Performance Share Award Subplan 2005-2007


    PERFORMANCE
      SHARE AWARD SUBPLAN

    OF
      THE 2002 OMNIBUS LONG-TERM COMPENSATION PLAN

    2005-2007
      PERFORMANCE PERIOD

    EFFECTIVE
      JANUARY 1, 2005

    


    


    AMENDED
      OCTOBER 5, 2005

    


    


    


    


    


    


    


    


    


    


    


    EASTMAN
      CHEMICAL COMPANY

    


    



    
      
        
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    PERFORMANCE
      SHARE AWARD SUBPLAN

    OF
      THE 2002 OMNIBUS LONG-TERM COMPENSATION PLAN

    2005-2007
      PERFORMANCE PERIOD

    


    


    


    TABLE
      OF CONTENTS

    


    Section TitlePage

    


    Section
      1. Background
      1

    


    Section
      2. Definitions
      1

    


    Section
      3. Administration
      2

    


    Section
      4. Eligibility
      2

    


    Section
      5. Form of Awards
      3

    


    Section
      6. Size of Awards
      3

    


    Section
      7. Composition of Comparison Group
      4

    


    Section
      8. Preconditions to Receipt of an Award
      4

    


    Section
      9. Manner and Timing of Award Payments
      5

    


    Section
      10. No Rights as Stockholder
      6

    


    Section
      11. Application of Plan
      6

    


    Section
      12. Adjustment of Actual Grant Amount
      6

    


    Section
      13. Amendments
      6

    


    Exhibit
      A
      7

    


    Exhibit
      B
      8

    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    


    



    
      
        
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        EXHIBIT 10.03

      

    



    EASTMAN
      CHEMICAL COMPANY

    PERFORMANCE
      SHARE AWARD SUBPLAN

    OF
      THE 2002 OMNIBUS LONG-TERM COMPENSATION PLAN

    2005-2007
      PERFORMANCE PERIOD

    


    


    


    Section
      1. Background.
      Under
      Section 11 of the Eastman Chemical Company 2002 Omnibus Long-Term Compensation
      Plan (the "Plan"), the "Committee" (as defined in the Plan), may, among other
      things, award shares of the $.01 par value common stock ("Common Stock") of
      Eastman Chemical Company (the "Company") to "Employees" (as defined in the
      Plan), and such awards may take the form of performance shares, which are
      contingent upon the attainment of certain performance objectives during a
      specified period, and subject to such other terms, conditions, and restrictions
      as the Committee deems appropriate. The purpose of this Performance Share Award
      Subplan (this "Subplan") is to set forth the terms of the grant of performance
      shares for the 2005-2007 Performance Period specified herein, effective as
      of
      January 1, 2005 (the "Effective Date").

    


    Section
      2. Definitions.

    


    
      	
              (a)

            	
              The
                following definitions shall apply to this
                Subplan:

            


    

    


    
      	(i)  	
              "Actual
                Grant Amount" means the number of shares of Common Stock to which
                a
                participant is entitled under this Subplan, calculated in accordance
                with
                Section 6 of this Subplan.

            


    

    


    
      	(ii)  	
              “Award
                Amount” means the performance shares awarded to the participant under this
                Subplan at the beginning of the Performance
                Period.

            


    

    


    
      	 	
              (iii)

            	
              "Award
                Payment Date" means the date the Compensation Committee approves
                the
                payout of Common Stock covered by an award under this Subplan to
                a
                participant.

            


    

    


    
      	 	
              (iv)

            	
              "Comparison
                Group" is the group of companies comprising the “Materials Sector” from
                Standard and Poor’s Super Composite 1500 Index, identified as Global
                Industry Classification Standard (“GICS”) 15.


            


    

    


    
      	 	
              (v)
                

            	
              “Cost
                of Capital” reflects the cost of debt and the cost of equity, expressed as
                a percentage, reflecting the percentage of interest charged on debt
                and
                the percentage of expected return on
                equity.

            


    

    


    
      	 	
              (vi)

            	
              “Earnings
                from Continuing Operations” shall be defined as the total sales of the
                Company minus the costs of all operations of any nature used to produce
                such sales, including taxes, plus after-tax interest associated with
                the
                Company's capital debt.

            


    

    


    
      	(vii)  	
              "Maximum
                Deductible Amount" means the maximum amount deductible by the Company
                under Section 162(a), taking into consideration the limitations under
                Section 162(m), of the Internal Revenue Code of 1986, as amended,
                or any
                similar or successor provisions
                thereto.

