<PAGE>   1
                               FIRST AMENDMENT TO
                              EMPLOYMENT AGREEMENT
                              --------------------

         This First Amendment to the Employment Agreement made as of June 4,
1995 (the "Agreement") between Kmart Corporation, a Michigan corporation
(together with its successors and assigns permitted under this Agreement, the
"Company"), and Floyd Hall (the "Executive") is made as of September 21, 1998.

         1. Section 1(g) of the Agreement is hereby amended by the addition of
the following flush language at the end thereof:

         "Notwithstanding the foregoing, the parties hereto agree that no
         determination made or to be made by the Board in connection with the
         stock options awarded pursuant to Section 6(d) hereof shall, by itself,
         constitute grounds for a Constructive Termination Without Cause."

         2. Section 2 of the Agreement is hereby revised to read, in its
entirety, as follows:

                  "2.      Term of Employment.
                           -------------------

                           The Company hereby employs the Executive, and the
         Executive hereby accepts such employment, for the period commencing
         June 4, 1995 and ending at the close of business on April 1, 2001,
         subject to earlier termination of the Term of Employment in accordance
         with the terms of this Agreement; provided that the Term of Employment
         may be extended by mutual consent of the Parties."

         3. Section 6(a) of the Agreement is hereby revised to read, in its
entirety, as follows:

                           "(a) General. During the Term of Employment, the
         Executive shall be eligible to participate in the long-term incentive
         programs of the Company. In any event, he shall be entitled to the
         awards described in Sections 6(b), 6(c) and 6(d) below, subject to the
         conditions described therein."





<PAGE>   2



         4. Section 6 of the Agreement is hereby revised by the addition of the
following new Section 6(d) at the end thereof:

                           "(d) Additional Stock Option Awards. In consideration
         of the extension of the Term of Employment pursuant to the First
         Amendment to the Agreement made as of September 21, 1998, the Company
         shall grant the Executive additional 10-year options, substantially in
         the form attached to the First Amendment as Exhibits A and B, to
         purchase an aggregate 1,000,000 shares of Stock (the "Extension
         Options"). The Extension Options shall be granted pursuant to the Kmart
         Corporation 1997 Long-Term Equity Compensation Plan (the "1997 Plan")
         and the Kmart Corporation 1992 Stock Option Plan (the "1992 Plan" and,
         together with the 1997 Plan, the "Plans"), but to the extent that any
         provisions of this Section 6(d) or Exhibit A or B to the First
         Amendment conflict with the provisions of the Plans, the provisions of
         this Section 6(d) and Exhibits A and B to the First Amendment shall be
         controlling. As of September 21, 1998, Extension Options to purchase
         686,615 shares of Stock shall be granted under the 1997 Plan, and
         Extension Options to purchase 313,385 shares of Stock shall be granted
         under the 1992 Plan. The exercise price of the Extension Options shall
         be $13.19 per share, which was the Fair Market Value (as defined in the
         respective Plan) of a share of Stock on the grant date. The Extension
         Options shall vest (a "Vesting Event") only upon satisfaction of the
         following two conditions: (Condition 1) the Executive's execution of a
         separate written waiver of all cash payments described in Sections
         10(d)(ii) and 10(d)(iv) or, to the extent relating to payments
         described in Sections 10(d)(ii) and 10(d)(iv) hereof, Section 10(e)
         hereof; and (Condition 2) either (x) the Board's formal approval of
         successorship arrangements with respect to the Executive's positions
         and responsibilities with the Company, which approval specifically
         refers to the satisfaction of this vesting requirement, or (y) a Change
         in Control (as defined in the Plans). Notwithstanding Section 10(e)
         hereof, but subject to the immediately preceding sentence, the
         Extension Options shall not vest upon a Change in Control. Vested
         Extension Options shall become exercisable only upon the earliest to
         occur of April 1, 2001, a Change in Control or the Executive's death.
         Except as provided in the last sentence of this Section 6(d), Extension
         Options which become exercisable shall remain exercisable for the
         remainder of their 10-year terms. In the event that holders of the
         Company's common stock receive cash, securities or other property in
         respect of their common stock in connection with a Change in Control
         transaction which results in a Vesting Event, the Company shall use its
         reasonable efforts to enable the Executive (if he so


