<PAGE>
                                                                   EXHIBIT 10.1

                              EMPLOYMENT AGREEMENT

AGREEMENT, by and between Polaroid Corporation, a Delaware corporation, with
headquarters located at 784 Memorial Drive, Cambridge, Massachusetts, together
with its successors and assigns permitted under this Agreement (the "Company"),
and William L. Flaherty residing at 11 Coburn Road, Weston, Massachusetts (the
"Executive") effective this 6th day of June 2001.

                              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)      "ANNUAL BONUS" shall mean a bonus amount payable under the
                  Company's executive annual bonus plan (currently the Polaroid
                  Incentive Plan for Executives).

         (b)      "BASE SALARY" shall mean the annual rate of base salary as
                  provided for in Section 3 below, as increased by the Board
                  from time to time.

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

         (d)      "CAUSE" means either of the following:

                  (i)      Executive's willful malfeasance having a material
                           adverse effect on the Company; or,

                  (ii)     Breach of a material policy of the Company; or

                  (iii)    Executive's conviction of a felony;

                  provided, that any action or refusal by Executive shall not
                  constitute "Cause" if, in good faith, Executive believed such
                  action or refusal to be in,


                                  Page 1 of 11

<PAGE>

                  or not opposed to, the best interests of the Company, or if
                  Executive shall be entitled, under applicable law or under an
                  applicable Certificate of Incorporation or By-Laws of the
                  Company, as they may be amended or restated from time to time,
                  to be indemnified with respect to such action or refusal.

         (e)      "CODE" means the Internal Revenue Code of 1986, as amended.

         (f)      "CONSTRUCTIVE TERMINATION" shall occur when the Executive
                  voluntarily terminates his employment with the Company or
                  retires after the occurrence of one or more of the following
                  events without the Executive's consent:

                  (i)      a reduction in Base Salary or the elimination of or
                           reduction of any benefit under any bonus, incentive
                           or other employee benefit plan, or the Executive's
                           participation or membership in the same, without an
                           economically equivalent replacement unless benefit or
                           compensation adjustments apply to all executives
                           receiving such benefit;

                  (ii)     the reassignment of Executive without Executive's
                           consent to a location more than fifty (50) miles from
                           the Executive's regular workplace or the provision of
                           significantly less favorable working conditions;

                  (iii)    the reduction in the Executive's job title or level
                           as an Executive Vice President; or

                  (iv)     a significant diminution in duties or
                           responsibilities or the reassignment of Executive to
                           duties which represent a position of lesser
                           responsibility.

         (g)      "DISABILITY" shall mean the Executive's disability within the
                  meaning of the Polaroid Long Term Disability Plan.

         (h)      "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
                  as in effect on the date in question.

         (i)      "SEVERANCE PERIOD" shall mean the period of twenty-four (24)
                  months following such termination.

         (j)      "STOCK" shall mean the outstanding shares of Common Stock of
                  the Company and any other shares of capital stock of the
                  Company into which the Common Stock shall be reclassified or
                  changed.


                                  Page 2 of 11
<PAGE>

         (k)      "SUBSIDIARY" of the Company shall mean any corporation of
                  which the Company owns, directly or indirectly, more than
                  fifty percent (50%) of the Voting Stock.

         (l)      "SUPPLEMENTAL PLANS" shall mean any and all Company
                  non-qualified benefit plans including, but not limited to, any
                  supplemental retirement plan.

         (m)      "TERMINATION DATE" shall mean the date of the Executive's
                  termination of employment from the Company.

2.       DUTIES AND RESPONSIBILITIES. The Executive shall be employed as
         Executive Vice President and Chief Financial Officer of the Company.
         Anything herein to the contrary notwithstanding, nothing shall preclude
         the Executive from:

         (a)      serving, subject to approval of the Board, 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;

         (b)      engaging in charitable activities and community affairs; and,

         (c)      managing his personal investments and affairs, provided that
                  such activities do not interfere with the proper performance
                  of his duties and responsibilities in the Company.

3.       BASE SALARY. The Executive shall be paid an annualized Base Salary of
         $390,000, payable in accordance with the regular payroll practices of
         the Company. The Base Salary shall be reviewed periodically by the
         Board.

4.       HIRING BONUS. The Executive shall receive a hiring bonus of $100,000 as
         soon as practical following the later of the Executive starting his
         employment with the Company or the execution of this Agreement.

