Document:

EX-10.1 COMPENSATION ARRANGEMENTS

 

Exhibit 10.1

Compensation Arrangements with Certain Executive Officers

     The following table sets forth the 2008 salary for the Company’s current executive officers
identified by name pursuant to Item 11 and the compensation disclosures in the Company’s Proxy
Statement for its 2008 Annual Meeting of Shareholders that is incorporated by reference into such
Item 11. The table also sets forth each such officer’s 2008 incentive compensation target under
the Company’s Executive Annual Incentive Compensation Plan (the “EICP”), as a percentage of salary,
and his actual incentive compensation award for 2007 (whether under the EICP or based on other
considerations).

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	2008
	 	 	2007	 	2008	 	Incentive
	 	 	Incentive	 	Base	 	Compensation
	 	 	Compensation	 	Salary	 	Target (1)
	Paul B. Domorksi
	 	$	358,561	 	 	$	445,000	 	 	 	80	%
	President and CEO
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Don T. Scartz
	 	$	154,979	 	 	$	295,000	 (2)	 	 	50	%
	Executive Vice President, Chief Financial Officer and Treasurer until May 2, 2008, and
thereafter Senior Financial Adviser

	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Neilson A. Mackay
	 	$	220,000	 	 	$	300,000	 	 	 	55	%
	Executive Vice President — Corporate Strategy

	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Gary B. Shell
	 	 	 	 	 	$	240,000	 	 	 	45	%
	Senior Vice President, Chief Financial Officer and Treasurer, effective May 2, 2008

	 
	 	 	 	 	 	 	 	 	 	 	 	 
	James S. Childress
	 	$	31,000	 	 	$	250,000	(3)	 	 	—	 
	Vice President and General Manager, LXE, until May 2, 2008

	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Gary W. Hebb (4)
	 	$	21,594	 	 	$	243,024	 	 	 	50	%
	Vice President and General Manager, SATCOM

 

			
	(1).	 	Actual incentive compensation payment under the EICP is determined based on
Company or divisional performance during 2008, primarily with reference to operating
income compared with targets approved by the Compensation Committee in February
2008. For the CEO and CFO, the determination is weighted 50% based on performance
against a corporate operating income target of $22,642,000 and 50% based on
performance against EPS of $1.30. In the cases of corporate officers other than the
CEO, awards are subject to reduction by up to 10% based on the CEO’s evaluation of
individual performance. For divisional officers, the determination is weighted 70%
based on divisional performance, 15% based on corporate performance against the
operating income target, and 15% based on performance against individual objectives
as specified and

 

 

			
	 	 	evaluated by the CEO. In general, divisional performance will be measured against
operating income targets that are believed to require excellent execution of
divisional business plans but are reasonably likely to be achieved.
	 
	 	 	In general, no incentive compensation is paid under the EICP if actual performance
is at 80% or less of targeted performance. Performance above target would normally
result in a 2-for-1 percentage increase in incentive compensation, except that the
maximum payment based on divisional performance is 150% of target. The Committee
retains the right to modify, either up or down, the incentive compensation otherwise
payable based on the factoring process, or to make separate discretionary bonus
payments, to take into account individual or Company/division performance on
non-financial or supplemental financial objectives. The Committee and Board also
have the right to make other discretionary awards, outside the EICP, based on
factors they believe to be appropriate in the circumstances.
	 
	(2).	 	Mr. Scartz’s stated salary for full-time employment. Effective May 2, 2008,
Mr. Scartz is retiring as Executive Vice President, CFO and Treasurer, and will
thereafter serve on a part-time basis at an hourly rate of $147.50, for up to 2,000
hours over two years. Upon termination of these arrangements, he will be paid the
amount, if any, by which $295,000 exceeds the aggregate of the hourly-rate payments
he has received. His EICP award for 2008 will be prorated based on his actual total
salary and hourly-rate payments for the year, and for 2009 will depend on the CEO’s
and Compensation Committee’s evaluation of his contributions during that year.
	 
	(3).	 	Effective May 2, 2008, Mr. Childress is retiring from his full-time position
and will thereafter serve as Senior Adviser through February 27, 2009. In that
position, he will be paid at any annual rate of $222,000, and will not be eligible
to participate in the Executive Incentive Compensation Plan.
	 
	(4).	 	Mr. Hebb’s compensation is fixed and paid in Canadian dollars. The 2007
Incentive Compensation amount paid has been converted into US dollars at the average
of the exchange rates in effect during 2007. The 2008 Base Salary amount has been
converted based on the average of exchange rates during the first quarter of 2008.