                                        2

<PAGE>   3



         elects) to exercise any vested Extension Options at a time and in a
         fashion that will entitle him to receive in exchange for any shares
         thus acquired the same consideration as is received in such Change in
         Control transaction by other holders of the Company's common stock. In
         the event of a Change in Control which does not result in a Vesting
         Event and in which the Company is not the surviving entity, the Company
         shall use its reasonable efforts to assure that the Executive shall be
         provided replacement options that are exercisable for equity securities
         of the surviving entity (or an equivalent award) which shall contain
         terms, conditions and an after-tax economic opportunity (including,
         without limitation, an aggregate spread value) no less favorable to the
         Executive than did the Extension Options immediately prior to such
         Change in Control. If the Executive's employment terminates under any
         circumstances prior to a Vesting Event (including, without limitation,
         because of death or disability), the unvested Extension Options shall
         terminate without vesting upon such termination of employment.
         Notwithstanding anything to the contrary in this Section 6(d), if the
         Executive violates the provisions of Section 11 hereof (without regard
         to the time limitations of such Section) prior to the exercise of all
         Extension Options, all then unexercised Extension Options held by the
         Executive (whether or not vested and exercisable) shall terminate upon
         such violation."

         5. Section 10(d)(ii) is hereby revised to read, in its entirety, as
follows:

                           "(ii) Base Salary, at the annualized rate in effect
         on the date of termination of the Executive's employment (or in the
         event a reduction in Base Salary is the basis for a Constructive
         Termination Without Cause, then the Base Salary in effect immediately
         prior to such reduction), for the period until the end of the
         originally scheduled Term of Employment, as extended by the First
         Amendment dated September 21, 1998; provided that in no event shall
         such period be less than 12 months nor more than 36 months; and
         provided further that the Executive and the Company may agree that the
         Company shall pay him the present value of such salary continuation
         payments in a lump sum (using as the discount rate the Applicable
         Federal Rate for short-term Treasury obligations as published by the
         Internal Revenue Service for the month in which such termination
         occurs);"

         6. As amended by this First Amendment, the Agreement is hereby 
specifically ratified and reaffirmed and shall continue in full force and 
effect.



                                        3

<PAGE>   4


         IN WITNESS WHEREOF, the undersigned have executed this First Amendment
as of September 21, 1998.

                                            KMART CORPORATION


                                            By   /s/ Anthony N. Palizzi 
                                              ----------------------------------
                                                     Anthony N. Palizzi 

                                                 /s/ Floyd Hall
                                            ------------------------------------
                                                     Floyd Hall











                                        4



<PAGE>   5
                                KMART CORPORATION
                               STOCK OPTION PLANS

                      NON-QUALIFIED STOCK OPTION AGREEMENT

<TABLE>
<S>                                              <C> 
                               OPTIONEE:         Floyd Hall
                 SOCIAL SECURITY NUMBER:         [__________]
                        OPTIONED SHARES:         686,615 shares of common stock, $1.00 par value, of
                                                 Kmart Corporation.
                                   PLAN:         1997 Long Term Equity Compensation Plan
                 PER SHARE OPTION PRICE:         $13.19
                            OPTION DATE:         September 21, 1998
                       TERMINATION DATE:         September 21, 2008
</TABLE>

This Stock Option Agreement (the "Agreement") is executed and delivered as of
the Option Date by and between Kmart Corporation (the "Company") and the
Optionee, an employee of the Company. The parties hereby agree as follows:

1.       The Company, pursuant to the above Plan, which is incorporated herein
         by reference, and subject to the terms and conditions thereof (except
         as otherwise specified herein), hereby grants to the Optionee an option
         to purchase the Optioned Shares at the Per Share Option Price (which
         represents the fair market value of the Company's common stock on the
         Option Date). The option granted hereby shall vest (a "Vesting Event")
         only upon satisfaction of the following two conditions: (Condition 1)
         the Optionee's execution of a separate written waiver of all cash
         payments described in Sections 10(d)(ii) and 10(d)(iv) or, to the
         extent relating to payments described in Sections 10(d)(ii) and
         10(d)(iv), Section 10(e) of Optionee's Employment Agreement with the
         Company made as of June 4, 1995, as amended from time to time (his
         "Employment Agreement"); and (Condition 2) either (x) formal approval
         by the Company's Board of Directors of successorship arrangements with
         respect to the Optionee's positions and responsibilities with the
         Company, which approval specifically refers to the satisfaction of
         this vesting requirement, or (y) a Change in Control (as defined in the
         Plan). If the option granted hereby becomes vested, it shall then
         become exercisable only upon the earliest to occur of April 1, 2001, a
         Change in Control or the Optionee's death.

2.       Notwithstanding any provision to the contrary contained in the Plan,
         but subject to Section 1 hereof, the option granted hereby shall not
         vest upon a Change in Control, except as provided in Section 1 hereof.
         Further, if the Optionee's employment terminates under any
         circumstances prior to a Vesting Event (including, without limitation,
         because of the Optionee's death or disability), the option shall
         terminate without vesting upon such termination of employment.
         Notwithstanding any provision of the Plan, the Optionee hereby
         specifically waives any right to have the option granted hereby vest
         except upon the occurrence of a Vesting Event and, subject to Section 3
         hereof, any right to have the option granted hereby become exercisable
         other than as provided in Section 1 hereof.

