<PAGE>
                                Eaton Corporation
                         2004 Annual Report on Form 10-K
                                   Item 15(c)
                                  Exhibit 10(w)

                  2005 NON-EMPLOYEE DIRECTOR FEE DEFERRAL PLAN

                                   I. PURPOSE

     The 2005 Non-Employee Director Fee Deferral Plan (the "Plan") enables each
Director of Eaton Corporation ("Eaton" or the "Company") who is not employed by
the Company to defer receipt of fees that may be payable to him or her for
future services as a member of the Board of Directors of the Company (the
"Board") or as chairman or as a member of any committee of the Board. The
purpose of the Plan is to help attract and retain highly qualified individuals
to serve as members of the Company's Board of Directors and as members of
committees thereof.

                                 II. ELIGIBILITY

     All members of the Board who are not employed by the Company are eligible
to participate in the Plan with respect to amounts earned as fees for services
as a member of the Board or as chairman or a member of any committee of the
Board.

                                III. DEFINITIONS

     The terms used herein shall have the following meanings:

     Account - A bookkeeping account established by Eaton for a Participant to
which may be credited Deferred Fees and earnings or losses thereon.

     Agreement - A written agreement between Eaton and a Participant deferring
the receipt of Fees and indicating the term of the deferral.

     Beneficiary - The person or entity designated in writing executed and
delivered by the Participant to the Committee. If that person or entity is not
living or in existence at the time any unpaid balance of Deferred Fees becomes
due after the death of a Participant, the term "Beneficiary" shall mean the
Participant's estate or legal representative or any person, trust or
organization designated in such Participant's will.

     Board - The Board of Directors of Eaton Corporation.

     Change in Control of Eaton - A change of control as determined in
accordance the provisions of Section 409A of the Code and Treasury Regulations
and published guidance issued pursuant thereto.
<PAGE>
     Code - Internal Revenue Code of 1986, as it may be amended from time to
time.

     Committee - The Governance Committee of the Board or such other committee
as the Board may from time to time designate for purposes of administration of
the Plan.

     Common Share Retirement Deferred Fees - Retirement Deferred Fees that are
converted into share units in accordance with Article VI.

     Deferred Fees - That portion of Fees deferred pursuant to the Plan.

     Eaton - Eaton Corporation, an Ohio corporation, and its subsidiaries and
successors and assigns.

     Eaton Common Shares - The common shares of Eaton Corporation with a par
value of $.50 each.

     Fees - Any amount payable to a Participant for services as a member of the
Board or as chairman or a member of any committee of the Board.

     Funded Amount - With respect to the Account of any Participant, the value
of any assets which have been placed in a grantor trust established by the
Company to pay benefits with respect to that Account, as determined at the time
initial payments are to be made pursuant to the selections made by the
Participants in accordance with Section 9.02.

     Interest Rate Retirement Deferred Fees - Retirement Deferred Fees that are
credited with Treasury Note Based Interest in accordance with Article VI.

     Participant - A member of the Board who is not an employee of Eaton and who
elects to defer receipt of Fees.

     Periodic Installments - Annual payments, over a period not to exceed
fifteen years, as elected by the Participant in accordance with the terms of the
Plan, which are substantially equal in amount, or, in the case of Common Share
Retirement Deferred Fees, substantially equal in the number of share units being
valued and paid or the number of Eaton Common Shares being distributed, except
that earnings attributable to periods following Retirement or Termination of
Service as a Director shall be included with each payment.

     Plan - This 2005 Non-Employee Director Fee Deferral Plan pursuant to which
Fees may be deferred for later payment, as set forth herein effective January 1,
2005, and adopted December 8, 2004.

     Retirement - The Termination of Service as a Director of a Participant who
is age 55 or older and who has at least ten years of service as a member of the
Board or who is age 70 or older.
<PAGE>
     Retirement Deferred Fees - That portion of Fees deferred for payment at
Retirement or in Periodic Installments commencing at Retirement, as elected by
the Participant in accordance with Article IV.

     Short-Term Deferred Fees - That portion of Fees deferred for payment as
elected by the Participant in accordance with Article V.

     Termination and Change in Control - The Termination of Service as a
Director of a Participant for any reason whatsoever prior to a Change in Control
if there is a subsequent Change in Control or the Termination of Service as a
Director of a Participant for any reason whatsoever during the three-year period
immediately following a Change in Control.

     Termination of Service as a Director - The time when a Participant shall no
longer be a member of the Board, whether by reason of retirement, death,
voluntary resignation, divestiture, removal (with or without cause), or
disability.

     Treasury Bill Interest Equivalent - A rate of interest equal to the
quarterly average yield of 13-week U.S. Government Treasury Bills.

