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                                                                      EXHIBIT 10

                                                                  EXECUTION COPY

                             EMPLOYMENT AGREEMENT

                   AGREEMENT, made and entered into by and between KMART
CORPORATION, a Michigan corporation (together with its successors and assigns
permitted under this Agreement, the "Company"), and CHARLES C. CONAWAY (the
"Executive").

                             W I T N E S S E T H :

                   WHEREAS, the Company desires to employ the Executive and to
enter into an agreement embodying the terms of such employment (this
"Agreement") and the Executive desires to enter into this Agreement and to
accept such employment, subject to the terms and provisions of this Agreement;


                   NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein and for other good and valuable consideration, the
receipt of which is mutually acknowledged, the Company and the Executive
(individually a "Party" and together the "Parties") agree as follows:

         1.        Definitions.

                   (a) "Affiliate" of a person or other entity shall mean a
person or other entity that directly or indirectly controls, is controlled by,
or is under common control with the person or other entity specified.

                   (b) "Base Salary" shall mean the salary provided for in
Section 4 below or any increased salary granted to the Executive pursuant to
Section 4.

                   (c) "Board" shall mean the Board of Directors of the Company.

                   (d) "Cause" shall mean:

                         (i) the Executive is convicted of a felony involving
         moral turpitude or any other felony if in the case of such other felony
         the Executive is unable to show that he (A) acted in good faith and in
         a manner he reasonably believed to be in or not opposed to the best
         interests of the Company and (B) had no reasonable cause to believe his
         conduct was unlawful; or

                         (ii) the Executive engages in conduct that constitutes
         willful gross neglect or willful gross misconduct in carrying out his
         duties under this Agreement, resulting, in either case, in material
         harm to the Company, unless the

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         Executive believed in good faith that such act or nonact was in or not
         opposed to the best interests of the Company.

                   (e) A "Change in Control" shall have the meaning set forth
in Section 2.6 of the Company's 1997 Long-Term Equity Compensation Plan as in
effect on the date hereof.

                   (f) "Committee" shall mean the Compensation and Incentives
Committee of the Board or any other committee of the Board performing similar
functions.

                   (g) "Constructive Termination" shall mean a termination of
the Executive's employment at his initiative as provided in Section 11(d) below
within one year following the occurrence, without the Executive's prior written
consent, of one or more of the following events:

                         (i) any failure to make timely and full payment of
         amounts required to be paid under this Agreement, or a reduction in the
         Executive's then current Base Salary or Target Bonus or the termination
         or material reduction of any employee benefit or perquisite enjoyed by
         him (other than as part of an across the board reduction in employee
         benefits applicable to all executive officers of the Company);

                         (ii) the failure to elect or reelect or appoint the
         Executive to any of the positions described in Section 3 below or
         removal of him from any such position;

                         (iii) a material reduction or material adverse change
         in the Executive's responsibilities, duties, authority, or any
         reduction in title, as provided herein, including, without limitation,
         the appointment of any person to an executive position at the Company
         that is co-equal with or senior to that of the Executive or any
         transfer of material responsibilities of the Executive to a subsidiary
         which has substantially the same effect as such an appointment, or
         after the Effective Date, the failure to offer to appoint or continue
         the Executive as Chairman and Chief Executive Officer of any company
         which becomes a successor of the Company by reason of a Change in
         Control, and as the Chairman and senior executive officer of the
         ultimate parent company which is within the same controlled group of
         corporations, within the meaning of Section 414 of the Internal Revenue
         Code of 1986, as amended, and which directly or indirectly controls the
         Company, or the assignment to the Executive of duties which are
         materially inconsistent with his duties or which materially impair the
         Executive's ability to function as the Chairman and Chief Executive
         Officer of the Company;

                         (iv) the relocation of the Company's principal office
         to a location more than 35 miles from Troy, Michigan; or

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                         (v) the failure of the Company to obtain the assumption
         in writing of its obligation to perform this Agreement by any successor
         to all or substantially all of the assets of the Company on or prior to
         a merger, consolidation, sale or similar transaction, as provided in
         Section 17 below.

                   (h) "Disability" shall mean the Executive's inability to
substantially perform his duties and responsibilities under this Agreement
by reason of any physical or mental incapacity for a period of 180 consecutive
days.

                   (i) "Effective Date" shall mean the date the Executive
executes this Agreement, as provided in Section 2 below.

                   (j) "Previous Employer" shall mean CVS Corporation, a
Delaware corporation.

                   (k) "Severance Period" shall mean the period during which the
Executive is receiving severance payments (or in respect of which a lump-sum
severance payment is made) pursuant to Section 11 (d) below.

                   (1) "Stock" shall mean the Common Stock of the Company.

                   (m) "Subsidiary" shall mean any corporation of which the
Company owns, directly or indirectly, more than 50% of the outstanding,
securities then entitled to vote.

                   (n) "Target Bonus" shall mean the Executive's annual target
bonus opportunity, as a percentage of Base Salary, as provided for in Section 5
below, or any increased annual target bonus opportunity approved by the
Committee.

                   (o) "Term of Employment" shall mean the period specified in
Section 2 below.


         2.        Term of Employment.

                   The Company hereby employs the Executive, and the Executive
hereby accepts such employment, for the period commencing on the date he
executes this Agreement (the "Effective Date") and ending on the fifth
anniversary of the Effective Date (the "Term of Employment"); provided, however,
that the Term of Employment shall be automatically extended for an additional
year on the fourth anniversary of the Effective Date and on each anniversary of
the Effective Date thereafter, unless written notice of non-extension is
provided by either Party to the other Party at least 180 days prior to the
applicable succeeding anniversary date.

         3.        Position, Duties and Responsibilities.

                   (a) During the Term of Employment, the Executive shall be
employed and serve as the Chairman of the Board and Chief Executive Officer of
the Company (or such other position or positions as may be agreed upon in
writing by the Executive and the Company) and be responsible for the general
management of the affairs of the Company.

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The Executive shall promptly be elected by the Board to be a member of the
Board. During the Term of Employment, the Company shall nominate the Executive
for re-election as a director at each annual meeting of shareholders coinciding
with the expiration of his term as a director and recommend him for re-election.
If elected by the shareholders, he shall serve as a member of the Board during
the Term of Employment. The Executive, in carrying out his duties under this
Agreement, shall report to the Board.

                   (b) The Executive shall perform such duties and carry out
such responsibilities incident to his position as may be determined from time to
time by the Board, which shall be consistent with the duties and
responsibilities customarily performed by persons in a similar executive
capacity. The Executive shall devote substantially all of his business time,
attention and skill to the performance of such duties and responsibilities, and
shall use his best efforts to promote the interests of the Company. The
Executive shall have all authority commensurate with such position, including,
without limitation, authority for decisions on hiring and terminations of
Company personnel. The Executive shall not, without the prior written approval
of the Board, engage in any other business activity which is in violation of
policies established from time to time by the Company.

