Document:

ex10-1.htm

Exhibit 10.1

 

CHANGE IN CONTROL AGREEMENT

This Change in Control Agreement (this “Agreement”) is made effective as of May 21, 2010 (the “Effective Date”), by and between Beacon Federal, a federally chartered savings association with its principal office in East Syracuse, New York (the “Bank”) and Kevin Gaglione (“Executive”).

 

WHEREAS, Executive currently serves in the position of Vice President, Commercial Lending of the Bank, a position of substantial responsibility; and

 

WHEREAS, the Bank wishes to provide economic assurances to Executive in certain circumstances, as specified herein;

 

NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows:

 

	
1.  

	
TERM OF AGREEMENT

 

This Agreement shall commence as of the Effective Date and shall continue thereafter for a period of one (1) year.  Commencing on the first anniversary date of this Agreement (the “Anniversary Date”), and continuing on each Anniversary Date thereafter, the term of this Agreement shall renew for an additional year such that the remaining term of this Agreement is always one (1) year, unless written notice of non-renewal (a “Non-Renewal Notice”) is provided to Executive at least thirty (30) days and not more than sixty (60) days prior to any such Anniversary Date, in which case the term of this Agreement shall become fixed and shall end one (1) year following such Anniversary Date.

 

	
2.  

	
TERMINATION OF EMPLOYMENT

 

This Agreement provides for certain payments and benefits to Executive only in the event of a Change in Control (as defined below) followed by the termination of Executive’s employment with the Bank, as set described in this Section 2.

 

(a)   Upon the occurrence of a Change in Control during the term of this Agreement followed by Executive’s (i) involuntary termination of employment, other than for Cause (as defined below) within one year after the Change in Control or (ii) voluntary termination of employment for Good Reason (as defined below), the provisions of Section 3 shall apply. Upon the occurrence of a Change in Control during the term of this Agreement, Executive shall have the right to elect to terminate employment with the Bank by resignation within one year after any of the following events, each of which shall constitute “Good Reason”: (A) a demotion, loss of title, office or significant authority (in each case, other than as a result of the fact that the Bank is merged into another entity in connection with the Change in Control and will not operate as a stand-alone, independent entity); (B) a reduction in his annual compensation or benefits; or (C) relocation of his principal place of employment by more than 50 miles from its location immediately prior to the Change in Control; provided, however, that the Executive must provide at least 30 days prior written notice to the Bank given within a reasonable period of time (not to exceed, except in case of a continuing breach, 90 days) after the event giving rise to the right to elect; provided, however, that the Bank shall have at least 30 days to remedy the situation.

 

  

  

  

 

(b)   The term “Change in Control” shall mean any of the following events, but shall not include a conversion of the Bank from mutual to stock form:

 

(i)             a change in control of the Bank or any holding company of the Bank of a nature that would be required to be reported in response to Item 5.01(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); or

 

(ii)            a change in control of the Bank or any holding company of the Bank within the meaning of the Home Owners’ Loan Act, as amended, and applicable rules and regulations promulgated thereunder, as in effect at the time of the Change in Control; or

 

(iii)           any of the following events, upon which a Change in Control shall be deemed to have occurred:

 

(A)           any “person” (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Bank or the Bank’s holding company representing 25% or more of the combined voting power of such outstanding securities, except for any securities purchased by an employee stock ownership plan or trust established by the Bank; or

 

(B)           individuals who constitute the Board on the Effective Date (the “Incumbent Board”) cease for any reason to constitute a majority thereof, provided that any person becoming a director subsequent to the Effective Date whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by stockholders of the Bank or the Bank’s holding company was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this subsection (B), considered as though they were members of the Incumbent Board; or

 

(C)           a sale of all or substantially all the assets of the Bank or the Bank’s holding company, or a plan of reorganization, merger, consolidation, or similar transaction occurs in which the security holders of the Bank or the Bank’s holding company immediately prior to the consummation of the transaction do not own at least 50.1% of the securities of the surviving entity to be outstanding upon consummation of the transaction; or

 

(D)           a proxy statement is issued soliciting proxies from stockholders of the Bank or the Bank’s holding company by someone other than the current management of the Bank or the Bank’s holding company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Bank or the Bank’s holding company, or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the plan are to be exchanged for or converted into cash or property or securities not issued by the Bank or the Bank’s holding company; or

 

  

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(E)           a tender offer is made for 25% or more of the voting securities of the Bank or the Bank’s holding company and stockholders owning beneficially or of record 25% or more of the outstanding securities of the Bank or the Bank’s holding company have tendered or offered to sell their shares pursuant to such tender offer and such tendered shares have been accepted by the tender offeror.

 

(c)   Even if a Change in Control shall occur during the term of this Agreement, Executive shall not have the right to receive termination benefits pursuant to Section 3 upon termination of employment for Cause.  Termination for “Cause” shall mean termination because of Executive’s personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, material breach of the Bank’s Code of Ethics, material violation of the Sarbanes-Oxley requirements for officers of public companies, if applicable, that in the reasonable opinion of the Chief Executive Officer will likely cause substantial financial harm or substantial injury to the reputation of the Bank of any holding company of the Bank, willfully engaging in actions that in the reasonable opinion of the Chief Executive Officer will likely cause substantial financial harm or substantial injury to the business reputation of the Bank, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than routine traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement.

 

	
3.  

	
PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL

 

(a)   If Executive’s employment is terminated in accordance with Section 2(a), the Company (i) shall be obligated to pay Executive, or in the event of Executive’s subsequent death, his or her beneficiary or beneficiaries, or his or her estate, as the case may be, as severance pay, an amount equal to the sum of (A) Executive’s highest annual rate of base salary paid to Executive at any time under this Agreement, plus (B) the highest bonus paid to Executive with respect to the completed fiscal year prior to the Change in Control; and (ii) shall provide at the Bank’s expense for twelve (12) months after the date of such termination of employment, life insurance coverage and non-taxable medical and dental coverage substantially comparable to the coverage maintained by the Bank for Executive prior to the termination of employment, except to the extent such coverage may be changed in its application to all Bank employees. The period for group health care continuation coverage under COBRA shall not begin until the expiration of such twelve (12) month period.

 

(b)           Upon the occurrence of a Change in Control, Executive shall have such rights as specified in any other employee benefit plan with respect to options and such other rights as may have been granted to the Executive under such plans.