5.       ANNUAL BONUS. The Executive shall participate in the Company's annual
         bonus plan using the targets and performance factors set forth in the
         Company's annual bonus plan, with an annual target award opportunity of
         at least fifty-five percent (55%) of Base Salary. For the year 2001,
         the Executive shall be guaranteed a minimum bonus of $100,000 payable
         in 2002 at such time as the payments of annual bonuses shall normally
         be made to other executives.

6.       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, as such plans or programs may be in effect from time to
         time, including, without limitation, long term incentive plan(s),
         pension, savings and other retirement plans or


                                  Page 3 of 11

<PAGE>

         programs, medical, dental, hospitalization, short-term and long-term
         disability and life insurance. Notwithstanding anything in this
         Agreement to the contrary, the terms of this Agreement shall replace
         the Executive's participation in The Polaroid Extended Severance Plan.

7.       RETIREMENT PLANS.

         (a)      The Executive is eligible to make 401(k) and voluntary
                  after-tax contributions through the Company's current Polaroid
                  Retirement Savings Plan, subject to change by the Company. Any
                  portion of Executive's contribution that cannot be made into
                  the Retirement Savings Plan due to the IRS limits shall be
                  contributed into the Polaroid Elective Deferred Compensation
                  Plan, a supplemental executive retirement plan.

         (b)      The Executive is eligible to participate in the Polaroid
                  Pension Plan, which is subject to change by the Company. The
                  Executive's pension benefits shall provide an opening account
                  balance of $250,000 and shall include a retirement crediting
                  rate equal to two (2) years of credited benefit accrual for
                  each year of credited benefit accrual earned for a period of
                  up to seven (7) years from the Executive's original date of
                  hire. Amounts contributed in excess of the IRS statutory
                  limits shall be placed in the current supplemental executive
                  retirement plan.

8.       RESTRICTED STOCK AWARD. The Executive shall receive 45,000 shares of
         restricted stock that will vest equally over three (3) years.

9.       OPTION AWARD. As part of the 2001 long-term incentive program, the
         Executive shall receive an Option grant of 100,000 options. These
         grants shall be priced as of the Executive's date of hire and be issued
         using the Company's 2001 Option Agreement.

10.      PERFORMANCE AWARD. As part of the Company 2001 long-term incentive
         program, the Executive shall also receive a Performance Share Award for
         the three-year period from 2001 - 2003. This Award shall be issued
         using the Company's 2001 Performance Share Award Agreement and shall
         provide a payout at target of 30,000 shares. The value of the award
         depends on the price of common stock at the time of the award and the
         ability to meet the performance factors set forth in the award. Should
         target be exceeded, the share amount shall increase, consistent with
         the terms of the Performance Share Award agreement.

11.      REIMBURSEMENT OF BUSINESS AND OTHER EXPENSES. 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.


                                  Page 4 of 11
<PAGE>

12.      VACATION. The Executive is entitled to at least four (4) weeks of
         vacation annually, which will be administered in accordance with the
         Company's vacation policy and prorated for the year 2001.

13.      TERMINATION DUE TO DISABILITY OR DEATH. In the event the Executive's
         employment is terminated due to Executive's Disability or death,
         Executive, or Executive's estate or beneficiaries, as the case may be,
         shall be entitled to:

         (a)      ANNUAL BONUS. Pro-rata portion of the Annual Bonus for the
                  year in which the Executive's Disability or death occurs; and,

         (b)      OTHER BENEFITS. Other benefits or entitlements in accordance
                  with applicable plans and programs of the Company.

14.      TERMINATION BY THE COMPANY FOR CAUSE. In the event the Company
         terminates the Executive's employment for Cause, the Executive shall be
         entitled to Base Salary through the date of the termination. Executive
         will not be entitled to receive a severance or any other benefits and
         all long-term incentive awards shall be forfeited. Nothing in this
         Agreement shall be construed to prevent the Company from terminating
         the Executive's employment for Cause. If the Executive is terminated
         for Cause, only this section shall apply.

