Document:

MTS Systems Corporation Exhibit 10.a to Form 10-K

 

MTS Systems Corporation

Management Variable Compensation (MVC) Plan 

(Revised October, 2003) 

1 

Table of Contents  

	Section
			Page
	
	1.	 	General Purpose of the Plan	 	3	 
	
2.	 	Definitions	 	3	 
	
3.	 	Eligibility and Participation	 	3	 
	
4.	 	Plan Goals	 	4	 
	
5.	 	Payout Opportunity	 	4	 
	
6.	 	Determining the Payout	 	4	 
	
7.	 	Relationship to Other Compensation Plans	 	5	 

2 

Section 1.     General Purpose of the Plan  

The name of this plan is the MTS
Systems Management Variable Compensation Plan (the “Plan”). The purpose of the
Plan is to focus efforts on achievement of near term financial objectives which are
critical to the success of MTS Systems Corporation; to reward accomplishments when
performance meets or exceeds established targets or business plan objectives; and to more
closely tie total compensation (salary plus variable) to the financial results and
performance of the company. No employment contract is implied by participation in the
Plan. 

Section 2.     Definitions  

Definitions as used in the Plan are: 

	  	a.  	  	“CEO” means
the Chief Executive Officer duly elected by the Board.  

	  	b.  	  	“Company” means
MTS Systems Corporation, a corporation organized under the laws of the State of Minnesota
(or any successor corporation).  

	  	c.  	  	“Employee” means
an employee of the Company, whether or not an officer or member of the Board, but
excluding any temporary employee and any person serving the Company only in the capacity
of a member of the Board.  

	  	d.  	  	“Participant” means
an Employee who is eligible to participate in the Plan.  

	  	e.  	  	“Plan” means
the MTS Systems Corporation Management Variable Compensation Plan.  

	  	f.  	  	“Plan
Year” means the applicable fiscal year of the Company.  

Section 3.     Eligibility and Participation  

Employees eligible to participate in
the Plan will include: 

	  	•  	  	Executives 

	  	•  	  	Managers
& technical supervisors 

	  	•  	  	Key marketing or
technical employees who meet certain minimum responsibilities for profitability,
financial/human resource acquisition and allocation, balance sheet control,
and/or market/technical direction. 

Employees eligible for
other variable compensation (i.e. commissions) are not eligible to participate
in the Plan. 

Participants must also work
at least 1,000 hours in the Plan Year and be employed at the end of the Plan
Year to be eligible for a payout. Employees resigning or terminating before the
end of the Plan Year, regardless of cause, are not eligible for a payout.
Participants who work less than full time during the Plan Year (g., due to a
personal leave, but not due to illness) would earn a proportionately reduced
payout. 

The CEO must approve any
waivers to the eligibility and participation rules listed above. 

3 

Section 4.     Plan Goals  

Achieving financial results
is one of the main objectives of the Plan. For the Executive Management Team,
all goals are financial. For all other participants, the goals are a combination
of plan financial and operating goals. The financial goals for the Plan Year
include: 

• Earnings Per Share (EPS)

• Earnings Before Interest and Taxes (EBIT)

• Working Capital Rate to Revenue (WCRR)

• Revenue  

The operating goals reflect group
accountability and are related to the operating unit where the employee has a direct
impact. 

The goals are established based on
the following list of approved business unit levels: 

	  	
AeroMet

Corporate

Friction Stir Welding

Sensors Software & Consulting

Test 

The goals for participants
below the direct reports to the CEO require one- over-one approval to:

	  	
• Integrate goals into the Company operating plan

• Guard against conflicting goals

• Help to assure consistency in degree of difficulty 

The CEO has the final approval for
plan goals over all participants other than himself. 

Section 5.     Payout Opportunity  

The MVC target payment is expressed
as a percentage of salary level midpoint and is assigned at the beginning of the Plan
Year. Incentive payments vary above and below the target percent based on the financial
results in comparison to the established goals. 

The MVC target percentage is assigned
based on salary level, scope of responsibility, and profit impact of the position. These
target percentages are reviewed annually with market survey information and are
competitive within similar companies and industries. The MVC target percentage range by
type of position is listed below: 

	Type of Position
		MVC Target % range
	
	Executive	 	30% – 70%	 
	
Manager/Technical Supervisor/	 
	Key Technical Employee	 	6% – 25%	 

Overranging is when the payout is
greater than 100% because the actual results are above established goals. An overranging
multiplier is assigned to each financial goal. For all positions, the MTS EPS goal must be
met or exceeded before the overranging multiplier for each established goal is applied.
There is no overranging potential for operating goals. 

