Document:

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GUARANTEE

     FOR VALUE RECEIVED, the sufficiency of which is hereby acknowledged, and in connection with
that certain funding agreement (the “Funding Agreement”), entered into by and between Principal
Life Insurance Company, an Iowa insurance company (“Principal Life”), and Principal Life Income
Fundings Trust 2007-58, a New York common law trust (the “Trust”), relating to the notes (the
“Notes”) issued by the Trust, Principal Financial Group, Inc., a Delaware corporation and the
indirect parent company of Principal Life (the “Guarantor”), hereby furnishes to the Trust its full
and unconditional guarantee of the Guaranteed Amounts (as hereinafter defined) as follows:

1. Guarantee.

          (a) The Guarantor hereby fully, irrevocably, absolutely and unconditionally guarantees, as a
guarantee of payment and not merely as a guarantee of collection, immediate payment when due to the
Trust any payments required to be made by Principal Life to the Trust under the Funding Agreement
which shall become due and payable regardless of whether such payment is due at maturity, on an
interest payment date or as a result of redemption or otherwise (the “Scheduled Payments”) but
shall be unpaid by Principal Life (the “Guaranteed Amounts”). Notwithstanding anything to the
contrary contained herein, in no event shall the Guaranteed Amounts exceed the Deposit (as defined
in the Funding Agreement) of the Funding Agreement, plus accrued but unpaid interest and any other
amounts due and owing under the Funding Agreement, less any amounts paid by Principal Life to the
Trust.

          (b) In the event that Principal Life fails to make a Scheduled Payment in full when due (the
“Payment Notice Date”), then the Trust or Citibank, N.A., as indenture trustee for the benefit of
the holders of the Notes (the “Indenture Trustee”), pursuant to the indenture (the “Indenture”)
between the Trust and the Indenture Trustee, may present the Guarantor with notice (each, a
“Payment Notice”) of such failure in writing on or after the Payment Notice Date. The Payment
Notice shall identify (1) the Funding Agreement, (2) the Trust, (3) the Payment Notice Date and (4)
the amount of the Scheduled Payments not paid by Principal Life to the Trust as of the Payment
Notice Date. Upon receipt of such Payment Notice, the Guarantor will immediately pay the
Guaranteed Amounts pursuant to Section 7.

          (c) In the event that, after receipt of a Payment Notice from the Trust, the Guarantor fails
to make immediate payment to the Trust or the Indenture Trustee of the Guaranteed Amounts, then
the Trust and the Indenture Trustee may enforce the obligations of the Guarantor under this
Guarantee, including by immediately bringing suit directly against the Guarantor (without first
bringing suit against Principal Life) for the Guaranteed Amounts not paid to the Trust as of the
Payment Notice Date.

          (d) This Guarantee is an unsecured, unsubordinated and contingent obligation of the Guarantor
and ranks equally with all other unsecured and unsubordinated obligations of the Guarantor.

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     2. Termination. This Guarantee is a continuing and irrevocable guarantee of the
Guaranteed Amounts now or hereafter existing and shall terminate and be of no further force and
effect with respect to the Funding Agreement and the Notes upon the full payment of the Scheduled
Payments or upon the earlier extinguishment of the obligations of Principal Life under the Funding
Agreement.

     3. Amendments. Subject to the trust agreement relating to the Trust and the Indenture, no
provision of this Guarantee may be waived, amended, supplemented or modified, except by a written
instrument executed by the Trust and the Guarantor.

     4. Assignment; Governing Law. This Guarantee shall inure to the benefit of the Trust and its
successors, assigns and pledgees. This Guarantee shall be governed by, and construed in accordance
with, the laws of the State of New York without regard to conflict of law principles.

     5. Notices. All notices given pursuant to this Guarantee shall be in writing, and shall
either be delivered, mailed or telecopied to the locations listed below or at such other address or
to the attention of such other persons as such party shall have designated for such purpose in a
written notice complying as to delivery with the terms of this Section 5. Each such notice shall
be effective (i) if given by telecopy, when transmitted to the applicable number so specified in
this Section 5 (such notice shall also be sent by mail, with first class postage prepaid), (ii) if
given by mail, three days after deposit in the mails with first class postage prepaid, or (iii) if
given by any other means, when actually delivered at such address.

If to the Guarantor:

Principal Financial Group, Inc.