 

Each officer participates in the Company’s Employee Performance Bonus Plan on the same terms
as all other full-time employees. Under this Plan, which has been initiated in 2008 and
partially replaces funding previously devoted to the Company’s qualified Retirement Benefit
Plan, each employee will receive a cash bonus equal to 3% of his or her base compensation if
the Company achieves 2008 operating income of $22,600,000, with proportional increases or
reductions for actual results in excess or less than that amount.

Each officer other than Mr. Hebb also participates in the Company’s 401(k) and Retirement
Benefit Plans on the same terms as all other full-time employees, but Company contributions
to the Retirement Benefit Plan for 2008 will be substantially

 

 

 below those in earlier years due to the implementation of the Employee Performance Bonus
Plan. Mr. Hebb participates on the same terms as other employees in the Company’s Canadian
retirement program, which is similar to the 401(k) plan for US employees. The Company does
not currently provide a supplemental retirement plan for its executive officers.Ex-10.1 2008 Executive Management Incentive Award

 

Exhibit 10.1

NOTE: CERTAIN MATERIAL HAS BEEN REDACTED FROM THIS DOCUMENT AND FILED SEPARATELY
WITH THE SEC PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER
RULE 24b-2. THE LOCATIONS OF THESE REDACTIONS ARE INDICATED THROUGHOUT THE
DOCUMENT BY THE FOLLOWING MARKING: [***].

2008 EXECUTIVE MANAGEMENT INCENTIVE AWARDS

     As Adopted by the Compensation and Human Resources Committee of the Board of Directors on February
20, 2008

Introduction

     2008 Executive Management Incentive Awards (“EMIA”), made pursuant to Article 9 of the King
Pharmaceuticals, Inc. (the “Company”) Incentive Plan (the “Plan”), will be comprised of 1 to 2
financial objectives (“Financial Objectives”) and, for most participants, individual operational
objectives (“Operational Objectives”). In determining the potential EMIA payout for any
participant, Financial Objectives and Operational Objectives shall be weighted as determined either
by the Committee or by the Chief Executive Officer, as further detailed below. All capitalized
terms not otherwise defined shall have the meanings assigned to them in the Plan.

Administration

     The Compensation and Human Resources Committee of the Board of Directors of the Company (the
“Committee”) shall have complete discretionary authority over the administration of the EMIAs as
set forth herein including, without limitation, the authority to adjudicate claims related to
EMIAs, interpret the terms of EMIAs, and to resolve disputes and factual questions related to
EMIAs. Determinations of the Committee shall be binding on the Company and the EMIA participants.

Eligibility to Participate

     Except as otherwise determined by the Committee, executives having the title of Vice President
or more senior titles as of January 1, 2008 shall be eligible to participate in the 2008 EMIA. The
President and Chief Executive Officer, Chief Financial Officer, Chief Commercial Officer, Chief
Technical Operations Officer, General Counsel, Corporate Compliance Officer, Chief Science Officer
and Executive Vice President, Corporate Affairs are designated “Top Executives.”

     The Committee and/or the Chief Executive Officer, as further detailed below in the section
entitled “Objective Approval and Weighting,” may establish an EMIA for an executive who is hired or
promoted to fill an EMIA-eligible position after January 1, 2008; provided, however, that

	 	a.	 	an EMIA may be established for a Top Executive after 90 days have elapsed since January
1, 2008 only if 75.1% or more of the performance time period is remaining at the time the
EMIA is established, in accordance with Treas. Reg. § 1.162-27(e);
	 
	 	b.	 	any executive hired after September 30, 2008 is ineligible for an EMIA; and
	 
	 	c.	 	any employee of the Company promoted into an EMIA-eligible position and who becomes an
EMIA Participant (but who is not a Top Executive) shall participate in the EMIA and 2008
Management Incentive Plan prorata (if a participant of the Management Incentive Plan).

 

 

Objective Approval and Weighting

     The Committee shall establish and approve all Financial Objectives and any amendments thereto.
EMIAs for the Top Executives shall be based entirely upon Financial Objectives. The Committee shall
approve the specific weighting of the Financial Objectives for the Top Executives and any
amendments thereto. EMIAs for Top Executives shall be established during the first 25% of the
applicable performance period and shall be based upon prospective financial goals the
accomplishment of which is substantially uncertain at the time of the establishment of the EMIA.

     The Chief Executive Officer or his designee shall approve, for all EMIA Participants other
than Top Executives, (1) the weighting of their Financial Objectives, based upon each executive’s
ability to affect the accomplishment of those objectives, and (2) their Operational Objectives, and
any amendments to either of these items.

