exv10w3








    Exhibit 10.3



 




    TRANSITIONAL
    COMPENSATION AGREEMENT



 



    THIS AGREEMENT made and entered into as of November 20,
    2002 and amended and restated as of December   ,
    2008 by and between Woodward Governor Company, a Delaware
    corporation, (hereinafter called the “Corporation”)
    and Thomas A. Gendron (hereinafter called the
    “Executive”).



 



    WITNESSETH THAT:



 



    WHEREAS, the Board of Directors of the Corporation (the
    “Board”) has determined that it is in the best
    interests of the Corporation and its shareholders to assure that
    the Corporation will have the continued dedication of the
    Executive, despite the possibility, threat or occurrence of a
    Change in Control (as defined below) of the Corporation; and



 



    WHEREAS, the Board believes that it is imperative to diminish
    the inevitable distraction of the Executive which would result
    from the personal uncertainties and risks created by a
    threatened or pending Change in Control and to encourage the
    Executive’s full attention and dedication to the business
    of the Corporation currently and in the event of any threatened
    or pending Change in Control and to provide the Executive with
    appropriate compensation and benefit protection upon a Change in
    Control;



 



    NOW, THEREFORE, the Corporation and the Executive, each
    intending to be legally bound, hereby mutually covenant and
    agree as follows:



 



    1. Term.  This Agreement shall become
    effective upon the occurrence of a Change in Control (as defined
    in Paragraph 4(d), below) (hereinafter called the
    “Effective Date”) and shall remain in effect for a
    term continuing until the end of the twenty-fourth (24th)
    calendar month following the month in which the Effective Date
    occurs; provided, however, that, anything in this Agreement to
    the contrary notwithstanding, if a Change in Control occurs and
    if the Executive’s employment with the Corporation was
    terminated prior to the date on which the Change in Control
    occurs, and if it is reasonably demonstrated by the Executive
    that such termination of employment (a) was at the request
    of a third party who was taking steps reasonably calculated to
    effect a Change in Control or (b) otherwise arose in
    connection with or anticipation of a Change in Control, then for
    all purposes of this Agreement the “Effective Date”
    shall mean the date immediately prior to the date of such
    termination of employment.



 



    2. Employment.  After the Effective Date,
    the Corporation shall employ the Executive to, and the Executive
    shall, exercise such authority and perform such executive duties
    as are commensurate with the authority being exercised and
    performed by the Executive during the
    ninety-day
    period immediately prior to the Effective Date, which services
    shall be performed at the location where the Executive was
    employed immediately prior to the Effective Date. The Executive
    shall also continue to serve as a member of the Board of
    Directors of the Corporation, if serving as such as of the
    Effective Date. The Executive shall devote substantially his
    entire time during reasonable business hours (reasonable sick
    leave and vacations excepted) and reasonable best efforts to
    fulfill faithfully and responsibly his duties hereunder. During
    the period of employment after the Effective Date, it shall not
    be a violation of this Agreement for the Executive to serve on
    corporate, civic or charitable boards or committees, or be
    involved in civic, charitable or educational endeavors, or
    manage personal investments, so long as such activities do not
    significantly interfere with the performance of Executive’s
    responsibilities as an employee of the Corporation hereunder. It
    is expressly agreed and understood that to the extent any such
    activities were conducted by the Executive prior to the
    Effective Date, the continued conduct of such or similar
    activities subsequent to the Effective Date shall not thereafter
    be deemed to interfere with the performance of the
    Executive’s responsibilities to the Corporation.



 



    3. Compensation and Benefits.  For the
    Executive’s employment with the Corporation after the
    Effective Date, the Executive shall be compensated as follows:



 



    (a) The Executive shall receive an annual base salary at a
    rate not less than the highest aggregate annual base salary and
    seniority-based vacation plan amount paid or payable to the
    Executive by the Corporation during the 24 month period
    immediately prior to the Effective Date, to be paid in
    accordance













 






    the Corporation’s regular payroll practices. Such amount,
    or such greater annual base salary rate which may be paid or
    payable to the Executive after the Effective Date, is
    hereinafter referred to as the “Annual Base Salary.”



 



    (b) The Executive shall be eligible to participate on a
    reasonable basis in the Corporation’s bonus and incentive
    compensation plans and programs which provide opportunities to
    receive compensation which are not less than opportunities
    provided by the Corporation for executives with comparable
    annual base salary.



 



    (c) The Executive shall be entitled to receive executive
    and employee benefits and perquisites which are not less than
    the executive and employee benefits and perquisites provided by
    the Corporation to executives with comparable annual base salary.



 



    For purposes of this Paragraph 3, “executives with
    comparable annual base salary” shall mean those executives
    of the Corporation whose annual base salary falls within a range
    the low end of which is 90% of the Executive’s Annual Base
    Salary and the high end of which is 110% of the Executive’s
    Annual Base Salary.



 



    4. Termination.  Unless earlier terminated
    in accordance with the following provisions of this
    Paragraph 4, the Corporation shall continue to employ the
    Executive and the Executive shall remain employed by the
    Corporation from the Effective Date through the end of the term
    of this Agreement as set forth in Paragraph 1, above.
    Paragraph 6 hereof sets forth certain obligations of the
    Corporation in the event that the Executive’s employment
    hereunder is terminated prior to the expiration of such term.
    Certain capitalized terms used in this Paragraph 4 and in
    Paragraphs 5 and 6 hereof are defined in
    Paragraph 4(d), below.