4 

	Payout Opportunity – Executive 
	

	Weight 	  	30% 	  	50% 	  	20% 	  
	

	Goal 	  	Corp EPS 	  	BU EBIT or 	  	BU WCRR or 	  
	  	  	  	  	BU Revenue 	  	BU Revenue 	  
	

	Over Range Multiplier 	  	2 	  	3 	  	2 	  
	

	Maximum Over-ranging 	  	60% 	  	150% 	  	40% 	  
	

	Total 	  	250% Maximum Over-ranging 
	

	BU: Business Unit 

	Payout Opportunity – Manager/Technical Supervisor/Key Technical Employee 
	

	Weight 	  	20% 	  	50% 	  	20% 	  	10% 	  
	

	Goal 	  	Corp EPS 	  	BU EBIT 	  	BU WCRR or
BU Revenue	  	Operating Objective 	  
	

	Over Range Multiplier 	  	2 	  	3 	  	2 	  	1 	  
	

	Maximum Over-ranging 	  	40% 	  	150% 	  	40% 	  	10% 	  
	

	Total 	  	240% Maximum Over-ranging 	  
	

	BU: Business Unit 

Section 6. Determining the Payout  

Payouts are based on four
factors: 1) the degree to which goals are met; 2) the MVC target percentage; 3)
the midpoint of the salary range as assigned at the beginning of the Plan Year;
and 4) the percentage of time worked during the Plan Year. 

Each goal is assigned a
payout range. The minimum level or hurdle represents that level of performance
below, which no award is to be paid. The stretch target and maximum stretch
target of a payout range represents performance above target and overranging may
apply at these levels. The sum of the relative weightings of the objectives must
equal 100%. 

Payouts will be made within
90 days of the end of the Plan Year, expected to be on or before December 31.

Section 7.     Relationship to Other Compensation Plans  

7.a     “Non-Management” Variable Compensation (VC) 

Employees may be eligible for a
variable compensation bonus at the end of the Plan Year if they are not eligible to
participate in another variable compensation program (i.e. Management Variable
Compensation, sales commissions); work at least a 1,000 hours during the Plan Year; and
are employed by the Company at the end of the Plan Year. 

The following is an outline summary
to which these VC plans must adhere. They are included in the MVC Plan for reference only. 

5 

	  	• 	  	VC
Competitive payout potential is 3% of the midpoint of the salary range in which the
employee is placed at the beginning of the fiscal year.  

	  	• 	  	VC
payout will normally be based on the combination of the results of a corporate goal and
the employee’s vice president’s goals for the year.  

	  	• 	  	The
entire 3% VC payout potential is eligible for overranging for participating employees.  

	  	• 	  	Eligibility
and participation rules for VC will be the same as those for MVC, where appropriate. 

	Payout Opportunity – Non-Management 
	

	Weight 	  	30% 	  	60% 	  	20% 	  
	

	Goal 	  	Corp EPS 	  	BU EBIT 	  	BU WCRR or 	  
	  	  	  	  	  	  	BU Revenue 	  
	

	Over Range Multiplier 	  	2 	  	3 	  	3 	  
	

	Maximum Over-ranging 	  	40% 	  	180% 	  	60% 	  
	

	Total 	  	280% Maximum Over-ranging 
	

	BU: Business Unit 

7.b     Retirement Plan 

The calculations for the Management
Variable Compensation Plan and Variable Compensation Plan are made after deductions for
retirement plans. 

Payout to a U.S. based participant in
the Management Variable Compensation Plan and Variable Compensation Plan is included in
the calculation of the Company’s contribution to that employee’s retirement
plan. 

6MTS Systems Corporation Exhibit 10.s to Form 10-K

Exhibit 10.s  

     

CHANGE IN CONTROL AGREEMENT  

	  	
MTS Systems Corporation 

14000 Technology Drive

Eden Prairie, MN 55344-2290

Telephone 952-937-4000

Fax 952-937-4515 

        THIS
CHANGE IN CONTROL AGREEMENT is made and entered into by and between MTS Systems
Corporation, a Minnesota corporation with its principal offices at 14000 Technology Drive,
Eden Prairie, MN 55344 (the “Company”) and Douglas E. Marinaro
(the”Executive”), residing at Eden Prairie, and shall be effective as of
this 28th day of January, 2003. 

        WHEREAS,
the Company considers the establishment and maintenance of a sound and vital management to
be essential to protecting and enhancing the best interests of the Company and its
shareholders; and 

        WHEREAS,
the Executive has made and is expected to continue to make, due to the Executive’s
intimate knowledge of the business and affairs of the Company, its policies, methods,
personnel, and problems, a significant contribution to the profitability, growth, and
financial strength of the Company; and 

        WHEREAS,
the Company, as a publicly held corporation, recognizes that the possibility of a Change
in Control may exist, and that such possibility and the uncertainty and questions which it
may raise among management may result in the departure or distraction of the Executive in
the performance of the Executive’s duties, to the detriment of the Company and its
shareholders; and 

        WHEREAS,
it is in the best interests of the Company and its stockholders to reinforce and encourage
the continued attention and dedication of management personnel, including the Executive,
to their assigned duties without distraction and to ensure the continued availability to
the Company of the Executive in the event of a Change in Control; and 

        WHEREAS,
the Company and the Executive previously signed a Change in Control Agreement and now
desire to amend and restate that agreement in its entirety. 