     Treasury Note Based Interest - A rate of interest equal to the average
yield of 10-year U.S. Government Treasury Notes plus 300 basis points.

     Trustee - The trustee of any trust which holds assets for the payment of
the benefits provided by the Plan.

                              IV. ELECTION TO DEFER

     Section 4.01 Deferral Options.  For each calendar year commencing with
                  ----------------
2005, a Participant may elect to defer the receipt of all or part of his or her
Fees as Short-Term Deferred Fees or Retirement Deferred Fees. Once a Participant
has made an effective election, he or she may not thereafter change that
election or change any allocation between Short-Term Deferred Fees or Retirement
Deferred Fees.

     Section 4.02 Amount Deferred.  Not less than 10% of Fees payable for any
                  ---------------
calendar year may be deferred under the Plan. If a Participant elects to
allocate a portion of Fees to both Short-Term Deferred Fees and Retirement
Deferred Fees, the amount allocated to each shall be not less than 10% of the
Fees payable for any calendar year.

     Section 4.03 Election Deadline.  To be in effect for a calendar year, a
                  -----------------
Participant's election must be completed, signed and filed with the Committee on
or before December 31 of the immediately preceding calendar year, except that in
the case of the first year in which a Participant becomes eligible to
participate in the Plan, such election may be made with respect to
<PAGE>
services performed subsequent to the election within 30 days after the date the
Participant becomes eligible to participate in the Plan.

     Section 4.04 Additional Terms.  At the time the Participant elects to defer
                  ----------------
all or part of his or her Fees for a calendar year as Short-Term Deferred
Compensation, the Participant shall also specify the year in which payment of
such amount shall commence (which shall not be prior to the second year
following the calendar year for which the Fees were deferred) and the method of
payment selected from those permitted under Article V, provided that payment
shall commence on or about March 15 of the specified year. At the time the
Participant elects to defer all or part of his or her Fees for a calendar year
as Retirement Deferred Fees, the Participant shall also specify that payment of
such amounts be made in a lump sum or in Periodic Installments, including the
term of such Periodic Installments, upon Retirement, provided that the date of
payment or commencement shall be on or about March 15 of the year following the
date of such Retirement, subject to the provisions of Section 6.06.

                           V. SHORT-TERM DEFERRED FEES

     If elected by a Participant, payment of the amount of Fees allocated to
Short-Term Deferred Fees will be deferred. Short-Term Deferred Fees shall be
credited to the Participant on the date such amount would have been distributed
to him or her if there had been no valid deferral election by establishing an
Account in the Participant's name. Treasury Bill Interest Equivalents shall be
credited quarterly to the Participant's Short-Term Deferred Fees Account until
such compensation is paid to the Participant. Short-Term Deferred Fees, together
with credited Treasury Bill Interest Equivalents, shall be paid to the
Participant in a lump sum or in not more than five annual installments, as
elected by the Participant. Upon the death of a Participant prior to payment of
such amounts, payment shall be made to his or her Beneficiary in a lump sum as
soon as practicable.

                          VI. RETIREMENT DEFERRED FEES

     Section 6.01 Duration.  If elected by a Participant, payment of the amount
                  --------
of Fees allocated to Retirement Deferred Fees will be deferred to Retirement.
Retirement Deferred Fees shall be credited to the Participant on the date such
amount would have been distributed to him or her if there had been no valid
deferral election by establishing an Account in the Participant's name.

     Section 6.02 Common Share Retirement Deferred Fees.  Between 50% and 100%,
                  -------------------------------------
as elected by the Participant, of the amount allocated to Retirement Deferred
Fees shall be credited to Common Share Retirement Deferred Fees, and the balance
shall be credited to Interest Rate Retirement Deferred Fees.

     Common Share Retirement Deferred Fees shall be converted into a number of
share units based upon the average of the mean prices for Eaton Common Shares
for the twenty trading days of the New York Stock Exchange during which Eaton
Common Shares were traded
<PAGE>
immediately preceding the end of the calendar quarter in which the Fees to be
deferred were earned. For purposes of the Plan, "mean price" shall be the mean
of the highest and lowest selling prices for Eaton Common Shares quoted on the
New York Stock Exchange List of Composite Transactions on the relevant trading
day. On each Eaton Common Share dividend payment date, dividend equivalents
equal to the actual Eaton Common Share dividends paid shall be credited to the
share units in the Participant's Account, and shall in turn be converted into
share units utilizing the mean price for Eaton Common Shares on the dividend
payment date.

     Upon payment of Common Share Retirement Deferred Fees in Eaton Common
Shares, the share units standing to the Participant's credit shall be converted
to the same number of Eaton Common Shares for distribution to the Participant.