                   (c) Anything herein to the contrary notwithstanding, nothing
shall preclude the Executive from (i) serving on the boards of directors of a
reasonable number of other corporations or the boards of a reasonable number of
trade associations and/or charitable organizations (subject to the reasonable
approval of the Board), (ii) engaging in charitable activities and community
affairs, and (iii) managing his personal investments and affairs, provided that
such activities do not materially interfere with the proper performance of his
duties and responsibilities as the Company's Chairman and Chief Executive
Officer.

          4.       Base Salary.

                   During the Term of Employment, the Executive shall be paid an
annualized Base Salary, payable in accordance with the regular payroll practices
of the Company, of $1,400,000. The Base Salary shall be reviewed no less
frequently than annually for increase in the discretion of the Board and/or the
Committee. The Base Salary, including any increase, shall not be decreased
during the Term of Employment. The Base Salary shall not be required to be
deferred by the Executive under any Company plan or program.

          5.       Annual Incentive Awards.

                   During the Term of Employment, the Executive shall have an
annual target bonus opportunity of at least 125% of his then-current Base Salary
under the Company's Annual Incentive Bonus Plan or any successor plan (the
"Target Bonus"), payable if the performance goals established by the Committee
for the relevant year are met. If performance goals established by the
Committee for a particular year are not met, the Executive shall receive a
lesser amount as determined in accordance with guidelines established by
the Committee, consistent with the guidelines applicable to the Chief

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Executive Officer as a senior executive of the Company. Notwithstanding the
foregoing, the Executive shall receive a guaranteed bonus of $1,750,000 for the
fiscal year beginning February 1, 2000 without proration for the partial year
of service from the Effective Date through January 31, 2001. Payment of the
annual bonus shall be made at the same time that other senior-level executives
receive their incentive awards. The Executive shall participate in the Company's
Management Stock Purchase Plan.

         6.        Long-Term Incentive Programs.

                   (a) General. During the Term of Employment, the Executive
shall be eligible to participate in the long-term incentive programs of the
Company, with any awards under such programs to be in the sole discretion of the
Committee. In any event, he shall be entitled to the awards described in
Sections 6(b) below.

                   (b) Stock Option Awards.

                           (i) As of the Effective Date, the Company shall grant
         the Executive a 10-year option to purchase an aggregate of 1,500,000
         shares of Stock (the "New Option"), which may be granted under the
         terms of the Company's stock option plans, or outside the terms of
         such plans, with terms and conditions consistent in all respects with
         the provisions of this Agreement and otherwise substantially the same
         as those granted under the Company's stock option plans. The exercise
         price per share of the New Option shall be equal to the closing price
         on the New York Stock Exchange of the Stock on the last trading day
         immediately preceding the Effective Date. The New Option shall become
         vested and exercisable in two equal installments on the first and
         second anniversaries of the Effective Date, provided the Executive is
         employed by the Company on each such date, except as otherwise
         provided in Section 11 hereof. Notwithstanding anything to the
         contrary in this Section 6(b) or in the Company's stock option plans,
         if the Executive violates the provisions of Section 12 below, the New
         Option shall immediately terminate.

                           (ii) The Company will recommend to the Board of
         Directors of Bluelight.com, Inc. that the Executive be granted a
         10-year option to purchase 250,000 shares of Bluelight.com common
         stock, with an exercise price equal to the fair market value of a
         share of Bluelight.com common stock on the date of grant and with
         other terms comparable to the grants of options for Bluelight.com
         common stock previously granted to other senior executives of the
         Company under the Bluelight.com, Inc. 1999 Equity Incentive Plan. The
         grant will be subject to the approval of the Bluelight.com., Inc.
         Board of Directors.

                           (iii) During the Term of Employment, the Executive
         will have an annual opportunity to be granted an option (the "Annual
         Option") for shares of Stock at a target level value of 400% of Base
         Salary, based upon the achievement of performance goals established by
         the Committee. The determination of the value of the Annual Option
         will be determined using the valuation method

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         employed by the Committee generally with respect to annual option
         grants to other senior executives of the Company.

         7.        Employee Benefit Programs.

                   During the Term of Employment, the Executive shall be
entitled to participate in all employee pension and welfare benefit plans and
programs made available to the Company's senior-level executives or to its
employees generally, as such plans or programs may be in effect from time to
time, including, without limitation, pension, profit sharing, savings and other
retirement plans or programs, medical, dental, hospitalization, short-term and
long-term disability and life insurance plans, accidental death and
dismemberment protection, travel accident insurance, and any other pension or
retirement plans or programs and any other employee welfare benefit plans or
programs that may be sponsored by the Company from time to time, including any
plans that supplement the above-listed types of plans or programs,
whether funded or unfunded. Without limiting the generality of the foregoing,
the Executive shall be offered the opportunity to elect life insurance coverage
on terms substantially comparable to those offered under the Company's Estate
Enhancement Program for Directors, subject to terms and conditions of such
program.

         8.        Reimbursement of Business and Other Expenses; Perquisites;
                   Vacations.

                   (a) The Executive is authorized to incur reasonable expenses
in carrying out his duties and responsibilities under this Agreement and the
Company shall promptly reimburse him for all business expenses incurred in
connection with carrying out the business of the Company, subject to
documentation in accordance with the Company's policy. The Company shall pay all
reasonable legal and financial advisor expenses incurred in connection with the
preparation of the Executive's employment arrangements with the Company.

                   (b) During the Term of Employment, the Executive shall be
entitled to participate in all of the Company's executive fringe benefits in
accordance with the terms and conditions of such arrangements as are in effect
from time to time for the Company's senior-level executives.

                   (c) The Company acknowledges its obligation to provide the
Executive with transportation during the Employment Period that provides him
with security to address bona fide business-oriented security concerns, and
shall, at Company expense (except as provided below), make available to the
Executive and his family Company or other private aircraft for
business and personal use at his discretion, provided that any such personal
use shall be limited to travel within the United States. The Executive shall pay
the Company the standard Company charges for personal use of such aircraft. It
is recognized that the Executive's travel by Company aircraft is required for
security purposes and, as such, will constitute business use of the aircraft.