711 High Street

Des Moines, Iowa 50392

Attention: General Counsel

Telephone: (515) 247-5111

Facsimile: (515) 248-3011

With a copy to:

Principal Life Insurance Company

711 High Street

Des Moines, Iowa 50392

Attention: Jim Fifield

Telephone: (515) 248-9196

Facsimile: (866) 496-6527

If to the Trust:

Principal Life Income Fundings Trust (followed by the number of the Trust specified in this Guarantee)

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c/o U.S. Bank Trust National Association

100 Wall Street, 16th Floor

New York, New York 10005

Attention: Thomas E. Tabor

Telephone: (212) 361-6184

Facsimile: (212) 809-5459

With a copy to:

Citibank, N.A.

Citibank Agency and Trust

388 Greenwich Street, 14th Floor

New York, New York 10013

Attention: Nancy Forte

Telephone: (212) 816-5685

Facsimile: (212) 816-5527

     6. Representations and Warranties. The Guarantor represents and warrants that: (i) it is duly
organized and in good standing under the laws of the jurisdiction of its organization and has full
capacity and right to make and perform this Guarantee, and all necessary authority has been
obtained; (ii) this Guarantee constitutes a legal, valid and binding obligation of the Guarantor
enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency and similar
laws affecting creditors’ rights and general principles of equity, regardless of whether
enforcement is sought in a proceeding in equity or at law; (iii) the making and performance of this
Guarantee does not and will not violate the provisions of any applicable law, regulation or order,
and does not and will not result in the breach of, or constitute a default under, any material
agreement, instrument or document to which it is a party or by which it or any of its property may
be bound or affected, except to the extent disclosed in the registration statement registering the
issuance of this Guarantee and the Funding Agreement, as amended, supplemented or modified from
time to time (the “Registration Statement”), and to the extent that any such violation, breach or
default does not result in a material adverse effect on the Guarantor; and (iv) all consents,
approvals, licenses and authorizations of, and filings and registrations with, any governmental
authority required under applicable law and regulations for the making and performance of this
Guarantee have been obtained or made and are in full force and effect, except to the extent
disclosed in the Registration Statement and to the extent that the failure to acquire any such
consent, approval, license, authorization, filing or registration does not result in a material
adverse effect on the Guarantor.

     7. Notice of, and Consent to, Security Interest. The Trust hereby notifies the Guarantor that
it has granted to the Indenture Trustee, on behalf of the holders of the Notes, a security interest
in the Collateral (as defined in the Indenture), including, but not limited to, any and all payment
to be made by the Guarantor to the Trust under this Guarantee. The Trust hereby notifies the
Guarantor that it has collaterally assigned to the Indenture Trustee, for the benefit of the
holders of the Notes, this Guarantee. The Guarantor, by executing this Guarantee, hereby (i)
affirms that it has made or simultaneously will make changes to its books and records to reflect
such security interest and collateral assignment, (ii) consents to the security interest

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granted, and collateral assignment made, by the Trust to the Indenture Trustee of this
Guarantee, (iii) agrees to make all payments due under this Guarantee to the Collection Account (as
defined in the Indenture) or any other account designated in writing to the Guarantor by the
Indenture Trustee and (iv) agrees to comply with all orders of the Indenture Trustee with respect
to this Guarantee without any further consent from the Trust.

     8. WAIVER OF JURY TRIAL; FINAL AGREEMENT. TO THE EXTENT ALLOWED BY APPLICABLE LAW, THE
GUARANTOR WAIVES TRIAL BY JURY WITH RESPECT TO ANY ACTION, CLAIM, SUIT OR PROCEEDING ON OR ARISING
OUT OF THIS GUARANTEE. THIS GUARANTEE REPRESENTS THE FINAL AGREEMENT BETWEEN THE GUARANTOR AND THE
TRUST AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS AMONG SUCH PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG SUCH PARTIES.

	 	 	 	 	 
	 	 	PRINCIPAL FINANCIAL GROUP, INC.
	 