3.       In the event that holders of the Company's common stock receive cash,
         securities or other property in respect of their common stock in
         connection with a Change in Control transaction, the Company shall use
         its best efforts to enable the Optionee (if he so elects)




<PAGE>   6



         to exercise any options granted hereby which shall have vested at a
         time and in a fashion that will entitle him to receive in exchange for
         any shares thus acquired the same consideration as is received in such
         Change in Control transaction by other holders of the Company's common
         stock. In the case of a Change in Control which does not result in a
         Vesting Event and in which the Company is not the surviving entity, the
         Company shall use its reasonable efforts to assure that the Optionee
         shall be provided replacement options that are exercisable for equity
         securities of the surviving entity (or an equivalent award) which shall
         contain terms, conditions and an after-tax economic opportunity
         (including, without limitation, an aggregate spread value) no less
         favorable to the Optionee than did the options granted hereby
         immediately prior to such Change in Control.

4.       The option granted hereby shall not be treated as an incentive stock
         option under the Internal Revenue Code.

5.       The option granted hereby shall terminate no later than at the close of
         business on the Termination Date; provided, however, that if the option
         has not become vested on or before April 1, 2001, the option shall
         terminate on April 1, 2001. If the option vests and becomes
         exercisable, it shall remain exercisable until the close of business on
         the Termination Date, except that if the Optionee violates the
         provisions of Section 11 (without regard to the time limitations of
         such Section) of his Employment Agreement, the option granted hereby
         (whether or not vested and exercisable) shall terminate upon such
         violation.

6.       The Optionee shall comply with and be bound by all the terms and
         conditions contained in the Plan, except that to the extent that any
         provision of this Agreement conflicts with any provision of the Plan,
         the provision of this Agreement shall be controlling.

7.       The option granted hereby shall be exercisable during the Optionee's
         lifetime only by the Optionee in accordance with the terms of this
         Agreement and the terms of the Plan and shall not be assignable or
         transferable except by Will or the laws of descent and distribution;
         provided, however, that the option may after the death of the Optionee
         be exercised pursuant to the terms of this Agreement and the terms of
         the Plan by a Beneficiary of the Optionee.

8.       The obligation of the Company to sell and deliver any stock under this
         option is specifically subject to all applicable laws, rules,
         regulations and governmental and stockholder approvals.

9.       Any notice by the Optionee to the Company hereunder shall be in writing
         and shall be deemed duly given only upon receipt thereof by the Company
         at its principal offices. Any notice by the Company to the Optionee
         shall be in writing and shall be duly given if mailed at the address
         last specified to the Company by the Optionee.

10.      The validity and construction of this Agreement shall be governed by
         the laws of the State of Michigan.




                                       2


<PAGE>   7


In Witness Whereof, the Company has caused this Agreement to be executed by a
duly authorized representative and the Optionee has hereunto set his hand as of
the day and year first above written.

     KMART CORPORATION                           OPTIONEE




     --------------------------------            -------------------------------
     Anthony N. Palizzi                          Floyd Hall








  Please Sign And Retain This Stock Option Agreement For Your Future Reference























                                       3



<PAGE>   8
                                 KMART CORPORATION
                               STOCK OPTION PLANS

                      NON-QUALIFIED STOCK OPTION AGREEMENT

<TABLE>
<S>                                              <C>
                               OPTIONEE:         Floyd Hall
                 SOCIAL SECURITY NUMBER:         [__________]
                        OPTIONED SHARES:         313,385 shares of common stock, $1.00 par value, of
                                                 Kmart Corporation.
                                   PLAN:         1992 Stock Option Plan
                 PER SHARE OPTION PRICE:         $13.19
                            OPTION DATE:         September 21, 1998
                       TERMINATION DATE:         September 21, 2008
</TABLE>

This Stock Option Agreement (the "Agreement") is executed and delivered as of
the Option Date by and between Kmart Corporation (the "Company") and the
Optionee, an employee of the Company. The parties hereby agree as follows:

