exv10w1



 





Exhibit 10.1




May 29, 2007




Mr. Lewis Kling

President and Chief Executive Officer

Flowserve Corporation




Dear Lew:



Your colleagues on the Board of Directors of Flowserve Corporation want you to know how pleased we
are with the company’s performance since you assumed the positions of President and Chief Executive
Officer. The completion of the restatements; the drive toward focusing the business units on
operational excellence, cooperation, customer satisfaction and total solutions selling; and the
strong financial results that have been posted are all very clear indicators of your effectiveness
in leading Flowserve over the last 21 months. Building a strong executive team that will continue
the implementation of the company’s operational and strategic plans and then be able to lead the
company subsequent to your retirement is now of paramount importance, and your commitment to this
objective is recognized and valued.



We are pleased that you are willing to serve beyond the term of your existing employment agreement
and until your successor as CEO is qualified and elected. We have given a great deal of
consideration to your total compensation opportunity and have decided to take a variety of actions
regarding your long-term incentives. As you shift your focus from dealing with restoring effective
operations to preparing the organization for the future, we intend to provide for long-term
incentives that recognize those new challenges and, if you are successful, have the potential to
enhance significantly the value of your compensation over the term of your employment and beyond.



The long-term compensation package that we have designed, which is summarized in the following
paragraphs, is closely linked to the continuing improvement of company performance both absolutely
and relative to the Aspiration Group that was recently identified by management (and approved by
the Organization & Compensation Committee) as the appropriate benchmark group for both compensation
and performance. Of course, there would be no reduction in your base salary during the term of
your employment, and you would be provided with benefits during the term of your employment on
basis no less favorable than that applicable to other senior management of the company from time to
time.



First, we would set the annual grant value of your long-term incentives at three times your annual
salary in effect on each grant date for each full year of employment. Consistent with the overall
program we recently approved and as further provided in this letter agreement, it is currently
planned that these annual awards will be evenly divided



 









 







between restricted stock units (RSUs) with time-based vesting and performance-based restricted
shares the vesting of which will be dependent on Flowserve performance relative to the Aspiration
Group in overlapping three-year performance periods. These awards to you would be made on terms
and conditions (including with respect to the establishment of award targets and thresholds) no
less favorable than those applicable to other senior management of the company.



Second, in connection with your willingness to serve beyond the end of your existing employment
agreement, we believe that you should have the ability to benefit from the plans you have created
and implemented as well as from the foundation that you are building in the management team, not
only through the term of your employment, but also in the years immediately following your
retirement. Therefore, in a major departure from our standard practice, (i) you would receive full
awards of RSUs and performance-based restricted shares for each of 2008 and 2009 unless your
employment is terminated before the date of grant in such year by reason of death or disability (as
defined in your existing employment agreement), by the company for cause (as that term is defined
in your existing employment agreement) or by you for any reason other than following the assignment
to you of duties materially inconsistent with your position or following any actions by the company
resulting in a material diminution of your position or duties, and (ii) you would have the
opportunity to vest or earn all of those full awards (provided that, to the extent any awards that
might otherwise be required following a termination of employment cannot be made as contemplated by
reason of securities or other laws, the company will provide an award of economically equivalent
value as of the date of grant (as determined for financial reporting purposes) in a form that does
not result in a violation of such laws). The RSUs will vest in accordance with the terms of each
grant (currently in thirds on each of the first three anniversaries of grant) and the
performance-based restricted shares may be earned on the basis of performance over the three-year
periods to which they pertain. In practical terms (assuming that a new CEO is in place no later
than February 2010), this means that vesting and earnout of some of your awards will continue to
occur in 2010, 2011 and 2012 and will not be dependent on your being employed by the company.



Third, in connection with your agreeing to serve beyond the expiration of your existing employment
agreement, we would grant you 50,000 performance-based restricted shares. Half of these shares may
be earned on the basis of Flowserve’s three-year average RONA performance relative to the
Aspiration Group after your retirement. If Flowserve’s projected RONA performance in the years
ending 2010, 2011, and 2012 is achieved as determined by the O&C Committee, the shares would be
earned. The other half of the 50,000 performance-based restricted shares may be earned on the
basis of Flowserve’s three-year average total shareholder return (TSR), also relative to the
Aspiration Group’s three-year average TSR. The shares would be earned if Flowserve’s TSR equals or
exceeds the average three-year TSR of the Aspiration Group in the years ending 2010, 2011, and
2012. In either case, if relative performance falls short of the goals, the shares would not be
earned. For each of these performance requirements, fifty percent of the awards would be subject
to earnout over the three-year period 2008-2010, 30 percent
over the three-year period 2009-2011 and 20 percent over the three-year period 2010-2012.



 









 





Among the conditions of the grants described in this letter are (a) that you must remain employed
as CEO through the earlier of the date at which the Board of Directors appoints a new CEO or
February 28, 2010, and (b) that you will agree to resign your employment and position as a director
and all other positions with the company and its affiliates upon the qualification of a new CEO
without recourse to the company’s severance plan for corporate officers or any other severance
arrangements to which you are otherwise entitled (provided that you will be paid your “accrued
compensation (as defined in your existing employment agreement and provided further that, if you
are terminated by the company without cause (as defined in your existing employment agreement) or
if you terminate your employment following the assignment to you of duties materially inconsistent
with your position or following any actions by the company resulting in a material diminution of
your position or duties, in either case after June 30 of any year, you will be paid a pro-rata
portion (based on the number of days worked during the year divided by 365) of the annual bonus
that otherwise would have been paid to you, at the time the bonus otherwise would have been paid to
you, based upon the actual level of performance for such year).