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                   (d) The Executive shall relocate his permanent residence
from Rhode Island to Michigan. The Executive shall be entitled to a
reimbursement payment from the Company equal to his relocation expenses
(determined in accordance with the Company's relocation policy) incurred in
connection with the Executive's relocation and to the extent not covered thereby
will reimburse him for any loss up to an aggregate of $1 million on the sale of
his East Greenwich, Rhode Island properties, subject to providing reasonable
documentation thereof. The Company shall pay the Executive an
additional payment in an amount such that the net amount retained by the
Executive, after deduction for all federal, state and local income tax and any
employment tax on the reimbursement payments, shall equal the amount of the
reimbursement payment.

                   (e) The Executive shall be entitled to a reimbursement
payment from the Company equal to any reasonable expenses incurred by the
Executive for temporary housing for the Executive and his family in the Troy,
Michigan area for a period of up to six months following the Effective
Date.
                   (f) In all events, during the Term of Employment, the Company
shall:
                           (i) make available to the Executive a car and a
         driver for his use in Michigan;

                           (ii) reimburse the Executive for personal financial
         (including tax) counseling (other than legal fees) by a firm or firms
         to be chosen by the Executive, such reimbursement to be no more than
         the amount authorized under Company policy in effect from time to time;
         and

                           (iii) provide the Executive with a residential
         security system in his residence in the Detroit metropolitan area
         and pay the maintenance of such system including the monthly service
         charges.

                   (g) The Executive shall be entitled to four weeks paid
vacation per year.

         9.        Sign-On Award. As of the Effective Date, the Executive
shall be awarded as a sign-on award of 200,000 shares of Stock free of all
restrictions.

         10.       Buy-Out Provisions

                   The following payments and benefits are provided to the
Executive in consideration of his substantial loss of compensation rights from
the Previous Employer in connection with entering into this Agreement. Among
such lost rights are those pursuant to the following plans and programs of the
Previous Employer: the Long Term Plan, the Long Term Preferred Plan, the Long
Term Incentive Plan, the Long Term Restricted Stock Plan, the Retention Bonus
Plan and the Supplemental Executive Retirement Plan.

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                   (a) Cash Payment. In consideration of the Executive foregoing
payments and benefits that would otherwise become due to him under the plans and
programs of the Previous Employer, the Executive will be entitled to a cash
payment of $5,000,000, payable in installments as follows:

                           (i)   The first installment, of $2,500,000, shall be
         paid on the second day following the Effective Date.

                           (ii)  The remaining $2,500,000 shall be payable in
         four equal installments of $625,000 each on the second, third, fourth
         and fifth anniversaries of the Effective Date, provided the Executive
         is employed by the Company on each such date, except as otherwise
         provided in Section 11 hereof.

                   (b) Stock Award. In consideration of the Executive foregoing
payments and benefits that would otherwise become due to him under the plans
and programs of the Previous Employer, the Executive shall be awarded 303,000
shares of Stock free of all restrictions as of the Effective Date.

                   (c) Option Grant. In consideration of the Executive foregoing
certain rights to which he would otherwise be entitled under stock options
granted to him under the plans and programs of his Previous Employer, as of the
Effective Date, the Company shall grant the Executive a 10-year option to
purchase an aggregate of 2,500,000 shares of Stock (the "Replacement Option"),
which may be granted under the terms of the Company's stock options plans, or
outside the terms of such plans, in either event, on terms consistent with this
Agreement and otherwise consistent with the provisions of the Company's Stock
Option Plans. The exercise price per share of the Replacement Option shall be
equal to the closing price on the New York Stock Exchange of the Stock on the
last trading day immediately preceding the Effective Date. The Replacement
Option shall vest in four equal installments on the second, third, fourth and
fifth anniversaries of the Effective Date, provided the Executive is employed by
the Company on each such date, except as otherwise provided in Section 11
hereof. Notwithstanding anything to the contrary in this Section 10(c) or in the
Company's stock option plans, if the Executive violates the provisions of
Section 12 hereof, the Replacement Option shall immediately terminate.

                   (d) Restricted Stock Award. In consideration of the Executive
foregoing certain rights to which he would otherwise be entitled under
restricted stock granted to him under the plans and programs of his Previous
Employer, as of the Effective Date, the Company shall grant the Executive
615,000 restricted shares of Stock (the "Restricted Stock"). Shares of
the Restricted Stock shall become vested, and the forfeiture and transfer
restrictions thereon shall lapse, in two equal installments on the dates
immediately prior to the fourth and fifth anniversaries of the Effective Date,
provided the Executive is employed by the Company on each such date, except as
otherwise provided in Section 11 hereof. Notwithstanding anything to the
contrary in this Section 10(d), if the Executive violates the provisions of
Section 12 hereof, all unvested shares of Restricted Stock shall be immediately
forfeited.

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                   (e) Retention Bonuses. In consideration of the Executive
foregoing certain payments and benefits that would otherwise become due to him
under the plans and programs of his Previous Employer, the Company shall provide
the Executive with a retention bonus arrangement providing for an aggregate
$10,000,000 in retention bonus payments contingent upon the continued employment
of the Executive by the Company, except as otherwise provided in Section 11
hereof, to be paid on a pro-rata annual basis from the first through the fifth
anniversary of the Effective Date, with such amounts payable in each
installment 50% in cash and 50% in shares of Stock (valued at the fair market
value on the date of payment (using the closing price on the immediately prior
trading date)), that will be free of restrictions on the date of payment.

                   (f) SERP. In consideration of the Executive foregoing
benefits that would otherwise become due to him under the plans and programs
of his Previous Employer, the Company shall provide the Executive with a
pension arrangement providing for the accrual of retirement benefits payable at
age 55 that are substantially equivalent in the aggregate to the benefits the
Executive would have been entitled upon retirement at age 55 under the
Supplemental Executive Retirement Plan of his Previous Employer, as in effect on
the date hereof, offset by the benefits payable under such plan of the Previous
Employer (including any underlying qualified plan), as well as under any
comparable supplemental or qualified plan established by the Company.

                   (g) Offset and Reduction. Notwithstanding the provisions of
Sections 10(a)-(e) above, in the event that the Previous Employer accelerates
the vesting of any stock options, restricted stock, equity compensation,
incentive compensation, retirement benefits or there is otherwise a material
increase in the payments, rights or benefits that were expected to be forfeited
as a result of termination of employment with his Previous Employer prior to
becoming vested from those communicated to the Company by the Executive and his
representatives prior to the Effective Date, the Company shall be entitled to
offset the value of such increase, on a benefit by benefit basis (e.g.,
adjustment in the amount of retention bonus received from the Previous Employer
shall result in an offset to the amount payable under Section 10(e) above), from
the benefits payable to the Executive under the provisions of Sections 10(a)-(e)
above (using the same methodology as employed by the Company in establishing
such benefits); provided, however, that any such reduction shall not include the
intrinsic value of stock options to the extent that such value is attributable
to any time period to exercise stock options that is not made available to the
Executive by the Previous Employer. As a condition of the Executive's rights
under this Section 10, the Executive shall be required to provide (i) written
evidence satisfactory to the Company of all rights and benefits of his Previous
Employer to which this Section 10 relates and (ii) a written representation
satisfactory to the Company that there has not been any increase as described
above, within 90 days following the Effective Date.