            


    

    


    (viii) “Participation
      Date” means November 2, 2004. 

     

    (ix) “Performance
      Period" means January 1, 2005 through December 31, 2007.

     

    (x) “Performance
      Year” means one of the three calendar years in the Performance
      Period.

    


    
      
        
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              (xi)

            	
              “Return
                on Capital” shall mean the return produced by funds invested in the
                Company and shall be determined as Earnings from Continuing Operations,
                as
                defined in Section 2.a.(vi), divided by the Average Capital Employed.
                Average Capital Employed shall be derived by adding the Company's
                capital
                debt plus equity at the close of the last day of the year preceding
                the
                Performance Year, to the Company's capital debt plus equity at the
                close
                of the last day of the present Performance Year, with the resulting
                sum
                being divided by two. Capital debt is defined as the sum of borrowing
                by
                the Company due within one year and long-term borrowing, as designated
                on
                the Company's balance sheet. The resulting ratio shall be multiplied
                by
                One Hundred (100) in order to convert such to a percentage. Such
                percentage shall be calculated to the third place after the decimal
                point
                (i.e., xx.xxx%), and then rounded to the second place after the decimal
                point (i.e., xx.xx%).

            


    

    


    
      	 	
              (xii)

            	
              "Target
                Award Range" means, with respect to any eligible Employee, the number
                of
                performance shares within the range specified on Exhibit A hereto
                for the
                Salary Grade applicable to such
                Employee.

            


    

    
      	 	
              (xiii)

            	
              “TSR”
                means total stockholder return, as reflected by the sum of (A) change
                in
                stock price (measured as the difference between (I) the average of
                the
                closing prices of a company’s common stock on the New York Stock Exchange,
                or of the last sale prices or closing prices of such stock on another
                national trading exchange, as applicable, in the period beginning
                on the
                tenth trading day preceding the beginning of the Performance Period
                and
                ending on the tenth trading day of the Performance Period and (II)
                the
                average of such closing or last sale prices for such stock in the
                period
                beginning on the tenth trading day preceding the end of the Performance
                Period and ending on the tenth trading day following the end of the
                Performance Period) plus (B) dividends declared, assuming reinvestment
                of
                dividends, and expressed as a percentage return on a stockholder’s
                hypothetical investment.

            


    

    


    
      	
              (b)

            	
              Any
                capitalized terms used but not otherwise defined in this Subplan
                shall
                have the respective meanings set forth in the Plan.
                

            


    

    


    Section
      3. Administration.
      This
      Subplan shall be administered by the Committee. The Committee shall have
      authority to interpret this Subplan, to prescribe rules and regulations relating
      to this Subplan, and to take any other actions it deems necessary or advisable
      for the administration of this Subplan, and shall retain all general authority
      granted to it under Section 3 of the Plan. At the end of the Performance
      Period, the Committee shall approve Actual Grant Amounts awarded to participants
      under this Subplan. 

    


    Section
      4. Eligibility.
      The
      Employees who are eligible to participate in this Subplan are those Employees
      who, as of the Participation Date, are at Salary Grade 53 and above. These
      Salary Grades generally include Employees who, as of the Participation Date,
      have been designated as "officers" of the Company for purposes of Section 16
      of
      the Exchange Act, and held positions with the Company considered carrying
      responsibilities and functions generally associated with a vice-president-level
      position. Employees who are promoted during the Performance Period to a position
      that would meet the above criteria, but who do not hold such position as of
      the
      Participation Date, are not
      eligible
      to participate in this Subplan. 

    


    Section
      5. Form of Awards.
      Subject
      to the terms and conditions of the Plan and this Subplan, Awards under this
      Subplan shall be paid in the form of unrestricted shares of Common Stock, except
      for conversions to cash and deferrals under Section 9 of this Subplan, and
      except that if a participant is entitled to any fraction of a share of Common
      Stock, as a result of Section 10 of this Subplan or otherwise, then in lieu
      of
      receiving such fraction of a share, the participant shall be paid a cash amount
      representing the market value, as determined by the Committee, of such fraction
      of a share at the time of payment.

    


    Section
      6. Size of Awards.
      

