<PAGE>
 
                                AMENDMENT NO. 2
                                      TO
                             ARCO CHEMICAL COMPANY
                         KEY MANAGEMENT DEFERRAL PLAN

                              ------------------


     Pursuant to resolutions adopted by the Board of Directors on October 17,
1996, the following amendment is hereby made to the ARCO Chemical Company Key
Management Deferral Plan (the "Plan") effective as of January 1, 1997.

1.   Article I, Section 3.1 of the Plan is amended to read as follows: 

     "3.1 Account means a separate bookkeeping account maintained by the Company
     for each Employee and which measures and determines the amounts to be paid
     to the Employee under the Plan for each component of Deferred Compensation.
     Separate subaccounts will be established for separate components of
     Deferred Compensation, as applicable, deferred by an Employee."

2.   Article I, Section 3.10 of the Plan is amended to read as follows:

     "3.10 Deferral Commitment means a promise made by an Employee to defer
     compensation pursuant to Article III for which a Participation Agreement
     has been submitted by the Employee to the Administrative Committee."

3.   Article I, Section 3.12 of the Plan is deleted and Sections 3.13 through 
     3.31 are redesignated as Sections 3.12 through 3.30.

4.   Article II, Section 2 of the Plan is amended to read as follows:




                                       1


                                 EXHIBIT 10.1
<PAGE>
 
"Section 2. Basic Forms of Deferral

2.1             A Participant may elect to defer the following forms of 
compensation in a Participation Agreement:

        (a)     Base Pay Deferral.  Commencing with Base Pay earned during pay 
periods ending on and after October 1, 1990, a Participant may elect to defer 
Base Pay earned during a Deferral Period, subject to any limitations, conditions
or restrictions, such as minimum or maximum amounts that may be deferred, as are
prescribed by the Administrative Committee in advance of the Deferral Period.

        (b)     Award Deferral.  A Participant may elect to defer Awards to be
paid by the Company during a Deferral Period, subject to any limitations, 
conditions or restrictions, such as minimum or maximum amounts that may be 
deferred, as are prescribed by the Administrative Committee in advance of the 
Deferral Period.

        (c)     ESSP Benefit Deferral.  A Participant may elect to defer the 
ESSP Benefit earned during the Deferral Period, subject to any limitations, 
conditions or restrictions, such as minimum or maximum amounts that may be 
deferred, as are prescribed by the Administrative Committee in advance of the 
Deferral Period.

        (d)     CAP Plan Make-Up Deferral.  Any amount of Base Pay that the  
Participant elected to defer into the CAP Plan during each Deferral Period and 
which was not permitted due to legal restrictions, other than the limitation on
the amount of deferrals under Section 402(g) of the Code, precluding such 
deferrals to the CAP Plan shall be deferred under this Plan to the extent that 
such deferrals would have received the Matching Company Contribution under the 
CAP Plan.  To the extent that such amounts are deferred into this Plan during 
the 



                                       2
<PAGE>
 
     Deferral Period, the Company will contribute an additional amount to this
     Plan based upon the Matching Company Contribution formula then in effect
     under the CAP Plan."

5.   Article II, Section 4 of the Plan is amended to read as follows:

     "Section 4. Limitation on Deferral

     4.1         Except as otherwise permitted for accelerated Deferred 
     Compensation, as defined in Section 7.1(b) of this Article, Deferral
     Commitments shall be subject to the following limitations:

           (a)   A Participant may not defer more than fifty percent (50%) of
     the Participant's Base Pay, except that the limit shall be seventy-five
     percent (75%) of the Participant's Base Pay payable during the first Plan 
     Year, which commences on the Effective Date and ends on December 31, 1990 
     and during the Plan Year commencing on January 1, 1991.


           (b)   The minimum amount that may be deferred for the Deferral Period
     relating to a Deferral Commitment, shall be established by the
     Administrative Committee in advance of the Deferral Period and shall be
     allocable among the forms of Deferred Compensation described in Article II,
     Section 2.1(a) through (c)."

6.   Article III, Section 1 of the Plan is amended to read as follows:

     "Section 1. Accounts

     1.1         For record-keeping purposes only, an Account shall be
     maintained for each Participant. Separate subaccounts shall be maintained
     for each form of Deferred Compensation of a Participant."



                                       3
<PAGE>
 
7.   Article III, Section 3 of the Plan is amended to read as follows:

     "Section 3. Interest Rate

     3.1   (a) A Participant's Account shall be credited as of each Valuation
     Date during each Plan Year at the interest rate previously announced by the
     Company to be applicable for the Plan Year, compounded annually. Interest
     shall be credited as of each Valuation Date from the dates when deferred
     amounts are credited to Accounts based on the balance of each Account.