                   (h) Forfeiture of Certain Payments. Notwithstanding any
provisions of this Agreement to the contrary, in the event that, prior to the
first anniversary of the Effective Date, (i) the Executive shall give notice of
his voluntary termination of employment pursuant to Section 11(f) below (or
shall so terminate without giving notice) or (ii) the Company shall terminate
the employment of the Executive for Cause, pursuant

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to Section 11(c) below, then the Executive shall immediately forfeit the
payments and awards made pursuant to Sections, 9, 10(a) and 10(b) hereof. In
this regard, within 15 days of such termination, the Executive shall be required
to (a) repay to the Company $2,500,000 in cash, together with interest accrued
at an annual rate of 6.5% and (b) return to the Company 503,000 shares of Stock,
or the cash equivalent of such shares of Stock based on the closing trading
price of the Stock on the New York Stock Exchange on the trading date
immediately prior to the date of repayment.

         11.       Termination of Employment.

                   (a) Termination Due to Death. In the event the Executive's
employment is terminated due to his death, his estate or his beneficiaries
as the case may be, shall be entitled to:

                           (i)   Base Salary through the date of death;

                           (ii)  a pro rata annual bonus for the year in which
the Executive's death occurs, based on the Target Bonus for such year, payable
in a single installment promptly after his death;

                           (iii) the balance of any annual or long-term cash
incentive awards (if any) earned (but not yet paid) pursuant to the terms of the
applicable programs;

                           (iv)  any restricted stock award outstanding at
the time of his death shall become fully vested and any forfeiture provisions
set forth in the relevant restricted stock agreement based on the continued
employment of the Executive shall immediately lapse;

                           (v)   any outstanding stock option or other equity
award at the time of death shall become fully vested, and his estate shall have
the right to exercise any such award for the lesser of (a) 12 months from
the date of death or (b) the remainder of the full original term of the option
(notwithstanding any contrary provision of any plan or agreement);

                           (vi)  any amounts earned, accrued or owing to the
Executive but not yet paid under this Agreement, including, without limitation,
any amounts not yet paid under Section 10(a)(ii) above; and

                           (vii) other or additional benefits in accordance
with applicable plans and programs of the Company.

                   (b) Termination Due to Disability. In the event the
Executive's employment is terminated due to his Disability, he shall be entitled
in such case to the following:

                           (i)   Base Salary through the date of termination;

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                           (ii) through the Company's long-term disability plans
         or otherwise, an amount equal to 60% of the Base Salary for the period
         beginning on the date of termination through the Executive's attainment
         of age 65;

                           (iii) the annual bonus for the year in which
         termination due to Disability occurs, based on the Target Bonus for
         such year, payable in a single installment promptly following
         termination due to Disability;

                           (iv) any restricted stock award outstanding at the
         time of his termination due to Disability shall become fully vested and
         any forfeiture provisions set forth in the relevant restricted stock
         agreement based on the continued employment of the Executive shall
         immediately lapse;

                           (v) the balance of any annual or long-term cash
         incentive awards (if any) earned (but not yet paid) pursuant to the
         terms of the applicable programs;

                           (vi) any outstanding stock option or other equity
         award at the time of termination due to Disability shall become fully
         vested, and he shall have the right to exercise any such award for the
         lesser of (a) 12 months from the date of Disability or (b) the
         remainder of the full original term of the option (notwithstanding any
         contrary provision of any plan or agreement);

                           (vii) any amounts earned, accrued or owing to the
         Executive but not yet paid under this Agreement, including, without
         limitation, any amounts not yet paid under Section 10(a)(ii) above;

                           (viii) continued participation to the extent provided
         in medical, dental, hospitalization and life insurance coverage and in
         all other employee welfare plans and programs in which he was
         participating on the date of termination for the period of the
         Disability or until he attains age 65, if earlier; and

                           (ix) other or additional benefits in accordance with
         applicable plans and programs of the Company.

                   In no event shall a termination of the Executive's employment
for Disability occur unless the Party terminating his employment gives written
notice to the other Party in accordance with Section 24 below.

                   (c) Termination by the Company for Cause.

                           (i) A termination for Cause shall not take effect
         unless the provisions of this paragraph (i) are complied with. The
         Executive shall be given written notice by the Board of the intention
         to terminate him for Cause, such notice (A) to state in detail the
         particular act or acts or failure or failures to act that constitute
         the grounds on which the proposed termination for Cause is based and
         (B) to be given within six months of the Board learning of such act
         or acts or

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         failure or failures to act. The Executive shall have 10 days after the
         date that such written notice has been given to the Executive in which
         to cure such conduct, to the extent such cure is possible. If he fails
         to cure such conduct, the Executive shall then be entitled to a hearing
         before the Board. Such hearing shall be held within 15 days of notice
         to the Company by the Executive, provided he requests such hearing
         within 10 days of the written notice from the Board of the intention to
         terminate him for Cause. If, within five days following such hearing,
         the Executive is furnished written notice by the Board confirming that,
         the Board has determined, by majority vote at a meeting of the Board
         duly called and held as to which termination of the Executive is an
         agenda item, that grounds for Cause on the basis of the original notice
         exist, he shall thereupon be terminated for Cause.

                           (ii)   In the event the Company terminates the
         Executive's employment for Cause, he shall be entitled to:

                                  (A) Base Salary through the date of the
                   termination of his employment for Cause;

                                  (B) the balance of any annual or long-term
                   cash incentive awards (if any) earned (but not yet paid)
                   pursuant to the terms of the applicable programs;

                                  (C) any amounts earned, accrued or owing to
                   the Executive but not yet paid under this Agreement; and

                                  (D) other or additional benefits in accordance
                   with applicable plans or programs of the Company.

                   (d) Termination Without Cause or Constructive Termination.

                           (i) A Constructive Termination shall not take effect
         unless the provisions of this paragraph (i) are complied with. The
         Company shall be given written notice by the Executive of the intention
         to terminate his employment on account of a Constructive Termination,
         such notice (A) to state in detail the particular act or acts or
         failure or failures to act that constitute the grounds on which the
         proposed Constructive Termination is based and (B) to be given within
         six months of the Executive learning of such act or acts or failure or
         failures to act. The Company shall have 30 days after the date that
         such written notice has been given to the Company in which to cure such
         conduct, to the extent such cure is possible.