 



    (a) Death or Disability.  The
    Executive’s employment shall terminate immediately as of
    the Date of Termination in the event of the Executive’s
    death or in the event that the Executive becomes disabled. The
    Executive will be deemed to be disabled upon the earlier of
    (i) the end of a six (6)-consecutive month period during
    which, by reason of physical or mental injury or disease, the
    Executive has been unable to perform substantially all of his
    usual and customary duties under this Agreement or (ii) the
    date that a reputable physician selected by the Board, and as to
    whom the Executive has no reasonable objection, determines in
    writing that the Executive will, by reason of physical or mental
    injury or disease, be unable to perform substantially all of the
    Executive’s usual and customary duties under this Agreement
    for a period of at least six (6) consecutive months. If any
    question arises as to whether the Executive is disabled, upon
    reasonable request therefor by the Board, the Executive shall
    submit to reasonable medical examination for the purpose of
    determining the existence, nature and extent of any such
    disability. The Board shall promptly give the Executive written
    notice of any such determination of the Executive’s
    disability and of any decision of the Board to terminate the
    Executive’s employment by reason thereof. Until the Date of
    Termination for disability, the base salary payable to the
    Executive shall be reduced dollar-for-dollar by the amount of
    any disability benefits paid to the Executive in accordance with
    any disability policy or program of the Corporation.



 



    (b) Discharge for Cause.  In accordance
    with the procedures hereinafter set forth, the Board may
    discharge the Executive from his employment hereunder for Cause.
    Any discharge of the Executive for Cause shall be communicated
    by a Notice of Termination to the Executive given in accordance
    with Paragraph 14 of this Agreement. For purposes of this
    Agreement, a “Notice of Termination” means a written
    notice which (i) indicates the specific termination
    provision in this Agreement relied upon, (ii) sets forth in
    reasonable detail the facts and circumstances claimed to provide
    a basis for termination of the Executive’s employment under
    the provision so indicated and (iii) specifies the
    termination date, which may be as early as the date of the
    giving of such notice. No purported termination of the
    Executive’s employment for Cause shall be effective without
    a Notice of Termination.



 



    (c) Termination for Other Reasons.  The
    Corporation may discharge the Executive without Cause by giving
    written notice to the Executive in accordance with
    Paragraph 14 at least fifteen (15) days prior to the
    Date of Termination. The Executive may resign from his
    employment, without liability to the Corporation, by giving
    written notice to the Corporation in accordance with
    Paragraph 14 at least fifteen (15) days prior to the
    Date of Termination.




    

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    (d) Definitions.  For purposes of this
    Agreement, the following capitalized terms shall have the
    meanings set forth below:



 



    (i) “Accrued Obligations” shall mean, as
    of the Date of Termination, the sum of (A) the
    Executive’s Annual Base Salary through the Date of
    Termination to the extent not theretofore paid, (B) the
    amount of any bonus, incentive compensation, deferred
    compensation and other cash compensation accrued by the
    Executive as of the Date of Termination to the extent not
    theretofore paid and (C) any vacation pay, expense
    reimbursements and other cash entitlements accrued by the
    Executive as of the Date of Termination to the extent not
    theretofore paid. For the purpose of this
    Paragraph 4(d)(i), amounts shall be deemed to accrue
    ratably over the period during which they are earned, but no
    discretionary compensation shall be deemed earned or accrued
    until it is specifically approved by the Board or the
    Compensation Committee in accordance with the applicable plan,
    program or policy.



 



    (ii) “Cause” shall mean: (A) the
    Executive’s commission of an act materially and
    demonstrably detrimental to the financial condition
    and/or
    goodwill of the Corporation or any of its subsidiaries, which
    act constitutes gross negligence or willful misconduct by the
    Executive in the performance of his material duties to the
    Corporation or any of its subsidiaries, or (B) the
    Executive’s commission of any material act of dishonesty or
    breach of trust resulting or intended to result in material
    personal gain or enrichment of the Executive at the expense of
    the Corporation or any of its subsidiaries, or (C) the
    Executive’s conviction of a felony involving moral
    turpitude, but specifically excluding any conviction based
    entirely on vicarious liability. No act or failure to act will
    be considered “willful” unless it is done, or omitted
    to be done, by the Executive in bad faith or without reasonable
    belief that his action or omission was in the best interests of
    the Corporation. In addition, no act or omission will constitute
    Cause unless (A) a resolution finding that Cause exists has
    been approved by a majority of all of the members of the Board
    at a meeting at which the Executive is allowed to appear with
    his legal counsel and (B) the Corporation has given
    detailed written notice thereof to the Executive and, where
    remedial action is feasible, he then fails to remedy the act or
    omission within a reasonable time after receiving such notice.



 



    (iii) A “Change in Control” shall be
    deemed to have occurred if:



 



    (A) Any “person” (as defined in
    Section 13(d) and 14(d) of the Securities Exchange Act of
    1934, as amended (the “Exchange Act”)), excluding for
    this purpose the Corporation or any subsidiary of the
    Corporation, or any employee benefit plan of the Corporation or
    any subsidiary of the Corporation, or any person or entity
    organized, appointed or established by the Corporation for or
    pursuant to the terms of such plan which acquires beneficial
    ownership of voting securities of the Corporation, is or becomes
    the “beneficial owner” (as defined in
    Rule 13d-3
    under the Exchange Act) directly or indirectly of securities of
    the Corporation representing fifteen percent (15%) or more of
    the combined voting power of the Corporation’s then
    outstanding securities; provided, however, that no Change in
    Control shall be deemed to have occurred (1) as the result
    of an acquisition of securities of the Corporation by the
    Corporation which, by reducing the number of voting securities
    outstanding, increases the direct or indirect beneficial
    ownership interest of any person to fifteen percent (15%) or
    more of the combined voting power of the Corporation’s then
    outstanding securities, but any subsequent increase in the
    direct or indirect beneficial ownership interest of such a
    person in the Corporation shall be deemed a Change in Control,
    or (2) as a result of the acquisition directly from the
    Corporation of securities of the Corporation representing less
    than 50% of the voting power of the Corporation, or (3) if
    the Board of Directors of the Corporation determines in good
    faith that a person who has become the beneficial owner directly
    or indirectly of securities of the Corporation representing
    fifteen percent (15%) or more of the combined voting power of
    the Corporation’s then outstanding securities has
    inadvertently reached that level of ownership interest, and if
    such person divests as promptly as practicable a sufficient
    amount of securities of the Corporation so that the person no
    longer has a direct or indirect beneficial ownership interest in
    fifteen percent (15%) or more of the combined voting power of
    the Corporation’s then outstanding securities; or



