**Exhibit 10.1**

 

**NIC Inc.**

**Management Annual Incentive Plan**

***(as approved March 2008)***

 

**Objective****–**The Management Annual Incentive Plan (“MAIP” or “the Plan”)is intended (i) to attract, retain, and reward key executives of NIC Inc.(“NIC” or “the Company”) and (ii) to promote execution against annualperformance goals.  The Plan is designedto:

 

·                  Reinforcestrategically important operational and financial objectives;

·                  Contributeto competitive compensation opportunities; and

·                  Alignthe interests of Participants with those of NIC’s shareholders.

 

**Definitions–**Certain terms are defined in *Attachment A*for the purposes of the Plan.

 

**Administration–**The Plan shall be administered by the Compensation Committee of theBoard of Directors (the “Committee”); provided, however, that the Committee, inits discretion, may delegate to certain officers or employees of the Companythe responsibility for handling certain day-to-day operational aspects of thePlan.  Any reference to the PlanAdministrator hereinafter which relates to administration of the Plan willrefer to the Committee and/or any officer(s) or employee(s) to whomthe Committee has delegated responsibilities or powers.

 

TheCommittee has discretion to (i) interpret the Plan; (ii) prescribe,amend, and rescind any rules and regulations necessary or appropriate forthe administration of the Plan; and (iii) make such other determinationsand take such other action as it deems necessary or advisable.  Without limiting the generality of theforegoing sentence, the Committee may, in its sole discretion (but in a uniformand consistent manner), treat all or any portion of any period during which aParticipant is on military leave or on an approved leave of absence (as definedby the Committee) from the Company as a period of employment of suchParticipant by the Company for the purpose of this Plan.  Any interpretation, determination, or otheraction made or taken by the Committee shall be final, binding, and conclusiveon all interested parties.

 

**Term ofthe Plan** – The Plan will be considered in effect from theeffective date established when the Plan is approved by the Board of Directorsof the Company (the “Board”).  The Planwill terminate by action of the Board or Committee.  Awards granted hereunder prior to the Plan’stermination will continue to be effective in accordance with the terms andconditions of the Plan.

 

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**Eligibility–**The Plan will cover key employees of the Company as determined by theCommittee.  Eligibility under the Plan orparticipation in the Plan is not a guarantee of employment.  To be eligible for a full year’s Award underthe Plan for a given Plan Year, a Participant must remain in the Company’semploy for the entire Plan Year and through the date of payout.  For individuals that are not eligible underthe Plan at the onset of a given Plan Year, the following guidelines apply:

 

***1.******             ******Newly-hiredEmployee***

 

Atthe sole discretion of the Committee, a newly-hired employee shall be eligibleto an Award if the individual commences employment with the Company at or priorto the first day of the third quarter of the Plan Year (i.e., minimum sixmonths of employment for the Plan Year). No Award under the Plan shall be granted if employment commences morethan six months after commencement of the Plan Year.

 

***2.******             ******Mid-periodPromotion***

 

Atthe sole discretion of the Committee, an employee who is promoted intoeligibility during the Plan Year shall be eligible if the promotion becomeseffective at or prior to the first day of the third quarter of the Plan Year(i.e., promotion becomes effective a minimum of six months prior to the end ofthe Plan Year).  No Award shall begranted if the promotion becomes effective less than six months prior to theend of a Plan Year.

 

**Terminationof Service –**In the event a Participant separates from service tothe Company, Awards made to the Participant will be treated as follows:

 

***1.******             ******Deathor Disability***

 

Ifthe applicable performance goals are ultimately satisfied, a Participant whodies or experiences a Disability during the Plan Year will receive (or theParticipant’s estate will receive) a pro rata Award based on actual days workedduring the Plan Year.  Awards will bepaid as soon as practicable following attainment of the applicable performancegoals.  The Committee may, in its solediscretion, elect to pay a Participant’s estate earlier than the end of a PlanYear if such payment amount is based on both the Participant’s actual daysworked during the Plan year and the estimated performance toward theperformance goals as of the date of the Participant’s death.  In all cases, the payment will be made priorto March 15th of the calendar year following the year for whichthe Committee determines that the applicable performance goals were satisfied.

 

***2.******             ******Retirement***

 

Ifthe applicable performance goals are ultimately satisfied, a Participant whoretires during a given Plan Year will receive a pro rata Award based on actualperformance as measured at the end of the Plan Year, subject to any requiredseverance agreement.  Accordingly, forthe avoidance of doubt, such award will be made on account of a Participant’sretirement only if the Performance Goals are obtained.  In all cases, the payment will be made priorto March 15th of the calendar year following the year for whichthe Committee determines that the applicable performance goals were satisfied.