    


    (a) Target
      Award Range.
      Exhibit
      A hereto shows by Salary Grade the Target Award Range. The Salary Grade to
      be
      used in determining the size of any Award Amount to a participant under this
      Subplan shall be the Salary Grade applicable to the position held by the
      participant on the Participation Date. The actual size of the Award Amount
      to
      the participant shall be determined based on an assessment by his or her senior
      management of the participant’s past performance and potential for contributions
      to the Company’s future long term success. Based on this assessment, the
      participant may receive no award, the target award amount, or any amount within
      the Target Award Range to the nearest 10 performance shares. Each member of
      senior management will have a performance share budget, based on the cumulative
      award targets for their reports, which must be balanced for their organizations.
      

    


    
      
        
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      	(b)  	
              Stock
                Option Grants for Employees Named After the Participation
                Date.
                Employees who are hired into, or promoted to a Salary Grade 53 or
                above
                position after the Participation Date but prior to the Performance
                Period,
                will be eligible to receive an additional number of options to purchase
                Company stock as of the next scheduled meeting of the Compensation
                Committee following their hire or promotion. The additional grant
                of
                options will be determined based on several factors, including timing
                of
                the promotion or hire, number of options received in the previous
                assignment, stock option target ranges for the employee’s new salary
                grade, and considerations of performance assessment. The amount of
                the
                award will be recommended by the Company’s Chief Executive Officer for
                approval by the Compensation Committee. The option grant price will
                be the
                closing price of Company common stock on the New York Stock Exchange
                on
                the meeting date of the Compensation
                Committee.

            


    

    


    
      	(c)  	
              Actual
                Grant Amount.
                Subject to the Committee’s authority to adjust the Actual Grant Amount
                described in Section 12, the Actual Grant Amount awarded to the
                participant at the end of the Performance Period is determined by
                applying
                a multiplier to the participant’s Award Amount. The multiplier shall be
                determined by comparing Company performance relative to two
                measures:

            


    

    


    
      	(i)  	
              The
                Company's TSR during the Performance Period relative to the TSRs
                of the
                companies in the Comparison Group during the Performance
                Period.
                The Company and each company in the Comparison Group shall be ranked
                by
                TSR, in descending order, with the company having the highest TSR
                during
                the Performance Period being ranked number one. The Comparison Group
                shall
                further be separated into quintiles (first 20%, second 20%, etc.)
                and the
                Company's position, in relation to the Comparison Group, shall be
                expressed as a position in the applicable quintile ranking;
                and

            


    

    


    
      	 	 	
              (ii)
                

            	
              The
                arithmetic average, for each of the Performance Years during the
                Performance Period, of the Company’s average Return on Capital minus a
                Return on Capital target.
                The Return on Capital target will be determined by the Committee.
                 

            


    

    


    An
      award
      multiplier table is shown in Exhibit B. The award multiplier is based on the
      Company’s performance relative to its quintile ranking relative to the
      Comparison Group, and its average Return on Capital relative to a target during
      the Performance Period. The award multipliers range from 3.0 (i.e. 300%), if
      the
      Company's TSR is in the top performing quintile (top 20%) of companies in the
      Comparison Group, and the average Return on Capital minus the target Return
      on
      Capital is greater than 10 percentage points, to 0.0 (with no shares of Common
      Stock being delivered to participants under this Subplan), if the Company does
      not meet certain levels of performance relative to the two measures.


    


    Section
      7. Composition of Comparison Group.
      The
      Comparison Group is composed of companies relevant for purposes of TSR
      comparisons under this Subplan. However, during the Performance Period, a
      company in the Comparison Group may be dropped from the Comparison Group if
      a
      company's common stock ceases to be publicly traded on a national stock exchange
      or market; or a company is a party to a significant merger, acquisition, or
      other reorganization. Under these, or similar circumstances, the company or
      companies may be removed from the Comparison Group, and may be replaced with
      another company or companies by Standard & Poor’s, consistent with their
      established criteria for selection of companies for the Comparison Group. In
      any
      case where the Comparison Group ceases to exist, or is otherwise determined
      to
      no longer be appropriate as the basis for a measure under this Subplan, the
      Committee may designate a replacement Comparison Group. In any such case, the
      Committee shall have authority to determine the appropriate method of
      calculating the TSR of such former and/or replacement Comparison Group, whether
      by complete substitution of the replacement Comparison Group (and disregard
      of
      the former Comparison Group) over the entire Performance Period or by pro rata
      calculations for each Comparison Group or otherwise. 

    


    Section
      8. Preconditions to Receipt of an Award.