 



    (B) During any period of two (2) consecutive years
    (not including any period prior to the Effective Date of this
    Agreement), individuals who at the beginning of such two-year
    period constitute the Board of Directors of the Corporation and
    any new director or directors (except for any




    

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    director designated by a person who has entered into an
    agreement with the Corporation to effect a transaction described
    in subparagraph (A), above, or subparagraph (C), below) whose
    election by the Board or nomination for election by the
    Corporation’s shareholders was approved by a vote of at
    least two-thirds of the directors then still in office who
    either were directors at the beginning of the period or whose
    election or nomination for election was previously so approved,
    cease for any reason to constitute at least a majority of the
    Board (such individuals and any such new directors being
    referred to as the “Incumbent Board”); or



 



    (C) Consummation of (1) an agreement for the sale or
    disposition of the Corporation or all or substantially all of
    the Corporation’s assets, (2) a plan of merger or
    consolidation of the Corporation with any other corporation, or
    (3) a similar transaction or series of transactions
    involving the Corporation (any transaction described in parts
    (1) through (3) of this subparagraph (C) being
    referred to as a “Business Combination”), in each case
    unless after such a Business Combination (x) the
    shareholders of the Corporation immediately prior to the
    Business Combination continue to own, directly or indirectly,
    more than fifty-one percent (51%) of the combined voting power
    of the then outstanding voting securities entitled to vote
    generally in the election of directors of the new (or continued)
    entity (including, but not by way of limitation, an entity which
    as a result of such transaction owns the Corporation or all or
    substantially all of the Corporation’s former assets either
    directly or through one or more subsidiaries) immediately after
    such Business Combination, in substantially the same proportion
    as their ownership of the Corporation immediately prior to such
    Business Combination, and (y) at least a majority of the
    members of the board of directors of the entity resulting from
    such Business Combination were members of the Incumbent Board at
    the time of the execution of the initial agreement, or of the
    action of the Board, providing for such Business
    Combination; or



 



    (D) Approval by the shareholders of the Corporation of a
    complete liquidation or dissolution of the Corporation.



 



    (iv) “Date of Termination” shall mean
    (A) in the event of a discharge of the Executive by the
    Board for Cause, the date specified in such Notice of
    Termination, (B) in the event of a discharge of the
    Executive without Cause or a resignation by the Executive, the
    date specified in the written notice to the Executive (in the
    case of discharge) or the Corporation (in the case of
    resignation), which date shall be no less than fifteen
    (15) days and no more than thirty-one (31) days from
    the date of such written notice; provided however, if the
    written notice is received in December, the fifteen
    (15) days notice period may be shortened so that in no
    event will the Date of Termination occur in the year following
    the year in which the written notice is received by either
    party, (C) in the event of the Executive’s death, the
    date of the Executive’s death, and (D) in the event of
    termination of the Executive’s employment by reason of
    disability pursuant to Paragraph 4(a), the date the
    Executive receives written notice of such termination.



 



    (v) “Good Reason” shall mean any of the
    following without the written consent of the Executive: (A)
    (1) assignment of duties inconsistent with the
    Executive’s position, authority, duties or responsibilities
    referred to in Paragraph 2, or any action by the
    Corporation which results in a substantial diminution of such
    position, authority, duties or responsibilities, other than an
    isolated, insubstantial and inadvertent action not taken in bad
    faith and which is remedied by the Corporation promptly after
    receipt of notice thereof given by the Executive, or (2) if
    applicable, removal or other failure to continue Executive as a
    member of the Board as required by Paragraph 2,
    (B) any reduction in Executive’s Annual Base Salary,
    or bonus or incentive opportunities from those referred to in
    Paragraph 3(a) or 3(b), other than an isolated,
    insubstantial and inadvertent reduction not made in bad faith
    and which is remedied by the Corporation promptly after receipt
    of notice thereof given by the Executive, or (c) a
    relocation of Executive to an office location more than
    30 miles from the location referred to in Paragraph 2,
    or (D) failure by the Corporation to provide Executive with
    the executive or employee benefits and perquisites referred to
    in Paragraph 3(c), other than an isolated, insubstantial
    and inadvertent reduction not made in bad faith and which is
    remedied by the Corporation promptly after receipt of notice
    thereof given by the Executive, or (E) failure by any
    successor to enter into the assumption of and agreement to
    perform this Agreement referred to in Paragraph 13. For
    purposes of this Paragraph 4(d)(v), any good faith
    determination by the Executive that one of the foregoing events
    has occurred shall be conclusive. In




    

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    addition, resignation for any reason by the Executive, which
    resignation is to be effective at any time during the
    30 day period beginning twelve (12) months after the
    Effective Date shall constitute a resignation for Good Reason;
    provided, further, that if the Executive dies or becomes
    disabled after the execution of a definitive agreement for a
    transaction which will constitute a Change in Control but before
    the expiration of such
    30-day
    period, then the Executive shall be deemed to have terminated
    employment for Good Reason on the later of (1) the
    effective date of the Change in Control or (2) the date of
    the Executive’s death or termination of employment due to
    disability.



 



    (vi) “Qualifying Termination” shall mean
    termination of the Executive’s employment after the
    Effective Date and during the term of this Agreement as
    described in Paragraph 1, above, (A) by reason of the
    discharge of the Executive by the Corporation other than for
    Cause or disability or (B) by reason of the resignation of
    the Executive for Good Reason within six (6) months after
    an event constituting Good Reason or (C) in accordance with
    the last sentence of the definition of Good Reason in
    subparagraph (v), above.