 

***3.******             ******OtherTermination***

 

Inthe case of a Participant who separates from the Company under voluntaryTermination of Service, Termination of Service for Cause, or resignation wheresuch resignation is determined by the Committee to be in anticipation of orrelated to a possible Termination of Service for Cause, all Awards not yet paidunder the Plan will be canceled.  Theemployee will have no further right or interest under this Plan with respect toany Awards or payments, and the Company will have no further obligation withrespect thereto.  In the eventterminations are deemed “mutual” between the Company and the Participant, theCommittee, in its sole discretion, may consider payment of a pro rata Award;however, the Committee has no obligation to do so.

 

**IncentiveOpportunity –**Annually and in advance of the Plan Year, theCommittee will establish incentive opportunities under the Plan for eachParticipant.  Generally, incentiveopportunities will be established as a percentage of a Participant’s basesalary, and the Award percentage earned will be applied 

 

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toa Participant’s base salary as of May 1st of the Plan Year towhich the incentive opportunity pertains. At the end of the Plan Year, a Participant may earn an Award equal to,greater than, or lesser than (including zero) the target opportunity, subjectto established threshold, target, and superior levels of performance asestablished in advance by the Committee in its sole discretion.  No payments will be awarded if thresholdperformance is not achieved, and no additional payments above the maximumincentive amount will be awarded for performance in excess of the superiorlevel.

 

**PerformanceMeasurement Periods –**The measurement period under the Plan will beone year, coinciding with the Company’s fiscal year beginning on January 1and ending on December 31.  Eachyear, a new Plan Year will commence.

 

**PerformanceMeasures and Goals –**The Committee will establish the performancemeasures and associated weightings for incentive calculations under thePlan.  The Committee may modify thedefinition of performance measures under the Plan and/ or substitute newmeasures for new Plan Years.

 

Theseperformance measures can be one or more of the following consolidated (company-wide)or subsidiary, division or operating unit financial measures:  (1) pre-tax or after-tax income (beforeor after allocation of corporate overhead and bonus), (2) net income(before or after taxes), (3) reduction in expenses, (4) pre-tax orafter-tax operating income, (5) earnings (including earnings before taxes,earnings before interest and taxes, or earnings before interest, taxes,depreciation and amortization,  (6) grossrevenue, (7) working capital, (8) profit margin or gross profits, (9) shareprice, (10) cash flow or cash flow per share (before or after dividends),(11) cash flow return on investment or cash flow return on investedcapital,  (12) return on capital(including return on total capital or return on invested capital), (13) returnon assets or net assets, (14) market share, (15) pre-tax or after-tax earningsper share, (16) pre-tax or after-tax operating earnings per share,  (17) total stockholder return, (18) growthmeasures, such as revenue growth or operating income growth, as compared with apeer group or other benchmark, (19) economic value-added models or equivalentmetrics, (20) comparisons with various stock market indices, (21) improvementin or attainment of expense levels or working capital levels, (22) operatingmargins, gross margins or cash margins, (23) year-end cash, (24) debtreductions, (25) stockholder equity, (26) regulatory achievements, (27)implementation, completion or attainment of measurable objective with respectto research, development, products or projects, production volume levels,acquisitions and divestitures and recruiting and maintaining personnel,  (28) customer satisfaction, (29) operatingefficiency, productivity ratios, (30) strategic business criteria, consistingof one or more objectives based on meeting specified revenue, marketpenetration, geographic business expansion goals (including accomplishingregulatory approval for projects), cost or cost savings targets, accomplishingcritical milestones for projects, and goals relating to acquisitions ordivestitures, or any combination thereof (in each case before or after suchobjective income and expense allocations or adjustments as the Committee mayspecify within the applicable period).

 

Performancegoals may be expressed on an absolute and/ or relative basis, may be based onor otherwise employ comparisons based on current internal targets, the pastperformance of the Company or the performance of one or more subsidiaries,divisions or operating units of the Company or the past or current performanceof other companies, or any combination thereof and in the case ofearnings-based measures, may use or employ comparisons relating to capital(including, but not limited to, the cost of capital), stockholders’ equity and/or shares outstanding, or to assets or net assets.  In all cases, the performance goals shall besuch that they satisfy any applicable requirements under Treas. Reg. Sec.1.162-27(e)(2) (as amended from time to time), that the achievement ofsuch goals be “substantially uncertain” at the time that they are established,and that the award opportunity be defined in such a way that a third party withknowledge of the relevant facts could determine whether and to what extent theperformance goal has been met, and, subject to the Committee’s right to applynegative discretion (within the meaning of Treas. Reg. Sec. 1.162-27(d)(iii)),the amount of the Award payable as a result of such performance.