     Section 6.03 Interest Rate Retirement Deferred Fees.  Retirement Deferred
                  --------------------------------------
Fees not credited to Common Share Retirement Deferred Fees shall be credited to
Interest Rate Retirement Deferred Fees. Interest Rate Retirement Deferred Fees
shall be credited to the Interest Rate Retirement Deferred Fees Account, which
shall earn Treasury Note Based Interest, compounded quarterly, until paid.

     Section 6.04 Periodic Installments.  Upon the death of a Participant who
                  ---------------------
has commenced receiving Periodic Installments, the entire remaining amount of
his or her Retirement Deferred Fees shall be distributed to the Participant's
Beneficiary. Such distribution shall be made in a lump sum as soon as
practicable following the death.

     Section 6.05 Termination of Service as a Director.  The Retirement Deferred
                  ------------------------------------
Fees Account of a Participant whose Termination of Service as a Director occurs
for reasons other than Retirement shall be distributed in a lump sum as soon as
practicable following the Participant's Termination of Service as a Director for
reasons other than Retirement; subject, however, to the limitations set forth in
Section 6.06.

     Earnings shall be credited on undistributed Retirement Deferred Fees
Accounts, and annual installment payments shall be adjusted to reflect such
additional earnings, based on the remaining number of installment payments to be
distributed and based on Treasury Note Based Interest, computed quarterly.

     Section 6.06 Limitations on Distribution.  Notwithstanding any provision of
                  ---------------------------
the Plan to the contrary, Fees deferred under the Plan shall not be distributed
earlier than

     (a)  separation from service as determined by the Secretary of the Treasury
          (except as provided below with respect to a key employee of Eaton);

     (b)  the date the Participant becomes disabled (within the meaning of
          Section 409A(a)(2)(C) of the Code);

     (c)  death of the Participant;
<PAGE>
     (d)  a specified time (or pursuant to a fixed schedule) specified under the
          Plan at the date of the deferral of such Fees;

     (e)  to the extent provided by the Secretary of the Treasury, a change in
          the ownership or effective control of Eaton, or in the ownership of a
          substantial portion of the assets of Eaton; or

     (f)  the occurrence of an unforeseeable emergency as defined in Section
          409A(a)(2)(B)(ii) of the Code.

     In the case of any key employee (as defined in Section 416(i) of the Code
without regard to paragraph (5) thereof) of Eaton, distributions may not be made
before the date which is six months after the date of separation from service
(or, if earlier, the date of death of the Participant).

                         VII. AMENDMENT AND TERMINATION

     Section 7.01 Right to Amend or Terminate.  Eaton fully expects to continue
                  ---------------------------
the Plan but it reserves the right, except as otherwise provided herein, at any
time by action of the Committee, to modify, amend or terminate the Plan for any
reason, including adverse changes in the federal tax laws. Notwithstanding the
foregoing, upon the occurrence of a Change in Control of Eaton, no amendment,
modification or termination of the Plan shall, without the consent of any
particular Participant, alter or impair any rights or obligations under the Plan
with respect to that Participant.

     Section 7.02 American Jobs Creation Act of 2004.  The Plan is intended to
                  ----------------------------------
provide for the deferral of compensation in accordance with the provisions of
Section 409A of the Code and Treasury Regulations and published guidance issued
pursuant thereto. Accordingly, the Plan shall be construed in a manner
consistent with those provisions and may at any time be amended in the manner
and to the extent determined necessary or desirable by Eaton to reflect or
otherwise facilitate compliance with such provisions with respect to amounts
deferred on and after January 1, 2005, including as contemplated by Section
885(f) of the American Jobs Creation Act of 2004. Moreover, to the extent
permitted in guidance issued by the Secretary of the Treasury and in accordance
with procedures established by the Committee, a Participant may be permitted to
terminate participation in the Plan or cancel an outstanding deferral election
with regard to amounts deferred after December 31, 2004. Notwithstanding any
provisions of the Plan to the contrary, no otherwise permissible election or
distribution shall be made or given effect under the Plan that would result in
taxation of any amount under Section 409A of the Code.
<PAGE>
                              VIII. ADMINISTRATION

     The Plan shall be administered by the Committee. The Committee shall
interpret the provisions of the Plan where necessary and may adopt procedures
for the administration of the Plan which are consistent with the provisions of
the Plan and any rules adopted by the Committee.

     Each Participant or Beneficiary must claim any benefit to which such
Beneficiary may be entitled under the Plan by a written notification to the
Committee. If a claim is denied, it must be denied within a reasonable period of
time in a written notice stating the specific reasons for the denial. The
claimant may have a review of the denial by the Committee by filing a written
notice with the Committee within sixty days after the notice of the denial of
his or her claim. The written decision by the Committee with respect to the
review must be given within 120 days after receipt of the written request.