 

(c)           All cash severance payments shall be made in a lump sum within thirty (30) days after Executive’s termination of employment.  Such payments shall not be reduced in the event Executive obtains other employment following termination of employment with the Bank.

(d)           Notwithstanding the preceding paragraphs of this Section 3, in the event that the aggregate payments or benefits to be made or afforded to Executive in the event of a Change in Control would be deemed to include an “excess parachute payment” under Section 280G of the Internal Revenue Code or any successor thereto, then at the election of Executive, (i) such payments or benefits shall be payable or provided to Executive over the minimum period necessary to reduce the present value of such payments or benefits to an amount that is one dollar ($1.00) less than three times Executive’s “base amount” under such Section 280G, or (ii) the payments or benefits to be provided under this Section 3 shall be reduced to the extent necessary to avoid treatment as an excess parachute payment, with the allocation of the reduction among such payments and benefits to be determined by Executive.

 

  

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(e)           Executive understands that the Bank’s reputation is important to the success of its business and Executive agrees that, for a period of one year following termination of employment, Executive shall not, directly or indirectly, make any written or verbal statements which may defame, disparage or cast in a negative light the Bank or injure the Bank’s reputation, goodwill, or standing in the community or which may defame, disparage or cast in a negative light or injure the reputation, goodwill or standing in the community of any of the Bank’s current or former officers or employees.

	
4.  

	
NOTICE OF TERMINATION

 

Any purported termination of Executive’s employment by the Bank or by Executive shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a “Notice of Termination” shall mean a written notice that shall indicate the Date of Termination and, in the event of termination by Executive, the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive’s employment under the provision so indicated.  “Date of Termination” shall mean the date specified in the Notice of Termination (which, in the case of termination for Cause, shall be immediate).  In no event shall the Date of Termination exceed 30 days from the date Notice of Termination is given.

 

	
5.  

	
SOURCE OF PAYMENTS

 

All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Bank. Any holding company established by the Bank may accede to this Agreement but only for the purposed of guaranteeing payment and provision of all amounts and benefits due hereunder to Executive.

 

	
6.  

	
EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS

 

This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Bank or any predecessor of the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided.  No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement.

 

	
7.  

	
NO ATTACHMENT

 

(a)   Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect.

 

  

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(b)   This Agreement shall be binding upon, and inure to the benefit of, Executive and the Bank and their respective successors and assigns.

 

	
8.  

	
MODIFICATION AND WAIVER

 

(a)   This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto.

 

(b)   No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived.

 

	
9.  

	
REQUIRED PROVISIONS

 

(a)           The Bank may terminate Executive’s employment at any time, but any termination by the Board other than termination for Cause shall not prejudice Executive’s right to compensation or other benefits under this Agreement.  Executive shall have no right to receive compensation or other benefits for any period after termination for Cause.

 

(b)           If Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank’s affairs by a notice served under Section 8(e)(3) [12 USC §1818(e)(3)] or 8(g)(1) [12 USC §1818(g)(1)] of the Federal Deposit Insurance Act, the Bank’s obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings.  If the charges in the notice are dismissed, the Bank may in its discretion (i) pay Executive all or part of the compensation withheld while its contract obligations were suspended and (ii) reinstate (in whole or in part) any of its obligations which were suspended.

 

(c)            If Executive is removed and/or permanently prohibited from participating in the conduct of the Bank’s affairs by an order issued under Section 8(e)(4) [12 USC §1818(e)(4)] or 8(g)(1) [12 USC §1818(g)(1)] of the Federal Deposit Insurance Act, all obligations of the Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected.

 

(d)           If the Bank is in default as defined in Section 3(x)(1) [12 USC §1813(x)(1)] of the Federal Deposit Insurance Act, all obligations of the Bank under this Agreement shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties.

 

  

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(e)           All obligations under this Agreement shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the Bank, (i) by the Director of the OTS or his or her designee, at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) [12 USC §1823(c)] of the Federal Deposit Insurance Act; or (ii) by the Director or his or her designee at the time the Director or his or her designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director to be in an unsafe or unsound condition.  Any rights of the parties that have already vested, however, shall not be affected by such action.

 

(f)            Notwithstanding anything herein contained to the contrary, any payments to Executive by the Bank or any holding company of the Bank, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with Section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1828(k), and the regulations promulgated thereunder in 12 C.F.R. Part 359.

 

	
10.  

	
SEVERABILITY

 

If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect.

 

	
11.  

	
HEADINGS FOR REFERENCE ONLY

 

The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement.

 

	
12.  

	
GOVERNING LAW

 

The validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of New York.

 

	
13.  

	
ARBITRATION

 

Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a single arbitrator sitting in a location selected by Executive within twenty-five miles of East Syracuse, New York in accordance with the rules of the American Arbitration Association then in effect.  Judgment may be entered on the arbitrator’s award in any court having jurisdiction.

 

	
14.  

	
SUCCESSOR TO THE BANK

 

Any successor to or assignee of the Bank, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank, expressly and unconditionally assumes and agrees to perform the Bank’s obligations under this Agreement, in the same manner and to the same extent that the Bank would be required to perform if no such succession or assignment had taken place.

 

  

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15.  

	
OBLIGATIONS OF BANK

 

The termination of Executive’s employment, other than following a Change in Control, shall not result in any obligation of the Bank under this Agreement.

 

	
16.  

	
SIGNATURES

 

IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed by its duly authorized officers, and Executive has signed this Agreement, effective as of the date first above written.