        THEREFORE,
in consideration of the foregoing and other respective covenants and agreements of the
parties herein contained, the parties hereto agree as follows: 

        1.   
Term of Agreement. This Agreement shall be effective from and after the
date hereof and shall continue in effect through December 31, 2003, and shall
automatically be extended for successive one-year periods thereafter unless the
Board of Directors of the Company (the “Board”) 

 

Change in Control Agreement

shall have approved, and
the Executive is notified in writing, prior to January 1, 2004 and each January
1 thereafter, that the term of this Agreement shall not be extended or further
extended; provided, however, that if a Change in Control shall
have occurred during the original or any extended term of this Agreement, this
Agreement shall continue in effect for a period of 24 months from the date of
the occurrence of a Change in Control or, if an event triggering the
Company’s severance payment obligations to the Executive under Section 4(d)
has occurred during such 24-month period, this Agreement shall continue in
effect until the benefits payable to the Executive hereunder have been paid in
full. In the event that more than one Change in Control shall occur during the
original or any extended term of this Agreement, the 24-month period shall
follow the last Change in Control. This Agreement shall neither impose nor
confer any further rights or obligations on the Company or the Executive on the
day after the end of the term of this Agreement. Expiration of the term of this
Agreement of itself and without subsequent action by the Company or the
Executive shall not end the employment relationship between the Company and the
Executive. 

        2.   
Change in Control. No benefits shall be payable hereunder unless there
shall have been a Change in Control. For purposes of this Agreement, a
“Change in Control” of the Company shall mean a change in control
which would be required to be reported in response to Item 6(e) on Schedule 14A
of Regulation 14A promulgated under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), whether or not the Company is then
subject to such reporting requirement, including, without limitation, if:

		        (a)   
Any “person” (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than a trustee or other fiduciary holding securities under
an employee benefit plan of the Company or any subsidiary of the Company,
becomes a “beneficial owner” (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing
30% or more of the combined voting power of the Company’s then outstanding
securities; or 

		        (b)   
During any period of two consecutive years (not including any period ending
prior to the effective date of this Agreement), the Incumbent Directors cease
for any reason to constitute at least a majority of the Board of Directors. The
term “Incumbent Directors” shall mean those individuals who are
members of the Board of Directors on the effective date of this Agreement and
any individual who subsequently becomes a member of the Board of Directors
(other than a director designated by a person who has entered into agreement
with the Company to effect a transaction contemplated by Section 2(c)) whose
election or nomination for election by the Company’s shareholders was
approved by a vote of at least a majority of the then Incumbent Directors; or 

		        (c)   
(i)  The Company consummates a merger, consolidation, share exchange, division or
other reorganization of the Company with any corporation or entity, other than
an

2

Change in Control Agreement

		entity owned
at least 80% by the Company, unless immediately after such transaction, the shareholders
of the Company immediately prior to such transaction beneficially own, directly or
indirectly 51% or more of the combined voting power of resulting entity’s
outstanding voting securities as well as 51% or more of the Total Market Value of the
resulting entity, or in the case of a division, 51% or more of the combined voting power
of the outstanding voting securities of each entity resulting from the division as well
as 51% or more of the Total Market Value of each such entity, in each case in
substantially the same proportion as such shareholders owned shares of the Company prior
to such transaction; (ii) the shareholders of the Company approve an agreement for the
sale or disposition (in one transaction or a series of transactions) of assets of the
Company, the total consideration of which is greater than 51% of the Total Market Value
of the Company, or (iii) the Company adopts a plan of complete liquidation or winding-up
of the Company. Total Market Value”shall mean the aggregate market value of the
Company’s or the resulting entity’s outstanding common stock (on a fully
diluted basis) plus the aggregate market value of the Company’s or the resulting
entity’s other outstanding equity securities as measured by the exchange rate of the
transaction or by such other method as the Board determines where there is not a readily
ascertainable exchange rate. 

        3.   
Termination Following Change in Control. If a Change in Control shall
have occurred during the term of this Agreement, the Executive shall be entitled
to the benefits provided in subsection 4(d) unless such termination is (A)
because of the Executive’s death or Retirement, (B) by the Company for
Cause or Disability, or (C) by the Executive other than for Good Reason. 