 



    5. Vesting of Equity Awards Upon a Change in
    Control.  Immediately upon a Change in Control,
    all stock options, restricted stock and other equity awards to
    the Executive which are not otherwise vested shall vest in full,
    and all options shall remain exercisable for the period provided
    for in the applicable plan or award agreement.



 



    6. Obligations of the Corporation Upon
    Termination.  The following provisions describe
    certain obligations of the Corporation to the Executive under
    this Agreement upon termination of his employment. However,
    except as explicitly provided in this Agreement, nothing in this
    Agreement shall limit or otherwise adversely affect any rights
    which the Executive may have under applicable law, under any
    other agreement with the Corporation or any of its subsidiaries,
    or under any compensation or benefit plan, program, policy or
    practice of the Corporation or any of its subsidiaries.



 



    (a) Death, Disability, Discharge for Cause, or
    Resignation Without Good Reason.  In the event the
    Executive’s employment terminates by reason of the death or
    disability of the Executive (other than in circumstances which
    constitute a Qualifying Termination under
    Paragraph 4(d)(vi)(C)), or by reason of the discharge of
    the Executive by the Corporation for Cause, or by reason of the
    resignation of the Executive other than for Good Reason, the
    Corporation shall pay to the Executive, or his designated
    beneficiaries, heirs or estate, in the event of the
    Executive’s death, all Accrued Obligations in a lump sum
    within thirty (30) days after the Date of Termination;
    provided, however, that any portion of the Accrued Obligations
    which consists of bonus, deferred compensation, or incentive
    compensation shall be determined and paid in accordance with the
    terms of the relevant plan as applicable to the Executive. In
    addition, if the Executive’s employment is terminated by
    death, disability or retirement under a retirement plan of the
    Corporation or by resignation of the Executive other than for
    Good Reason, the Executive may, in the discretion of the
    Compensation Committee, be awarded a pro rata cash bonus for the
    year in which the Date of Termination occurs; provided, however,
    that in no event shall any pro rata cash bonus be paid later
    than March 15th of the year following the year in
    which the Date of Termination occurs.



 



    (b) Qualifying Termination.  In the event
    of a Qualifying Termination, the Executive shall receive the
    following benefits:



 



    (i) Payment of all Accrued Obligations in a lump sum on the
    Date of Termination; provided, however, that any portion of the
    Accrued Obligations which consists of bonus, deferred
    compensation or incentive compensation shall be determined and
    paid in accordance with the terms of the relevant plan as
    applicable to the Executive.



 



    (ii) Payment in a lump sum on the Date of Termination of a
    pro rata cash bonus for the year in which the Date of
    Termination occurs, determined and paid in accordance with the
    terms of the then current annual bonus plan applicable to the
    Executive; provided, however, that such pro rata amount shall
    not be less than the pro rata amount determined using the
    greater of (A) the full year’s bonus to which
    Executive would have been entitled based on the
    Corporation’s performance for the year, or (B) the
    greater of the Executive’s target bonus (x) for such
    year under such plan or (y) for the year in which the
    Effective Date of this Agreement occurs based on the annual
    bonus plan as in effect and applicable to Executive immediately
    prior to the Effective Date.




    

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    (iii) Payment in a lump sum on the Date of Termination of a
    salary replacement amount equal to three hundred percent (300%)
    of the Annual Base Salary required to be paid to Executive
    pursuant to Paragraph 3(a) above, or if greater, the rate
    of Annual Base Salary as in effect immediately prior to the Date
    of Termination.



 



    (iv) Payment in a lump sum on the Date of Termination of a
    bonus replacement amount equal to three hundred percent (300%)
    of the highest of the annual bonus paid or payable to the
    Executive for the three (3) years preceding the year in
    which the Date of Termination occurs or, if greater, the greater
    of (A) Executive’s target bonus for year in which the
    Date of Termination occurs or (B) Executive’s target
    bonus for the year in which the Effective Date occurs under the
    terms of the annual bonus plan in effect immediately prior to
    the Effective Date.



 



    (v) Payment in a lump sum on the Date of Termination of a
    long-term incentive compensation bonus replacement amount equal
    to three hundred percent (300%) of the highest of the long-term
    incentive compensation bonus paid or payable to the Executive
    during the three (3) years preceding the year in which the
    Date of Termination occurs or, if greater, the highest of the
    Executive’s target long-term incentive compensation award
    opportunity for any award cycle ending during or after the year
    in which the Effective Date occurs.



 



    (vi) Payment in a lump sum on the Date of Termination of a
    retirement replacement amount equal to 300% of the sum of the
    Retirement Savings Plan and Executive Benefit Plan contributions
    made or credited by the Corporation for the benefit of the
    Executive for the plan year of each such plan during which the
    Date of Termination occurs or, if greater, for the plan year of
    each such plan (or any successor or replacement plan)
    immediately preceding the plan year in which the Effective Date
    occurs.



