Exhibit
10.(b)


 


CUMMINS ENGINE COMPANY, INC.


TARGET BONUS PLAN


 


(Amended
as of December 10, 1996

and February 12, 2001)


 


1.  Purpose.  The Target Bonus Plan is designed to (i) reinforce
the financial objectives of the Company in the minds of management and other
employees, (ii) attain and maintain a leadership position for the Company
in its method of compensating employees consistent with the relative size of
the Company, the industry in which the Company competes, and the relative
performance of employees, (iii) recognize the performance of the Company
as a whole, maximizing the contributions of the Company’s various businesses,
and (iv) reward both team and individual performance.  The Plan is an incentive plan providing
compensation that varies with the financial results of the Company.


 


2.             Philosophy. 
Bonus payments should relate to the importance of the employee’s
position in influencing Company performance, the financial performance of the
Company during a Quarter, and the performance of the individual during that
Quarter.  Bonus payments should encourage
and promote outstanding decisions and efforts by teams and individuals for the
benefit of the Company.


 


3.             Definitions.


 


(a)           “Base Salary” means the salary paid
to a Participant during a Quarter, exclusive of allowances, incentive pay,
reimbursed expenses, fringe benefits and other similar forms of payment.


 


(b)           “Compensation Committee” or “Committee”
means the Compensation Committee of the Board of Directors of the Company.


 


(c)           “Company” means Cummins Engine
Company, Inc.


 


(d)           “Participant” means an officer of the
Company designated by the Compensation Committee, or other employees as
designated by the President of the Company or his designee.


 


(e)           “Performance Measure” means the
Company’s, or a designated business segment of the Company’s,  return on equity, return on sales, net
income, sales growth, return on assets, total shareholder return, free cash
flow, or a combination thereof.


 


(f)            “Plan” means the Target Bonus Plan
described herein.


 


(g)           “Plan Year” means the Company’s
fiscal year.


 


(h)           “Quarter” means a fiscal quarter of
the Company.


 


(i)            “Target Bonus” means an incentive
bonus amount described in section 7 of the Plan.


 


(j)            “Target Bonus Percentage” means a
percentage of the Participant’s Base Salary intended to be paid as a Target
Bonus under the Plan.


 


4.             Eligibility. 
The Company shall designate the Participants each Plan Year and
establish the Target Bonus Percentage applicable to each Participant.  The Company shall have the power to change
the Target Bonus Percentage of a Participant or remove one or more Participants
from the Plan.


 


5.             Target Bonus Percentage.   The Target Bonus Percentage assigned to each
Participant by the Committee shall be based on various criteria applicable to
the Participant including, but not limited to


 

















 


(i) the scope and
breadth of the Participant’s management position, (ii) opportunity for
independent thought and action, (iii) effect on the Company’s financial
performance, (iv) role in decision-making, (v) working relationships
within the Company, and (vi) the level of compensation prevailing in the
industry in which the Company competes.


 


6.             Bonus Payout Schedule.  A Bonus Payout Schedule will be calculated by
the Committee and communicated to Participants.  The Bonus Payout Schedule will specify the
Performance Measure and the performance level against the measure during the
Quarter required to achieve each payout factor (“Bonus Factor”).  In addition to specifying the Performance
Measure, the Committee may, in its discretion, specify that up to 20% of the
determination of each Bonus Factor also be based upon achieving certain other
financial or non-financial goals and objectives.  The “Target Performance” is that performance
which provides a 1.0 Bonus Factor.


 


7.             Target Bonus. 
A Target Bonus is calculated for each Participant by multiplying Base
Salary times the Target Bonus Percentage designated for the Participant.


 


8.             Earned Bonus. 
Performance during the Quarter in excess of the Target Performance or
performance less than the Target Performance will result in an increased or
diminished bonus, respectively, from the Target Bonus communicated to the
Participant.  The “Earned Bonus” will be
calculated by multiplying the Target Bonus Percentage times the Participant’s
Base Salary times the Bonus Factor associated with the actual performance for
that Quarter as specified in the Bonus Payout Schedule in effect for the Plan
Year containing the Quarter.


 


9.             Change in Accounting Standards.  For purposes of determining the Bonus Factor,
the Company’s actual performance under the Performer Measure will exclude
extraordinary charges and credits which result from a change in accounting
standards of the Company.


 


10.           Adjustment for Individual
Performance.  The Earned Bonus will
be the bonus paid, except in unusual circumstances where poor individual
performance justifies a reduced bonus.


 


11.           Termination of Employment.  During any Quarter that a Participant’s
employment is voluntarily or involuntarily terminated, including termination
due to death, disability or retirement, the amount of the Earned Bonus for that
Quarter will be paid to the Participant or his or her legal representative or
estate, whichever is applicable.


 


12.           Bonus Distribution Date.  Any Earned Bonus will be distributed as soon
as practicable following the determination of actual performance.  In general, the Earned Bonus will be
distributed approximately six (6) weeks following the end of the Quarter
in which earned; provided however, payments under the Plan may be deferred
pursuant to the Company’s Deferred Compensation Plan.


 


13.           Administration.  The Plan shall be administered by the
Compensation Committee.  No member of the
Committee shall be eligible to receive a bonus under this Plan while serving on
the Committee.  The Committee shall have
authority to interpret the Plan and to establish, amend and rescind rules and
regulations for the administration of the Plan, and all such interpretations, rules and
regulations shall be conclusive and binding on all persons.  Notwithstanding any other provision of the
Plan to the contrary, the Committee may impose such conditions on participation
in and bonuses under the Plan as it deems appropriate.


 


14.           Optional Administration as Annual
Plan.  The Plan is designed to
operate primarily as a quarterly plan, measuring Company performance and paying
Target Bonuses on the basis of quarterly results.  From time-to-time, however, the Committee
may, in its sole discretion determine it wishes to measure performance and pay
Target Bonuses on the basis of a Plan Year. 
In the event such a determination is made, all references contained in
this Plan to the term “Quarter” shall be deemed to mean “Plan Year” as the
context requires.


 

















 


15.           Amendment and Termination.  The Board of Directors may at any time amend,
modify, alter or terminate this Plan.


 


16.           Governing Law.  This Plan and all determinations made and
actions taken pursuant hereto, shall be governed by the laws of the State of
Indiana and construed accordingly.


 


17.           Miscellaneous.  There shall be no bonus pool or cumulative
bonus pool.  This Plan is based upon the
number of Participants, the Target Bonus Percentages, the Bonus Factors and the
Base Salaries of the Participants.