    


    
      	
              (a)

            	
              Continuous
                Employment.
                Except as specified in paragraph (b) below, to remain eligible for
                an
                Award under this Subplan, an eligible Employee must remain continuously
                employed with the Company or a Subsidiary at all times from the Effective
                Date through the Award Payment
                Date.

            


    

    


    
      
        
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              (b)

            	
              Death,
                Disability, Retirement, or Termination for an Approved Reason Before
                the
                Award Payment Date.
                If
                a participant's employment with the Company or a Subsidiary is terminated
                due to death, disability, retirement, or any approved reason prior
                to the
                Award Payment Date, the participant shall receive, subject to the
                terms
                and conditions of the Plan and this Subplan, an Award representing
                a
                prorated portion of the Actual Grant Amount to which such participant
                otherwise would be entitled, with the precise amount of such Award
                to be
                determined by multiplying the Actual Grant Amount by a fraction,
                the
                numerator of which is the number of full calendar months employed
                in the
                Performance Period from the Effective Date through and including
                the
                effective date of such termination, and the denominator of which
                is 36
                (the total number of months in the Performance Period).
                

            


    

    


    Section
      9. Manner and Timing of Award Payments.

    


    
      	
              (a)

            	
              Timing
                of Award Payment.
                Except for deferrals under Sections 9(c) and 9(d), if any Awards
                are
                payable under this Subplan, the payment of such Awards to eligible
                Employees shall be made as soon as is administratively practicable
                after
                the end of the Performance Period and final approval by the
                Committee.

            


    

    


    
      	
              (b)

            	
              Tax
                Withholding.
                The Company may withhold or require the grantee to remit a cash amount
                sufficient to satisfy federal, state, and local taxes (including
                the
                participant’s FICA obligation) required by law to be withheld. Further,
                either the Company or the grantee may elect to satisfy the withholding
                requirement by having the Company withhold shares of common stock
                having a
                Fair
                Market
                Value
                on the date the tax is to be determined equal to the minimum statutory
                total tax which could be imposed on the
                transaction.

            


    

    


    
      	
              (c)

            	
              Deferral
                of Award in Excess of the Maximum Deductible Amount.
                If payment of the Award would, or could in the reasonable estimation
                of
                the Committee, result in the participant's receiving compensation
                in
                excess of the Maximum Deductible Amount in a given year, then such
                portion
                (or all, as applicable) of the Award as would, or could in the reasonable
                estimation of the Committee, cause such participant to receive
                compensation from the Company in excess of the Maximum Deductible
                Amount
                may, at the sole discretion of the Committee, be converted into the
                right
                to receive a cash payment, which shall be deferred until after the
                participant retires or otherwise terminates employment with the Company
                and its Subsidiaries, provided that such deferral is compliant with
                the
                requirements of Internal Revenue Code Section 409A and Treasury
                Regulations and guidance
                thereunder.

            


    

    


    
      	
              (d)
                

            	
              Election
                to Defer the Award.
                Any participant in this Subplan may elect to defer the Award until
                after
                the participant retires or otherwise terminates employment with the
                Company and its Subsidiaries under the terms and subject to the conditions
                of the Eastman Executive Deferred Compensation Plan, as the same
                now
                exists or may be amended hereafter (the "EDCP"). If the participant
                chooses to defer the Award, the Award shall be converted into the
                right to
                receive a cash payment.

            


    

    


    
      	
              (e)
                

            	
              Award
                Deferral to the EDCP.
                In the event that all or any portion of an Award is converted into
                a right
                to receive a cash payment pursuant to Sections 9(c) or 9(d), except
                as
                otherwise provided in this Section with respect to Section 16 insiders,
                an
                amount representing the Fair Market Value, as of the date the Common
                Stock
                covered by the Award otherwise would be delivered to the participant,
                of
                the Actual Grant Amount (or the deferred portion thereof) will be
                credited
                to the Stock Account of the EDCP, and hypothetically invested in
                units of
                Common Stock. Notwithstanding
                the foregoing, for each Section 16 insider electing to defer the
                Award,
                the deferrable amount, when initially credited to the participant's
                EDCP
                Account, shall be held in a participant's Interest Account until
                the next
                date that dividends are paid on Common Stock, and on such date the
                deferrable amount that would have been initially credited to the
                participant's Stock Account but for this sentence shall be transferred,
                together with allocable interest thereon, to the participant's Stock
                Account, subject to provisions set forth in the EDCP. Thereafter,
                such amount shall be treated in the same manner as other investments
                in
                the EDCP and shall be subject to the terms and conditions
                thereof.

