**Exhibit 10.2**

 

**Monaco Coach Corporation**

 

**Executive Pay Reduction Program**

 

The following Executive PayReduction Program (the “Program”) was approved by the Compensation Committee(the “Committee”) of the Board of Directors (the “Board”) of Monaco Coach Corporation(the “Company”) on July 21, 2008.

 

**Purpose**

 

The purpose of the Programis to allow the Company to reduce expenses through a temporary reduction ofexecutive salaries, while providing a potential means for participants to earna performance-based award (bonus) equivalent to their lost salaries and fortheir previous salary levels to be restored through the achievement of businessobjectives.  The Program is designed tofocus executive behavior on reducing debt by increasing cash flows, reducingexpenses and returning the Company to profitability resulting in increasedshareholder value.

 

**Participants**

 

The participants in theProgram are the executive management of the Company as well as designatedexecutive management of certain wholly-owned subsidiaries.  The Company may also designate other keydirector-level employees as participants.

 

**ExecutivePay Reductions**

 

Effective during thePerformance Period (as defined below), the base salaries of participants arereduced by the following percentages:

 

Chief Executive Officer –50%

President – 30%

Executive Pay Grades E2 - E4– 15%

Executive Pay Grade E5(others as appropriate) – 10%

 

Depending on prevailingbusiness conditions, the Company will seek to restore base salary levels ineffect prior to the Program upon termination of the Performance Period.  The Committee with input from the ChiefExecutive Officer retains the discretion to adjust the rate of pay for anyparticipant during or following the Performance Period.

 

**PerformanceBonus**

 

Each participant will beeligible to earn a cash bonus equivalent to all or a portion of the amount ofthe forgone base salaries as a result of the pay reductions during thePerformance Period if the pre-established performance goal (described below) isachieved by the Company, subject to the participant remaining employed by the 

 

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Company or an Affiliatethrough the end of the Performance Period (except as set forth below).

 

**PerformancePeriod**

 

The Performance Period willbe the twelve-month period beginning with the third quarter of 2008 and endingwith the close of the second quarter of 2009, or earlier at the close of thequarter during which the performance goals are achieved prior to the secondquarter of 2009, as described below.

 

**PerformanceGoals**

 

The performance goal forearning a performance bonus related to forgone salaries through the Program isthe achievement of Operating Cash Flow of $58 million during the PerformancePeriod (the “Operating Cash Flow Goal”). Performance bonuses relating to the Operating Cash Flow Goal may only beearned prior to the second quarter of 2009 by achievement of 100% of theOperating Cash Flow Goal with the determination made on a quarter-by-quarterbasis.  All or a portion of the performancebonus relating to forgone base salaries not previously earned in thePerformance Period may be earned at the end of the second quarter of 2009 asset forth below in “Performance Bonus Formula for the Operating Cash Flow Goal.”

 

If the Operating Cash FlowGoal is achieved at 100% prior to the second quarter of 2009 and provided thata participant remains employed with the Company through the end of the quarterduring which the Operating Cash Flow Goal is achieved at 100%, the participantwill be eligible to earn 100% of the foregone base salary for such quarter andprior quarters of the Performance Period to the extent performance bonusesrelating to forgone salaries for such prior quarters have not previously beenearned.

 

Any earned performancebonuses relating to the Operating Cash Flow will be paid according to thepayment schedule set forth below in “Performance Bonus Formula for theOperating Cash Flow Goal”.

 

The performance goal for thereinstatement of base salaries is the return of the Company to positiveOperating Income in any single quarter of the Performance Period (the “OperatingIncome Goal”).  The Performance Periodfor the Operating Income Goal will terminate upon the achievement of suchgoal.  Base salaries will be restored totheir pre-Program levels effective at the beginning of the first quarterfollowing the quarter in which the Operating Income Goal is achieved.

 

**TargetBonus**

 

The target performance bonuswill equal 100% of the amount of forgone base salary during the PerformancePeriod as a result of the Program.  In noevent will the actual performance bonus exceed 100% of the forgone basesalaries during the Performance Period as a result of the Program.

 

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**PerformanceBonus Formula for the Operating Cash Flow Goal**

 

During the first threequarters of the Performance Period, the performance bonus will only be earnedupon 100% achievement of the Operating Cash Flow Goal, with the determinationof the achievement of the goal to be determined quarterly.