           (b) Guaranteed Interest Rate. In no event will the Interest Rate 
     applicable to a Participant's Account during the Participant's lifetime and
     Transferred Accounts from the ARCO Chemical Company Annual Incentive Plan
     be less than the Citibank Base Rate and in no event will the Interest Rate
     applicable to Transferred Accounts from the ARCO Chemical Company Executive
     Supplementary Savings Plan be less than the Money Market Rate of interest
     under the CAP Plan for the period of time commencing on the date of
     transfer and ending on the date the Accounts are paid."

8.   Article IV, Section 1 of the Plan is amended to read as follows:

     "Section 1. Plan Benefit

     1.1       If a Participant has a Termination of Employment for any reason 
     the Company shall pay a Plan benefit equal to the Participant's Account
     balance, as determined below:

           (a) A Participant's Account shall be credited with the rate of 
     interest previously determined under Article III, Section 3.1(a) or (b),
     and communicated in advance of each Deferral Period, to be applicable for
     each Plan Year that the Account has been maintained.

                                       4
<PAGE>
 
           (b) The Interest Rates provided under Section 1.1(a) of this Article,
     shall be payable until the Participant's Account is distributed in full."

9.   Article IV, Section 2, Paragraph 2.1 of the Plan is amended to read as 
     follows:

     "2.1      Retirement Distributions shall be paid at the time and in the 
     form of benefit elected by the Participant for the total Deferred
     Compensation (Base Pay, Awards and ESSP), at the time of the Deferral
     Commitment establishing such deferral, on the Participation Agreement. A
     Participant's election shall be irrevocable, except as follows:

           (a) Once each Plan Year prior to the Plan Year previously designated 
     by the Administrative Committee and communicated to Participants, at a time
     and on a form prescribed by the Administrative Committee, each Participant
     may change the time and/or form of the Retirement Distribution of the total
     Deferred Compensation in the Participant's Account. Effective as of the
     Plan Year previously designated by the Administrative Committee under the
     preceding sentence, the election by the Participant on file on such date
     shall govern the time and form of the Retirement Distribution for all
     amounts in the Participant's Account, whether attributable to deferrals
     before or after such date.

           (b) A Participant may request, by application to the Administrative 
     Committee, approval of a change of the prior election at any time prior to
     retirement or commencement of benefits, or in the case of installment
     payments, following commencement of payments, (i) without any reduction in,
     or imposition of any penalty on, the Participant's Account, provided that
     the Administrative Committee determines, upon application of the
     Participant, that the Participant has experienced a Financial Hardship
     justifying the request for a change of election; or (ii) the Administrative
     Committee, in its sole discretion, determines that it is appropriate to
     grant the Participant's request.

                                       5
<PAGE>
 
           (c)  Absent an election by the Participant of the form and/or 
     commencement date of the Retirement Distribution, payment will be made in a
     lump sum immediately following the Participant's date of retirement."

10.  Article IV, Section 4 of the Plan is amended to read as follows:

     "Section 4. Survivor Benefits
     4.1   (a)  Death After Age 65. If the Participant dies on or after
                -------------------
     attaining age 65 the Survivor Benefits shall be equal to the Participant's
     Account balance, payable in the form previously elected by the Participant.

           (b)  Death Prior to Termination of Employment and Prior to Age 65.  
                -------------------------------------------------------------
     If the Participant dies prior to attaining age 65 and prior to Termination
     of Employment, the Survivor Benefit shall be paid in monthly installments
     and shall be the greater of (i) forty percent (40%) of the Participant's
     total Deferral Commitment, or (ii) the actual Account balance of the
     Participant, assuming a payout for the number of years between the
     Participant's death and the year the Participant would have attained age
     65, increased by the applicable Interest Rate credited on unpaid Account
     balances of deceased Participants during each year of the payment period
     to the survivor.

           (c)  Death After Termination of Employment and Prior to Age 65.  If 
                ----------------------------------------------------------
     the Participant dies after Termination of Employment and prior to age 65,
     the Participant's Account balance, if any, shall be paid by continuation of
     the form of benefit which was payable to the Participant for the remaining
     payments which would have been made to the Participant if the Participant
     has lived, increased by the applicable Interest Rate credited on unpaid
     Account balances of deceased Participants during each year of the payment
     period to the survivor.

                                       6
<PAGE>
 
           (d)   Special Rule. If the Participant dies before age 65, the 
                 ------------
     Survivor Benefit will be paid in monthly installments until the Participant
     would have attained age 65; provided, however, that if payment is made
     pursuant to Section 4.1 (b)(ii) of this Article, and the number of years
     between the Participant's death and the year the Participant would have
     attained age 65 is less than the period of installments elected by the
     Participant to be payable upon retirement, then the Survivor Benefit will
     be paid in accordance with the Participant's retirement election of
     installments to be payable upon retirement."

11.  Article IV, Section 5 of the Plan is amended to read as follows:

     "Section 5. In-Service Distributions

     5.1         A Participant may elect to receive an In-Service Distribution 
     from the Participant's Account subject to the following restrictions:

           (a)   Timing of Election. The election to take an In-Service 
     Distribution from an Account must be made at the same time the Participant
     makes the annual Deferral Commitment.