     The weighting of EMIA objectives shall be as follows:

	 	 	 	 	 	 	 
	 	 	Financial	 	Operational
	Executive	 	Objectives	 	Objectives
	President and Chief Executive Officer

	 	75% EPS and 25% Revenues
	 	 	0	%
	Chief Financial Officer

	 	100% EPS
	 	 	0	%
	Chief Commercial Officer

	 	25% EPS and 75% Revenues
	 	 	0	%
	Remaining direct reports to the CEO

	 	100% EPS
	 	 	0	%
	All other EMIA Participants

	 	50% EPS
	 	 	50	%

Award Payout Schedule

     EMIA Participants are eligible for cash awards (“EMIA Payouts”) which are a percentage of
their 2008 base salary earned, as described in the table below.

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	ACHIEVEMENT LEVEL
	POSITION	 	THRESHOLD	 	TARGET	 	STRETCH
	President & Chief Executive Officer
	 	 	50	%	 	 	100	%	 	 	200	%
	Chief Financial Officer
	 	 	35	%	 	 	70	%	 	 	140	%
	Chief Commercial Officer
	 	 	30	%	 	 	60	%	 	 	120	%
	Chief Technical Operations Officer
	 	 	30	%	 	 	60	%	 	 	120	%
	Chief Science Officer
	 	 	30	%	 	 	60	%	 	 	120	%
	General Counsel
	 	 	30	%	 	 	60	%	 	 	120	%
	EVP Level 1
	 	 	25	%	 	 	50	%	 	 	100	%
	EVP Level 2
	 	 	20	%	 	 	40	%	 	 	80	%
	Senior Vice President
	 	 	17.5	%	 	 	35	%	 	 	70	%
	Vice President
	 	 	15	%	 	 	30	%	 	 	60	%

Calculating an EMIA Payout

     The weight previously established for each objective (a percentage) is multiplied by the
percentage (as provided in the table above) associated with the EMIA Participant’s achievement
level in connection with that objective (none, threshold, target or stretch, or, in the case of
Financial Objectives, a prorata percentage between these levels). Once this calculation is
performed for each objective, the results of all calculations are summed and that sum is multiplied
by the 2008 base salary

2

 

earned by the EMIA Participant. The result is the EMIA Payout for the EMIA Participant. See
the attached example.

     The award for any person who becomes an EMIA Participant, or for an EMIA Participant who is
promoted, during the performance period will be prorated based on the portion of the year spent in
each position.

Eligibility for EMIA Payout

     Payment of any EMIA shall be contingent upon the Committee’s determination that Financial
Objectives have been met by the Company, and at what achievement level those objectives have been
met. Also:

	 	a.	 	In the case of any of the Top Executives, EMIA Payouts shall be contingent upon the
Committee’s certification of the achievement level applicable to the executive in
connection with each Financial Objective.
	 
	 	b.	 	In the case of any EMIA Participant who holds the title of EVP Level 1 or a more senior
title, other than the Top Executives, EMIA Payouts shall be contingent upon the Committee’s
approval of the determination of the Chief Executive Officer, or his designee, of the
achievement level applicable to each of the EMIA Participant’s Operational Objectives.
	 
	 	c.	 	In the case of any EMIA Participant who holds a title more junior than EVP Level 1,
payment of any EMIA shall be contingent upon the determination of the Chief Executive
Officer, or his designee, of the achievement level applicable to each of the EMIA
Participant’s Operational Objectives.

     Other than for reasons of Death, Incapacity, Disability or Approved Retirement, an EMIA
Participant must be employed by the Company on December 31, 2008 or the EMIA Participant will
forfeit any EMIA which he or she may have otherwise qualified to receive.

     In the event of an EMIA Participant’s death on or after January 1, 2009, the EMIA shall be
paid to his or her estate. In the event of an EMIA Participant’s death on or before December 31,
2008, a prorata portion of the Participant’s target payout percentage, reflecting the EMIA
Participant’s time in service during the performance year, shall be paid to his or her estate as
soon as reasonably practicable.

     In the event of an EMIA Participant’s termination due to incapacity (as evidenced by the
judgment or decree of a court of competent jurisdiction) on the date his or her EMIA is paid by the
Company, the EMIA shall be paid to his or her legal guardian or appointed representative. In the
event of an EMIA Participant’s incapacity on or before December 31, 2008, a prorata portion of the
Participant’s target payout percentage, reflecting the EMIA Participant’s time in service during
the performance year, shall be paid to his or her legal guardian or appointed representative as
soon as reasonably practicable.

     In the event of an EMIA Participant’s termination due to Disability on or before December 31,
2008, a prorata portion of the Participant’s target payout percentage, reflecting the EMIA
Participant’s time in service during the performance year, shall be paid to the Participant as soon
as reasonably practicable.

3

 

     In the event of an EMIA Participant’s Approved Retirement on or before December 31, 2008, a
prorata portion of the Participant’s target payout percentage, reflecting the EMIA Participant’s
time in service during the performance year, shall be paid to the Participant as soon as reasonably
practicable.