                           (ii) In the event the Executive's employment is
         terminated by the Company without Cause, other than due to Disability
         or death, or in the event there is a Constructive Termination, the
         Executive shall be entitled to:

                                  (A) Base Salary-through the date of
termination of the Executive's employment;

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                   (B) Base Salary, at the monthly 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, then the Base Salary in
effect immediately prior to such reduction), payable each month for a period of
thirty-six months following the date of termination (the "Severance Period");
provided 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);

                   (C) pro-rata annual bonus for the year in which termination
occurs, based on the Target Bonus for such year, payable in a single installment
promptly following termination;

                   (D) an amount equal to one-twelfth (1/12) of the Target Bonus
amount for the year in which termination occurs, payable each month over the
Severance Period, provided that the Executive and the Company may agree that the
Company shall pay him the present value of such bonus amount in a lump sum
(using the discount referred to in Section 11(d)(ii)(B) above);

                   (F) the balance of any annual or long-term cash incentive
awards earned (but not yet paid) pursuant to the terms of the applicable
programs;

                   (G) any restricted stock award outstanding at the time of
such termination of employment shall become fully vested, and any forfeiture
provisions set forth in the relevant restricted stock agreement based on the
continued employment of the Executive shall immediately lapse;

                   (H) any outstanding stock option or other equity award at the
time of termination shall become fully vested, and he shall have the right to
exercise any such award for the remainder of the lessor of (a) 36 months from
the date of termination or (b) the full original term of the option
(notwithstanding any contrary provision of any plan or agreement);

                   (I) any amounts earned, accrued or owing to the Executive but
not yet paid under this Agreement, including, without limitation, any remaining
amounts not yet paid under Section 10(a)(ii) or 10(e) above;

                  (J) continued participation in all medical, dental,
hospitalization and life insurance coverage and in other employee welfare
benefit plans or programs in which he was participating on the date of the
termination of his employment until the end of the Severance Period; provided
that the Company's obligations under this clause (ix) shall be reduced to the
extent that the Executive receives similar coverage and benefits under the plans
and programs of a subsequent employer; and provided, further, that (x) if the
Executive is precluded from continuing his participation in any employee benefit
plan or program as provided in this clause (ix) of this Section 11(d), he shall
be



                                       13

<PAGE>   14

provided with the after-tax economic equivalent of the benefits provided under
the plan or program in which he is unable to participate for the period
specified in this clause (ix) of this Section 11(d), (y) the economic equivalent
of any benefit foregone shall be deemed to be the lowest cost that would be
incurred by the Executive in obtaining such benefit himself on an individual
basis, and (z) payment of such after-tax economic equivalent shall be made
quarterly in advance; and

                   (K) other or additional benefits in accordance with
applicable plans and programs of the Company.

         (e) Termination of Employment Following a Change in Control.

         If, within two years following a Change in Control, the Executive's
employment is terminated without Cause or there is a Constructive Termination,
the Executive shall be entitled to the payments and benefits provided in Section
11(d) above, provided that all cash payments provided therein shall be paid in a
lump sum without any discount. In addition, immediately following a Change in
Control, all accrued or earned amounts that are not otherwise vested, as well as
all options, restricted stock and other equity-based awards in which he is not
yet vested, shall become fully vested, including, without limitation, the
Executive's accrued benefits under any supplemental retirement plan maintained
by the Company. All accrued benefits under such plans shall be paid as a
lump-sum cash payment.

         (f) Voluntary Termination.

         In the event of a termination of employment by the Executive on his own
initiative, other than a termination due to death or Disability or a
Constructive Termination, the Executive shall have the same entitlements as
provided in Section 11(c)(ii) above for a termination for Cause. A voluntary
termination under this Section 11(f) shall be effective upon 30 days' prior
written notice to the Company and shall not be deemed a breach of this
Agreement.

         (g) Payment Following a Change in Control.

         In the event that the termination of the Executive's employment is for
one of the reasons set forth in Section 11(e) above and the aggregate of all
payments or benefits made or provided to the Executive under Section 11(e) above
and under all other plans and programs of the Company (the "Aggregate Payment")
is determined to constitute a Parachute Payment, as such term is defined in
Section 280G(b)(2) of the Internal Revenue Code, the Company shall pay to the
Executive, prior to the time any excise tax imposed by Section 4999 of the
Internal Revenue Code ("Excise Tax") is payable with respect to such Aggregate
Payment, an additional amount which, after the imposition of all income and
excise taxes thereon, is equal to the Excise Tax on the Aggregate Payment. The
determination of whether the Aggregate Payment constitutes a Parachute Payment
and, if so, the amount to be paid to the Executive and the time of payment
pursuant to this Section 11(g) shall be made by an independent auditor (the
"Auditor") jointly selected by the Company and the Executive and paid by the
Company.

                                       14
<PAGE>   15


The Auditor shall be a nationally recognized United States public accounting
firm which has not, during the two years preceding the date of its selection,
acted in any way on behalf of the Company or any Affiliate thereof. If the
Executive and the Company cannot agree on the firm to serve as the Auditor, then
the Executive and the Company shall each select one accounting firm and those
two firms shall jointly select the accounting firm to serve as the Auditor.

         (h) No Mitigation; No Offset.

         In the event of any termination of employment under this Section 11,
the Executive shall be under no obligation to seek other employment and there
shall be no offset against amounts due the Executive under this Agreement on
account of (i) any remuneration attributable to any subsequent employment that
he may obtain except as specifically provided in this Section 11 or (ii) any
claims the Company may have against the Executive.

         (i) Nature of Payments.

         Any amounts due under this Section 11 are in the nature of severance
payments considered to be reasonable by the Company and are not in the nature of
a penalty.

         (j) Exclusivity of Severance Payments.

         Upon termination of the Executive's employment during the Term of
Employment, he shall not be entitled to any severance payments or severance
benefits from the Company, other than as provided herein, or any payments by the
Company on account of any claim by him of wrongful termination, including claims
under any federal, state or local human and civil rights or labor laws, other
than the payments and benefits provided hereunder, except for any benefits which
may be due the Executive in normal course under any employee benefit plan of the
Company which provides benefits after termination of employment.

         (k) Non-competition.

         The Executive agrees that any right to receive the severance payments
and benefits hereunder will cease if the Executive breaches the provisions of
Section 12(a) below. The Executive agrees that any violation of the provisions
of Section 12(a) below will result in the immediate forfeiture of any severance
payments or benefits hereunder and any rights to exercise or receive stock
options or restricted stock. The foregoing is in addition to the rights of the
Company under Section 10(g) and 10(h) above.