 

	  	  	BEACON FEDERAL	  
	  	  	  	  	  
	  	  	  	  	  
	
May 21, 2010

	  	
By:

	
/s/ Ross J Prossner

	  
	
Date

	  	  	
President and Chief Executive Officer

	  
	  	  	  	  	  
	  	  	EXECUTIVE:	  
	  	  	  	  	  
	  	  	  	  	  
	
May 21, 2010

	  	/s/ Kevin Gaglione	  
	
Date

	  	Kevin Gaglione	  

 

 

 

 

7Annual Incentive Plan

 EXHIBIT 10.1 

SEARS HOLDINGS CORPORATION 

ANNUAL INCENTIVE PLAN 

SECTION 1 

GENERAL 

1.1. Purpose. The Sears Holdings Corporation Annual Incentive Plan (“AIP”) is a performance-based
incentive program. The purpose of the AIP is to reward eligible employees of Sears Holdings Corporation (“Company”) and its participating subsidiaries and affiliates (collectively referred to as “Employers”), for sustained
Company fiscal performance. The AIP is established under, and constitutes a part of, the Sears Holdings Corporation Umbrella Incentive Program (“UIP”), which UIP was previously approved by shareholders. Both (a) Awards (as defined in
Section 9) structured to satisfy the requirements for “performance-based compensation” outlined in regulations issued under Section 162(m) of the Internal Revenue Code (“Code”), and (b) Awards not so structured,
may be issued hereunder. The effective date of the AIP is April 27, 2010, which is the date the Compensation Committee (as defined in Section 9) adopted the AIP (“Effective Date”). 

1.2. Operation, Administration and Definitions. The operation and administration of the AIP, including the Awards made
under the AIP with respect to any Performance Period (as defined under subsection 3.3), shall be subject to the provisions of Section 7. Capitalized terms in the AIP shall be defined in the provision in which a term first appears or as set
forth in Section 9. 
 1.3. Participating Employers. Each Employer whose eligible employee’s are covered
by the AIP may be referred to herein as a “Participating Employer”. Participating Employers are listed on Appendix A. 

SECTION 2 

PARTICIPATION 

2.1. Eligible Employee. Except as provided herein, the term “Eligible Employee” means as to any Performance
Period all: (a) salaried employees and (b) “corporate hourly employees”, of any Employer, including the Company, which is a Participating Employer. “Corporate hourly employees” refer to hourly employees employed at a
Support Center (as defined in Section 9). Subject to the terms and conditions of the AIP, the Senior Corporate Compensation Executive (as defined in Section 9) shall determine Eligible Employee status, except as determined by the
Compensation Committee, in accordance with subsection 7.1. Eligible Employees are “Participants” in the AIP; provided, however, that an otherwise Eligible Employee shall not be a Participant in the AIP with respect to any portion of a
Performance Period during which he or she is participating under any other annual incentive program that is sponsored by the Company or any subsidiary or affiliate of the Company. 

 2010
AIP 
  

 2.2. New Hires; Changes in Status; Promotions and Demotions.

 (a) New Hires. The Compensation Committee, the Senior Corporate Compensation Executive, or an
authorized representative of either, as applicable, shall determine whether and when an employee who is a new hire is an Eligible Employee. The terms and conditions of any Award for such an individual shall be (i) based on the Target Annual
Incentive for the new hire’s incentive-eligible position and (ii) subject to a fraction, the numerator of which is the number of full days on active payroll (except as otherwise provided in Section 6.2) during the applicable
Performance Period (as defined in subsection 3.3) that the Eligible Employee was a Participant in the AIP and the denominator of which is the number of full days in such Performance Period. 

(b) Changes in Status. The Compensation Committee or Senior Corporate Compensation Executive, as applicable,
shall determine whether and when an employee who has a change in status becomes or ceases to be an Eligible Employee during the Performance Period. The terms and conditions of any Award for such an individual shall be (i) based on the Target
Annual Incentive for the incentive-eligible position and (ii) subject to a fraction, the numerator of which is the number of full days on active payroll (except as otherwise provided in Section 6.2) during the applicable Performance Period
that the Eligible Employee was a Participant in the AIP and the denominator of which is the number of full days in such Performance Period. 

(c) Promotion. If a Participant is promoted, the Award for such an individual shall be based on a pro-ration,
whereby the Target Annual Incentive for the new position will apply to the remainder of the applicable Performance Period and the Target Annual Incentive for the immediately preceding incentive-eligible position will apply to the portion of such
Performance Period immediately preceding the effective date of the promotion, subject to subsection 3.2. Notwithstanding the foregoing, in no event will positive discretion be applied to any Award that has been designated as intended to meet the
requirements of Code Section 162(m) (and the regulations issued thereunder) with respect to a Performance Period or as of the payment date (as defined under subsection 5.1). 

(d) Demotions. If a Participant is demoted, the Award for such an individual shall be based on a pro-ration,
whereby the Target Annual Incentive for the new incentive-eligible position (if any) will apply only to the remainder of the Performance Period and the Target Annual Incentive for the immediately preceding incentive-eligible position will apply only
to the portion of the Performance Period immediately preceding the effective date of the demotion, subject to subsection 3.2. 

SECTION 3 

ANNUAL INCENTIVE AWARDS 

3.1. Annual Incentive Awards. Except as provided herein, the Senior Corporate Compensation Executive shall
determine, in its sole discretion, the “Target Annual Incentive” (as defined herein) for each Participant. Notwithstanding the forgoing, the Compensation Committee shall approve the Target Annual Incentives and the Awards for Executives
(as defined in Section 9) under its purview. 
 (a) A “Target Annual Incentive” shall refer to the
percentage of a Participant’s rate of base pay during a Performance Period, which may be reflected as a percentage of base pay or flat dollar amount. 
  

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AIP 
  

 (b) The “Target Incentive Award” shall consist of a commitment
by the Company to distribute, at the time specified in, and in accordance with the applicable provisions of, Section 5 below, a dollar amount based on a Participant’s Target Annual Incentive and based on actual performance of the Company
and the Participant, as compared to established performance goals described in Section 4 below. The Target Incentive Award shall be subject to pro-ration (if applicable) and certification of the calculation of the final Award amount by the
Compensation Committee or Senior Corporate Compensation Executive, as applicable. 
 (c) The “Annual
Incentive Award” shall refer to the final annual portion of a Participant’s Target Incentive Award payable on the payment date (as defined in subsection 5.1 below), if any. 

(d) Any Annual Incentive Award shall be satisfied by a distribution in accordance with Section 5 and subject to
Sections 6 and 7. 
 3.2. Adjustments based on Status Changes during Performance Period. Notwithstanding
anything in the AIP to the contrary, with respect to Awards that are not designated as intended to meet the requirements of “performance-based compensation” under Code Section 162(m) (and the regulations issued thereunder) and prior
to the settlement of any Award, if the Target Annual Incentive for a new incentive-eligible position (including if due to promotion or demotion) is lower or higher than the Target Annual Incentive for a Participant’s immediately prior position,
the Participant’s Target Incentive Award may be adjusted by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, to ensure that the overall target cash compensation (i.e., the sum of base pay and Target Annual
Incentive) for the new position is comparable to the overall target cash compensation for the immediately prior position. 

