Document:

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                                                                   Exhibit 10.11

                                     1998
                                     ----

                               Prudential Annual
                               -----------------
                                Incentive Plan
                                --------------

                                  August 1998

The Compensation Committee may, in its sole discretion, at any time and from
time to time amend, modify, suspend, or terminate this Plan, in whole or in
part, without notice to or the consent of any Participant or employee.
<PAGE>

                Table of Contents
                -----------------

 . I.      Program Concept
 . II.     Eligbility
 . III.    Creation of Bonus Pools
 . IV.     Adjusting a Bonus Pool
 . V.      Bonus Allocation
 . VI.     Payment of Bonus
 . VII.    Termination of Employment
 . VIII.   Plan Administration
 . IX.     Plan Amendment and Termination
 . X.      No Contract of Employment
 . XI.     Successors
 . XII.    Taxes

<PAGE>

I.   Program Concept
--------------------

The Prudential Annual Incentive Plan effective as of January 1, 1998, was
developed to recognize and reward contributions that the Participants make
towards The Prudential Insurance Company of America's ("Prudential" or "the
Company") annual objectives. The design, based on the "bonus pool" concept, is
intended to provide greater flexibility to deliver market competitive
compensation that also recognizes Company, Business Group, and individual
performance.

The annual incentive award or bonus is one of the four elements of Total
Compensation applicable to Executives in Prudential. The other elements are Base
Salary, Long Term Incentive Award, and Benefits/Perquisites. Each element is
designed to serve a specific purpose. Together, the four elements are intended
to provide Total Compensation that is externally competitive given satisfactory
performance.

II.  Eligibility
----------------

Employees at the Department Vice President or equivalent level and above are
eligible to participate in this Plan ("Participants").

III. Creation of Bonus Pools
----------------------------

A number of bonus pools are to be created to provide annual incentive awards for
Participants covered by each bonus pool. The amount allocated to each bonus pool
is based on the number of people included in the pool, competitive market
requirements and the performance of the business or group as described below.

For 1998, the following bonus pools are to be created:

 .  A CEO pool. The direct reports of the CEO will be paid from this pool.
 .  A Business Group pool for each designated Business Group. The annual
   incentive awards for all Participants working in a Business Group including
   corporate functional staff assigned to the business will be paid from that
   pool.
 .  A Corporate Function pool for each designated Corporate Center Function. The
   annual incentive awards for all Participants in the Corporate Center Function
   will be paid from that pool.

The aggregate of the "par" or target bonus of all Participants in the pool at
the end of the performance period will be used initially to establish the target
size of the bonus pool. Adjustments will be made where the "par" amounts are not
in keeping with market practice. Over time, the "par" amounts will be replaced
by market driven factors.

                                       3
<PAGE>

IV. Adjusting a Bonus Pool
--------------------------

At the beginning of each calendar year, annual performance contracts are to be
established for the Company, for each Business Group and for each Corporate
Center Function having a separate bonus pool. The amount of the target bonus
pool will be adjusted at the end of the calendar year based on the actual
performance of the Company, the Business Group, or the Corporate Center Function
against these performance contracts. The Company's performance will be focused
primarily on financial results achieved versus pre-established targets. The
performance for the Business Groups will be measured against several
"performance drivers." The performance of Corporate Center Functions will be
measured against performance objectives established for the year.

The results achieved are to be assessed on a scale ranging from 0 to 2.0 and
assigned a score called a Performance Factor ("PF").

For the CEO bonus pool, the target bonus pool amount is to be multiplied twice
by the PF to arrive at the adjusted bonus pool amount.

For each Business Group bonus pool, 25% of the bonus opportunity is to be
adjusted according to the Company's PF and the remaining 75% adjusted according
to the PF for the individual Business Group. The target bonus pool amount is to
be multiplied by the resulting weighted PF twice to arrive at the adjusted bonus
pool amount.

For each Corporate Center Function bonus pool, the target bonus pool amount is
to be multiplied once by an adjusted Company PF to arrive at the adjusted bonus
pool amount. The adjusted Company PF is the square of the Company PF adjusted by
up to plus or minus 0.2 based on the Corporate Center Function's performance
versus the performance objectives for the year.

The following is an illustration of how a Business Group's target bonus pool
amount is impacted by results achieved. For the purpose of this illustration,
assume that the Business Group's target bonus pool is $7 million, the Company PF
is 1.10 and the Business Group's PF is 1.20.

      Company weighting of 25% X PF of 1.10 =               0.275
      Business Group weighting of 75% X PF of 1.20 =        0.900
                                                            -----
      Weighted PF =                                         1.175
      Weighted PF squared                                 X 1.175
                                                          -------
      Resulting PF =                                  1.380
      Target Bonus Pool                                   X $7 million
                                                          ------------
      Adjusted Bonus Pool =                              $9.66 million
                                                         =============

                                       4
<PAGE>

To illustrate the operation of the use of the adjusted PF for a Corporate Center
Function, assuming a target bonus pool of $1.0 million, a Company PF of 1.10 and
an adjustment factor of +0.1, the adjusted pool amount would be as follows:

      Square of 1.10 Company PF (1.1 x 1.1) =            1.21
      Adjustment                                        +0.10
                                                         ----
      Resulting Adjusted PF =                            1.31
      Target Bonus Pool                                X $1 million
                                                       ------------
      Adjusted Bonus Pool =                           $1.31 million
                                                      =============

V. Bonus Allocation
-------------------

The allocation or payment of bonus awards to Participants from the adjusted
bonus pool will be based on the following:

      . The size of the bonus pool achieved
      . The Participant's performance
      . Value of the Participant's contribution
      . Market value of the Participant's position

In the case of functional employees working in a Business Group, the amounts to
be allocated are to be arrived at jointly between the head of the Business Group
and the head of the Corporate Center Function.

