange Act or Section
162(m) of the Code, that Plan provision shall cease to apply. The Subcommittee
may revoke any grant if it is contrary to law or modify a grant to bring it into
compliance with any valid and mandatory government regulation.

 SECTION 4.    NO GUARANTY OF EMPLOYMENT

               The grant of a Stock Option or award of Contingent Restricted
Stock or conversion to Performance-Based Restricted Stock under the Plan shall
not confer upon a recipient any right to continue in the employ of the Company
nor shall it interfere with or restrict in any way the right of the Company to
discharge an Eligible Employee at any time for any reason, with or without good
cause.

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<PAGE>
 
 SECTION 5.    RELATION TO BENEFIT PLANS

               Stock Options, Contingent Restricted Stock, Performance-Based
Restricted Stock and dividends on Performance-Based Restricted Stock will not be
considered as compensation for the purpose of any other benefit plans maintained
by the Company.

 SECTION 6.    ASSIGNMENT OR TRANSFER

               Unless the Subcommittee determines otherwise, no Stock Option or
share of Contingent Restricted Stock or Performance-Based Restricted Stock shall
be assignable or transferable by an Eligible Employee otherwise than by will or
the laws of descent and distribution.

 SECTION 7.    RIGHTS AS STOCKHOLDER

a.             An Eligible Employee under the Plan shall have no rights of a
     holder of Common Stock by virtue of an award of Stock Options or Contingent
     Restricted Stock hereunder, unless and until he or she becomes entitled to
     have shares of Common Stock or Performance-Based Restricted Stock issued to
     him or her pursuant to the Plan.

b.             An Eligible Employee who has received an award of Performance-
     Based Restricted Stock shall have the right to vote such stock. All
     dividends paid with respect to Performance-Based Restricted Stock shall be
     reinvested in additional shares of Restricted Stock, based on the Fair
     Market Value of Common Stock on the date the dividend is paid, and shall be
     subject to the same restrictions, including the date on which such
     restrictions lapse, as the shares of Performance-Based Restricted Stock
     with respect to which the dividends are paid. Stock received with respect
     to an award of Performance-Based Restricted Stock pursuant to a stock
     split, stock dividend, or other change in the capitalization of the Company
     will be held subject to the same restrictions on transferability that are
     applicable to such shares of Performance-Based Restricted Stock.

c.             No Common Stock shall be issued or transferred in connection with
     any grant hereunder unless and until all legal requirements applicable to
     the issuance or transfer of such Common Stock have been complied with to
     the satisfaction of the Subcommittee. The Subcommittee shall have the right
     to condition any grant hereunder on the participant's undertaking in
     writing to comply with such restrictions on his or her subsequent
     disposition of such shares of Common Stock 

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<PAGE>
 
     as the Subcommittee shall deem necessary or advisable as a result of any
     applicable law, regulation or official interpretation thereof, and
     certificates representing such shares may be legended to reflect any such
     restrictions. Certificates representing shares of Common Stock issued or
     transferred under the Plan will be subject to such stop-transfer orders and
     other restrictions as may be required by applicable laws, regulations and
     interpretations, including any requirement that a legend be placed thereon.

 SECTION 8.    WITHHOLDING TAXES

a.             The Company shall have the right to withhold from salary or other
     compensation or to cause the employee (or the executor or administrator of
     his or her estate or his or her distributee) to make payment of any
     federal, state, local, or foreign taxes required to be withheld with
     respect to any exercise of a Stock Option or award or vesting or deemed
     vesting of Performance-Based Restricted Stock.

b.             In the case of an exercise of Stock Options or the vesting of
     Performance-Based Restricted Stock, an Eligible Employee may elect to have
     the withholding obligation satisfied by having the Company withhold shares
     of Common Stock received upon the exercise of the Stock Option or the
     vesting of Performance-Based Restricted Stock, as the case may be.

 SECTION 9.    AMENDMENT AND DISCONTINUANCE OF THE PLAN

               The Subcommittee may amend or discontinue the Plan as it shall
from time to time consider desirable, provided that:

a.             No amendment shall, without further approval by the holders of a
     majority of the shares which are represented in person or by proxy and
     entitled to vote on the subject at a meeting of stockholders of the
     Company, change the terms of the Plan so as to increase the maximum number
     of shares upon which Stock Options may be granted or which may be issued
     upon a grant of Performance-Based Restricted Stock from the amounts
     described in Subsections 1(a) and (b) of this Article, reduce the minimum
     Stock Option price, or extend the maximum Stock Option period; and

b.             No amendment, discontinuance, or termination shall deprive
     persons who hold shares of Contingent Restricted Stock or Performance-Based
     Restricted Stock, or who are entitled to exercise Stock Options pursuant to
     the terms and provisions of the Plan, of their rights with respect thereto.

                                       22
<PAGE>
 
c.             If required by Section 162(m) of the Code, the Plan must be
     reapproved by the stockholders of the Company no later than the first
     stockholders meeting that occurs in the fifth year following the year in
     which the stockholders previously approved the Plan.

 SECTION 10.   EFFECTIVE DATE

               The effective date of the Plan is February 19, 1998.

 SECTION 11.   TERM OF PLAN

               The Plan will terminate at the end of the third consecutive
Performance Period (including for this purpose any extended period as described
in Section 2(a) of Article III), unless terminated earlier by the Subcommittee.

 SECTION 12.   MISCELLANEOUS

               The Plan shall be unfunded.  The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any grants under this Plan.  The participants
shall in all respects be unsecured creditors of the Company.  The validity,
construction, interpretation and effect of the Plan and grant instruments issued
under the Plan shall exclusively be governed by and determined in accordance
with the law of  the Commonwealth of Pennsylvania.

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