3.3. Performance Period. The “Performance Period” refers to the applicable Fiscal Year (as defined in
Section 9) as determined by the Compensation Committee with respect to which an Award may be granted under the AIP. The amount of an Award, if any, shall be determined following completion of the applicable Performance Period in accordance with
this Section 3 and Section 4. 
 3.4. Pro-ration. 

(a) The Annual Incentive Award of a Participant who experiences a status change or position change shall be pro-rated
based on the number of days worked on active payroll in each incentive-eligible position during the applicable Performance Period. 

(b) The Annual Incentive Award of a Participant who experiences a demotion or promotion shall be pro-rated based on the
Target Annual Incentives in effect during the applicable Performance Period, subject to Sections 2.2 and 3.2 above. 

(c) The Annual Incentive Award of a Participant who experiences a disability or death, as described in subsections 6.1(b)
and (c) respectively, shall be pro-rated based upon a fraction, the numerator of which is the number of days worked on active payroll in an incentive-eligible position during the applicable Performance Period and the denominator of which is the
number of days in such Performance Period. 
  

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AIP 
  

 (d) The Annual Incentive Award of a Participant who experiences an
unpaid leave of absence during the applicable Performance Period shall be pro-rated in accordance with subsection 6.2(a). 

3.5. Reimbursement of Excess Awards. If Company’s financial statements or approved performance measures under
the AIP are the subject of a restatement due to error or misconduct, to the extent permitted by governing law, in all appropriate cases, the Company will seek reimbursement of Excess Awards paid under the AIP to Executives (and any other Participant
who is determined to have known of or been involved in any such misconduct) for the relevant performance period(s). For purposes of the AIP, an “Excess Award” means the positive difference, if any, between (a) the Annual
Incentive Award paid to an Executive and (b) the Annual Incentive Award that would have been paid to the Executive, had the Award been calculated based on the Company’s financial statements or performance measures as restated. The
Company will not be required to award Participants, including Executives, an additional AIP payment should the restated financial statements or performance measures result in a higher Annual Incentive Award. 

SECTION 4 

GOALS AND PERFORMANCE 

4.1. Company Goals. For each Performance Period, the Compensation Committee or Senior Corporate Compensation
Executive, as applicable, shall establish in writing the financial performance goals and any particulars or components (including without limitation Targets or Thresholds) applicable to each business and, with respect to each Participant, his or her
Assignment (as defined in Section 9). For Awards structured to satisfy the requirements for performance-based compensation outlined in regulations issued under Code Section 162(m), the applicable financial performance goals and any
particulars or components shall be approved on or before the latest date possible that will not jeopardize the status of such Awards as “performance-based compensation”. The financial performance goals and any particulars or components
will be objectively measurable. Except as otherwise approved by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, with respect to a Performance Period, the performance goals shall be based upon one or more of the
following: 
 (a) EBITDA 

(i) EBITDA. “EBITDA” shall refer to earnings before interest, taxes, depreciation and amortization for
the Performance Period computed as operating income appearing on the Company’s statement of operations for the applicable reporting period, other than Sears Canada (referred to as the “Domestic Company”), less depreciation and
amortization and gains/(losses) on sales of assets. In addition, it is adjusted to exclude significant litigation or claim judgments or settlements (defined as matters which are $1,000,000 or more) including the costs related thereto; the effect of
purchase accounting and changes in accounting methods; gains, losses and costs associated with acquisitions, divestitures and store closures; integration costs that are disclosed as merger related; and restructuring activities. If after the
Effective Date, the Domestic Company acquires assets or an entity that has associated EBITDA (measured using the same principles as those described in the preceding provisions of this paragraph (i)) in its last full fiscal year prior to the
acquisition, of greater than or equal to $100,000,000, any EBITDA associated with such assets or entity (after its acquisition) and during the Performance Period shall be disregarded in determining EBITDA under this paragraph (i). 

 

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AIP 
  

 (ii) Adjustments to Target EBITDA. The EBITDA incentive target
contemplates that the Domestic Company remains approximately the same size over the Performance Period. If, after the beginning of a Performance Period, Domestic Company divests itself of assets or an entity that has associated EBITDA (measured
using the same principles as those described in paragraph (i) above of this subsection 4.1(a)) in its last full fiscal year prior to the divestiture of greater than or equal to $100,000,000, Target EBITDA for the Performance Period will be
decreased by actual EBITDA of such assets or entity for the portion of such assets’ or entity’s last full fiscal year prior to the divestiture corresponding to the portion of the Performance Period (in which the divestiture occurs)
remaining after the divestiture occurs. 
 (b) Business Operating Profit. “Business Operating
Profit” shall refers to earnings before interest, taxes, and depreciation for each Business Unit (as define under Section 9) as reported on the Company’s domestic internal operating statements, and generally consists of merchandise
gross profit, vendor allowances/subsidy included in margin, return-to-vendor mark-outs, allocated zero percent (0%) finance promotion costs, product quality costs, inventory shrink, margin on service revenue, and business-specific expenses such as
marketing, rent, logistics, IT projects, store and payroll and other intra-company expenses. 
 (c) Store
Variable Profit Contribution. Store Variable Profit Contribution may be the financial performance goal for Participants who are under a Sears Full-Line Store, Kmart Store or any other retail unit (referred to collectively herein as “Retail
Units”), as determined by the Senior Corporate Compensation Executive. “Store Variable Profit Contribution” shall refer to the “variable profit contribution” balance reported on the system-generated store Profit &
Loss Statement and generally consists of store gross margin less expenses categorized as variable at a store level, such as payroll, benefits, advertising, supplies and certain operating costs. This performance goal does not apply to any
Executive.” 
 4.2. Company Performance. For each Performance Period, the Compensation Committee or
Senior Corporate Compensation Executive, as applicable, shall establish in writing the financial performance measures and any particulars or components (including without limitation payment percentages, modifier and adjustment provisions) applicable
to each business and each Participant. For Awards structured to satisfy the requirements for performance-based compensation outlined in regulations issued under Code Section 162(m), the applicable financial performance measures and any
particulars or components shall be approved on or before the latest date possible that will not jeopardize the status of such Awards as “performance-based compensation”. The financial performance measures and any particulars or components
will be objectively measurable and any payment based upon the achievement of a specified percentage or level of performance. Except as otherwise approved by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, with
respect to a Performance Period, the performance measures shall be based upon one or more of the following concepts: 

(a) Achievement of Target. With respect to each Performance Period, the Compensation Committee or Senior Corporate
Compensation Executive, as applicable, shall establish a target level of achievement for each performance goal (“Target”). If achieved, payout of Awards to which that performance goal applies shall be at 100%, subject to any applicable
modifiers or adjustments. 
  