15.      TERMINATION OR CONSTRUCTIVE TERMINATION BY THE COMPANY WITHOUT CAUSE.
         If prior to Change in Control, the Executive's employment is terminated
         by the Company without Cause or upon a Constructive Termination, upon
         the execution of a full and complete release, the Executive shall be
         entitled to:

         (a)      SEVERANCE PAYMENT. Base Salary, at the annualized rate in
                  effect on the date of termination of the Executive's
                  employment, in a stream of payments in accordance with the
                  Company's regular payroll schedule beginning on the regular
                  payroll distribution date next succeeding Executive's
                  Termination Date, for the Severance Period;

         (b)      ANNUAL BONUS. Annual Bonus payments for the period from the
                  beginning of the year in which the termination occurs through
                  the end of the Severance Period based on the actual
                  performance of the Company without regard to any other factors
                  (such as personal performance factors) that could reduce the
                  ultimate distribution; any such payment for a period of less
                  than a full year shall be pro-rated by the number of days for
                  which payment is made;

         (c)      INSURANCE. Medical, dental and executive life insurance
                  benefits (collectively "Insurance Benefits") at the same rate
                  as to actively employed officers of the Company for a period
                  equal to twenty-four (24) months following the Executive's
                  Termination Date or until the Executive is eligible


                                  Page 5 of 11
<PAGE>

                  to receive such Insurance Benefits through another employer
                  (this benefit shall run coterminous with COBRA rights),
                  whichever occurs first;

         (d)      DISABILITY COVERAGE. Short- and long-term disability coverage
                  that is reasonably comparable to the coverage provided to the
                  Executive on his Termination Date and which can be purchased
                  on the open market shall be for a period equal to the lesser
                  of twenty-four (24) months following the Executive's
                  Termination Date or until the Executive is eligible to receive
                  comparable benefits through another employer;

         (e)      OPTIONS. For all options granted through Executive's
                  Termination Date the Executive shall have an exercise period
                  being the lesser of two (2) years from the Executive's
                  Termination Date or the exercise period stated in the
                  Executive's applicable Option or Supplemental Option Agreement
                  and subject to all other terms of such agreements governing
                  the Options;

         (f)      PERFORMANCE AWARDS. A distribution of a pro-rata portion of
                  Performance Awards (including but not limited to Performance
                  Shares, PARS, and Restricted Stock) as earned through the
                  Executive's Termination Date will be made when distributions
                  from similar awards are made to active employees. The
                  Performance Award distributions, as adjusted for the pro-rata
                  period, shall be based on the Company's actual performance
                  during the performance period for such award. Determination of
                  award distributions shall be on the same basis as applied to
                  senior officers employed by the Company at the time such
                  awards are delivered. Notwithstanding the foregoing, no less
                  than seventy-five percent (75%) of all Restricted Stock Awards
                  granted on the effective date of this Agreement shall vest;

         (g)      FINANCIAL PLANNING AND OUTPLACEMENT COUNSELING. Financial
                  planning and outplacement services will be available to the
                  Executive. For reimbursement of these expenses Executive will
                  submit the necessary supporting documentation to Human
                  Resources. Specifically, the Company agrees to reimburse the
                  Executive up to a maximum of seventy five thousand dollars
                  ($75,000) for expenses that are related to the Executive's
                  financial planning and/or search for a new position, and/or
                  for expenses related to the Executive's setting himself up to
                  do independent consulting; including, but not limited to,
                  outplacement services, membership in and travel to
                  professional associations, home office equipment, supplies,
                  and financial planning. Such reimbursement shall be made upon
                  the submission by the Executive of periodic expense reports
                  accompanied by receipts for expenditures. The Executive's
                  entitlement to such outplacement services will end on the
                  earlier of one (1) year from the Executive's Termination Date
                  or the date the Company has reimbursed a total of seventy five
                  thousand dollars ($75,000).

                                  Page 6 of 11

<PAGE>

         (h)      OTHER BENEFITS. Other benefits or entitlements in accordance
                  with applicable plans and programs of the Company.

         (i)      SURVIVOR BENEFITS. Should the Executive become eligible to
                  receive payments and benefits under this section and die prior
                  to receipt of all such payments and benefits, the residual
                  payments shall be made to the Executive's beneficiary(ies).
                  Any residual family medical and dental benefits which the
                  Executive was receiving on the Executive's date of death shall
                  continue to the family members the Executive had covered in
                  such medical and dental plans on such date.