 



    (vii) Continuation, for a period of three (3) years
    after the Date of Termination, of the following employee
    benefits on terms at least as favorable to the Executive as
    those which would have been provided if the Executive’s
    employment had continued for that time pursuant to this
    Agreement, with the cost of such benefits to be paid by the
    Corporation: medical and dental benefits, life and disability
    insurance, and executive physical examinations
    (“Corporation-Paid Coverage”). Corporation-Paid
    Coverage shall be paid directly by the Corporation to the
    applicable insurer
    and/or
    administrator when premiums for such coverage are due in
    accordance with the terms and conditions of the applicable
    insurance policy or administrative services agreement.
    Notwithstanding the foregoing, if the Executive is a
    “specified employee” (as described in Section 7
    below) on the date of the Executive’s “separation from
    service” (as described in Section 7 below), continued
    coverage under the disability and life insurance plans shall be
    solely at the expense of the Executive for the period beginning
    on the date of the Executive’s separation and ending six
    (6) months thereafter. On the date six (6) months and
    one (1) day following his or her separation (or, in the
    event of his or her death, at such earlier time as provided in
    Section 7 below), the Corporation shall reimburse the
    Executive for the Corporation-Paid Coverage under the disability
    and life insurance plans portion of such expense in a lump sum
    cash payment. Thereafter, Corporation-Paid Coverage under the
    disability and life insurance plans shall be paid directly by
    the Corporation to the applicable insurer
    and/or
    administrator when premiums for such coverage are due in
    accordance with the terms and conditions of the applicable
    insurance policy or administrative services agreement. To the
    extent the Corporation is unable to provide comparable insurance
    for reasons other than cost; the Corporation may provide a
    lesser level or no coverage and compensate the Executive for the
    difference in coverage through a cash lump sum payment grossed
    up for taxes, payable on the Date of Termination. This payment
    will be tied to the cost of an individual insurance policy if it
    were assumed to be available. Upon the expiration of the
    coverage provided under this paragraph (vii), the Executive and
    Executive’s dependents will be entitled to elect
    Consolidated Omnibus Budget Reconciliation Act of 1985
    (“COBRA”) continuation coverage on the same basis as
    would be extended with respect to an employee whose employment
    terminated at the time of such expiration and for purposes of
    Title X of COBRA, the date of the “qualifying
    event” for the Executive and Executive’s dependents
    shall be the date upon which the Corporation-Paid Coverage
    terminates.




    

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    (viii) Outplacement services, at the expense of the
    Corporation, from a provider reasonably selected by the
    Executive; provided however, to the extent the outplacement
    services are taxable under the Internal Revenue Code, the
    expenses must be incurred before the last day of the second year
    following separation from service and the reimbursement must be
    made before the last day of the third year following separation
    from service.



 



    (ix) Tax preparation services for the Executive’s
    taxable year in which the Date of Termination occurs, provided
    at the expense of the Corporation, on the same basis as provided
    to Executive immediately prior to the Effective Date; provided
    however, to the extent the tax preparation services are taxable
    under the Internal Revenue Code, the expenses must be incurred
    before the last day of the second year following separation from
    service and the reimbursement must be made before the last day
    of the third year following separation from service.



 



    7. Section 409A.



 



    (a) Six-Month Delay.  Notwithstanding
    anything to the contrary in this Agreement, no Deferred
    Compensation Separation Benefits (as defined below) will be
    considered due or payable until the Executive has incurred a
    “separation from service” within the meaning of
    Section 409A of the Internal Revenue Code of 1986, as
    amended and the final regulations and any guidance promulgated
    thereunder (together, “Section 409A”).
    Notwithstanding anything to the contrary in this Agreement, if
    the Executive is a “specified employee” within the
    meaning of Section 409A at the time of his termination
    (other than due to death), the severance payable to him, if any,
    pursuant to this Agreement, when considered together with any
    other severance payments or separation benefits that are
    considered deferred compensation under Section 409A
    (together, the “Deferred Compensation Separation
    Benefits”) that are payable within the first six
    (6) months following his termination of employment, will
    become payable on the first payroll date that occurs on or after
    the date six (6) months and one (1) day following the
    date of the Executive’s termination of employment. All
    subsequent Deferred Compensation Separation Benefits, if any,
    will be payable in accordance with the payment schedule
    applicable to each payment or benefit. Notwithstanding anything
    herein to the contrary, if the Executive dies following
    termination but prior to the six (6) month anniversary of
    termination, then any payments delayed in accordance with this
    Section 7 will be payable in a lump sum as soon as
    administratively practicable after the date of the
    Executive’s death and all other Deferred Compensation
    Separation Benefits will be payable in accordance with the
    payment schedule applicable to each payment or benefit. Each
    payment and benefit payable under this Agreement is intended to
    constitute separate payments for purposes of
    Section 1.409A-2(b)(2)
    of the Treasury Regulations.



 



    (b) The foregoing provisions are intended to comply with
    the requirements of Section 409A so that none of the
    severance payments and benefits to be provided hereunder will be
    subject to the additional tax imposed under Section 409A,
    and any ambiguities herein will be interpreted to so comply. The
    Executive and the Corporation agree to work together in good
    faith to consider amendments to this Agreement and to take such
    reasonable actions, which are necessary, appropriate or
    desirable to avoid imposition of any additional tax or income
    recognition prior to actual payment to him under
    Section 409A.



 



    8. Certain Additional Payments by the
    Corporation.  The Corporation agrees that:



 



    (a) Anything in this Agreement to the contrary
    notwithstanding, in the event it shall be determined that any
    payment or distribution by the Corporation to or for the benefit
    of the Executive (whether paid or payable or distributed or
    distributable pursuant to the terms of this Agreement or
    otherwise, but determined without regard to any additional
    payments required under this Paragraph 8) (a
    “Payment”) would be subject to the excise tax imposed
    by Section 4999 of the Internal Revenue Code of 1986, as
    amended, (the “Code”) or if any interest or penalties
    are incurred by the Executive with respect to such excise tax
    (such excise tax, together with any such interest and penalties,
    being hereinafter collectively referred to as the “Excise
    Tax”), then the Executive shall be entitled to receive an
    additional payment (a
    “Gross-Up
    Payment”) in an amount such that, after payment by the
    Executive of all taxes (including any interest or penalties
    imposed with respect to such taxes), including, without
    limitation, any income taxes (and any interest and penalties
    imposed with respect thereto) and Excise Tax imposed upon the
    Gross-Up
    Payment, the Executive retains an amount of the
    Gross-Up
    Payment equal to the Excise Tax imposed




    

    7








 






    upon the Payment. Notwithstanding the foregoing, if the
    Executive is a “specified employee” (as described in
    Section 7 above) on the date of the Executive’s
    “separation from service” other than due to death (as
    described in Section 7 above) and a
    Gross-Up
    Payment would not have been required under this Section 8
    in the absence of the benefits provided for in this Agreement,
    any Gross-Up
    Payment otherwise due to the Executive on or within the six
    (6) month period following the Executive’s separation
    from service will accrue during such six (6) month period
    and will become payable in a lump sum payment (less any
    applicable withholding taxes) on the date six (6) months
    and one (1) day following the date of the Executive’s
    separation from service.