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AIP 
  

 (b) Achievement of Threshold. With respect to each Performance
Period, the Compensation Committee or Senior Corporate Compensation Executive, as applicable, shall establish a threshold level of achievement that must be met with respect to performance goal before any portion of an Award is payable. If achieved,
payout of Awards to which that performance goal applies shall be at the Threshold percentage, subject to any applicable modifiers or adjustments. 

(c) Achievement Between Threshold and Target. In the event achievement of a performance goal falls between
Threshold and Target with respect to a Performance Period, the Compensation Committee or Senior Corporate Compensation Executive, as applicable, may establish a formula for determining payout levels between these two points, which payout shall be
subject to any applicable modifiers or adjustments. 
 (d) Payout Above Target. In the event achievement
of a performance goal exceeds the Target with respect to a Performance Period, Compensation Committee or Senior Corporate Compensation Executive, as applicable, may establish a formula for determining payout levels above Target, which payout shall
be subject to any applicable modifiers or adjustments. Compensation Committee or Senior Corporate Compensation Executive, as applicable, also may provide for a maximum or no maximum. 

4.3. Participant and Team Performance. 

(a) Individual Modifier. Except as otherwise approved by the Compensation Committee or Senior Corporate
Compensation Executive, as applicable, with respect to a Performance Period or as provided in subsection (a)(ii) herein, the Compensation Committee or Senior Corporate Compensation Executive, as applicable, shall have the discretion to apply an
individual performance modifier to a Participant’s Annual Incentive Award, which enables the Award to be modified, positively or negatively, based on individual Participant or team performance, subject to the following: 

(i) An individual modifier may be applied to modify a Participant’s Annual Incentive Award as follows: 

 

					
	 Performance
	  	Annual Rating	  	Modifier
	 Exceeds Expectation
	  	5	  	+ 0% to 25%
	 Above Average
	  	4	  	+ 0% to 15%
	 Average
	  	3	  	No adjustment
	 Below Average
	  	2	  	- 25%
	 Poor Performance
	  	1	  	- 100%

  

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 (ii) The individual modifier shall not apply to the portion of an Award
attributable to any portion of the Performance Period during which a Participant is an Executive (as defined in Section 9), and in no event will positive discretion be applied to any Award for a Participant who is a “covered employee”
within the meaning of Code Section 162(m) (and the regulations issued thereunder) with respect to the Performance Period or as of the payment date (as defined under subsection 5.1). 

(b) Location Balanced Scorecard. Except as otherwise approved by the Compensation Committee or Senior Corporate
Compensation Executive, as applicable, with respect to a Performance Period, the Senior Corporate Compensation Executive shall apply the results of the Location Balanced Scorecard to qualify or modify the Annual Incentive Award of Participants under
a Sears Full-Line Store or Kmart Store, provided such units have met its applicable Threshold Store Variable Profit Contribution. The Location Balanced Scorecard results will apply to qualify or modify these Participants’ Annual Incentive Award
as determined by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, with respect to a Performance Period. 

(i) “Location Balanced Scorecard” refers to an internal rating scorecard which measures elements that a Sears
Full-Line Store or Kmart Store team can control and for which the team can be held accountable, including getting stores to standard, executing core processes, customer relations, associate relations and managing expenses. 

(ii) The Senior Corporate Compensation Executive shall have the discretion to apply an individual performance modifier
described in subsection 4.3(a) above to the Annual Incentive Award of Participants under a Sears Full-Line Store or Kmart Store, which enables the Award to be modified, positively or negatively, based on individual Participant performance.

 (iii) Notwithstanding the forgoing, the Award payable to any Participant under a Retail Unit shall be subject
to the applicable maximum payout percentage, if any, as determined by the Senior Corporate Compensation Executive. 
 4.4.
Other Financial Performance Metrics. In addition to the financial performance goals and measures and other particulars and components that are described above in this Section 4, other financial goals and measures may be
established for certain Business Unit as well as to measure the contribution or profit of businesses other than Business Units as defined in Section 9. The applicability of any other performance measure referred to in this Section 4.4 to a
Participant will depend on his or her Business Unit, business and/or Assignment as approved by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, with respect to a Performance Period. 

4.5. Additional Requirements. All Annual Incentive Awards awarded under the AIP are subject to the provisions of
Sections 5, 6 and 7. 
  

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 SECTION 5 

DISTRIBUTION 

5.1. Time of Payment. Subject to Sections 6 and 7, the Annual Incentive Awards that are payable
under the AIP with respect to a Performance Period, based on the Awards and payout formulas described at Sections 3 and 4, shall be distributed immediately after the Compensation Committee has certified the attainment of the performance goals and
the Compensation Committee or Senior Corporate Compensation Executive, as appropriate, has determined the amount to be paid to each Participant, which shall in no event be later than the date that is two and one-half
(2 1/2) months after the last day of the
applicable Fiscal Year. Notwithstanding anything herein to the contrary, such distributions shall be made no later than required by Code Section 409A to avoid treatment of the AIP as a deferred compensation plan under Code Section 409A.
The date as of which payment is made in accordance with this subsection 5.1 is referred to herein as the “payment date.” 

5.2. Form of Payment. An Annual Incentive Award shall generally be satisfied by a single, lump sum cash payment to
the Participant, provided, however, that, at the discretion of the Committee, the Company may elect, by such deadline as specified under uniform and nondiscriminatory rules established by the Committee, to satisfy such Annual Incentive Award by
payment of shares of Company common stock (“Stock”) in lieu of cash, or a combination of cash and shares of Stock. The number of shares of Stock shall be equal to (a) the amount of the Award to be paid in stock in accordance with this
subsection 5.2, divided by (b) the Fair Market Value of a share of Stock, on the principal securities exchange or market on which the shares are then listed or admitted, on the business day immediately preceding the date of distribution or, if
the Stock is not traded on that date, on the next preceding date on which Stock was traded; provided that issuance of any shares of Stock in accordance with this subsection 5.2 shall be contingent on the availability of shares of Stock under any
shareholder-approved plan of the Company providing for the issuance of Stock in satisfaction of the Awards hereunder (which in no event shall be an employee stock purchase plan). 