         Modifications to this Section may be made by the Company or its
         successors; however, any modifications which decrease the benefits or
         restrict the eligibility conditions will not be made before June 2003
         and thereafter require twelve (12) months prior written notice by the
         Company.

16.      INDEMNIFICATION; DIRECTOR'S AND OFFICER'S LIABILITY INSURANCE. The
         Executive shall, after the Termination Date, retain all rights to
         indemnification under applicable law or under the Company's Certificate
         of Incorporation or By-Laws, as they may be amended or restated from
         time to time. In addition, the Company shall maintain Director's and
         Officer's liability insurance on behalf of the Executive, at the better
         of the level in effect immediately prior to the Change in Control or
         the Executive's Termination Date, for the two (2) year period following
         the Termination Date, and throughout the period of any applicable
         statute of limitations.

17.      EFFECT ON EXISTING PLANS. All Change in Control provisions applicable
         to the Executive and contained in any plan, program, agreement or
         arrangement maintained as of the date this Agreement is signed
         (including, but not limited to, any stock option, restricted stock or
         pension plan) shall remain in effect through the date of a Change in
         Control, and for such period thereafter as is necessary to carry out
         such provisions and provide the benefits payable thereunder, and may
         not be altered in a manner which adversely affects the Executive
         without the Executive's prior written approval. This means that all
         awards of options, performance shares or such other awards as may be
         granted shall upon Change in Control be fully vested consistent with
         these terms. Notwithstanding the foregoing, no benefits shall be paid
         to the Executive, however, under the Polaroid Extended Severance Plan
         or any other severance plan maintained generally for the employees of
         the Company if the Executive is eligible to receive severance benefits
         under this Agreement.

18.      DISPUTES. Any dispute or controversy arising under or in connection
         with this Agreement shall be settled exclusively by arbitration in
         Boston, Massachusetts in accordance with the Rules of the American
         Arbitration Association then in effect.

                                  Page 7 of 11

<PAGE>

         Judgment may be entered on an arbitrator's award relating to this
         Agreement in any court having jurisdiction.

19.      NON-COMPETITION. During employment or any Severance Period pursuant to
         the provisions of paragraph 15, or in no event for a period less than
         twelve (12) months following any other termination of employment, the
         Executive shall not engage in any activity directly or indirectly with
         Eastman Kodak Company or Fuji, whether as a principal, partner,
         executive, consultant, shareholder, director (other than as a holder of
         not in excess of one percent (1%) of the outstanding voting shares of
         any publicly traded company) or otherwise.

20.      CONFIDENTIALITY. Without the prior written consent of the Company,
         except to the extent required by an order of a court having competent
         jurisdiction or under subpoena from an appropriate government agency,
         the Executive shall comply with the Confidentiality Agreement Executive
         executed when Executive was hired and further shall not disclose any
         trade secrets, customer lists, drawings, designs, information regarding
         product development, marketing plans, sales plans, manufacturing plans,
         management organization information (including data and other
         information relating to members of the Board and management), operating
         policies or manuals, business plans, financial records or other
         financial, commercial, business or technical information relating to
         the Company or information designated as confidential or proprietary
         that the Company may receive belonging to suppliers, customers or
         others who do business with any of its Subsidiaries (collectively,
         "Confidential Information") to any third person unless such
         Confidential Information has been previously disclosed to the public by
         the Company; is in the public domain (other than by reason of
         Executive's breach of this Agreement); or has been disclosed to the
         Executive prior to the date hereof from sources not breaching any
         agreement with the Company.

21.      COMPANY PROPERTY. Promptly following the Executive's termination of
         employment, the Executive shall return to the Company all property of
         the Company including but not limited to computer(s), identification
         badge, and business cards, credit cards, and all copies of Confidential
         Information in the Executive's possession or under Executive's control
         whether on paper or electronic storage media.

22.      MISCELLANEOUS ADJUSTMENTS UPON TERMINATION. Upon termination of the
         Executive's employment, the Company shall have the right to deduct from
         any cash payment due to Executive, all amounts required by applicable
         law to be withheld and in addition, any amounts which Executive may owe
         to the Company as of the Executive's Termination Date, including but
         not limited to items such as company store, corporate credit card
         obligations and Company property issued to Executive and not otherwise
         accounted for or returned.