		        (a)   
Disability; Retirement. If, as a result of incapacity due to physical or
mental illness, the Executive shall have been absent from the full-time
performance of the Executive’s duties with the Company for at least three
(3) consecutive months, and within 30 days after written Notice of Termination
is given the Executive shall not have returned to the full-time performance of
the Executive’s duties, the Company may terminate the Executive’s
employment for “Disability”. Any question as to the existence of the
Executive’s Disability upon which the Executive and the Company cannot
agree shall be determined by a qualified independent physician selected by the
Executive (or, if the Executive is unable to make such selection, it shall be
made by any adult member of the Executive’s immediate family), and approved
by the Company. The determination of such physician made in writing to the
Company and to the Executive shall be final and conclusive for all purposes of
this Agreement. Termination by the Company or the Executive of the
Executive’s employment based on “Retirement” shall mean
termination on or after attaining age sixty-five (65). 

		        (b)   
Cause. For purposes of this Agreement, “Cause shall mean: 

3

Change in Control Agreement

		        (i)   
the willful and continued failure by the Executive (other than any such failure
resulting from (1) the Executive’s incapacity due to physical or mental
illness, (2) any such actual or anticipated failure after the issuance of a
Notice of Termination by the Executive for Good Reason or (3) the Company’s
active or passive obstruction of the performance of the Executive’s duties
and responsibilities) to perform substantially the duties and responsibilities
of the Executive’s position with the Company after a written demand for
substantial performance is delivered to the Executive by the Board, which demand
specifically identifies the manner in which the Board believes that the
Executive has not substantially performed the duties or responsibilities; 

		        (ii)   
the conviction of the Executive by a court of competent jurisdiction for felony
criminal conduct which, in the good faith opinion of the Company, would impair
the Executive’s ability to perform his or her duties or impair the business
reputation of the Company; or 

		        (iii)   
the willful engaging by the Executive in fraud or dishonesty which is
demonstrably and materially injurious to the Company, monetarily or otherwise. 

	  	
No act, or failure to act, on the Executive’s part shall be deemed willful unless
committed, or omitted by the Executive in bad faith and without reasonable belief that the
Executive’s act or failure to act was in the best interest of the Company and the
Executive shall have either failed to correct, or failed to take all reasonable steps to
correct, such act or failure to act within sixty (60) days from the Executive’s
receipt of written notice from the Company demanding that the Executive take such action.
The Executive shall not be terminated for Cause unless and until the Company shall have
delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of
not less than three-quarters of the entire membership of the Board at a meeting of the
Board called and held for such purpose (after reasonable notice to the Executive and an
opportunity for the Executive, together with the Executive’s counsel, to be heard
before the Board), finding that, in the good faith opinion of the Board, the
Executive’s conduct was Cause and specifying the particulars thereof in detail. 

		        (c)   
Good Reason. The Executive shall be entitled to terminate his or her
employment for Good Reason. For purposes of this Agreement, “Good
Reason” shall mean, without the Executive’s express written consent,
any of the following: 

		        (i)   
The authority, powers, functions, responsibilities or duties assigned to the
Executive, as compared to those in effect immediately prior to the Change in

4

Change in Control Agreement

		Control, are materially and adversely diminished without the Executive’s
written consent (except for any diminution that occurs solely as a result of the
fact that the Company ceases to be a public company); 

		        (ii)   
A reduction by the Company in the Executive’s annual compensation
including, but not limited to, base pay or short and/long term incentive pay in
effect immediately prior to a Change in Control; 

		        (iii)   
The Company requiring the Executive to relocate his or her office, or to be
based in an office, more than 50 miles from his or her office immediately prior
to the Change in Control (except for required travel on the Company’s
business to an extent substantially consistent with the Executive’s
business travel obligations immediately prior to the Change in Control); 

		        (iv)   
The failure by the Company to continue to provide the Executive with benefits at
least as favorable to those enjoyed by the Executive under any of the
Company’s pension, life insurance, medical, health and accident,
disability, deferred compensation, incentive awards, incentive stock options, or
savings plans in which the Executive was participating immediately prior to the
Change in Control, the taking of any action by the Company which would directly
or indirectly materially reduce any of such benefits or deprive the Executive of
any material fringe benefit enjoyed immediately prior to the Change in Control,
or the failure by the Company to provide the Executive with the number of paid
vacation or sick days to which Executive is entitled immediately prior to the
Change in Control, provided, however, that the Company may amend any such plan
or programs as long as such amendments do not reduce any benefits to which the
Executive would be entitled upon termination; 

		        (v)   
The failure of the Company to obtain a satisfactory agreement from any successor
to assume and agree to perform this Agreement, as contemplated in
Section 8; 

		        (vi)   
any material violation of this Agreement by the Company; 

		        (vii)   
the Company requests the Executive’s resignation from employment; or 

		        (viii)   
any purported termination of the Executive’s employment which is not made
pursuant to a Notice of Termination satisfying the requirements of this

5

Change in Control Agreement

		Agreement; for purposes of this Agreement, no such purported termination shall be effective. 

		        (d)   
Notice of Termination. Any purported termination of the Executive’s
employment by the Company or by the Executive shall be communicated by written
Notice of Termination to the other party hereto in accordance with Section 9.
For purposes of this Agreement, a “Notice of Termination” shall mean a
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth the facts and circumstances claimed to provide a
basis for termination of the Executive’s employment. 