Timing of EMIA Payout

     The payment of each EMIA will be made between January 1 and March 15, 2009.

Tax Matters

     All EMIA payments are subject to applicable state, federal, local and other tax withholding
requirements.

     In the case of the Top Executives, all EMIA Payouts are intended to be “qualified
performance-based compensation” in accordance with Treas. Reg. § 1.162-27(e) and shall be
interpreted and administered as such unless the Committee determines that it is in the best
interests of the Company not to adhere to the requirements of 162(m) of the Internal Revenue Code
of 1986, as amended (the “Code”), and Treas. Reg. § 1.162-27.

Other Matters

     The Committee, in its discretion, may reduce or eliminate any EMIA Payout in the event it
determines it is in the best interests of the Company to do so for reasons including, without
limitation, financial distress of the Company, administrative difficulties or that the EMIA Payout
is nondeductible by the Company under the Internal Revenue Code. The reduction of one or more EMIA
Payouts shall not increase the EMIA Payout of any other EMIA Participant.

     The Committee may, at any time, amend or terminate this EMIA program. The Board of Directors
of the Company, in its discretion, may, at any time, withdraw the Committee’s authority over this
EMIA program.

     The grant of an EMIA shall in no way be construed or interpreted to establish or guarantee a
term of employment and does not change the “at-will” or other status of any person employed by the
Company.

     The terms and conditions of this EMIA program are, in their entirety, set forth in this
document and the EMIA documents pertaining to a specific EMIA Participant. Once established, EMIA
objectives may only be altered by valid written notice to that effect from the Committee or the
Chief Executive Officer or his designee, as applicable, as described in the section above entitled
“Objective Approval and Weighting.” Any oral representation or writing not authorized and approved
by the Committee, or the Chief Executive Officer or his designee, as applicable, shall be void and
of no effect, and shall not be binding on the Company or the Committee.

4

 

Financial Objectives

     The time period for the measurement of performance of Financial Objectives is January 1
through December 31, 2008. In the event that achievement of Financial Objectives is greater than
Threshold but less than Stretch, payout percentages applicable to Financial Objectives will be
prorated to reflect actual achievement (actual revenues or earnings per share).

Financial Objective 1: Revenues

     The portion of any EMIA Payout payable pursuant to Financial Objective 1 will be based on
achieving the 2008 revenue targets detailed in the following table.

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	ACHIEVEMENT LEVEL1
	 	 	Threshold	 	Target	 	Stretch
	Revenues
	 	$	[***]	 	 	$	[***]	 	 	$	[***]	 

Financial Objective 2: Earnings Per Share

     The portion of any EMIA Payout payable pursuant to Financial Objective 2 will be based on
achieving the 2008 earnings per share targets as detailed in the following table.

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	ACHIEVEMENT LEVEL1
	 	 	Threshold	 	Target	 	Stretch
	Earnings per share1
	 	$	[***]	 	 	$	[***]	 	 	$	[***]	 

Operational Objectives

     Each executive other than the Top Executives and direct reports to the CEO will own
Operational Objectives with the percentage weighting of each based on the importance of that
objective to the success of the business. The time period for the measurement of performance of
Operational Objectives is January 1 through December 31, 2008.

Minimum Earnings Per Share Requirement

     No payout will be made for any objective unless the company achieves 60% of Target earnings
per share.

 

			
	1	 	[***]

5

 

EMIA Calculation Example

Sample Position: EVP Level 2

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	Payout	 	Objective
	Objective	 	Weight	 	Performance	 	Percentage	 	Payout
	Financial — EPS
	 	 	50	%	 	Target	 	 	40	%	 	 	0.20 (20%)	
	Operational Objective 1

	 	 	10	%	 	Stretch	 	 	80	%	 	 	0.08 (8%)	
	(e.g., Achievement of
Revenue Targets)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Operational Objective 2
	 	 	15	%	 	Target	 	 	40	%	 	 	0.06 (6%)	
	Operational Objective 3
	 	 	15	%	 	Target	 	 	40	%	 	 	0.06 (6%)	
	Operational Objective 4
	 	 	10	%	 	Threshold	 	 	20	%	 	 	0.02 (2%)	
	Total Objectives Weight
	 	 	100	%	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total EMIA Payout
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	0.42 (42%)	

The EVP receives 42% of his or her 2008 base salary earned as the EMIA.

Note: In the event that achievement of Financial Objectives (or any
Operational Objective which is structured identically to either Financial
Objective) is greater than Threshold but less than Stretch, payout percentages
applicable to Financial Objectives will be prorated to reflect actual
achievement (actual revenues or earnings per share); provided, however, that
no payout will be made for any Financial Objective or Operational Objective
unless the Company achieves 60% of Target earnings per share.

6

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