 

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Forthese purposes, the “applicable period” with respect to any Plan Year is theperiod commencing on or before the first day of the Plan Year and ending nolater than the ninetieth (90th) day of the Plan Year.   For each Plan Year, the Committee will, inits sole discretion and within the applicable period, establish the goals (*i.e.*, Threshold, Target, and Superior) associated with eachperformance measure and determine the weighting of each measure for thepurposes of incentive calculations under the Plan.  Such performance measures and goals willremain unchanged for the Plan Year, subject to the statement immediately below.

 

TheCommittee, in its sole discretion, may exclude the following from performancecalculations under the Plan:  effects ofextraordinary, unusual, special, or one-time events; effects of legal,accounting, or regulatory changes; effects of events that are outside ofmanagement’s control; effects of events that are not reflective of a decisionmade (or area overseen) by management; effects of “preventive” measures takenby management; effects from the disposal of a business segment; or effects oftax adjustments.

 

Performancemeasures, their weightings, and associated goals for the current Plan Year areset forth in *Attachment B*.

 

**AwardPayout -**Awards will be paid to Participants as soon aspracticable following the end of the Plan Year and verification ofresults.  No amounts earned under thePlan will require additional criteria (e.g., the passage of time) to completethe earning process.  Awards will becalculated as a percentage of a Participant’s actual base salary as of May 1stfor the Year in which the performance goals are established and the PerformanceAward is payable.

 

Paymentunder the Plan is subject to compliance by the Participant with any writtenagreement between the Participant and the Company, including an employmentagreement, non-compete agreement, or other agreement relating to confidentialinformation.  If the Participant breachesany such agreement, he/ she shall immediately forfeit his/ her right to receiveany unpaid amounts earned under the Plan.

 

TheCompany has the right to deduct from all net amounts paid under the Plan anyfederal, state, or local taxes required by law to be withheld with respect tosuch payments.

 

**MiscellaneousProvisions**

 

1.               A Participant’s Award willimmediately pay out upon the occurrence of a Change in Control as if targetperformance for the active Plan Year had been achieved.

 

2.               The Plan may be amended ordiscontinued by the Committee at any time without prior notification toParticipants.  However, no amendment mayadversely affect an outstanding Award made under the Plan.

 

3.               The Committee maintains solediscretion to adjust Awards under the Plan downward for legitimate andreasonable performance reasons.

 

4.               The Committee will, to theextent permitted by law, have the sole and absolute authority to makeretroactive adjustments to any Awards paid to Participants where the paymentwas predicated upon the achievement of erroneous financial or strategicbusiness results, or where the Participant engaged in intentional misconductthat increased his/ her incentive income. Where applicable, the Company willseek to recover any amount determined to have been inappropriately received bya Participant under the Plan.

 

5.               The Committee may obtainsuch agreements or undertakings, if any, as the Committee may deem necessary oradvisable to assure compliance with any law or regulation of any governmentalauthority.  The Plan and any Award madehereunder shall be subject to all applicable federal and state laws, rules andregulations, and to such approvals by any government or regulatory agency asmay be required.

 

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6.               No member of the Board orCommittee, nor any officer or employee of the Company acting on behalf of theBoard or Committee, shall be personally liable for any action, determination,or interpretation taken or made in good faith with respect to the Plan.  All members of the Board or Committee, andeach and any officer or employee of the Company acting on their behalf will, tothe extent permitted by law, be fully indemnified and protected by the Companywith respect to any such action, determination, or interpretation.

 

7.               The interests ofParticipants under the Plan are not subject to claims, indebtedness,attachment, execution, garnishment, or other legal or equitable process.  Participant interests under the Plan may notbe transferred or assigned, other than by will or by the laws of descent anddistribution.  If the Participantattempts to alienate, assign, pledge, hypothecate, or otherwise dispose ofAwards or other rights under the Plan, except as provided for in this Plan, orin the event of any levy, attachment, execution, or similar process upon theright or interest conferred by this Plan, the Board may terminate theParticipant’s Award by notice to him/ her, and it shall thereupon become nulland void.