5.3. Termination of Employment and Other Provisions. All distributions are subject to the provisions of Sections 6
and 7, below. 
 SECTION 6 

TERMINATION OF EMPLOYMENT; LEAVE OF ABSENCE; REINSTATEMENT 

Any Award payable under this Section 6 shall be payable in accordance with Section 5. 

6.1. Termination of Employment. If a Participant incurs a termination of employment before the payment date (as
defined in Section 5.1 above) for a Performance Period, the effect of termination of employment on a Participant’s right to receive an Award under the AIP shall depend on the reason for the termination, as described in this subsection 6.1.

 (a) Voluntary Termination or Involuntary Termination. In the event that prior to the payment date of an
Award, a Participant (i) voluntarily terminates employment (for any reason other than due to permanent and total disability (as defined in subsection (b) immediately below)) or (ii) is involuntarily terminated for any reason (other
than death) prior to the payment date of an Award, such Participant shall forfeit his or her Award, except as prohibited by law. For the avoidance of doubt, if a Participant retires prior to the payment date of an Award, such Participant shall
forfeit his or her Award. 
  

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 (b) Disability. In the event that prior to the payment
date of an Award, a Participant suffers a permanent and total disability (as defined in the Company’s long-term disability program, regardless of whether the Participant is covered by such program) while employed by the Company or an Employer
resulting in termination or retirement, subject to Section 7 below, such Participant shall be entitled to a distribution of the Award that would otherwise be payable to the Participant under Sections 3 and 4 above, pro-rated based upon a
fraction, the numerator of which is the number of full days worked on active payroll in an incentive-eligible position during the applicable Performance Period and the denominator of which is the number of days in such Performance Period (or the
number of days remaining in such Performance Period after the individual is assigned to an incentive-eligible position). 

(c) Death. In the event that a Participant dies while employed by a Participating Employer but prior to the payment
date of his or her Award, the estate of such Participant shall be entitled to a distribution of the Award, if any, payable in cash that would otherwise be payable to the Participant under Sections 3 and 4 above, pro-rated based upon a fraction, the
numerator of which is the number of full days worked on active payroll in an incentive-eligible position during the applicable Performance Period and the denominator of which is the number of full days in such Performance Period (or the number of
days remaining in such Performance Period after the individual is assigned to an incentive-eligible position). 
 6.2.
Leave of Absence.  
 (a) General. In the event that a Participant is on an
unpaid leave of absence any time during the Performance Period or at the time of the payment date, subject to paragraphs (b) and (c) immediately below and Section 7, such Participant shall be entitled to a distribution of the Award
that would otherwise be payable to the Participant under Sections 3 and 4 above, pro-rated based upon a fraction, the numerator of which is the number of full days worked on active payroll in an incentive-eligible position during the applicable
Performance Period and the denominator of which is the number of days in such Performance Period. 
 (b)
Short-Term Disability. In the event that a Participant is on a leave of absence due to short-term disability (including, for purposes of the AIP, paid maternity leave) any time during the Performance Period, subject to paragraphs
(c) below and Section 7), the period of the leave of absence shall be treated as time on active payroll and will be credited toward the determination of the Participant’s Award and the Participant shall be entitled to payment of the
Award in accordance with Section 5, even if the Participant is on the short-term disability leave of absence as of the payment date. 

(c) Salary Continuation. In the event that a Participant is receiving salary continuation under a severance or
non-compete agreement or a Company-sponsored transition pay or severance pay plan as of the payment date, such Participant shall forfeit his or her Award. 
  

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 6.3. Reinstatement. If a Participant who forfeited his or her Award
with respect to a Performance Period as a result of a termination of employment is reinstated or rehired during the Performance Period, any Award attributable to the portion of such Performance Period prior to the termination of employment shall
remain forfeited. Notwithstanding the foregoing, such a Participant shall be eligible for an Award based on a fraction, the numerator of which is the number of days worked on active payroll in an incentive-eligible position on or after the date of
reinstatement or rehire during the Performance Period and the denominator of which is the number of days in such Performance Period. 

SECTION 7 

OPERATION AND ADMINISTRATION 

7.1. Compensation Committee and Senior Corporate Compensation Executive. 

(a) Compensation Committee. Notwithstanding paragraph (b) immediately below, the Compensation
Committee: 
 (i) Shall approve the Target Annual Incentives and the Awards for Executives under its
purview; 
 (ii) Notwithstanding paragraph (b) below, with respect to Executives under its purview, shall
have the authority and discretion to establish the terms, conditions, restrictions, and other provisions of such Awards, including without limitation the financial performance goals and the performance measures for each such Executive’s
Assignment in accordance with Section 4, and to amend, cancel, or suspend Awards (in accordance with Section 8), subject to the requirements of Code Section 162(m), if applicable; 

(iii) May make additional changes to the AIP that it deems appropriate for the effective administration of the AIP;
provided however, that these changes may not increase the benefits to which Participants may become entitled under the AIP nor change the pre-established measures or goals that have been approved, except as explicitly provided in the AIP; and

 (iv) Shall be responsible for all other duties and responsibilities allocated to the Compensation Committee
under the terms and conditions of the AIP. 
 (b) Senior Corporate Compensation Executive. Except as
provided in paragraph (a) immediately above, the Senior Corporate Compensation Executive: 
 (i) Shall
Determine the Target Annual Incentive for Participant other than Executives under the purview of the Compensation Committee; 

(ii) Shall have the authority to control and manage the operation and administration of the AIP; 

(iii) Shall be responsible for the day-to-day administration of the AIP, including without limitation the exception
process described in Section 7.2 below; 
  

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 (iv) With respect to Participants other than respect to Executives under
its purview of the Compensation Committee and subject to the other provisions of the AIP, shall have the authority and discretion to determine the time or times of receipt of Awards, to establish the terms, conditions, restrictions, and other
provisions of such Awards, and to amend, cancel, or suspend Awards (in accordance with Section 8), subject to the requirements of Code Section 162(m), if applicable; and 

(v) Shall be responsible for all other duties and responsibilities allocated to the Senior Corporate Compensation
Executive under the terms and conditions of the AIP. 
 (c) Any determinations by the Compensation Committee or
Senior Corporate Compensation Executive, as applicable, regarding this AIP are binding on all Participants. 