	 	 	 	 
	 
	 	 	 	 
	 

	 	By:
	 	/s/ Elizabeth D. Swanson
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	Name:
	 	Elizabeth D. Swanson
	 
	 	 	 	 
	 

	 	Title:
	 	Counsel
	 
	 	 	 	 
	 

	 	Date:
	 	The Effective Date (as defined in the Funding
	 

	 	 	 	Agreement)

Acknowledged and Agreed:

THE PRINCIPAL LIFE INCOME FUNDINGS

TRUST DESIGNATED IN THIS GUARANTEE

	 	 	 	 	 
	By:	 	U.S. Bank Trust National Association,
	 	 	not in its individual capacity, but solely in its
	 	 	capacity as trustee
	 
	 	 	 	 
	By:	 	Bankers Trust Company, N.A.,
	 	 	under Limited Power of Attorney, dated March 2, 2007
	 
	 	 	 	 
	By:

	 	/s/ Diana L. Cook
	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	Name:

	 	Diana L. Cook	 	 
	 
	 	 	 	 
	Title:

	 	Vice President	 	 
	 
	 	 	 	 
	Date:

	 	The Effective Date (as defined in the Funding	 	 
	 

	 	Agreement)	 	 

4exv10w1

 

 EXHIBIT
10.1

EMPLOYMENT AGREEMENT

     THIS AGREEMENT (the “Agreement”) is made and entered into as of the 23rd of April, 2007, by
and between PAYLESS SHOESOURCE, INC., a Delaware corporation, (“Payless”) and William E. May
(“Executive”). The renewal date of this Agreement is May 31, 2009, for the first Renewal Date and
May 31 of each calendar year thereafter (the “Renewal Date”).

     In consideration of mutual promises and agreements set forth in this Agreement, Payless and
Executive agree as follows:

	1.	 	(a) Payless and/or its subsidiaries and affiliates agree to employ Executive, and Executive
agrees to render personal services to Payless, for the period commencing on the date of this
Agreement through May 31, 2009, (the “Contract Term”) as Executive Vice President-Chief
Operating Officer of Payless and/or to perform such other executive duties as may from time to
time be required of Executive by Payless. Upon the Renewal Date of this Agreement, the
Contract Term shall automatically be extended by one (1) year unless, within 30 days of the
Renewal Date, Payless shall deliver to Executive, or Executive shall deliver to Payless,
written notice that the Contract Term shall not be extended.

     (b) Payless agrees to pay Executive basic compensation for such services during the
Contract Term at the annual rate of $600,000, payable in equal bi-weekly installments, and in
accordance with Paragraph 5, which annual rate will be subject to an annual review during
Payless’ regularly scheduled review time.

     (c) Executive shall be eligible to participate in such annual and long-term cash incentive
bonus programs and arrangements established from time to time for executives of Payless (the
“Incentive Plans”), in accordance with and subject to all of the terms and provisions of such
Incentive Plans.

     (d) Payless shall reimburse Executive for all items of normal expense incurred by
Executive as an employee of Payless in accordance with Payless’ reimbursement policies in effect
from time to time.

     (e) Payless has adopted certain employee benefit plans and has established certain
arrangements concerning executive perquisites which may, from time to time, confer rights and
benefits on Executive in accordance with their terms, and Payless may, in the future, adopt
additional employee benefit plans and establish additional arrangements concerning executive
perquisites, and may in the future amend, modify or terminate any of the aforesaid employee
benefit plans and arrangements, all in accordance with their terms and in accordance with
applicable law. Executive shall be entitled to whatever rights and benefits may be conferred on
Executive, from time to time in accordance with the terms of such plans and arrangements, as
they may be amended from time to time, independent of this Agreement.

 

     (f) Executive will be eligible for future grants of restricted stock, stock-settled
appreciation rights, and stock options, if any, as may be made under the terms of the Payless
ShoeSource, Inc. Stock Incentive Plan, in accordance with the criteria established from time to
time by the Compensation Committee of Payless ShoeSource, Inc. Board of Directors.

     (g) All references to payment dates or vesting dates in this Paragraph 1 or in such plans
and arrangements, shall require that Executive be employed by Payless on such date to receive
such payment or be vested in such benefit.

	2.	 	(a) At all times during the Contract Term, Executive will:

     (i) faithfully and diligently perform Executive’s duties in conformity with the
directions of Payless and serve Payless to the best of Executive’s ability;

     (ii) devote Executive’s undivided time and attention to the business of Payless, subject
to reasonable vacations in accordance with Payless’ vacation policy as it applies from time
to time, to such extent as may be reasonably necessary for the proper performance of the
personal services to be rendered by Executive under this Agreement;

     (iii) maintain Executive’s residence within reasonable access to the Corporate
Headquarters of Payless for the Contract Term.

(b) At all times during the Contract Term, Executive will not:

     (i) engage in any activity which conflicts or interferes with or adversely affects
Executive’s performance of Executive’s duties hereunder, or

     (ii) accept any other employment, whether as an Executive or as a consultant or in any
other capacity, and whether or not compensated therefor, or

     (iii) violate the terms of any of the policies described in Payless’ Policy of Business
Conduct distributed from time to time to Executive.