                                  Page 8 of 11
<PAGE>

23.      NON-SOLICITATION OF EMPLOYEES. During employment or any Severance
         Period pursuant to the provisions of paragraph 15, or in no event for a
         period less than twelve (12) months following any other termination of
         employment, the Executive shall not directly or indirectly induce any
         employee of the Company to terminate employment with the Company, and
         shall not directly or indirectly, either individually or as owner,
         agent, consultant, director, officer, shareholder or otherwise, employ
         or offer employment to any person who is employed by the Company.

24.      NONDISPARAGEMENT. During the period in which the Executive is employed
         by the Company or any of its Subsidiaries, and for a period of two (2)
         years following the Executive's Termination Date, the Executive shall
         not commit any act, or in any way assist others to commit any action,
         intended to injure the Company, nor shall the Executive engage in any
         public criticism regarding his employment or the business affairs of
         the Company, nor to make any negative, detrimental, or derogatory
         comments concerning the Company or its directors, officers, or
         individuals known to the Executive to be employees, past and present;
         the Company and its officers and directors agree to make no criticism
         regarding the Executive or his employment with the Company.

25.      INJUNCTIVE RELIEF WITH RESPECT TO COVENANTS. Executive acknowledges and
         agrees that the covenants and obligations of the Executive with respect
         to noncompetition, nonsolicitation, confidentiality and Company
         property relate to special, unique and extraordinary matters, including
         his own skills, and that a violation of any of the terms of such
         covenants and obligations will cause the Company irreparable injury for
         which adequate remedies are not available at law. Therefore, the
         Executive agrees that the Company shall be entitled to an injunction,
         restraining order or such other equitable relief (without the
         requirement to post bond) restraining Executive from committing any
         violation of the covenants and obligations contained in this Agreement.
         These injunctive remedies are cumulative and are in addition to any
         other rights and remedies the Company may have at law or in equity.

26.      PROVISIONS SURVIVING BEYOND TERMINATION DATE. The obligations of the
         Executive set forth above shall not extend beyond his Termination Date
         where such date follows a Change in Control.

27.      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.

28.      ASSIGNMENT. Except as otherwise provided herein, this Agreement shall
         be binding upon, inure to the benefit of and be enforceable by the
         Company and the


                                  Page 9 of 11
<PAGE>

         Executive and their respective heirs, legal representatives, successors
         and assigns. If the Company shall be merged into or consolidated with
         another entity, the provisions of this Agreement shall be binding upon
         and inure to the benefit of the entity surviving such merger or
         resulting from such consolidation.

29.      REPRESENTATION. The Company represents and warrants that it is fully
         authorized and empowered to enter into this Agreement and each of the
         Parties represents and warrants that the performance of the obligations
         of such Party under this Agreement will not violate any agreement
         between that Party and any other person, firm or organization.

30.      ENTIRE AGREEMENT. This Agreement, with the Change in Control Agreement,
         the Company offer letter and the plans and grant agreements referenced
         in such documents, 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.

31.      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.

32.      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.

33.      SURVIVORSHIP. 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.

34.      BENEFICIARIES/REFERENCES. The Executive shall be entitled to select
         (and change, to the extent permitted under any applicable law) 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. Absent any written
         notice the beneficiary shall be the Executive's estate.


                                  Page 10 of 11
<PAGE>

35.      GOVERNING LAW. This Agreement shall be governed by, construed, and
         interpreted in accordance with the laws of Massachusetts without
         reference to principles of conflict of laws.

36.      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:
                  Polaroid Corporation
                  784 Memorial Drive
                  Cambridge, MA 02139
                  Attention: Vice President, Human Resources

         If to the Executive:
                  William L. Flaherty
                  11 Coburn Road
                  Weston, MA  02493

37.      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.

38.      COUNTERPARTS. This Agreement may be executed in two (2) or more
         counterparts.

39.      WITHHOLDING. The Company may, to the extent required by law, withhold
         applicable federal, state and local income and other taxes from any
         payments due to the Executive hereunder.

IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date
first written above.

                                     POLAROID CORPORATION

                                     By:    /S/ GARY T. DICAMILLO
                                           -------------------------------------
                                     Name:  Gary T. DiCamillo
                                     Title: Chairman and Chief Executive Officer

Accepted and Agreed to:

By:      /S/ WILLIAM L. FLAHERTY
         -----------------------
         William L. Flaherty


                                  Page 11 of 11