     The determinations of the Committee shall be final and conclusive.

                      IX. TERMINATION AND CHANGE IN CONTROL

     Section 9.01 Termination and Change in Control.  Notwithstanding anything
                  ---------------------------------
herein to the contrary other than Section 6.06, upon the occurrence of a
Termination and Change in Control, the Participants shall be entitled to receive
from the Company the payments as provided in Section 9.02.

     Section 9.02 Payment Requirement.  No later than the date a Participant
                  -------------------
makes an initial election under the Plan, the Participant shall select one of
the payment alternatives set forth below with respect to that portion of the
Participant's Account equal to the full amount of the Account minus the Funded
Amount, and with respect to that portion of the Account equal to the Funded
Amount. The payment alternatives selected with respect to the two portions of
the Account need not be the same. The payment alternatives are as follows:

     (a)  a Lump Sum Payment within 30 days following the Termination and Change
          in Control;

     (b)  payment in monthly, quarterly, semiannual or annual payments, over a
          period not to exceed fifteen years, as selected by the Participant at
          the time provided in the first paragraph of this Section 9.02,
          commencing within 30 days following the Termination and Change in
          Control which are substantially equal in amount or in the number of
          share units being valued and paid or in the number of Eaton Common
          Shares being distributed, except that earnings attributable to periods
          following Termination and Change in Control shall be included with
          each payment.
<PAGE>
Payment of such amounts shall be made to each such Participant in accordance
with his or her selected alternative as provided in Section 9.02.

                                X. MISCELLANEOUS

     Section 10.01 Adjustments.  In the event of a reorganization, merger,
                   -----------
consolidation, reclassification, recapitalization, combination or exchange of
shares, stock split, stock dividend, rights offering or similar event affecting
shares of the Company, the Committee shall equitably adjust the number of share
units previously allocated to the Accounts of Participants as Common Share
Retirement Deferred Fees.

     Section 10.02 Designation of Beneficiaries.  Each Participant shall have
                   ----------------------------
the right, by written instruction to the Committee, on a form supplied by the
Committee, to designate one or more primary and contingent Beneficiaries (and
the proportion to be paid to each, if more than one is designated) to receive
his or her Account balance upon his or her death. Any such designation shall be
revocable by the Participant.

     Section 10.03 Committee Actions.  All actions of the Committee hereunder
                   -----------------
may be taken with or without a meeting, as permitted by law and by the Company's
Amended Regulations.

     Section 10.04 Assignment.  No benefit under the Plan shall be subject to
                   ----------
anticipation, alienation, sale, transfer or encumbrance, and any attempt to do
so shall be void. No benefit hereunder shall in any manner be liable for the
debts, contracts, or liabilities of the person entitled to such benefits. If a
Participant or Beneficiary shall become bankrupt, or attempt to anticipate,
alienate, sell, transfer or encumber any benefit hereunder, then such benefit
shall, in the discretion of the Committee, cease and terminate, and the
Committee may hold or apply the same for the benefit of the Participant or his
or her spouse, children, or other dependents, or any of them, in such manner and
in such amounts and proportions as the Committee may deem proper. During a
Participant's lifetime, rights hereunder are exercisable only by the Participant
or the Participant's guardian or legal representative. Notwithstanding the
foregoing, nothing in this Section shall prohibit the transfer of any benefit by
will or by the laws of descent and distribution or (if permitted by applicable
regulations under Section 16(b) of the Securities Exchange Act) pursuant to a
qualified domestic relations order, as defined under the Code and the Employee
Retirement Income Security Act of 1974, as amended.

     Section 10.05 No Funding Required.  The obligations of Eaton to make
                   -------------------
payments shall be a liability of Eaton to the Participant. Eaton shall not be
required to maintain any separate fund or reserve, or purchase or acquire life
insurance on a Participant's life, or otherwise segregate assets to assure that
any particular asset of Eaton is available to make such payments by reason of
Eaton's obligations hereunder. Nothing contained in the Plan shall be construed
as creating a trust or other fiduciary relationship between Eaton and a
Participant or any other person.
<PAGE>
     Section 10.06 No Contract for Services.  The Plan shall not be deemed to
                   ------------------------
constitute a contract for services between Eaton and a Participant. Neither the
execution of the Plan nor any action taken by Eaton or the Committee pursuant to
the Plan shall confer on a Participant any legal right to be continued as a
member of the Board or in any other capacity with Eaton whatsoever.

     Section 10.07 Governing Law.  The Plan shall be construed and governed in
                   -------------
accordance with the law of the State of Ohio to the extent not covered by
Federal law.