	3.	 	(a) At all times during the Contract Term and for a period of one (1) year immediately
following Executive’s last day of employment with Payless or, if there is more than one (1)
year remaining in the Contract Term at the time of termination of employment, for the
remainder of the Contract Term, Executive will not directly or indirectly:

     (i) own, manage, operate, finance, join, control, or participate in the ownership,
management, operation, financing or control of, or be employed by any Competing Business(as
defined below), or

     (ii) solicit for employment, hire or offer employment to, or disclose information to or
otherwise aid or assist any person or entity other than Payless or any subsidiary of Payless
in

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soliciting for employment, hiring or offering employment to, any employee of Payless or
any subsidiary of Payless, or

     (iii) take any action which is intended to harm Payless or its reputation, which Payless
reasonably concludes could harm Payless or its reputation or which Payless reasonably
concludes could lead to unwanted or unfavorable publicity to Payless.

     Nothing in this Pargaraph 3(a) shall prevent Executive, however, from performing
Executive’s duties and responsibilities for Payless. In addition, ownership of an investment of
less than the greater of $25,000 or 1% of any class of equity or debt security of a Competing
Business shall not constitute ownership or participation in ownership in violation of Paragraph
3(a)(i).

(b) The term “Competing Business” shall include, but not be limited to,

     (i) any retail business with gross sales or revenue in the prior fiscal year of more
than $25 million (or which is a subsidiary, affiliate or joint venture partner of a business
with gross sales or revenue in the prior fiscal year of more than $25 million) which sells
footwear at retail to consumers at price points competitive, or likely to be competitive,
with Payless (e.g., including, without limitation, Wal-Mart Stores, Inc., K-Mart Corporation,
Target Corporation., Aldo Group, Genesco Inc., Foot Locker, Inc., Brown Shoe Company, Inc.,
Shoe Carnival, Inc., Jones Apparel Group, Inc., DSW, Inc., Kohl’s Corporation, Liz Claiborne
Inc., Big Five Sporting Goods Corporation, Shoe Zone, Bata, J.C. Penney Company, Inc. and
Sears, Roebuck and Co.) within 20 miles of any Payless store or the store of any wholesale
customer of Payless in the United States, or anywhere in any foreign country in which Payless
has retail stores, franchisees or wholesale customers;

     (ii) any franchising or wholesaling business with gross sales or revenue in the prior
fiscal year of more than $25 million (or which is a subsidiary, affiliate or joint venture
partner of a business with gross sales or revenue in the prior fiscal year of more than $25
million) which sells footwear at wholesale to franchisees, retailers or other footwear
distributors located within 20 miles of any Payless store or the store of any wholesale
customer of Payless in the United States, or anywhere in any foreign country in which Payless
has retail stores, franchisees or wholesale customers:

     (iii) any footwear manufacturing business with gross sales or revenue in the prior
fiscal year of more than $25 million (or which is a subsidiary, affiliate or joint venture
partner of a business with gross sales or revenue in the prior fiscal year of more than $25
million) which sells footwear to retailers or other footwear distributors located within 20
miles of any Payless store or the store of any wholesale customer of Payless in the United
States, or anywhere in any foreign country in which Payless has retail stores, franchisees,
or wholesale customers with such footwear manufacturing businesses (including, without
limitation, Jones Apparel Group, Inc., Dexter, Stride Rite Corporation, Wolverine Worldwide,
Inc., The Timberland Company, Nike Inc., Reebok International Ltd., K-Swiss, Keds and
Adidas-Salomon); or

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     (iv) any business which provides buying office services to any store or group of stores
or businesses referred to in Paragraph 3.(b) (i), 3. (b) (ii) or 3. (b) (iii).