 



    (b) Subject to the provisions of paragraph (c), below, all
    determinations required to be made under this Paragraph 8,
    including whether and when a
    Gross-Up
    Payment is required and the amount of such
    Gross-Up
    Payment and the assumptions to be utilized in arriving at such
    determination, shall be made by the accounting firm which is
    then serving as the auditors for the Corporation (the
    “Accounting Firm”), which shall provide detailed
    supporting calculations both to the Corporation and the
    Executive within fifteen (15) business days of the receipt
    of notice from the Executive that there has been a Payment, or
    such earlier time as is requested by the Corporation. In the
    event that the Accounting Firm is serving as accountant or
    auditor for the individual, entity or group effecting the Change
    in Control, the Executive may appoint another nationally
    recognized accounting firm to make the determinations required
    hereunder (which accounting firm shall then be referred to as
    the Accounting Firm hereunder). All fees and expenses of the
    Accounting Firm shall be borne solely by the Corporation. Any
    Gross-Up
    Payment, as determined pursuant to this Paragraph 8, shall
    be paid by the Corporation to the Executive within five
    (5) days of the receipt of the Accounting Firm’s
    determination. If the Accounting Firm determines that no Excise
    Tax is payable by the Executive, it shall furnish the Executive
    with a written opinion that failure to report the Excise Tax on
    the Executive’s applicable federal income tax return would
    not result in the imposition of a negligence or similar penalty.
    Any good faith determination by the Accounting Firm shall be
    binding upon the Corporation and the Executive. As a result of
    the uncertainty in the application of Section 4999 of the
    Code at the time of the initial determination by the Accounting
    Firm hereunder, it is possible that
    Gross-Up
    Payments which will not have been made by the Corporation should
    have been made (“Underpayment”), consistent with the
    calculations required to be made hereunder. In the event that
    the Corporation exhausts its remedies pursuant to paragraph (c),
    below, and the Executive thereafter is required to make a
    payment of any Excise Tax, the Accounting Firm shall determine
    the amount of the Underpayment that has occurred and any such
    Underpayment shall be promptly paid by the Corporation to or for
    the benefit of the Executive.



 



    (c) The Executive shall notify the Corporation in writing
    of any claim by the Internal Revenue Service that, if
    successful, would require the payment by the Corporation of a
    Gross-Up
    Payment. Such notification shall be given as soon as practicable
    but no later than fifteen (15) business days after the
    Executive is informed in writing of such claim and shall apprise
    the Corporation of the nature of such claim and the date on
    which such claim is requested to be paid. The Executive shall
    not pay such claim prior to the expiration of the thirty
    (30)-day period following the date on which Executive gives such
    notice to the Corporation (or such shorter period ending on the
    date that any payment of taxes with respect to such claim is
    due). If the Corporation notifies the Executive in writing prior
    to the expiration of such period that it desires to contest such
    claim, the Executive shall:



 



    (i) Give the Corporation any information reasonably
    requested by the Corporation relating to such claim,



 



    (ii) Take such action in connection with contesting such
    claim as the Corporation shall reasonably request in writing
    from time to time, including, without limitation, accepting
    legal representation with respect to such claim by an attorney
    reasonably selected by the Corporation,



 



    (iv) Cooperate with the Corporation in good faith in order
    effectively to contest such claim, and



 



    (v) Permit the Corporation to participate in any
    proceedings relating to such claim; provided, however, that the
    Corporation shall bear and pay directly all costs and expenses
    (including additional interest and penalties) incurred in
    connection with such contest and shall indemnify and hold the




    

    8








 






    Executive harmless, on an after-tax basis, for all taxes
    (including interest and penalties with respect thereto),
    including without limitation any Excise Tax and income tax
    (including interest and penalties with respect thereto), imposed
    as a result of such representation and payment of costs and
    expenses. Without limiting the foregoing provisions of this
    paragraph (c), the Corporation shall control all proceedings
    taken in connection with such contest and, at its sole option,
    may pursue or forego any and all administrative appeals,
    proceedings, hearings and conferences with the taxing authority
    in respect of such claim and may, at its sole option, either
    direct the Executive to pay the tax claimed and sue for a refund
    or contest the claim in any permissible manner; and the
    Executive agrees to prosecute such contest to a determination
    before any administrative tribunal, in a court of initial
    jurisdiction and in one or more appellate courts, as the
    Corporation shall determine; provided, however, that if the
    Corporation directs the Executive to pay such claim and sue for
    a refund, the Corporation shall advance the amount of such
    payment to the Executive on an interest-free basis and shall
    indemnify and hold the Executive harmless, on an after-tax
    basis, for all taxes (including interest and penalties with
    respect thereto), including without limitation any Excise Tax
    and income tax (including interest or penalties with respect
    thereto), imposed with respect to such advance or with respect
    to any imputed income with respect to such advance; and further
    provided that any extension of the statute of limitations
    relating to payment of taxes for the taxable year of the
    Executive with respect to which such contested amount is claimed
    to be due is limited solely to such contested amount.
    Furthermore, the Corporation’s control of the contest shall
    be limited to issues with respect to which a
    Gross-Up
    Payment would be payable hereunder and the Executive shall be
    entitled to settle or contest, as the case may be, any other
    issue raised by the Internal Revenue Service or any other taxing
    authority.