1.       The Company, pursuant to the above Plan, which is incorporated herein
         by reference, and subject to the terms and conditions thereof (except
         as otherwise specified herein), hereby grants to the Optionee an option
         to purchase the Optioned Shares at the Per Share Option Price (which
         represents the fair market value of the Company's common stock on the
         Option Date). The option granted hereby shall vest (a "Vesting Event")
         only upon satisfaction of the following two conditions: (Condition 1)
         the Optionee's execution of a separate written waiver of all cash
         payments described in Sections 10(d)(ii) and 10(d)(iv) or, to the
         extent relating to payments described in Sections 10(d)(ii) and
         10(d)(iv), Section 10(e) of Optionee's Employment Agreement with the
         Company made as of June 4, 1995, as amended from time to time (his
         "Employment Agreement"); and (Condition 2) either (x) formal approval
         by the Company's Board of Directors of successorship arrangements with
         respect to the Optionee's positions and responsibilities with the
         Company, which approval specifically refers to the satisfaction of this
         vesting requirement, or (y) a Change in Control (as defined in the
         Plan). If the option granted hereby becomes vested, it shall then
         become exercisable only upon the earliest to occur of April 1, 2001, a
         Change in Control or the Optionee's death.

2.       Notwithstanding any provision to the contrary contained in the Plan,
         the option granted hereby shall not vest upon a Change in Control,
         except as provided in Section 1 hereof. Further, if the Optionee's
         employment terminates under any circumstances prior to a Vesting Event
         (including, without limitation, because of the Optionee's death or
         disability), the option shall terminate without vesting upon such
         termination of employment. Notwithstanding any provision of the Plan,
         the Optionee hereby specifically waives any right to have the option
         granted hereby vest except upon the occurrence of a Vesting Event and,
         subject to Section 3 hereof, any right to have the option granted
         hereby become exercisable other than as provided in Section 1 hereof.





<PAGE>   9



3.       In the event that holders of the Company's common stock receive cash,
         securities or other property in respect of their common stock in
         connection with a Change in Control transaction, the Company shall use
         its best efforts to enable the Optionee (if he so elects) to exercise
         any options granted hereby which shall have vested at a time and in a
         fashion that will entitle him to receive in exchange for any shares
         thus acquired the same consideration as is received in such Change in
         Control transaction by other holder of the Company's common stock. In
         the case of a Change in Control which does not result in a Vesting
         Event and in which the Company is not the surviving entity, the Company
         shall use its reasonable efforts to assure that the Optionee shall be
         provided replacement options that are exercisable for equity securities
         of the surviving entity (or an equivalent award) which shall contain
         terms, conditions and an after-tax economic opportunity (including,
         without limitation, an aggregate spread value) no less favorable to the
         Optionee than did the options granted hereby immediately prior to such
         Change in Control.

4.       The option granted hereby shall not be treated as an incentive stock
         option under the Internal Revenue Code.

5.       The option granted hereby shall terminate no later than at the close of
         business on the Termination Date; provided, however, that if the option
         has not become vested on or before April 1, 2001, the option shall
         terminate on April 1, 2001. If the option vests and becomes
         exercisable, it shall remain exercisable until the close of business on
         the Termination Date, except that if the Optionee violates the
         provisions of Section 11 (without regard to the time limitations of
         such Section) of his Employment Agreement, the option granted hereby
         (whether or not vested and exercisable) shall terminate upon such
         violation

6.       The Optionee shall comply with and be bound by all the terms and
         conditions contained in the Plan, except that to the extent that any
         provision of this Agreement conflicts with any provision of the Plan,
         the provision of this Agreement shall be controlling.

7.       The option granted hereby shall be exercisable during the Optionee's
         lifetime only by the Optionee in accordance with the terms of this
         Agreement and the terms of the Plan and shall not be assignable or
         transferable except by Will or the laws of descent and distribution;
         provided, however, that the option may after the death of the Optionee
         be exercised pursuant to the terms of this Agreement and the terms of
         the Plan by a Beneficiary of the Optionee.

8.       The obligation of the Company to sell and deliver any stock under this
         option is specifically subject to all applicable laws, rules,
         regulations and governmental and stockholder approvals.

9.       Any notice by the Optionee to the Company hereunder shall be in writing
         and shall be deemed duly given only upon receipt thereof by the Company
         at its principal offices. Any notice by the Company to the Optionee
         shall be in writing and shall be duly given if mailed at the address
         last specified to the Company by the Optionee.



                                       2


<PAGE>   10


10.      The validity and construction of this Agreement shall be governed by
         the laws of the State of Michigan.

In Witness Whereof, the Company has caused this Agreement to be executed by a
duly authorized representative and the Optionee has hereunto set his hand as of
the day and year first above written.

         KMART CORPORATION                  OPTIONEE


         -------------------------------    -------------------------------
         Anthony N. Palizzi                 Floyd Hall






  Please Sign And Retain This Stock Option Agreement For Your Future Reference

















                                       3