(c) Background of non-compete restrictions:

     (i) Payless is one of the leading retail companies in North America, with self-service
shoe stores throughout the United States and its territories, Canada and Central America;

     (ii) In connection with its business, Payless has expended a great deal of time, money
and effort to develop and maintain its confidential, proprietary and trade secret
information; this information, if misused or disclosed, could be very harmful to Payless’
business and its competitive position in the marketplace;

     (iii) Executive desires to be employed by Payless, to be eligible for opportunities for
advancement within Payless, to be eligible for potential compensation increases and to be
given access to confidential and proprietary information of Payless necessary for Executive
to perform Executive’s job, but which Payless would not make available to Executive but for
Executive’s signing and agreeing to abide by the terms of this Agreement as a condition of
Executive’s employment by Payless;

     (iv) Executive recognizes and acknowledges that Executive’s position with Payless
provides Executive with access to Payless’ confidential and proprietary trade secret
information and other confidential business information; and

     (v) Payless compensates its associates to, among other things, develop and preserve
goodwill and relationships on Payless’ behalf and to develop and preserve business
information for Payless’ exclusive ownership and use;

     (vi) long-term customer and supplier relationships often can be difficult to develop
and require a significant investment of time, effort and expense;

     (vii) Executive recognizes and acknowledges that if Executive’s employment with Payless
were to cease, Payless would need certain protections in order to ensure that Executive does
not appropriate or use any confidential information entrusted to Executive during the course
of Executive’s employment by Payless or take any other action which could result in a loss of
Payless’ goodwill that was generated on Payless’ behalf and at its expense, and, more
generally, to prevent Executive from having an unfair competitive advantage over Payless.

     (d) Reasonableness of non-compete restrictions. Executive acknowledges and agrees that
the restrictions in Paragraph 3 are reasonable and enforceable in view of the background for the
non-compete restrictions set forth in Paragraph 3(c) and in view of, among other things, the
following:

     (i) the markets in which Payless and its subsidiaries operate their business;

     (ii) the confidential information to which Executive has or will have access;

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     (iii) Executive’s training and background, which are such that neither Payless nor
Executive believes that the restraint will pose an undue hardship on Executive;

     (iv) a Competing Business could benefit greatly if it were to obtain Payless’
confidential information;

     (v) Payless would not have adequate protection if Executive were permitted to work for
any Competing Business since Payless would be unable to verify whether its confidential
information was being disclosed or misused;

     (vi) the limited duration and limited scope of, and the limited activities prohibited
by, the restrictions in Paragraph 3;

     (vii) Payless’ legitimate interests in protecting its confidential information, goodwill
and relationships.

     (e) If Executive violates Executive’s obligations under Paragraph 3, then Payless shall be
entitled to all legal and equitable rights and remedies under this Agreement, including all of
its rights and remedies referred to in Paragraph 8 of this Agreement. Further, any time in
which Executive is in violation of Executive’s obligations shall not count toward satisfying the
time during which any injunctive restriction shall apply. For example, if Executive were to
join a competitor at the end of the Contract Term in violation of the restrictions in Paragraph
3(a) and work for such competitor for one month before a court enjoined such violation, then the
one year time period of the restriction would begin when such injunction were issued; the one
month in which Executive violated the restriction would not count toward the time that the
restriction applies.

	4.	 	If Executive becomes Disabled and remains continuously so Disabled for a period of 180
days, then Payless’ obligations under this Employment Agreement, at Payless’ option, may be
terminated by notice in writing to that effect given during the continuance of such
Disability, such termination to take effect the later of (a) the last day of the month during
which such notice is given or (b) the last day of such 180 day period. If Executive has made
a previous election to participate in the Payless ShoeSource, Inc. Long-Term Disability Plan
(subject to the terms and provisions of that plan), then the terms of that plan shall apply.
“Disability” or “Disabled” shall mean the inability of Executive to perform the essential
duties of Executive’s job under this Agreement.

	5.	 	(a) If Executive’s employment terminates during the Contract Term by reason of Executive’s
death or Disability, by Executive’s voluntary termination of employment or by Payless for
Cause,

     (i) Executive’s basic compensation and employee benefits shall cease on the date of
such termination, except as otherwise provided herein or in any applicable employee benefit
plan or program; and

     (ii) Executive (or Executive’s legal representative(s)) shall be entitled to such
portion of any incentive compensation as shall be payable under the terms of the Incentive
Plan;

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     (iii) Executive will have the opportunity to continue coverage in Payless’ medical,
dental, and vision plans in which Executive is participating on the date or termination or
resignation, through COBRA.

     (b) In addition, if Executive’s employment is terminated by reason of death, then
Executive’s obligations under Paragraphs 1 and 2 shall cease on the effective date of such
termination.

     (c) In addition, if Executive’s employment is terminated by reason of Disability, by
Executive voluntarily or by Payless for Cause, then Executive’s obligations under Paragraphs 1
and 2 shall cease on the effective date of such termination and Executive’s obligations under
Paragraphs 3 and 6 remain in full force and effect, and Payless shall be entitled to all legal
and equitable rights and remedies under this Agreement, including all of its rights and remedies
referred to in Paragraph 8 of this Agreement.