		        (e)   
Date of Termination. For purposes of this Agreement, “Date of
Termination” shall mean: 

		        (i)   
If the Executive’s employment is terminated for Disability, 30 days after
Notice of Termination is given (provided that the Executive shall have been
absent from full-time performance of duties for at least three (3) months and
shall not have returned to the full-time performance of the Executive’s
duties during such 30 day period, in accordance with Section 3(a) hereof); and 

		        (ii)   
If the Executive’s employment is terminated pursuant to subsections (b) or
(c) above or for any other reason (other than Disability), the date specified in
the Notice of Termination (which, in the case of a termination pursuant to
subsection (b) above shall not be less than 10 days, and in the case of a
termination pursuant to subsection (c) above shall not be less than 10 nor more
than 30 days, respectively, from the date such Notice of Termination is given).

		        (f)   
Dispute of Termination. If, within 10 days after any Notice of
Termination is given, the party receiving such Notice of Termination notifies
the other party that a dispute exists concerning the termination, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, or by a final judgment, order or
decree of a court of competent jurisdiction (which is not appealable or the time
for appeal therefrom having expired and no appeal having been perfected);
provided, that the Date of Termination shall be extended by a notice of dispute
only if such notice is given in good faith and the party giving such notice
pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Company shall continue to
pay the Executive full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, base salary) and continue the
Executive as a participant in all compensation, benefit and insurance plans in
which the Executive was participating when the notice giving rise to the dispute
was given, until the dispute is finally resolved in accordance with this
subsection. Amounts paid under this subsection are in 

6

Change in Control Agreement

		addition to all other
amounts due under this Agreement and shall not be offset against or reduce any
other amounts under this Agreement. 

        4.   
Compensation Upon Termination or During Disability. Following a Change in
Control of the Company, as defined in subsection 2(a), upon termination of the
Executive’s employment or during a period of Disability, the Executive
shall be entitled to the following benefits: 

		        (a)   
During any period that the Executive fails to perform full-time duties with the
Company as a result of a Disability, the Company shall pay the Executive, the
Executive’s base salary as in effect at the commencement of any such period
and the amount of any other form or type of compensation otherwise payable for
such period if the Executive were not so disabled, until such time as the
Executive is determined to be eligible for long term disability benefits in
accordance with the Company’s insurance programs then in effect or the
Executive is terminated for Disability. 

		        (b)   
If the Executive’s employment shall be terminated by the Company for Cause
or by the Executive other than for Good Reason or Disability, the Company shall
pay to the Executive his or her full base salary through the Date of Termination
at the rate in effect at the time Notice of Termination is given and the Company
shall have no further obligation to the Executive under this Agreement, except
with respect to any benefits to which the Executive is entitled under any
Company pension or welfare benefit plan, insurance program or as otherwise
required by law. 

		        (c)   
If the Executive’s employment shall be terminated by the Company or by the
Executive for Disability or Retirement, or by reason of death, the Company shall
immediately commence payment to the Executive (or the Executive’s
designated beneficiaries or estate, if no beneficiary is designated) of any and
all benefits to which the Executive is entitled under the Company’s
retirement and insurance programs then in effect. 

		        (d)   
If the Executive’s employment shall be terminated (A) by the Company other
than for Cause, Retirement, Disability or the Executive’s death or (B) by
the Executive for Good Reason, then the Executive shall be entitled to the
benefits provided below: 

		        (i)   
The Company shall pay the Executive, through the Date of Termination, the
Executive’s base salary as in effect at the time the Notice of Termination
is given and any other form or type of compensation otherwise payable for such
period; 

		        (ii)   
In lieu of any further salary payments for periods subsequent to the Date of
Termination, the Company shall pay a severance payment (the “Severance

7

Change in Control Agreement

		
Payment”) equal to two times the Executive’s Annual Compensation as
defined below. For purposes of this Section 4, Annual Compensation shall mean
the Executive’s annual salary (regardless of whether all or any portion of
such salary has been contributed to a deferred compensation plan), the average
annual Management Variable Compensation (“MVC”) earned by the
Executive during the three (3) fiscal years immediately preceding the Date of
Termination or, if less, the actual number of fiscal years the Executive has
participated in the MVC plan, and any other type or form of compensation paid to
the Executive by the Company (or any corporation (an Affiliate) affiliated with
the Company within the meaning of Section 1504 of the Internal Revenue Code of
1986 as it may be amended from time to time (the Code)) and included in the
Executive’s gross income for federal tax purposes during the 12-month
period ending immediately prior to the Date of Termination, but excluding: a)
any amount actually paid to the Executive as a cash payment of the target bonus
(regardless of whether all or any portion of such Company bonus was contributed
to a deferred compensation plan); b) compensation income recognized as a result
of the exercise of stock options or sale of the stock so acquired; and c) any
payments actually or constructively received from a plan or arrangement of
deferred compensation between Company and the Executive. All of the items
included in Annual Compensation shall be those in effect on the Date of
Termination and shall be calculated without giving effect to any reduction in
such compensation which would constitute a breach of this Agreement. The
Severance Payment shall be made in a single lump sum within 30 days after
the Date of Termination; 