            


    

    


    Section
      10. No Rights as Stockholder.
      No
      certificates for shares of Common Stock shall be issued under this Subplan
      nor
      shall any participant have any rights as a stockholder as a result of
      participation in this Subplan, until the Actual Grant Amount has been determined
      and such participant has otherwise become entitled to an Award under the terms
      of the Plan and this Subplan. In particular, no participant shall have any
      right
      to vote or to receive dividends on any shares of Common Stock under this
      Subplan, until certificates for such shares have been issued as described above;
      provided, however, that if payment of all or any portion of an Award under
      this
      Subplan has been deferred pursuant to Section 9 of this Subplan or
      otherwise, but such Award otherwise has become payable hereunder, then during
      the period during which payment is deferred, the deferred Award shall be
      credited with additional units of Common Stock, and (if applicable) fractions
      thereof, based on any dividends declared on the Common Stock, in accordance
      with
      the terms of the EDCP.

    


    
      
        
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    Section
      11. Application of Plan.
      The
      provisions of the Plan shall apply to this Subplan, except to the extent that
      any such provisions are inconsistent with specific provisions of this Subplan.
      In particular, and without limitation, Section 11 (relating to performance
      shares), Section 12 (relating to qualification of Awards as "performance-based"
      under Code Section 162(m)), Section 17 (relating to nonassignability),
      Section 18 (relating to adjustment of shares available), Section 19 (relating
      to
      withholding taxes), Section 20 (relating to noncompetition and confidentiality),
      Section 21 (relating to regulatory approvals and listings), Section 24 (relating
      to the governing law), Section 25 (relating to changes in ownership), Section
      26
      (relating to changes in control), Section 27 (relating to no rights to
      employment or participation), Section 28 (relating to no rights, title, or
      interest in Company assets), and Section 29 (relating to securities laws) shall
      apply to this Subplan. 

    Section
      12. Adjustment of Actual Grant Amount.
      The
      Committee may, in its sole discretion, adjust the Actual Grant Amount to reflect
      overall Company performance and business and financial conditions. 

    


    Section
      13. Amendments.
      The
      Committee may, from time to time, amend this Subplan in any manner.

    



    
      
        
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        EXHIBIT 10.03

      

    



    


    EXHIBIT
      A

    


    


    Eastman
      Chemical Company

    Performance
      Share Award Grant Table

    2005-2007
      Cycle

    


    


    


    


    ON
      FILE
      IN CORPORATE COMPENSATIION

    



    
      
        
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          EXHIBIT
            10.03

        

      

    


    


    EXHIBIT
      B

    


    


    Award
      Multiplier Table

    


    
      	
              Eastman
                TSR Relative to Comparison Companies

            	
               

              Differential
                from Target Return on Capital

            
	 	
              <-7%

            	
              -5%
                to 

              -7%

            	
              -3
                to 

              -5%

            	
              -1
                to 

              -3%

            	
              -1
                to +1%

            	
              +1
                to +3%

            	
              +3
                to +5%

            	
              +5
                to +7%

            	
              +7
                to +10%

            	
              >10%

            
	
              0-19%(
                5th
                quintile)

            	
              0.0

            	
              0.0

            	
              0.0

            	
              0.0

            	
              0.6

            	
              0.8

            	
              1.0

            	
              1.3

            	
              1.6

            	
              1.9

            
	
              20-39%(4th
                quintile)

            	
              0.0

            	
              0.0

            	
              0.0

            	
              0.4

            	
              0.8

            	
              1.0

            	
              1.3

            	
              1.6

            	
              1.9

            	
              2.2

            
	
              40-59%(3rd
                quintile)

            	
              0.0

            	
              0.0

            	
              0.4

            	
              0.6

            	
              1.0

            	
              1.3

            	
              1.6

            	
              1.9

            	
              2.2

            	
              2.5

            
	
              60-79%(2nd
                quintile)

            	
              0.0

            	
              0.4

            	
              0.6

            	
              1.0

            	
              1.3

            	
              1.6

            	
              1.9

            	
              2.2

            	
              2.5

            	
              2.8

            
	
              80-99%(1st
                quintile)

            	
              0.0

            	
              0.6

            	
              0.8

            	
              1.3

            	
              1.6

            	
              1.9

            	
              2.2

            	
              2.5

            	
              2.8

            	
              3.0

            


    

    


      
        
          
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