 

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**Attachment A – Definitions**

 

1.               “Award” means, a rightgranted to a Participant entitling him or her to a cash payment under the Planif the applicable performance criteria are satisfied and the Participantcomplies with all other criteria under the Plan.

 

2.               “Cause” means, unlessotherwise defined in a Participant’s employment agreement in which case suchdefinition will control, (i) serious, willful misconduct with respect tothe Participant’s duties as an Employee of the Company; (ii) engaging inany competitive behavior defined below; (iii) the Participant’s indictmentfor a felony; (iv) the Participant’s commission of fraud, embezzlement,theft, or other act involving dishonesty, or a crime constituting moralturpitude, in any case, whether or not involving the Company, that, in theopinion of the Company, renders the Participant’s continued employment harmfulto the Company; (v) abuse of illegal drugs or alcohol by the Participanton the employer’s premises or where the use of illegal drugs has an adverseeffect on a Participant’s performance; or (vi) the Participant acting inbad faith relative to the Company’s business interests.

 

Forpurposes of this Plan, a Participant shall be deemed to engage in competitivebehavior if he/ she (a) directly or indirectly, without the consent of theCompany, solicits or provides any services such as those provided by theCompany for anyone (i) who is a customer or client of the Company; or, (ii) whois a prospective customer or client of the Company with whom the Company hasdiscussed possible business relationships; (b) requests, induces, orattempts to influence any distributor or supplier of goods or services to theCompany to curtail or cancel any business they may transact with the Company;or (c) requests, induces, or attempts to influence, any client or customerof the Company whom he/ she has done business with, or potential client orcustomer whom he/she has been in contact with, to curtail or cancel anybusiness they may transact with the Company.

 

3.               “Change of Control” meansany of the following events:

 

(a)           any “Person” (as suchterm is used in Rule 13d-5 under the Securities Exchange Act of 1934 (the “ExchangeAct”) or group (as such term is defined in Sections 3(a)(9) and 13(d)(3) ofthe Exchange Act), other than a subsidiary or any employee benefit plan (or anyrelated trust) of the Company or a subsidiary, becomes the beneficial owner of50% or more of the common stock or of securities of the Company that areentitled to vote generally in the election of directors of the Company;

 

(b)           within a 12 monthperiod, a majority of the members of the Company’s Board of Directors isreplaced by directors whose election or nomination was not endorsed by amajority of the members of the Board before the date of the appointment orelection;

 

(c)           consummation of amerger, reorganization, consolidation or similar transaction (any of theforegoing, a “Merger”) as a result of which the Persons who were the respectivebeneficial owners of the outstanding common stock and voting securities of theCompany immediately before such Merger are not expected to beneficially own,immediately after such Merger, directly or indirectly, more than 50% of thecommon stock and the combined voting power of the voting securities of thecorporation resulting from such Merger, or

 

(d)           shareholder approvalof a plan of liquidation of the Company or a plan or agreement for the sale orother disposition of all or substantially all of the assets of the Company.

 

4.               “Code” means the InternalRevenue Code of 1986, as amended, and any Internal Revenue Code adopted in thefuture to replace the Internal Revenue Code of 1986.

 

5.               “Disability” means except asotherwise provided by the Committee, that the Participant either (i) isunable, by reason of a medically determinable physical or mental impairment, toengage in any 

 

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substantial gainful activity, on behalf of the Company which condition,in the opinion of a physician approved by the Committee, is expected to have aduration of not less than one hundred and twenty (120) days or (ii) hasbecome eligible to receive long-term disability benefits under aCompany-sponsored long-term disability plan, if any.

 

6.               “Employee” refers to anyperson who is employed by the Company, is on the Company’s payroll, and whosewages are subject to withholding under the Federal Insurance Contributions Act,codified in Code § 3121.

 

7.               “Involuntary Termination”means, unless such term (or term of similar meaning (e.g., “good reason”)) isotherwise defined in a Participant’s employment agreement, in which case suchdefinition will control:  (i) withoutthe Participant’s express written consent, a comprehensive and substantialreduction in all or most of the Participant’s primary duties, authority, andresponsibilities compared to the Participant’s duties, authority, andresponsibilities immediately prior to such reduction; (ii) without theParticipant’s express written consent, a significant reduction in theParticipant’s base salary compared to the Participant’s base salary in effectimmediately prior to such reduction; provided, however, that a reduction in theParticipant’s base salary of less than twenty percent (20%) or a reduction inthe Participant’s base salary that is part of an overall reduction incompensation also applied to other senior executives of the Company as a resultof decreased business performance by the Company or one of its business units,shall not constitute an Involuntary Termination; or (iii) any purportedtermination of the Participant by the Company that is not effected forDisability or Cause.