		        (iii)   
For the 24-month period after the Date of Termination, the Company shall arrange
to provide, at its sole expense, the Executive with life, disability, accident
and health insurance benefits substantially similar to those which the Executive
is receiving or entitled to receive immediately prior to the Notice of
Termination. The Executive shall be responsible for the payment of his or her
portion of the premiums for such benefits, (recognizing that the Executive shall
remain responsible for payment of the same relative percentage of total premiums
as the Executive paid prior to the Date of Termination). The cost of providing
such benefits shall be in addition to (and shall not reduce) the Severance
Payment. Benefits otherwise receivable by the Executive pursuant to this
paragraph (iii) shall be reduced to the extent comparable benefits are actually
received by the Executive during such period, and any such benefits actually
received by Executive shall be reported to the Company; and 

		        (iv)   
The Company shall also pay to the Executive all legal fees and expenses incurred
by the Executive as a result of such termination (including all such 

8

Change in Control Agreement

		
fees and expenses, if any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce any right or benefit provided by
this Agreement). 

		        (e)   
The Executive shall not be required to mitigate the amount of any payment
provided for in this Section 4 by seeking other employment or otherwise, nor
shall the amount of any payment or benefit provided for in this Section 4
(except as expressly provided in Section 4(d)(iii)) be reduced by any
compensation earned by the Executive as the result of employment by another
employer or by retirement benefits after the Date of Termination, or otherwise. 

		        (f)   
The Executive shall be entitled to receive all benefits payable to the Executive
under the Company pension and welfare benefit plans or any successor of such
plan and any other plan or agreement relating to retirement benefits which shall
be in addition to, and not reduced by, any other amounts payable to the
Executive under this Section 4. 

		        (g)   
The Executive shall be entitled to exercise all rights and to receive all
benefits accruing to the Executive under any and all Company stock purchase and
stock option plans or programs, or any successor to any such plans or programs,
which shall be in addition to, and not reduced by, any other amounts payable to
the Executive under this Section 4. 

		        (h)   
The Company will indemnify the Executive (and the Executive’s legal
representative or other successors) to the fullest extent permitted (including
payment of expenses in advance of final disposition of the proceeding) by the
laws of the State of Minnesota, as in effect at the time of the subject act or
omission, or the Articles of Incorporation and By-Laws of the Company as in
effect at such time or on the date of this Agreement, whichever affords or
afforded greater protection to the Executive; and the Executive shall be
entitled to the protection of any insurance policies the Company may elect to
maintain generally for the benefit of its directors and officers, against all
costs, charges and expenses whatsoever incurred or sustained by the Executive or
the Executive’s legal representatives in connection with any action, suit
or proceeding to which the Executive (or the Executive’s legal
representative or other successors) may be made a party by reason of the
Executive’s being or having been a director, officer or employee of the
Company or any of its subsidiaries or his or her serving or having served any
other enterprise as a director, officer or employee at the request of the
Company, provided that the Company shall cause to be maintained in effect for
not less than six years from the date of a Change in Control (to the extent
available) policies of directors’ and officers’ liability insurance of
at least the same coverage as those maintained by the Company on the date of
this Agreement and containing terms and conditions which are no less
advantageous than such policies. 

9

Change in Control Agreement

        Notwithstanding
anything herein to the contrary, if the Executive’s employment is governed by a
separate written employment agreement that provides benefits upon a termination of
employment, the aggregate of any payments or benefits payable under such employment
agreement shall offset and reduce the aggregate of payments and benefits under this
Agreement. 

5.    Non-Compete and Confidentiality. 

		        (a)   
Noncompetition. Except as provided in subsection (c) below, the Executive
agrees that, as a condition of receiving benefits under this Agreement, the
Executive will not render services directly or indirectly to any competing
organization, wherever located, for a period of one year following the Date of
Termination, in connection with the design, implementation, development,
manufacture, marketing, sale, merchandising, leasing, servicing or promotion of
any “Conflicting Product” which as used herein means any product,
process, system or service of any person, firm, corporation, organization other
than the Company, in existence or under development, which is the same as or
similar to or competes with, or has a usage allied to, a product, process,
system, or service produced, developed, or used by the Company. The Executive
agrees that violation of this covenant not to compete with the Company shall
result in immediate cessation of all benefits hereunder, other than insurance
benefits, which the Executive may continue where permitted under federal and
state law at his or her own expense. 