     (d) If Executive’s employment is terminated by Payless without Cause, then

     (i) Executive’s employment (and status as an employee) shall cease immediately;

     (ii) Provided that Executive is not in violation of Paragraphs 3, 6, or 9 of this
Agreement, Executive shall be entitled to a severance payment in an amount equal to two (2)
times Executive’s then current-base salary at the time of termination of employment, payable
in a lump sum, less applicable withholdings and deductions, on the next regular pay period
following termination of employment;

     (iii) Executive shall be entitled to the amount of any Annual Award payable to Executive
under the Payless ShoeSource, Inc. Incentive Compensation Plan (“ICP”) for the fiscal year in
which Executive’s employment is terminated, prorated by the number of days Executive is
actively employed in that fiscal year divided by 365, and payable at the time and pursuant to
the terms of the ICP, less applicable withholdings and deductions; provided, however, such
Annual Award must be paid no later than the time period established under IRC Section 409A
and the regulations thereunder to be exempt from IRC Section 409A under the “short-term
deferral” exception;

     (iv) Executive shall be entitled to the long-term portion of Executive’s cash incentive
bonus, if any, that would be payable under the ICP for the 2005-07, 2006-08, and 2007-09
performance periods, prorated based on the number of months actively employed during each
respective performance period, and payable no later than the time period established under
IRC Section 409A and the regulations thereunder to be exempt from IRC Section 409A under the
“short-term deferral” exception, less applicable taxes and withholding;

     (v) Executive will receive a special payment which is the equivalent, before taxes, to
the portion paid by Payless towards 24 months of COBRA coverage under Payless’ medical,
dental, and vision plans, provided Executive is participating in such plan(s) on the date or
termination;

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     (vi) Except as expressly provided in this Paragraph 5(d), Executive’s post-termination
obligations under this Agreement, including, without limitation, the provisions of Paragraphs
3 and 6, shall continue to apply following such termination.

(e) “Cause” means

     (i) an intentional act of fraud, embezzlement, theft or any other material violation of
law in connection with Executive’s duties or in the course of Executive’s employment with
Payless; or

     (ii) intentional damage to assets of Payless;

     (iii) intentional disclosure of confidential information of Payless contrary to the
policy of Payless;

     (iv) breach of Executive’s obligations under this Agreement;

     (v) intentional engagement in any competitive activity which would constitute a breach
of Executive’s duty of loyalty or of Executive’s obligations under this Agreement;

     (vi) intentional breach of any policy of Payless;

     (vii) the willful and continued failure by Executive to substantially perform
Executive’s duties with Payless (other than any such failure resulting from Executive’s
incapacity due to physical or mental illness); and/or

     (viii) the willful engaging by Executive in conduct which is demonstrably and materially
injurious to Payless, monetarily or otherwise.

     For purposes of Paragraph 5(e)(ii),(iii),(iv), an act, or a failure to act, shall not be
deemed “willful” or “intentional” unless it is done, or omitted to be done, by Executive in bad
faith or without reasonable belief that Executive’s action or omission was in the best interest
of Payless. Failure to meet performance standards or objectives, by itself, will not constitute
“Cause”.

     (f) Executive agrees that, in addition to any other remedies, Payless shall be permitted,
as part of the computation of any final amount or amounts due to Executive as wages,
compensation, bonus, deferred compensation or otherwise, and before any such amount shall be due
and owing, to reduce any amount which Payless may otherwise owe to Executive by any unpaid
amount which Executive owes to Payless.

	6.	 	(a) Executive will not, at any time, directly or indirectly, use or disclose any of Payless’
Confidential Information except as authorized and within the scope of Executive’s employment
with Payless.

     (b) At Payless’ request and/or termination of Executive’s employment with Payless,
Executive will return to Payless all documents, records, notebooks, computer diskettes and tapes
and anything

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else containing Payless’ Confidential Information, including all copies thereof, as
well as any other Payless property, in Executive’s possession, custody or control. Executive
will also delete from Executive’s own computer or other electronic storage medium any of
Payless’ proprietary or Confidential Information. Not later than 20 days after Executive’s
employment is terminated, Executive will certify in writing to Payless that Executive has
complied with these obligations.