 



    (d) If, after the receipt by the Executive of an amount
    advanced by the Corporation pursuant to paragraph (c), above,
    the Executive becomes entitled to receive any refund with
    respect to such claim, the Executive shall (subject to the
    Corporation’s complying with the requirements of said
    paragraph (c)) promptly pay to the Corporation the amount of
    such refund (together with any interest paid or credited
    thereon, after taxes applicable thereto). If, after the receipt
    by the Executive of an amount advanced by the Corporation
    pursuant to said paragraph (c), a determination is made that the
    Executive shall not be entitled to any refund with respect to
    such claim and the Corporation does not notify the Executive in
    writing of its intent to contest such denial of refund prior to
    the expiration of thirty (30) days after such
    determination, then such advance shall be forgiven and shall not
    be required to be repaid; and the amount of such advance shall
    offset, to the extent thereof, the amount of the
    Gross-Up
    Payment required to be paid.



 



    9. No Set-Off or Mitigation.  The
    Corporation’s obligation to make the payments provided for
    in this Agreement and otherwise to perform its obligations
    hereunder shall not be affected by any set-off, counterclaim,
    recoupment, defense or other claim, right or action which the
    Corporation may have against the Executive or others. In no
    event shall the Executive be obligated to seek other employment
    or take any other action by way of mitigation of the amounts
    payable to the Executive under any of the provisions of this
    Agreement, and such amounts shall not be reduced whether or not
    the Executive obtains other employment.



 



    10. Payment of Certain Expenses.  The
    Corporation shall pay the reasonable legal fees and expenses
    incurred by the Executive in connection with the negotiation and
    preparation of this Agreement. In addition, the Corporation
    shall pay promptly as incurred, to the fullest extent permitted
    by law, all legal fees and expenses which the Executive may
    reasonably incur as a result of any contest by the Corporation,
    the Executive or others of the validity or enforceability of, or
    liability under, any provision of this Agreement (including as a
    result of any contest initiated by the Executive about the
    amount of any payment due pursuant to this Agreement), plus in
    each case interest on any delayed payment at the applicable
    federal rate provided for in Section 7872(f)(2)(A) of the
    Code, plus an additional amount such that after payment by the
    Executive of all taxes imposed on such additional amount, the
    Executive shall retain an amount equal to the total taxes
    imposed on the Executive due to the payment by the Corporation,
    to or for the Executive, of legal fees and expenses with respect
    to any such contest; provided, however, that the Corporation
    shall not be obligated to make such payment with respect to any
    contest in which the Corporation prevails over the Executive.




    

    9








 






    11. Indemnification.  To the full extent
    permitted by law, the Corporation shall, both during and after
    the term of the Executive’s employment, indemnify the
    Executive (including the advancement of expenses) for any
    judgments, fines, amounts paid in settlement and reasonable
    expenses, including attorneys’ fees, incurred by the
    Executive in connection with the defense of any lawsuit or other
    claim to which he is made a party by reason of being (or having
    been) an officer, director or employee of the Corporation or any
    of its subsidiaries. In addition, the Executive shall be
    covered, both during and after the term of the Executive’s
    employment, by director and officer liability insurance to the
    maximum extent that such insurance covers any officer or
    director (or former officer or director) of the Corporation.



 



    12. Confidentiality.  During and after the
    period of employment with the Corporation, the Executive shall
    not, without prior written consent from the Chief Executive
    Officer or the General Counsel of the Corporation, directly or
    indirectly disclose to any individual, corporation or other
    entity, other than to the Corporation or any subsidiary or
    affiliate thereof or their officers, directors or employees
    entitled to such information or any other person or entity to
    whom such information is disclosed in the normal course of the
    business of the Corporation) or use for the Executive’s own
    benefit or for the benefit of any such individual, corporation
    or other entity, any Confidential Information of the
    Corporation. For purposes of this Agreement, “Confidential
    Information” is information relating to the business of the
    Corporation or its subsidiaries or affiliates (a) which is
    not generally known to the public or in the industry,
    (b) which has been treated by the Corporation and its
    subsidiaries and affiliates as confidential or proprietary,
    (c) which provides the Corporation or its subsidiaries or
    affiliates with a competitive advantage, and (d) in the
    confidentiality of which the Corporation has a legally
    protectable interest. Confidential Information which becomes
    generally known to the public or in the industry, or in the
    confidentiality of which the Corporation and its subsidiaries
    and affiliates cease to have a legally protectable interest,
    shall cease to be subject to the restrictions of this
    Paragraph 13.



 



    13. Binding Effect.  This Agreement shall
    be binding upon and inure to the benefit of the heirs and
    representatives of the Executive and the successors and assigns
    of the Corporation. Amounts payable under this Agreement upon
    the Executive’s death shall be paid to his beneficiaries,
    if any, designated in writing and filed with the Corporate
    Secretary, and in the absence of such designation, shall be paid
    to his heirs by will or laws of descent and distribution. The
    Corporation shall require any successor (whether direct or
    indirect, by purchase, merger, reorganization, consolidation,
    acquisition of property or stock, liquidation, or otherwise) to
    all or a substantial portion of its assets, by agreement in form
    and substance reasonably satisfactory to the Executive,
    expressly to assume and agree to perform this Agreement in the
    same manner and to the same extent that the Corporation would be
    required to perform this Agreement if no such succession had
    taken place. Regardless of whether such an agreement is
    executed, this Agreement shall be binding upon any successor of
    the Corporation in accordance with the operation of law, and
    such successor shall be deemed the “Corporation” for
    purposes of this Agreement.