		        (b)   
Confidentiality. The Executive further agrees and acknowledges the
Executive’s existing obligation that at all times during and subsequent to
his or her employment with MTS, the Executive will not divulge or appropriate to
the Executive’s own use or the uses of others any secret or confidential
information or knowledge pertaining to the business of MTS, or any of its
subsidiaries, obtained during his or her employment by MTS or any of its
subsidiaries. 

		        (c)   
Waiver — Unfriendly Change in Control. Notwithstanding anything
herein to the contrary: the restriction on competition under subsection (a)
shall not apply if the Executive’s employment terminates following a Change
in Control which has not been approved by a majority of the Incumbent Directors
in office immediately prior to the Change in Control (an “Unfriendly Change
in Control”). Furthermore, in such event, the Company waives any other
restriction on the Executive’s employment and consents unconditionally to
any employment the Executive may subsequently obtain. 

6.     Potential
Excise Tax.  

		        (a)   
Gross-Up Payments. In the event it shall be determined that any payment, distribution or benefit
made or provided by or on behalf of the Company to or for the benefit  

10

Change in Control Agreement

		of the Executive
(pursuant to this Agreement or contemplated hereunder) (a “Payment”), would be
subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986,
as amended (the “Code”), or any interest or penalties with respect to such
excise tax (such excise tax, together with any such interest and penalties, being,
collectively referred to as the “Excise Tax”), then the Company shall pay the
Executive in cash an additional amount (the “Gross-Up Payment”) such that,
after payment by the Executive of all taxes (including any interest or penalties imposed
with respect to such taxes), including but not limited to income taxes (and any interest
and penalties imposed with respect thereto) and the Excise Tax imposed upon the Gross-Up
Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed on the Payments. Notwithstanding the foregoing, no amount shall be paid under
this Section 6, and the amounts payable to the Executive under this Agreement shall be
reduced to the amount at which no such Excise Tax is payable, if the result of such
reduction is to place Executive in the same or a better after-tax position than would
result from making the additional payments provided under this Section.  

		        (b)    Determination
of Gross-Up Payment. Subject to sub-paragraph (c) below, all determinations required to be made under this Section 6, including whether a Gross-Up
Payment is required and the amount of the Gross-Up Payment, shall be made by the firm of
independent public accountants selected by the Company to audit its financial statements
for the year immediately preceding the Change in Control (the “Accounting Firm”)
which shall provide detailed supporting calculations to the Company and the Executive
within 30 days after the date of the Executive’s termination of employment. In the
event that the Accounting Firm is serving as accountant or auditor for the individual,
entity or group affecting the Change of Control, the Executive may appoint another
nationally recognized accounting firm to make the determinations required under this
Section 6 (which accounting firm shall then be referred to as the “Accounting Firm”).
All fees and expenses of the Accounting Firm in connection with the work it performs
pursuant to this Section 6 shall be promptly paid by the Company. Any Gross-Up Payment
shall be paid by the Company to the Executive within 5 days of the receipt of the
Accounting Firm’s determination. If the Accounting Firm determines that no Excise
Tax is payable by the Executive, it shall furnish the Executive with a written opinion
that failure to report the Excise Tax on the Executive’s applicable federal income
tax return would not result in the imposition of a penalty. Any determination by the
Accounting Firm shall be binding upon the Company and the Executive. As a result of the
uncertainty in the application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm, it is possible that Gross-Up Payments which will
not have been made by the Company should have been made (“Underpayment”). In
the event that the Company exhausts its remedies pursuant to sub-paragraph (c) below, and
the Executive is thereafter required to make a payment of Excise Tax, the Accounting Firm
shall promptly determine the amount of the Underpayment that has occurred and any such
Underpayment shall be paid by the Company to the Executive within 

11

Change in Control Agreement

		5 days after such
determination.  

		        (c)   Contest.
The Executive shall notify the Company in writing of any claim made by the Internal
Revenue Service that if successful, would require the Company to pay a Gross-Up Payment.
Such notification shall be given as soon as practicable but in no event later than ten
(10) business days in the case of an assessment and twenty (20) business days in all
other cases after the Executive knows of such claim and shall apprise the Company of the
nature of such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration of the 30-day period following
the date on which the Executive gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to the expiration of such period that it
desires to contest such claim, the Employee shall:  

	(1)  	  	give
the Company any information reasonably requested by the Company relating to such claim;  

	(2)  	  	take
such action in connection with contesting such claim as the Company shall reasonably
request in writing from time to time, without limitation, accepting legal representation
with respect to such claim by an attorney elected by the Company and reasonably
acceptable to the Executive;  

	(3)  	  	cooperate
with the Company in good faith in order to effectively contest such claim; and  

	(4)  	  	permit
the Company to participate in any proceedings relating to such claim, provided that the
Company shall bear and pay directly all costs and expenses (including interest and
penalties) incurred in connection with such contest including, upon request, advancing
Executives’ legal and administrative costs associated with such contest, and shall
indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or
income tax, including interest and penalties with respect thereto, imposed as a result of
such representation and payment of costs and expenses.  