(d) the Compensation Committee and the Senior Corporate Compensation Executive, as appropriate, shall have the authority
and discretion to interpret the AIP, to establish, amend, and rescind any rules and regulations relating to the AIP and to make all other determinations that may be necessary or advisable for the administration of the AIP. 

7.2. Incentive Exceptions. The Senior Corporate Compensation Executive shall have the authority to receive and
consider requests by Business Units of the Participating Employers for an exception to an established performance measures due to circumstances outside of the business unit’s control. The Senior Corporate Compensation Executive may establish a
procedure for reviewing and approving or rejecting an exception. Any exception determination shall be binding. In no event will positive discretion be applied, by the Compensation Committee or Senior Corporate Compensation Executive, to any Award
that has been designated as intended to meet the requirements of Code Section 162(m) (and the regulations issued thereunder) with respect to the Performance Period or as of the payment date (as defined under subsection 5.1). 

7.3. Discretion. Notwithstanding Section 7.2 or anything in the AIP to the contrary, with respect to Awards
that are not designated as intended to meet the requirements of “performance-based compensation” under Code Section 162(m) (and the regulations issued thereunder) and prior to the settlement of any Award, the Compensation Committee or
Senior Corporate Compensation Executive, as applicable, may change the pre-established measures and goals that have been approved for such Award and increase or reduce the amount of such Award. 

7.4. Tax Withholding. All distributions under the AIP are subject to withholding of all applicable taxes. In the
case of Awards under the AIP that are settled in shares of Stock, if any, the Compensation Committee or Senior Corporate Compensation Executive, as applicable, may condition the delivery of any shares or other benefits under the AIP on satisfaction
of the applicable withholding obligations. To the extent permitted by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, such withholding obligations may be satisfied: (a) through cash payment by the
Participant; (b) through the surrender of shares of Stock which the Participant already owns (provided, however, that to the extent shares described in this paragraph (b) are used to satisfy more than the minimum statutory withholding
obligation, 
  

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as described below, then, except as otherwise provided by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, payments made with shares of Stock in accordance
with this paragraph (b) shall be limited to shares held by the Participant for not less than six months prior to the payment date (or such other period of time as the Company’s accountants may require)); or (c) through the surrender
of shares of Stock to which the Participant is otherwise entitled under the AIP, provided, however, that such shares under this paragraph (c) may be used to satisfy not more than the Company’s minimum statutory withholding obligation
(based on minimum statutory withholding rates for Federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income). 

7.5. Source of Awards. In the case of Awards under the AIP that are settled in shares of Stock, such shares shall be
distributed under a stock plan adopted by the Company and approved by the shareholders thereof that provides for the issuance of Stock in satisfaction of Awards hereunder, (which in no event shall be an employee stock purchase plan.) In the event of
any conflict between this document and such stock plan, the provisions of the stock plan shall govern. 
 7.6. Settlement
of Awards. The obligation to make payments and distributions with respect to Awards may be satisfied through cash payments, the delivery of shares of Stock, or a combination thereof, as provided under subsection 5.2, subject, in the
case of settlement in shares, to the terms of the stock plan under which the Stock is issued. Satisfaction of any such obligations under an Award, which is sometimes referred to as the “settlement” of the Award, may be subject to such
conditions, restrictions and contingencies as the Compensation Committee or Senior Corporate Compensation Executive, as appropriate, shall determine. Each Employer shall be liable for payment of an Award due under the AIP with respect to any
Participant to the extent that such benefits are attributable to the services rendered for that Employer by the Participant. Any disputes relating to liability of an Employer for payment of an Award shall be resolved by the Compensation Committee or
Senior Corporate Compensation Executive, as appropriate. 
 7.7. Transferability. Except as otherwise
provided by the Senior Corporate Compensation Executive, Awards under the AIP are not transferable except as designated by the Participant by will or by the laws of descent and distribution. 

7.8. Form and Time of Elections. Unless otherwise specified herein, any election required or permitted to be
made by any Participant or other person entitled to benefits under the AIP, and any permitted modification, or revocation thereof, shall be in writing filed with the Senior Corporate Compensation Executive at such times, in such form, and subject to
such restrictions and limitations, not inconsistent with the terms of the AIP, as the Senior Corporate Compensation Executive shall require. 

7.9. Action by Company or Employer. Any action required or permitted to be taken under the AIP by the Company or any
other Employer shall be by resolution of its board of directors, or by action of one or more members of the board of directors of such company (including a committee of the board) who are duly authorized to act for such board with respect to the
applicable action, or (except to the extent prohibited by applicable law or applicable rules of any securities exchange or similar entity) by a duly authorized officer of such company. 

 

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 7.10. Gender and Number. Where the context admits, words in any
gender shall include any other gender, words in the singular shall include the plural and the plural shall include the singular. 

7.11. Limitation of Implied Rights. 

(a) Neither a Participant nor any other person shall, by reason of participation in the AIP, acquire any right in or title
to any assets, funds or property of the Company or any Employer whatsoever, including, without limitation, any specific funds, assets, or other property which the Company or any Employer, in its sole discretion, may set aside in anticipation of a
liability under the AIP. A Participant shall have only a contractual right to the cash, if any, payable under the AIP, unsecured by any assets of the Company or any Employer, and nothing contained in the AIP shall constitute a guarantee that the
assets of the Company or any Employer shall be sufficient to pay any benefits to any person. 
 (b) The AIP does
not constitute a contract of employment, and status as a Participant shall not give any Eligible Employee the right to be retained in the employ of the Company or any Employer, nor any right or claim to any benefit under the AIP, unless such right
or claim has specifically accrued and vested under the terms of the AIP. 
 7.12. Evidence. Evidence
required of anyone under the AIP may be by certificate, affidavit, document or other information, which the person charged with acting on such evidence considers pertinent and reliable, and which has been signed, made or presented by the proper
party or parties. 
 7.13. Information to be Furnished. The Company and the Participating Employers shall
furnish the Compensation Committee and the Senior Corporate Compensation Executive with such data and information as it determines may be required for it to discharge its duties. The records of the Company and the Participating Employers as to an
employee’s or Participant’s employment, termination of employment, leave of absence, reemployment, and compensation shall be conclusive on all persons unless determined to be incorrect. Participants and other persons entitled to benefits
under the AIP must furnish the Compensation Committee or Senior Corporate Compensation Executive, as appropriate, such evidence, data or information as the Compensation Committee or Senior Corporate Compensation Executive considers desirable to
carry out the terms of the AIP, subject to any applicable privacy laws. 
 SECTION 8 