     (c) During Executive’s employment with Payless and thereafter, Executive will

     (i) notify and provide Payless immediately with the details of any unauthorized
possession, use or knowledge of any of Payless’ Confidential Information,

     (ii) assist in preventing any reoccurrence of this possession, use or knowledge, and

     (iii) cooperate with Payless in any litigation or other action to protect or retrieve
Payless’ Confidential information.

     (d) “Confidential Information” means any non-public information pertaining to Payless’
business. Confidential Information includes information disclosed by Payless to Executive, and
information developed or learned by Executive during the course of or as a result of Executive’s
employment with Payless, which Executive also agrees is Payless’ property. Executive further
agrees that any item of intellectual or artistic property generated or prepared by Executive,
for Executive or with others, in connection with Executive’s employment by Payless is Payless’
sole property and shall remain so unless Payless otherwise specifically agrees in writing.
Confidential Information includes, without limitation, information and documents concerning
Payless’ processes; suppliers (including Payless’ terms, conditions and other business
arrangements with suppliers); supplier and customer lists; advertising, marketing plans and
strategies; profit margins; seasonal plans, goals, objectives and projections, compilations,
analyses and projections regarding Payless’ divisions, businesses, product segments, product
lines, suppliers, sales and expenses; files; trade secrets and patent applications (prior to
their being public); salary, staffing and employment information (including information about
performance of other executives); and “know-how,” techniques or any technical information not of
a published nature relating, for example, to how Payless conducts its business.

     (e) Executive agrees that Executive will not disclose to Payless or use, or induce Payless
to use, any proprietary information, trade secret or confidential business information of any
other person or entity, including any previous employer of Executive. Executive also represents
that Executive does not have any property or any confidential, proprietary or trade secret
information belonging to any prior employer.

	7.	 	(a) If any court of competent jurisdiction determines that, but for the provisions of this
Paragraph 7, any provision of this Agreement is illegal, void as against public policy or
otherwise unenforceable because it is deemed to be overbroad or unreasonable, then such
provision shall automatically be amended to the extent (but only to the extent) necessary to
make it sufficiently narrow in scope, time and geographic area so that it is enforceable, not illegal,
void as against

8

 

public policy or unreasonable. All other remaining terms and provisions shall
remain in full force and effect.

     (b) If Executive raises any question regarding the enforceability of any aspect of this
Agreement, including, without limitation, Paragraphs 3 or 6, Executive specifically agrees that
Executive will abide fully by such provisions unless and until a court of competent jurisdiction
has rendered a final judgment that such provisions are not fully enforceable.

	8.	 	(a) Payless and Executive shall each be entitled to pursue all legal and equitable rights
and remedies to secure performance of the obligations and duties of the other under this
Agreement, and enforcement of one or more of such rights and remedies shall in no way preclude
Payless or Executive from pursuing any and all other rights and remedies available to each of
them.

     (b) Executive acknowledges and agrees that the individualized services and capabilities
that Executive will render and provide to Payless during the Contract Term are of a personal,
special, unique, unusual, extraordinary and intellectual character.

     (c) Executive acknowledges and agrees that the restrictions in this Agreement on Executive
are reasonable in order to protect Payless’ expectations and rights under this Agreement and to
provide Payless with the protections that Payless needs to, among other things, safeguard its
Confidential Information. Executive agrees that any breach of this Agreement by Executive will
cause immediate irreparable injury to Payless, for which an award of damages alone may be
inadequate. Therefore, Payless shall be entitled, in addition to any other right or remedy it
may have, to an injunction without the posting of any bond or other security, enjoining or
restraining Executive from any violation or threatened violation of this Agreement. In the
event that Payless is successful in any suit or proceeding relating to the enforcement of this
Agreement, Executive agrees to pay Payless’ reasonable attorneys’ fees and costs.

	9.	 	The Executive agrees to disclose fully to Payless, and hereby assigns and transfers to
Payless, and agrees to execute any additional documentation Payless may reasonably request to
evidence the assignment and transfer, immediately upon the conception, development, making or
acquisition thereof, the right, title, and interest in and to any and all inventions,
discoveries, improvements, innovations, and/or designs (the “Work Product”) conceived,
discovered, developed, acquired or secured by Executive, solely or jointly with others or
otherwise, together with all associated U.S. and foreign intellectual property rights (i.e.,
patents, copyrights, trademarks or trade secrets) either:

     (a) during the period of Executive’s employment, if such Work Product is related directly
or indirectly, to the business of, or to the research or development work of Payless;

     (b) with the use of the time, materials, or facilities of Payless; or

     (c) within one (1) year after termination of such employment if conceived, discovered,
developed, acquired or secured as a result of and is attributable to work done during such
employment and relates to Work Product within the scope of the business of Payless, together
with rights to all intellectual property rights which may be granted thereon.