         (l) Release of Claims.

         As a condition of the Executive's entitlement to any of the severance
rights and benefits provided in this Section 11, the Executive shall be required
to execute and honor a release of claims in the form set forth in Exhibit A
hereto, subject to such

                                       15
<PAGE>   16

changes consistent with the intent of such release as may be necessary to
reflect changes in law.

         (m) Termination at Will.

         Notwithstanding anything herein to the contrary, the Executive's
employment with the Company is terminable at will with or without Cause;
provided, however, that a termination of the Executive's employment shall be
governed in accordance with the terms hereof.

    12. Restrictive Covenants.

         (a) Non-Compete. By and in consideration of the substantial
compensation and benefits to be provided by the Company hereunder, and further
in consideration of the Executive's exposure to the proprietary information of
the Company, the Executive agrees that he shall not, during the Term of
Employment and for the duration of the Severance Period, but in any event for a
period of at least eighteen months following termination of employment for any
reason, directly or indirectly own, manage, operate, join, control, be employed
by, or participate in the ownership, management, operation or control of or be
connected in any manner, including, but not limited to, holding the positions of
officer, director, shareholder, consultant, independent contractor, employee,
partner, or investor, with any Competing Enterprise; provided, however, that the
Executive may invest in stocks, bonds, or other securities of any corporation or
other entity (but without participating in the business thereof) if such stocks,
bonds, or other securities are listed for trading on a national securities
exchange or Nasdaq National Market and the Executive's investment does not
exceed 1% of the issued and outstanding shares of capital stock, or in the case
of bonds or other securities, 1% of the aggregate principal amount thereof
issued and oustanding. "Competing Enterprise" shall mean and be limited to the
following entities, including successors thereto: Albertson's Inc., American
Retail Group, Inc., American Stores Company, Carrefour sa, Kohl's Corporation,
The May Department Store Company, Montgomery Ward & Co., Inc., J.C. Penny
Company, Royal Ahold, Safeway, Inc., Sears, Roebuck and Co., Service Merchandise
Company, ShopKo Stores, Inc., Supervalue Inc., Target Corp., The Home Depot,
Inc., Toys R Us Inc., TJX Companies, Inc., and Wal-Mart Stores, Inc. The Parties
agree that the foregoing list of entities shall be amended (by written action
pursuant to Section 20 hereof) from time to time, if necessary, to include any
additional entity that, following the date hereof, becomes an owner and operator
of retail stores selling general merchandise that is national or international
in scope and is of a nature similar to the companies listed above.

         (b) Nonsolicitation. By and in consideration of the substantial
compensation and benefits to be provided by the Company hereunder, and further
in consideration of the Executive's exposure to the proprietary information of
the Company, the Executive agrees that he shall not, during the Term of
Employment and for the duration of the Severance Period, but in any event for a
period of at least eighteen months following termination of employment for any
reason, without the express prior written approval of the Company, (i) directly
or indirectly, in one or a series of transactions,

                                       16
<PAGE>   17
recruit, solicit or otherwise induce or influence any proprietor, partner,
stockholder, lender, director, officer, employee, sales agent, joint venturer,
investor, lessor, supplier, customer, agent, representative or any other person
which has a business relationship with the Company, or had a business
relationship with the Company within the 24 month period preceding the date of
the incident in question, to discontinue, reduce or modify such employment,
agency or business relationship with the Company, or (ii) employ or seek to
employ or cause any Competing Enterprise to employ or seek to employ any person
or agent who is then (or was at any time within six months prior to the date the
Executive or the Competing Enterprise employs or seeks to employ such person)
employed or retained by the Company.

         (c) Confidential Information. During the Term of Employment and at all
times thereafter, Executive agrees that he will not divulge to anyone (other
than the Company or any persons employed or designated by the Company) any
knowledge or information of any type whatsoever whether of a confidential nature
or otherwise relating to the business of the Company or any of its subsidiaries
or affiliates, as well as any information of a confidential nature obtained from
customers, clients or other third parties, including, without limitation, all
types of trade secrets (unless readily ascertainable from public or published
information or trade sources) and confidential commercial information, and the
Executive further agrees not to disclose, publish or make use of any such
knowledge or information without the prior written consent of the Company.

         (d) The Executive agrees that any breach of the terms of this Section
12 would result in irreparable injury and damage to the Company for which the
Company would have no adequate remedy at law; the Executive therefore also
agrees that in the event of said breach or any reasonable threat of breach, the
Company shall be entitled to an immediate injunction and restraining order to
prevent such breach and/or threatened breach and/or continued breach by the
Executive and/or any and all persons and/or entities acting for and/or with the
Executive. The terms of this paragraph shall not prevent the Company from
pursuing any other available remedies for any breach or threatened breach
hereof, including, but not limited to, remedies available under this Agreement
and the recovery of damages. The Executive and the Company further agree that
the provisions of the covenant not to compete are reasonable. Should a court or
arbitrator determine, however, that any provision of the covenant not to compete
is unreasonable, either in period of time, geographical area, or otherwise, the
parties hereto agree that the covenant shall be interpreted and enforced to the
maximum extent which such court or arbitrator deems reasonable.

         (e) The provisions of this Section 12 shall survive any termination of
this Agreement and the Term of Employment, and the existence of any claim or
cause of action by the Executive against the Company, whether predicated on this
Agreement or otherwise, shall not constitute a defense to the enforcement by the
Company of the covenants and agreements of this Section.

    13. Stock Ownership. At all times following the fifth anniversary of the
Effective Date, the Executive agrees to use his reasonable best efforts to
maintain

                                       17
<PAGE>   18




ownership of Stock (including shares of restricted stock) with a fair market
value (disregarding any restrictions) equal to at least 400% of his then-current
Base Salary.

    14. Registration Statements. As soon as practicable after the Effective Date
(but in no event later than the applicable vesting or exercise dates), the
Company shall file and keep effective a registration statement on Form S-8 (or
other applicable registration statement) with respect to the stock options,
restricted stock and awards of stock hereunder, except to the extent covered by
a comparable registration statement under the Company's stock incentive plans.