AMENDMENT AND TERMINATION 

The Company may amend or terminate the AIP at any time and for any reason in its sole discretion. Notwithstanding the foregoing, no
amendment may be made, without the consent of the shareholders of the Company, that would cause any Awards intended to meet the requirements of “performance-based compensation” under Code 162(m) and the regulations thereunder, to cease to
be deductible under Code Section 162(m). Further, notwithstanding anything herein to the contrary, (a) no amendment shall be made that would cause the AIP not to comply with the requirements of Code Section 409A or any other
applicable law or rule of any applicable securities exchange or similar entity, and (b) the AIP and any Award thereunder may be amended without Participant consent to the extent that the Compensation Committee (or its authorized representative)
determines such amendment necessary to cause the AIP or Award to comply with the requirements of Code Section 409A or any other applicable law or rule of any applicable securities exchange or similar entity. 

 

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 SECTION 9 

DEFINED TERMS 

9.1. In addition to the other definitions contained herein, the following definitions shall apply: 

(a) Assignment. The term “Assignment” refers to the performance goals and measure(s) (under subsections
4.1 and 4.2) that have been assigned by the Compensation Committee or Senior Corporate Compensation Executive, as appropriate, to a Participant, based upon position, location and/or business unit. Assignment also includes the weight of each
performance measure assigned to the Participant. 
 (b) Award. The term “Award” or
“Awards” refers to any Annual Incentive Award(s) awarded under the AIP. 
 (c) Business Unit.
The capitalized term “Business Unit” shall refer, individually, to each Operating Business Unit, the Brands Business Unit or the Online Business Unit; or collectively to all of these Business Units; provided, however, that Business Unit
shall not refer to the Support Business Units. 
 (d) Compensation Committee. The term “Compensation
Committee” refers to the Compensation Committee of the Board of Directors of Sears Holdings Corporation. 

(e) Code. The term “Code” means the Internal Revenue Code of 1986, as amended from time to time (and the
regulations issued thereunder). A reference to any provision of the Code shall include reference to any successor provision of the Code (and the regulations issued thereunder). 

(f) Executive. The term “Executive” refers to any employee of an Employer who holds a position of senior
vice president or higher of Sears Holdings Corporation (not of any subsidiary or affiliate) or any employee who is an executive officer under Section 16(b) of the Securities and Exchange Act of 1934 with respect to Sears Holdings Corporation.

 (g) Fair Market Value. The term “Fair Market Value” shall mean the reported closing price of
a share of Stock on the principal securities exchange or market on which the Stock is then listed or admitted to trading. 

(h) Fiscal Year. The capitalized term “Fiscal Year” refers to the fiscal year of the Company. 

(i) Retail Units. The term “Retail Units” refer collectively to each Sears Full-Line Store, Kmart Store
and all other retail units that are not a Business Unit or Support Business Unit as defined herein. 
  

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 (j) Senior Corporate Compensation Executive. The term
“Senior Corporate Compensation Executive” refers to the Senior Vice President and President, Talent and Human Capital Services (or equivalent), or if he or she has explicitly delegated his or her duties with respect to the AIP, as provided
herein, then the Senior Corporate Compensation Executive shall refer to such authorized representative to whom the duties of administering the AIP have been delegated. 

(k) Support Center. For purposes of determining which corporate hourly employees are Eligible Employees under the
AIP, the term “Support Center” refers to business units at the following corporate locations: (i) Hoffman Estates, Illinois, (ii) Troy, Michigan, (iii) Dodgeville, Wisconsin, (iv) Tucker, Georgia, (v) Dallas,
Texas, (vi) New York Design Center facilities in New York City, (vii) SHIP in Longwood, Florida, (viii) SRAC in Wilmington, Delaware and (ix) San Francisco Apparel Office in San Francisco, which cannot be tied specifically to any
one Business Unit. Employees on a Support Center overhead account may, however, be further categorized as determined by the Compensation Committee or Senior Corporate Compensation Executive, as applicable, under a Business Unit or other businesses
instead of under a Support Business Unit (as defined immediately below), if they can be tied specifically to such unit. 

(l) Support Business Unit. The term “Support Business Unit” shall refer to business units tied to a
Support Center that service multiple business units and cannot be tied specifically to any one Business Unit or Retail Unit, as determined by the Company. 

SECTION 10 

EXPIRATION OF AIP 

The payment obligation under the AIP with respect to a specific Performance Period shall expire, subject to earlier termination pursuant
to Section 8, on the date on which all Annual Incentive Awards (if any) are paid in full or would have been payable in accordance with the provisions of the AIP with respect to such Performance Period. 

*                    *  
                  * 
 IN WITNESS
WHEREOF, the Compensation Committee of the Board of Directors of Sears Holdings Corporation has caused this AIP to be executed effective as of the date first stated above, by the undersigned officer of Sears Holdings Corporation on this 29th
day of April, 2010. 
  

			
	SEARS HOLDINGS CORPORATION
		
	By:	 	 /s/ J. David Works

		 	J. David Works
		
	Title:	 	 Senior Vice President and

President, Talent and Human
 Capital Services

  

 15 

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AIP 
  

 SEARS HOLDINGS CORPORATION 

ANNUAL INCENTIVE PLAN 

APPENDIX A 

Participating Employers 

(As of April 27, 2010) 
  

	1.	Sears Holdings Corporation 

  

	2.	Sears Holdings Management Corporation 

  

	3.	Sears, Roebuck and Company 

  

	 	•	 	 Excluding Orchard Supply Hardware Stores Corporation 

  

	4.	Kmart Holding Corporation

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