9

 

     Upon discovery, development, making, or acquisition of any such Work Product, Executive
shall notify Payless and shall execute and deliver to Payless, without further compensation,
such documents prepared by Payless as may be reasonable or necessary to prepare or prosecute
applications for such Work Product and to assign and transfer to Payless Executive’s right,
title and interest in and to such Work Product and intellectual property rights thereof.
Executive acknowledges that Executive has carefully read and considered the provisions of this
paragraph and, having done so, agrees that the restrictions set forth herein are fair and
reasonable and are reasonably required for the protection of the interests of Payless, its
officers, directors, and other executives.

	10.	 	With the sole exception of the Change of Control Agreement dated April 23, 2007 and the
Indemnification Agreement dated April 23, 2007, each between Payless and the Executive, and
each amended from time to time (collectively, the “Related Agreements”), the entire
understanding and agreement between the parties has been incorporated into this Agreement, and
this Agreement supersedes all other agreements (except the Related Agreements) and
understandings between the Executive and Payless, with respect to the employment of Executive
by Payless and its parents and subsidiaries. This Agreement shall inure to the benefit of,
and shall be binding upon, Payless, its successors and assigns and upon Executive and
Executive’s heirs, successors and assigns; provided, however, that, since this is an agreement
for the rendering of personal services, Executive cannot assign any of Executive’s obligations
under this Agreement to anyone else. This Agreement may be executed in counterparts, in which
case each of the two (2) counterparts shall be deemed to be an original and the final
counterpart shall be deemed to have been executed in Topeka, Kansas.

	11.	 	Executive hereby represents and warrants that he is not a party to any instrument, agreement,
document, arrangement restricting him from being employed by Payless, or preventing him from
entering into this Agreement.

	12.	 	This Agreement has been executed by Payless at Payless’ corporate headquarters and principal
executive offices in Topeka, Kansas. Any questions or other matter arising under or relating
directly or indirectly to this Agreement, including but not limited to any questions
concerning the validity, interpretation, or performance of the Agreement, shall be governed by
and construed in accordance with the laws of the State of Kansas applicable to agreements made
and to be performed in such state without regard to such state’s conflicts of law provision.
All actions and proceedings arising out of or relating directly or indirectly to this
Agreement shall be filed and litigated exclusively in any state court or federal court located
in the City of Topeka, Kansas or in Shawnee County, Kansas. The parties hereto expressly
consent to the jurisdiction of any such court and to venue therein and consent to service of
process if made upon Payless’ registered agent or if made at Executive’s last known address on
the records of Payless.

BY SIGNING THIS AGREEMENT, EXECUTIVE HEREBY CERTIFIES THAT EXECUTIVE (A) HAS RECEIVED A COPY OF
THIS AGREEMENT FOR REVIEW AND STUDY BEFORE SIGNING IT; (B) HAS READ THIS AGREEMENT CAREFULLY
BEFORE SIGNING IT; (C) HAS HAD SUFFICIENT OPPORTUNITY TO REVIEW THE AGREEMENT WITH ANY ADVISOR
WHICH EXECUTIVE MAY DESIRE TO

10

 

CONSULT, INCLUDING LEGAL COUNSEL; (D) HAS HAD SUFFICIENT
OPPORTUNITY BEFORE SIGNING IT TO ASK ANY QUESTIONS EXECUTIVE HAS ABOUT THIS AGREEMENT AND HAS
RECEIVED SATISFACTORY ANSWERS TO ALL SUCH QUESTIONS; AND (E) UNDERSTANDS EXECUTIVE’S RIGHTS AND
OBLIGATIONS UNDER THIS AGREEMENT.

IN WITNESS WHEREOF, this Agreement has been executed by Executive, and then by Payless in
Topeka, Kansas, effective as of the date first above written.

	 	 	 	 	 	 	 
	 	 	/s/ William E. May	 	 
	 	 	 	 	 
	 	 	William E. May	 	 
	 
	 	 	 	 	 	 
	 

	 	Date:
	 	April 11, 2007	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	Payless ShoeSource, Inc.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:

Name:
	 	/s/ Jay A. Lentz
 

Jay A. Lentz
	 	 
	 

	 	Title:
	 	Senior Vice President- Human Resources	 	 

11

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