The grants will be structured to enable you to retire upon the qualification of your successor as
CEO without any adverse effect on the grants or your rights under the grants. However,
notwithstanding anything in your existing employment agreement, should you resign or retire without
the consent of the Board of Directors prior to February 28, 2010 (other than following the
assignment to you of duties materially inconsistent with your position or following any actions by
the company resulting in a material diminution of your position or duties), or should you be
terminated for cause (as that term is defined in your existing employment agreement) at any time,
the grants will be forfeited and the post-retirement vesting/earnout provisions of all other
long-term incentive grants that you might have received (whether or not vested and including, but
not limited to, stock options, restricted stock, restricted stock units, performance shares,
performance share units and contingent performance awards) will be cancelled without payment and
have no further force or effect (though of course you will retain amounts under grants that had
already been exercised and shares and units as to which the forfeiture restrictions shall have
lapsed). For the avoidance of doubt, notwithstanding anything in your existing employment
agreement, if your employment is terminated by the company before February 28, 2010 without cause
(as that term is defined in your existing employment agreement), if your employment is terminated
before February 28, 2010 by reason of disability (as that term is defined in your existing
employment agreement) or death, if you voluntarily terminate employment before February 28, 2010
following the assignment to you of duties materially inconsistent with your position or following
any actions by the company resulting in a material diminution of your position or duties, or if you
resign before February 28, 2010 upon the appointment of a successor CEO, all incentive awards that
are not performance based shall vest in full upon such termination, while all incentive awards that
are performance based shall continue in force in accordance with their terms. Also, if your
employment is terminated by the company



 









 







without cause, or by you voluntarily following a diminution of your position or duties, or if your
employment is terminated due to your death or disability, the unvested balances (if any) of your
non-qualified retirement plans shall become fully vested upon such termination. Moreover, in the
event there is a change in control of the company after the expiration of your existing employment
agreement at the end of its current term, the incentive awards you then hold will be treated in a
manner no less favorable than the treatment of awards then held by other senior management of the
company.



Finally, the company will permit you and your dependents, at your expense with respect to the full
cost of the applicable coverage, to participate in the company’s health and dental plans as in
effect from time to time (to the extent permitted under the terms of such plans and further to the
extent such participation would not cause an adverse tax consequence to any of the company’s other
current or former employees) after February 28, 2010 (or, if earlier, at such time as you otherwise
lose coverage under the company’s health and dental plans following a termination of employment)
until the time you and your spouse each become eligible for coverage under Medicare or a plan of a
subsequent employer (unless your employment is terminated before February 28, 2010 by the company
for cause (as that term is defined in your existing employment agreement)). If the company’s
health and dental plans do not permit you and your spouse to participate following your retirement
(or to the extent such participation would cause an adverse tax consequence to any of the company’s
other current or former employees), the company will reimburse you (or your spouse, as the case may
be) for any costs incurred in obtaining coverage comparable to that available under the company’s
health and dental plans as in effect from time to time in excess of what you or your spouse would
have had to pay to participate in the company’s health and dental plans pursuant to the immediately
preceding sentence.



We believe that this package of enhanced long-term incentives is appropriately performance
oriented, creates a strong incentive for you to prepare the company for the future, and presents a
very sizable potential addition to your total compensation should you succeed in doing so. We are
prepared to move as quickly as possible to implement the plans. Of course, the application of your
existing employment agreement to the disposition of incentive compensation awards following
termination of employment is modified to the extent inconsistent with the foregoing provisions of
this letter agreement (though the existing employment agreement otherwise shall remain in effect in
accordance with its terms until the end of its current term), and following the expiration of your
existing employment agreement at the end of its current term, that agreement will be of no further
force or effect and your employment status will be “at will,” provided of course that the company’s
obligations under Section 11 (titled, “Indemnification”) of your existing employment agreement will
survive the expiration of that agreement.



Award agreements will memorialize the terms and conditions of the long-term incentive grants as
described above together with your and the company’s other respective obligations under each such
grant in accordance with the company’s standard practices.



 









 





Flowserve is certainly in a strong position today, and headed in the right direction. But there is
still much that needs to be done. You have already led the company to significant performance
improvements, and we are confident that you will lead us to even greater heights in the years
ahead. We look forward to working with you to help you achieve that goal.



Please acknowledge your acceptance of the terms of this letter agreement by countersigning below
where indicated. This letter agreement may be executed in several counterparts, each of which
shall be deemed an original but which together shall constitute one and the same instrument.



Very truly yours,




	 	 	 
	/s/ Christopher A. Bartlett
 


	 	  
	Christopher A. Bartlett
	 	 






Chairman, Organization and Compensation Committee

Flowserve Corporation




ACKNOWLEDGED AND AGREED




	 	 	 
	/s/ Lewis Kling
 


	 	  
	Lewis
Kling 

Date: May 29, 2007