           (b)   Amount of Withdrawal. The amount which a Participant can elect 
     to receive as an In-Service Distribution with respect to an Account shall
     be such portions of the Participant's Account balance, as prescribed by the
     Administrative Committee in advance of the Deferral Period. If a previously
     elected amount exceeds the Account balance when in In-Service Distribution
     is to be made, only the Account balance will be paid.

           (c)   Timing and Form of In-Service Distribution. The In-Service 
     Distribution shall commence at the time and in the form elected by the
     Participant on the Participation Agreement at the time of the Deferral
     Commitment; provided, however, that if the Participant terminates
     employment

                                       7
<PAGE>
 
     without a right to commence a retirement allowance under the Retirement
     Plan, the In-Service Distribution election will be canceled and
     distribution will be made pursuant to Section 3 of this Article, and
     provided, further, that if the Participant terminates employment with a
     right to commence a retirement allowance, the In-Service Distribution
     election will be canceled and distribution will be made pursuant to Section
     2 of this Article."

12.  Sections 7 through 10 of Article IV of the Plan are amended to read as 
     follows:

     "Section 7. Disability

     7.1        If a Participant suffers a Disability under the provisions of
     the ARCO Chemical Company Key Management Long-Term Disability Plan, the
     Participant's Deferral Commitments will cease except for any Awards or ESSP
     Benefits which may be payable thereafter. Distribution of the Deferred
     Compensation will not be made due to the Disability. The Participant's
     Account will be distributed in accordance with the method which the
     Participant had elected for payment of retirement benefits with respect to
     such Deferred Compensation if and when the Participant retires following
     his Disability. Absent a retirement election by the Participant, payment
     will be made in a lump sum upon Termination of Employment.

     Section 8. Termination of Employment Due to Special Circumstances

     8.1        If a Participant terminates employment involuntarily in
     conjunction with a sale of assets or a reorganization (including
     termination due to a special job elimination) the Participant's Account
     will be distributed in accordance with the method which the Participant had
     elected for payment of retirement benefits with payment commencing on the
     earliest date the Participant would have become eligible to commence
     receiving the retirement benefit. During the period between the
     Participant's termination and the commencement of payments, interest will
     be credited to the Participant's Account each year at the applicable


                                       8
<PAGE>
 
Interest Rate.  Absent a retirement election by the Participant, payment will be
made in a lump sum upon Termination of Employment.

Section 9. Valuation and Settlement

9.1 The date on which a lump sum is paid or the date on which installment
payments commence shall be the "Settlement Date." The Settlement Date shall be
no more than thirty (30) days after the last day of the month in which the
Participant or his Beneficiary becomes entitled to payments on account of
retirement, other Termination of Employment or death, unless the Participant
elects to defer commencement of payments following retirement to a later date in
the Participation Agreement. The Settlement Date for an In-Service Distribution
or delayed payments following retirement shall be the month which the
Participant elects for commencement of such payments in the election form for
designation of form of payment. The amount of a lump sum and the initial amount
of installment payments shall be based on the value of the Participant's
Account as of the Valuation Date at the end of the immediately preceding month
before the Settlement Date. For example, the Valuation Date at the end of
December shall be used to determine lump sum or the initial amount of
installment payments which will be made in the following January.

Section 10.  Small Benefit


10.1  Notwithstanding any election made by the Participant, the Administrative 
Committee, in its sole discretion, may pay any benefit in the form of a lump sum
payment to the Participant or any Beneficiary, if the lump sum amount of the 
Account balance which remains in the Account following a distribution for any 
reason, or which is payable to the Participant or Beneficiary when payments to 
such Participant or Beneficiary would otherwise commence is less than $2,000."

                                       9
<PAGE>
 
13.   Article V of the Plan is amendment to read as follows:


                                  "ARTICLE V

                          DESIGNATION OF BENEFICIARY

      Section 1.   Designation of Beneficiary

      1.1          Each Participant shall have the right to designate a
      Beneficiary or Beneficiaries to receive Participant's interest in
      Participant's Account upon the Participant's death. Such designation shall
      be made on a form prescribed by and delivered to the Company. The
      Participant shall have the right to change or revoke any such designation
      from time to time by filing a new designation or notice of revocation with
      the Company, and no notice to any Beneficiary nor consent by any
      Beneficiary shall be required to effect any such change or revocation.

      Section 2.   Failure to Designate Beneficiary

      2.1          If a Participant shall fail to designate a Beneficiary before
      the Participant's death, or if no designated Beneficiary survives the
      Participant, the Administrative Committee shall direct the Company to pay
      the balance in Participant's Account in a lump sum to the executor or
      administrator for Participant's estate."


Executed This 22nd day of November, 1996.


ATTEST:                              ARCO CHEMICAL COMPANY



BY: /s/ John G. Chou                 BY: /s/ Frank W. Welsh
   ----------------------------         ----------------------------
                                         FRANK W. WELSH
                                         Vice President
                                         Human Resources


                                      10