 

8.               “Participant” shall mean anEmployee of the Company to whom an Award is granted under this Plan.

 

9.               “Plan Administrator” meansthe individual or committee appointed or designated by the Committee toadminister the Plan, if not the Committee itself.

 

10.         “Plan Year” refers to theactive twelve-month period of performance under the Plan.

 

11.         “Retirement” means aParticipant’s date of termination which is designated by the Committee as a “Retirement”for purposes of the Plan or, if applicable, a Participant’s date of terminationafter the normal retirement date specified in a plan maintained by the Companyunder which the Participant is covered, and which is qualified under section401(a) of the Code.

 

12.         “Termination of Service”occurs when a Participant ceases to serve as an Employee of the Company, forany reason.

 

13.         “Voluntary Termination”shall mean any termination of the employment hereunder, otherwise than as aresult of death or Disability, termination for Cause, or InvoluntaryTermination.

 

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** **

**Attachment B – Performance Measures and Weightings**

 

For2008, all Participants will be evaluated based on the Company’s consolidatedoperating results.  The Committee hasdetermined the following three measures will be used for Plan purposes, eachwith the assigned weightings as described:

 

·                  ***Operating Income***

 

50% of a Participant’s opportunity under the Plan – The definition ofOperating Income is consistent with that term defined in generally acceptedaccounting principles and will be derived directly from the face of theconsolidated statements of income included in the Company’s Annual Reports on Form 10-Kfor the year ending December 31, 2008

 

·                  ***Total Revenue***

*** ***

25% of a Participant’s opportunity under the Plan –**T**hedefinition of Total Revenue is consistent with that term defined in generallyaccepted accounting principles and will be derived directly from the face ofthe consolidated statements of income included in the Company’s Annual Reportson Form 10-K for the year ending December 31, 2008

 

·                  ***Cash Flow Return on InvestedCapital***

*** ***

25% of a Participant’s opportunity under the Plan – Cash Flow Return onInvested Capital is defined as consolidated cash flow from operating activitiesminus capital expenditures, the difference of which is divided by thedifference between total assets and non-interest bearing currentliabilities.  Consolidated cash flow fromoperating activities and capital expenditures will be derived from the face ofthe consolidated statements of cash flows included in the Company’s AnnualReport on Form 10-K for the year ending December 31, 2008.  Total assets and non-interest bearingliabilities will be derived from the face of the consolidated balance sheetsincluded in the Company’s Annual Reports on Form 10-K for the year ending December 31,2008.

 

Forthe 2008 Plan Year, the Committee determined a “target” performance level forthe Company for each of the above three performance criteria.  Performance of the Company at the targetlevel will result in an annual cash incentive that is 50% of the executive’sbase salary.  The Committee alsodetermined a range of possible cash incentives above and below targetperformance, ranging from 25% of base salary for achieving “threshold”performance to 75% of base salary for achieving “superior” performance.  No payments are awarded under the plan ifthreshold performance is not achieved, and no additional payments are awardedfor performance in excess of the superior level.  The following table sets forth threshold,target and superior Company performance levels for the performance criteriaincluded in the Plan for the 2008 Plan Year:

 
| ** **                           | ** ** | **Performance Levels** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|
| **Performance Criteria**        | ** ** | **Threshold**               | ** ** | **Target** | ** ** | **Superior** | ** ** |
| ** **                           | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating income                     |       | 90%  of budget              |       | Budget |   | 110%  of Budget |   |
|                                 |       |                        |       |   |   |   |   |
| Total revenue                        |       | 95%  of budget              |       | Budget |   | 105%  of Budget |   |
|                                 |       |                        |       |   |   |   |   |
| Cash flow return on invested capital |       | 20%                         |       | 25% |   | 30% |   |

 

Targetperformance levels for operating income and total revenues are based upon theCompany’s fiscal 2008 annual budget approved by the Board of Directors on February 4,2008.  Target performance for cash flowreturn on invested capital is based on the Company’s expected five-year averagereturn on invested capital from 2004 to 2008. Threshold and maximum performance levels in the table above wererecommended by management and approved by the Committee based on the Company’spast performance with respect to these metrics generally and relative tobudget.

 

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