    15. Indemnification.

         (a) The Company agrees that if the Executive is made a party, or is
threatened to be made a party, to any action, suit or proceeding, whether civil,
criminal, administrative or investigative (a "Proceeding"), other than a
Proceeding brought on behalf of the Previous Employer relating to the
Executive's employment agreement with the Previous Employer, by reason of the
fact that he is or was a director, officer or employee of the Company or is or
was serving at the request of the Company as a director, officer, member,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, including service with respect to employee benefit plans,
whether or not the basis of such Proceeding is the Executive's alleged action in
an official capacity while serving as a director, officer, member, employee or
agent, the Executive shall be indemnified and held harmless by the Company to
the fullest extent legally permitted or authorized by the Company's certificate
of incorporation or bylaws or resolutions of the Company's Board of Directors
or, if greater, by the laws of the State of Michigan against all cost, expense,
liability and loss (including, without limitation, attorney's fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by the Executive in connection
therewith, and such indemnification shall continue as to the Executive even if
he has ceased to be a director, officer, member, employee or agent of the
Company or other entity and shall inure to the benefit of the Executive's
heirs, executors and administrators. The Company shall advance to the Executive
all reasonable costs and expenses incurred by him in connection with a
Proceeding within 20 days after receipt by the Company of a written request for
such advance. Such request shall include an undertaking by the Executive to
repay the amount of such advance if it shall ultimately be determined that he is
not entitled to be indemnified against such costs and expenses.

         (b) Neither the failure of the Company (including its board of
directors, independent legal counsel or stockholders) to have made a
determination prior to the commencement of any Proceeding concerning payment of
amounts claimed by the Executive under Section 15(a) above that indemnification
of the Executive is proper because he has met the applicable standard of
conduct, nor a determination by the Company (including its board of directors,
independent legal counsel or stockholders) that the Executive has not met such
applicable standard of conduct, shall create a presumption that the Executive
has not met the applicable standard of conduct.

                                       18
<PAGE>   19
               (c) The Company agrees to continue and maintain a directors and
officers' liability insurance policy covering the Executive to the extent the
Company provides such coverage for its other executive officers or former
officers.

          16.  Effect of Agreement on Other Benefits.

               Except as specifically provided in this Agreement, the existence
of this Agreement shall not prohibit or restrict the Executive's entitlement to
full participation in the employee benefit and other plans or programs in which
senior executives of the Company are eligible to participate.

          17.  Assignability; Binding Nature.

          This Agreement shall be binding upon and inure to the benefit of the
Parties and their respective successors, heirs (in the case of the Executive)
and assigns. No rights or obligations of the Company under this Agreement may be
assigned or transferred by the Company except that such rights or obligations
may be assigned or transferred pursuant to a merger or consolidation in which
the Company is not the continuing entity, or the sale or liquidation of all or
substantially all of the assets of the Company, provided that the assignee or
transferee is the successor to all or substantially all of the assets of the
Company and such assignee or transferee assumes the liabilities, obligations
and duties of the Company, as contained in this Agreement, either contractually
or as a matter of law. The Company further agrees that, in the event of a sale
of reorganization transaction as described in the preceding sentence, it shall
take whatever action it legally can in order to cause such assignee or
transferee to expressly assume the liabilities, obligations and duties of the
Company hereunder. No rights or obligations of the Executive under this
Agreement may be assigned or transferred by the Executive other than his rights
to compensation and benefits, which may be transferred only by will or operation
of law, except as provided in Section 23 below.

          18.  Representations.

          The Company represents and warrants that it is fully authorized and
empowered by action of the Board to enter into this Agreement and to deliver and
hold open the accompanying offer letter, and that the performance of its
obligations under this Agreement will not violate any agreement between it and
any other person, firm or organization.

          19.  Entire Agreement.

          This Agreement contains the entire understanding and agreement
between the Parties concerning the subject matter hereof and supersedes all
prior agreements, understandings, discussions, negotiations and undertakings,
whether written or oral, between the Parties with respect thereto; provided,
however, that this Agreement shall not supersede any separate written
commitments by the Company with respect to indemnification.

                                       19

<PAGE>   20






          20.  Amendment or Waiver.

               No provision in this Agreement may be amended unless such
amendment is agreed to in writing and signed by the Executive and an authorized
officer of the Company. No waiver by either Party of any breach by the other
Party of any condition or provision contained in this Agreement to be performed
by such other Party shall be deemed a waiver of a similar or dissimilar
condition or provision at the same or any prior or subsequent time. Any waiver
must be in writing and signed by the Executive or an authorized officer of the
Company, as the case may be.

          21.  Severability.

               In the event that any provision or portion of this Agreement
shall be determined to be invalid or unenforceable for any reason, in whole or
in part, the remaining provisions of this Agreement shall be unaffected thereby
and shall remain in full force and effect to the fullest extent permitted by
law.

          22.  Survival.

               The respective rights and obligations of the Parties hereunder
shall survive any termination of the Executive's employment to the extent
necessary to the intended preservation of such rights and obligations.

          23.  Beneficiaries/References.

               The Executive shall be entitled, to the extent permitted under
any applicable law, to select and change a beneficiary or beneficiaries to
receive any compensation or benefit payable hereunder following the Executive's
death by giving the Company written notice thereof. In the event of the
Executive's death or a judicial determination of his incompetence, reference in
this Agreement to the Executive shall be deemed, where appropriate, to refer to
his beneficiary, estate or other legal representative.

          24.  Governing Law/Jurisdiction.

               This Agreement shall be governed by and construed and interpreted
in accordance with the laws of Michigan without reference to principles of
conflict of laws.

          25.  Resolution of Disputes.

               Any disputes arising under or in connection with this Agreement
shall, at the election of the Executive or the Company, be resolved by binding
arbitration, to be held in Detroit, Michigan in accordance with the rules and
procedures of the American Arbitration Association. Judgment upon the award
rendered by the arbitrator(s) may be entered in any court having
jurisdiction thereof. All costs and expenses of any arbitration or court
proceeding (including fees and disbursements of counsel) shall be borne by the
respective Party incurring such costs and expenses, but the Company shall
reimburse the

                                       20



<PAGE>   21




Executive for such reasonable costs and expenses in the event he substantially
prevails in such arbitration or court proceeding. Notwithstanding the
foregoing, following a Change of Control, all reasonable costs and expenses
(including fees and disbursements of counsel) incurred by the Executive pursuant
to this Section 25 shall be paid on behalf of or reimbursed to the Executive
promptly by the Company; provided, however, that no reimbursement shall be made
of such expenses if and to the extent the arbitrator(s) or the court
determine(s) that any of the Executive's litigation assertions or defenses were
in bad faith or frivolous.

          26.  Notices.

               Any notice given to a Party shall be in writing and shall be
deemed to have been given when delivered personally or sent by certified or
registered mail, postage prepaid, return receipt requested, duly addressed to
the Party concerned at the address indicated below or to such changed address as
such Party may subsequently give such notice of:

               If to the Company:       Kmart Corporation
                                        3100 West Big Beaver Road
                                        Troy, MI 48084-3163

                                        Attention: General Counsel

               If to the Executive:     Charles C. Conaway
                                        15 Signal Ridge Way
                                        East Greenwich, RI 02818

           27. Withholding.

               All amounts required to be paid by the Company shall be subject
to reduction in order to comply with applicable Federal, state and local tax
withholding requirements.