 

Performance bonuses relatingto forgone base salaries for the second quarter of 2009, and for previousquarters for which no performance bonus was earned, may be earned at the end ofthe second quarter of 2009 as follows:

 

·                  Threshold (50% achievementof Operating Cash Flow Goal) = 50% of the target performance bonus.

 

·                  75% achievement of OperatingCash Flow Goal = 75% of target performance bonus.

 

·                  Maximum (100% achievement ofOperating Cash Flow Goal) = 100% of target performance bonus.

 

If 100% of the OperatingCash Flow Goal is not attained during any of the first three quarters of thePerformance Period or the threshold performance level is not attained by thecompletion of the second quarter of 2009, participants will not be entitled toreceive any performance bonus pursuant to the Program.  If the Company’s performance falls betweenthe levels shown for the second quarter of 2009, the actual performance bonuswill be interpolated accordingly.

 

Earned performance bonuseswill be paid as soon as practical following the quarter in which they areearned, but in no event later than the date that is two-and-one-half monthsfrom the later of (i) the end of the Company’s tax year in which theperformance bonus is earned, or (ii) the end of the participant’s tax yearin which the performance bonus is earned, subject to the provisions set forthbelow in “Termination of Employment and Change in Control.”

 

**Terminationof Employment and Change in Control**

 

In the event a participantceases to be an employee of the Company or any Affiliate as the result of theparticipant’s death, Disability, Retirement or termination by the Company (orthe Affiliate employing the participant) without Cause, the participant will beentitled to receive a pro-rated portion of the full performance bonus thatwould have been earned during the Performance Period had the participantremained an employee through the end of the Performance Period based on theamount of time participant was employed during the Performance Period.  In such event, the performance bonus will bepaid at the time it would have otherwise been paid had the participant remainedemployed through the end of the Performance Period.  In addition, in the event of a Change inControl (as defined below) that occurs during the Performance Period while aparticipant is an employee, the target performance bonus will be deemed earnedand will be paid upon consummation of the Change in Control.  The transactions contemplated hereunder andthe duration of the 

 

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Performance Period set forthherein do not constitute an express or implied promise to any participant thathe or she will continue to be an employee for the Performance Period, or atall, and will not interfere with the participant’s right or the right of theCompany (or the Affiliate employing the participant) to terminate theparticipant as an employee at any time, with or without cause.

 

Notwithstanding theforegoing, if a participant is a “specified employee” within the meaning of Section 409Aof the Internal Revenue Code of 1986, as amended (the “Code”), and the finalregulations and any guidance promulgated thereunder (“Section 409A”) atthe time of the participant’s termination (other than due to death), and thebonus payable to the participant, if any, pursuant to the Program, whenconsidered together with any other severance or other payments or separationbenefits that are considered deferred compensation under Section 409A(together, the “Deferred Compensation Separation Benefits”) that are payablewithin the first six (6) months following the participant’stermination of employment, will become payable on the first payroll date thatoccurs on or after the date six (6) months and one (1) day followingthe date of the participant’s termination of employment.  All subsequent Deferred CompensationSeparation Benefits, if any, will be payable in accordance with the paymentschedule applicable to each payment or benefit. Notwithstanding anything herein to the contrary, if the participant diesfollowing his termination but prior to the six (6) month anniversary ofhis termination, then any payments delayed in accordance with this paragraphwill be payable in a lump sum as soon as administratively practicable after thedate of the participant’s death and all other Deferred Compensation SeparationBenefits will be payable in accordance with the payment schedule applicable toeach payment or benefit.

 

**Section 162(m) ParticipantPerformance Goals**

 

Executives who areparticipating in the Executive Variable Compensation Plan will participate inthe Program on the same terms and conditions as other participants to allow theperformance bonus to qualify as “performance-based compensation” under Section 162(m) ofthe Code.  The Committee will designatethose individuals who participate in the Executive Variable CompensationPlan.  In the event any provisions setforth herein are inconsistent with the terms of the Executive VariableCompensation Plan, the terms of the Executive Variable Compensation Plan will control.

 

**TaxWithholding**

 

The actual performance bonuswill be subject to tax withholding and other applicable deductions at the timeof payment.