	  	
Without
limitation on the foregoing provisions of this subparagraph (c), the Company shall
control all proceedings taken in connection with such contest. At its sole option, the
Company may pursue or forego any and all administrative appeals, proceedings, hearings
and conferences with the taxing authority in respect of such claim and may either direct
the Executive to pay the tax claimed and sue for a refund or contest the claim in any
permissible manner. The Executive agrees to prosecute such contest to a determination
before any  

12

Change in Control Agreement

	  	
administrative
tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine, provided that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Executive with respect to which
such contested amount is claimed to be due is limited solely to such contested amount.
The Company’s control of the contest shall be limited to issues with respect to
which a Gross-Up Payment would be payable hereunder, and the Executive shall be entitled
to settle or contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority. Furthermore, the Company agrees to hold in
confidence and not to disclose, without the Executive’s prior written consent, any
information with regard to Executive’s tax position which the Company obtains
pursuant to this Section 6.  

		        (d)   
Suit for Refund. If the Company directs the Executive to pay any claim
and sue for a refund, the Company shall advance the amount of such payment to
the Executive, on an interest-free basis. If the Executive becomes entitled to
receive any refund with respect to such claim, the Executive shall promptly pay
to the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If a determination is made
that the Executive shall not be entitled to any refund with respect to such
claim and the Company does not notify the Executive in writing of its intent to
contest such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid. 

        7.   Funding
of Payments. In order to assure the performance of the Company or its successor of
its obligations under this Agreement, the Company may deposit in a so-called “rabbi” trust
an amount equal to the maximum payment that will be due the Executive under the terms
hereof; provided, however, that the Company shall deposit in trust the amount equal to
the maximum payment due Executive immediately upon an Unfriendly Change in Control. Under
such written trust instrument, the trustee shall be instructed to pay to the Executive
(or the Executive’s legal representative, as the case may be) the amount to which
the Executive shall be entitled under the terms hereof, and the balance, if any, of the
trust not so paid or reserved for payment shall be repaid to the Company. If the Company
deposits funds in trust, payment shall be made no later than the occurrence of the Change
in Control. The written instrument governing the trust shall be irrevocable from and
after such Change in Control and shall contain such provisions protective of the
Executive as are contained in similar trust agreements approved by the Internal Revenue
Service in published private letter rulings (provided that the assets of the trust shall
be reachable by creditors of the Company as required by such rulings). The trustee shall
be a national bank selected by the Company with the consent of the Executive, with trust
powers and whose principal officers are located in the Minneapolis/St. Paul metropolitan
area. The trustee shall invest the assets of the trust in any readily marketable
securities of U.S. corporations (other than the Company, its successor, or any affiliate
of  

13

Change in Control Agreement

the Company or its successor). If
and to the extent there are not amounts in trust sufficient to pay Executive under this
Agreement, the Company shall remain liable for any and all payments due to Executive.  

        8.   
Successors; Binding Agreement. 

        (a)   
The Company will require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to 51% or more of the business and/or assets
of the Company to expressly assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to perform
it if no such succession had taken place. Failure of the Company to obtain such
assumption and agreement prior to the effectiveness of any such succession shall
be a breach of this Agreement and shall entitle the Executive to the
compensation and benefits from the Company in the same amount and on the same
terms as the Executive would be entitled hereunder if the Executive terminated
his or her employment for Good Reason following a Change in Control, except that
for purposes of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of Termination. 

        (b)   
This Agreement shall inure to the benefit of and be enforceable by the
Executive’s personal or legal representatives, successors, heirs, and
designated beneficiaries. If the Executive should die while any amount would
still be payable to the Executive hereunder if the Executive had continued to
live, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the Executive’s designated
beneficiaries, or, if there is no such designated beneficiary, to the
Executive’s estate. 

        9.   
Notice. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed to the last known residence address of the Executive or in the case of
the Company, to its principal office to the attention of each of the then
directors of the Company with a copy to its Secretary, or to such other address
as either party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective only upon
receipt. 

        10.   
Miscellaneous. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by the parties. No waiver by either party hereto at any time of any
breach by the other party to this Agreement of, or compliance with, any
condition or provision of this Agreement to be performed by such other-party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or similar time. No agreements or representations, oral
or otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not

14

Change in Control Agreement

expressly set forth in this
Agreement. The validity, interpretation, construction and performance of this Agreement
shall be governed by the laws of the State of Minnesota.  

        11.   
Validity. The invalidity or unenforceability or any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect. 

        IN
WITNESS WHEREOF, the undersigned officer, on behalf of MTS Systems Corporation, and the
Executive have hereunto set their hands as of the date first above written. 

MTS SYSTEMS CORPORATION

By 

   Its          Chairman and CEO

EXECUTIVE:

Douglas E. Marinaro 

15

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