           28. Headings.

               The headings of the sections contained in this Agreement are for
convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.



                                     21


<PAGE>   22




           29.  Counterparts.


                This Agreement may be executed in two or more counterparts.



                IN WITNESS WHEREOF, the undersigned have executed this
 Agreement on the dates provided below.


                                     KMART CORPORATION



                                     By: /s/ Warren F. Cooper
                                        ------------------------------
                                        Warren F. Cooper

                                     May 25, 2000





                                     EXECUTIVE


                                     /s/ Charles C. Conaway
                                     ---------------------------------
                                     Charles C. Conaway


                                     May 30, 2000







                                       22


<PAGE>   23




                                                                       EXHIBIT A


                             COVENANT NOT TO SUE AND
                     FULL AND COMPLETE RELEASE OF LIABILITY

1.  I, Charles C. Conaway (hereinafter referred to as the "Executive") in
    exchange for the consideration contained in paragraph 2, does hereby release
    and forever discharge Kmart Corporation and any related or affiliated
    companies or divisions or their current or former directors, officers,
    employees, or agents (hereinafter referred to as "Kmart") from any and all
    actions, causes of action, suits, controversies, claims and demands
    whatsoever, for or by reason of any matter, cause or thing whatsoever,
    whether known or unknown including, but not limited to, all claims arising
    under or in connection with the Michigan Elliott-Larsen Civil Rights Act, as
    amended, Michigan Whistle Blowers' Protection Act, as amended, the Michigan
    Persons With Disabilities Civil Rights Act, as amended, Age Discrimination
    in Employment Act of 1967, as amended, Americans With Disabilities Act of
    1990, as amended, Title VII of the Civil Rights Act of 1964, as amended,
    Civil Rights Act of 1991, as amended, Employee Retirement Income Security
    Act of 1974, as amended, Older Workers Benefit Protection Act of 1990, as
    amended, the Fair Labor Standards Act, as amended, the Family & Medical
    Leave Act of 1993, as amended, the common law of the State of Michigan, for
    tort, breach of express or implied employment contract, wrongful discharge,
    intentional infliction of emotional distress, and defamation or injuries
    incurred on the job or incurred as a result of loss of employment. This
    Covenant Not To Sue and Full and Complete Release of Liability shall not
    apply to any claim for benefits which may be due the Executive under the
    Employment Agreement (as defined in paragraph 2 below) or any benefit plan
    of Kmart which provides benefits after termination of employment. The
    Executive represents that he has not filed against Kmart any complaints,
    charges, or lawsuits arising out of his employment, or any other matter
    arising on or prior to the date of this Covenant Not To Sue and Full and
    Complete Release of Liability. The Executive covenants and agrees that he
    will not seek recovery against Kmart arising out of any of the matters set
    forth in this paragraph.

2.  The Executive agrees to accept and Kmart agrees to provide the following
    consideration: All rights and benefits of the Executive upon termination of
    employment under the Employment Agreement between Kmart and the Executive,
    as in effect on the date hereof (the "Employment Agreement").

3.  The Executive agrees that the acts done and evidenced hereby, and the
    release granted hereunder, are done and granted to compromise any doubtful
    and disputed claims and to avoid litigation, and are not an admission of
    liability on the part of Kmart, by whom any liability is expressly denied.

4.  The Executive acknowledges that he has no seniority, recall, reinstatement,
    or rehire rights with Kmart in any capacity. The Executive also acknowledges
    that, except as set forth herein and in the Employment Agreement, he is not
    entitled to any compensation from Kmart.


<PAGE>   24




5.  The Executive agrees that he will honor the restrictive covenants concerning
    noncompetition, nonsolicitation and nondisclosure set forth in the
    Employment Agreement.

6.  The Executive agrees that the terms of this covenant not to sue and full and
    Complete Release of Liability will not be made public and will not be
    disclosed to anyone, unless compelled by law.

7.  If any provision or paragraph of this Covenant Not To Sue and Full and
    Complete Release of Liability is ever determined not enforceable,
    the remaining provisions and paragraphs shall remain in full force and
    effect.

8.  The Executive acknowledges that he has been given 21 days within which to
    consider this Covenant Not To Sue and Full and Complete Release of Liability
    and that he has 7 days following his execution to revoke his signature. If
    The Executive revokes his consent hereto prior to the expiration of such
    7-day period, the Covenant Not To Sue and Full and Complete Release of
    Liability shall not be effective, and Kmart shall have no obligations to
    provide the Executive with the consideration set forth in paragraph 2 above.

9.  This Covenant Not To Sue and Full and Complete Release of Liability
    constitutes the entire agreement between The Executive and Kmart and
    there are no oral or written agreements, understandings, or representations
    that vary from the terms of this Covenant Not To Sue and Full and Complete
    Release of Liability.

10. The Executive acknowledges that this Covenant Not To Sue and Full and
    Complete Release of Liability will be governed by and construed and enforced
    in accordance with the internal laws of the State of Michigan. If a dispute
    arises concerning any provisions of this Covenant Not To Sue and Full and
    Complete Release of Liability, it shall be resolved by arbitration in Troy,
    Michigan in accordance with the rules of the American Arbitration
    Association.

11. Nothing in this Covenant Not To Sue and Full and Complete Release of
    Liability shall impair any indemnification rights The Executive may have as
    an officer of Kmart.

12. THE EXECUTIVE ACKNOWLEDGES THAT HE HAS READ THIS COVENANT NOT TO SUE AND
    FULL AND COMPLETE RELEASE OF LIABILITY, THAT HE HAS BEEN PROVIDED 21 DAYS TO
    CONSIDER THIS COVENANT NOT TO SUE AND FULL AND COMPLETE RELEASE OF
    LIABILITY, THAT HE HAS BEEN ADVISED THAT HE HAS 7 DAYS TO REVOKE HIS
    SIGNATURE, THAT HE HAS BEEN ADVISED THAT HE SHOULD CONSULT WITH AN ATTORNEY
    BEFORE HE EXECUTES THIS COVENANT NOT TO SUE AND FULL AND COMPLETE RELEASE
    OF LIABILITY, AND THAT HE UNDERSTANDS ALL OF ITS TERMS AND EXECUTES IT
    VOLUNTARILY

                                       2



<PAGE>   25






AND WITH FULL KNOWLEDGE OF ITS SIGNIFICANCE AND THE CONSEQUENCES THEREOF.



                                             -----------------------------------
                                             Charles C. Conaway







                                       3