 

**Audit andApproval of Awards**

 

The Chief Financial Officerwill review the financial calculations necessary to determine achievement ofthe Performance Goals and will report his findings to the Committee.  The Committee will certify in writing theextent to which the Performance Goal(s) has been satisfied and approve theactual performance bonus or salary reinstatement.

 

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**Applicabilityto Future Annual Incentive Plan Bonuses and Long Term Incentive Plan Grants**

 

In the event the OperatingIncome Goal has not yet been achieved at the time the 2008 Annual Incentive Planbonuses would be paid, if such bonuses are earned, the Company will have theoption to calculate the bonus using the participant’s base salary prior to thereduction pursuant to the Program, after the reduction pursuant to the Program,or a combination of the two, except for participants in the Executive VariableCompensation Plan who will have their respective bonuses calculated inaccordance with the terms of that plan. Similarly, if the Operating Income Goal has not yet been met at the timetarget bonuses are established under the 2009 Long Term Incentive Plan, theCompany will have the option to calculate the bonuses using the participant’sbase salary prior to the reduction pursuant to the Program, after the reductionpursuant to the Program, or a combination of the two, except for participantsin the Executive Variable Compensation Plan. The Committee retains the authority to determine the structure ofbonuses for participants in the Executive Variable Compensation Plan inaccordance with the terms of that plan, as it may be amended from time to time.

 

The Committee, with inputfrom the Chief Executive Officer, will determine the appropriate pay basis touse for establishing such awards.

 

**Definitions**

 

“Affiliate” means anycorporation or any other entity (including, but not limited to, partnershipsand joint ventures) controlling, controlled by, or under common control withthe Company.

 

“Cause” means (i) anact of dishonesty made by the participant in connection with the participantsresponsibilities as an employee of the Company (or an Affiliate), (ii) theparticipant’s conviction of, or plea of nolo contendere, to, a felony, (iii) theparticipant’s gross misconduct, or (iv) the participant’s continuedsubstantial violations of his employment duties after the participant hasreceived a demand for performance from the Company (or the Affiliate employingthe participant).

 

“Change in Control”

 

(i)        Any “person” (as such term is used inSections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended(the “Exchange Act”)) becomes the “beneficial owner” (as defined in Rule 13d-3of the Exchange Act), directly or indirectly, of securities of the Companyrepresenting more than fifty percent (50%) of the total voting powerrepresented by the Company’s then outstanding voting power; or

 

(ii)       A change in the ownership of asubstantial portion of the Company’s assets which occurs on the date that anyone person, or more than one person acting as a group acquires (or has acquiredduring the twelve (12) month period ending on the date of the most recentacquisition by such person or persons) assets from the Company that have atotal gross fair market value equal to or more than fifty percent (50%) of thetotal 

 

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gross fair market value ofall of the assets of the Company immediately prior to such acquisition; or

 

(iii)      A change in the composition of the Boardoccurring within a twelve (12) month period, as a result of which fewer than amajority of the directors are Incumbent Directors.  “Incumbent Directors” means directors whoeither (A) are directors as of the effective date of the Program, or (B) areelected, or nominated for election, to the Board with the affirmative votes ofat least a majority of the Incumbent Directors at the time of such election ornomination (but will not include an individual whose election or nomination isin connection with an actual or threatened proxy contest relating to theelection of directors to the Company); or

 

(iv)      The consummation of a merger orconsolidation of the Company with any other corporation, other than a merger orconsolidation which would result in the voting securities of the Companyoutstanding immediately prior thereto continuing to represent (either by remainingoutstanding or by being converted into voting securities of the survivingentity or its parent) fifty percent (50%) or more of the total voting powerrepresented by the voting securities of the Company or such surviving entity orits parent outstanding immediately after such merger or consolidation.

 

“Disability” meanstotal and permanent disability as defined in Section 22(e) (3) ofthe Code.

 

“Operating Cash Flow”for purposes of the Program is defined as the marginal cash flow created by thereduction of inventory (material, work in progress and finished goods), butexcludes resort segment inventories.

 

“Operating Income” isdefined for purposes of the Program as pre-bonus consolidated operating incomeat the end of any given quarter of the Performance Period.

 

“Retirement” means anemployee of the Company or any Affiliate who retires on or after age sixty-two(62) and such individual has been an employee of the Company or an Affiliate atleast five (5) years at the date of retirement.  In addition, the Committee may in itsdiscretion grant an eligible retirement that does not otherwise meet thecriteria.

 

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