 



    14. Notices.  All notices, requests,
    demands and other communications hereunder shall be in writing
    and shall be deemed to have been duly given when delivered by
    hand or by recognized commercial delivery service or on the
    third business day after being mailed within the continental
    United States by first class certified mail, return receipt
    requested, postage prepaid, addressed as follows:



 


			
	 	    (a) 
	
    If to the Board or the Corporation, to:





    Woodward Governor Company




    1000 East Drake Road




    Fort Collins, Colorado 80525




    Attn: Corporate Secretary



 


			
	 	    (b) 
	
    Thomas A. Gendron





    1000 East Drake Road




    Fort Collins, CO 80525




    (Unless otherwise specified by Executive)



 



    Such addresses may be changed by written notice sent to the
    other party at the last recorded address of that party.




    

    10








 






    15. Tax Withholding.  The Corporation
    shall provide for the withholding of any taxes required to be
    withheld by federal, state, or local law with respect to any
    payment in cash, shares of stock
    and/or other
    property made by or on behalf of the Corporation to or for the
    benefit of the Executive under this Agreement or otherwise. The
    Corporation may, at its option: (a) withhold such taxes
    from any cash payments owing from the Corporation to the
    Executive, (b) require the Executive to pay to the
    Corporation in cash such amount as may be required to satisfy
    such withholding obligations
    and/or
    (c) make other satisfactory arrangements with the Executive
    to satisfy such withholding obligations.



 



    16. Arbitration.  Any dispute or
    controversy between the Corporation and the Executive arising
    out of or relating to this Agreement or the breach of this
    Agreement shall be settled by arbitration administered by the
    American Arbitration Association (“AAA”) in accordance
    with its Commercial Arbitration Rules then in effect, and
    judgment on the award rendered by the arbitrator may be entered
    in any court having jurisdiction thereof. Any arbitration shall
    be held before a single arbitrator who shall be selected by the
    mutual agreement of the Corporation and the Executive, unless
    the parties are unable to agree to an arbitrator, in which case
    the arbitrator will be selected under the procedures of the AAA.
    The arbitrator shall have the authority to award any remedy or
    relief that a court of competent jurisdiction could order or
    grant, including, without limitation, the issuance of an
    injunction. However, either party may, without inconsistency
    with this arbitration provision, apply to any court otherwise
    having jurisdiction over such dispute or controversy and seek
    interim provisional, injunctive or other equitable relief until
    the arbitration award is rendered or the controversy is
    otherwise resolved. Except as necessary in court proceedings to
    enforce this arbitration provision or an award rendered
    hereunder, or to obtain interim relief, neither a party nor an
    arbitrator may disclose the existence, content or results of any
    arbitration hereunder without the prior written consent of the
    Corporation and the Executive. The Corporation and the Executive
    acknowledge that this Agreement evidences a transaction
    involving interstate commerce. Notwithstanding any choice of law
    provision included in this Agreement, the United States Federal
    Arbitration Act shall govern the interpretation and enforcement
    of this arbitration provision. The arbitration proceeding shall
    be conducted in Rockford, Illinois or such other location to
    which the parties may agree. The Corporation shall pay the costs
    of any arbitrator appointed hereunder.



 



    17. No Assignment.  Except as otherwise
    expressly provided herein, this Agreement is not assignable by
    any party and no payment to be made hereunder shall be subject
    to anticipation, alienation, sale, transfer, assignment, pledge,
    encumbrance or other charge.



 



    18. Execution in Counterparts.  This
    Agreement may be executed by the parties hereto in two
    (2) or more counterparts, each of which shall be deemed to
    be an original, but all such counterparts shall constitute one
    and the same instrument, and all signatures need not appear on
    any one counterpart.



 



    19. Jurisdiction and Governing Law.  This
    Agreement shall be construed and interpreted in accordance with
    and governed by the laws of the State of Illinois, other than
    the conflict of laws provisions of such laws.



 



    20. Severability.  If any provision of
    this Agreement shall be adjudged by any court of competent
    jurisdiction to be invalid or unenforceable for any reason, such
    judgment shall not affect, impair or invalidate the remainder of
    this Agreement. Furthermore, if the scope of any restriction or
    requirement contained in this Agreement is too broad to permit
    enforcement of such restriction or requirement to its full
    extent, then such restriction or requirement shall be enforced
    to the maximum extent permitted by law, and the Executive
    consents and agrees that any court of competent jurisdiction may
    so modify such scope in any proceeding brought to enforce such
    restriction or requirement.



 



    21. Prior Understandings.  This Agreement
    embodies the entire understanding of the parties hereto and
    supersedes all other oral or written agreements or
    understandings between them regarding the subject matter hereof.
    No change, alteration or modification hereof may be made except
    in a writing, signed by each of the parties hereto. The headings
    in this Agreement are for convenience of reference only and
    shall not be construed as part of this Agreement or to limit or
    otherwise affect the meaning hereof.




    

    11








 






    IN WITNESS WHEREOF, the parties hereto have executed and
    delivered this Agreement as of the day and year first above
    written.



	 	 	 	 	 
	
 
	
 
	
 
	
 
	
 

	
 
	
 
	
 
	
 
	
 

	

    Attest:


	
 
	
    WOODWARD GOVERNOR COMPANY

	
 
	
 
	
 
	
 
	
 

	
 
	
 
	
    By:
	
 
	
        


	
 
	
 
	
 
	
 
	
    


	
 
	
 
	
 
	
 
	
    Thomas A. Gendron

	
 
	
 
	
 
	
 
	
    Title: Chief Executive Officer and President

	
 
	
 
	
 
	
 
	
 

	
 
	
 
	
    By:
	
 
	
        


	
 
	
 
	
 
	
 
	
    


	
 
	
 
	
 
	
 
	
    James R. Rulseh

	
 
	
 
	
 
	
 
	

    Title: Chairman of the Compensation

     Committee of the Board of Directors












    

    12