VI. Payment of Bonus
--------------------

Payment under this Plan is normally made within the first quarter of the year
following the performance to those Participants actively employed by Prudential
at the time of payment. Payments made under this Plan will be included as
Earnings under The Prudential Retirement Plan Document (a component of The
Prudential Merged Retirement Plan) for the year in which the payment was earned
(i.e., the calendar year preceding the year in which the payment was made).
These payments will also be included in determining benefits under the long-term
disability coverages provided under the Company's Group Insurance Plan. These
payments will not be taken into account in determining benefits or contribution
amounts under any other employee benefit plan of the Company of any of its
affiliates.

VII. Termination of Employment
------------------------------

If employment is terminated prior to the payment of the bonus award, the bonus
award shall be canceled and forfeited and no amount will be payable. If a
Participant retires, dies, qualifies for Long-Term Disability, or is
involuntarily terminated from employment for reasons other than failure of job
performance or cause (as determined by the Compensation Committee), the
Compensation Committee may, in its discretion, provide the participant with a
bonus award.

                                       5
<PAGE>

VIII. Plan Administration
-------------------------

The Compensation Committee shall be the administrator of the Plan. The
Compensation Committee may assign all or some of its duties hereunder to
Corporate Compensation or to an officer or other employee of the Company. The
Compensation Committee shall administer the Plan in accordance with its terms
and shall have the discretion and authority necessary in the administration of
the Plan, including the authority to interpret the Plan, to make factual
determinations under the Plan, to determine Plan payments, and to determine
Bonus Pool targets and adjustments. The Compensation Committee shall have the
discretion and authority to adopt and revise rules and procedures relating to
the Plan, to correct any defect or omission or reconcile any inconsistency in
this Plan or any payment hereunder, and to make any other determinations that it
believes necessary or advisable in the administration of the Plan.
Determinations and decisions by the Compensation Committee shall be final and
binding on all employees, Participants and all other persons.

IX. Plan Amendment and Termination
----------------------------------

The Compensation Committee may, in its sole discretion, at any time and from
time to time amend, modify, suspend, or terminate this Plan, in whole or in
part, without notice to or the consent of any Participant or employee. This Plan
may be amended or terminated by resolution of the Compensation Committee and by
execution of a written instrument by a duly authorized officer of the Company.

X. No Contract of Employment
----------------------------

The establishment of this Plan, and amendment or modification to the Plan, or
any payment of a bonus award under the Plan shall not be deemed to constitute a
contract of employment between Prudential and any Participant, nor shall it
constitute a right to remain in the employ of Prudential. Employment with
Prudential is employment-at-will and either Prudential or a Participant may
terminate the Participant's employment with Prudential at any time, for any
reason, with or without cause or notice.

XI. Successors
--------------

All obligations of the Company under the Plan shall be binding upon and inure to
the benefit of any successor to the Company, whether the existence of such
successor is the result of a direct or indirect purchase, merger, consolidation,
demutualization or otherwise.

XII. Taxes
----------

The Company shall have the right to deduct from all payments under the Plan any
federal, state, or local taxes required by law to be withheld with respect to
such payments.

                                       6<PAGE>

                                                                   Exhibit 10.12

                          PRUDENTIAL FINANCIAL, INC.

                               STOCK OPTION PLAN

                                   ARTICLE I
                                    PURPOSE
                                    -------

     The purpose of the "Prudential Financial, Inc. Stock Option Plan" (the
"Plan") is to foster and promote the long-term financial success of Prudential
Financial, Inc. (the "Company") and materially increase shareholder value by (a)
                                                                              -
motivating superior employee performance by means of performance-related
incentives, (b) encouraging and providing for the acquisition of an ownership
             -
interest in the Company by the Company's and its Subsidiaries' (as hereinafter
defined) employees and agents, and (c) enabling the Company to attract and
                                    -
retain the services of outstanding employees upon whose judgment, interest, and
special effort the successful conduct of its operations is largely dependent.

                                  ARTICLE II
                                  DEFINITIONS
                                  -----------

     2.1  Definitions.  Whenever used herein, the following terms shall have the
          -----------
respective meanings set forth below:

          Alternative Awards.  "Alternative Awards" shall have the meaning set
          ------------------
     forth in Section 7.2.

          Approved Retirement.  "Approved Retirement" means termination of a
          -------------------
     Participant's employment (i) on or after the normal retirement date or any
                               -
     early retirement date established under any defined benefit pension plan
     maintained by the Company or a Subsidiary and in which the Participant
     participates or (ii) with the approval of the Committee (which may be given
                      --
     at or after grant), on or after attaining age 50 and completing such period
     of service as the Committee shall determine from time to time.

          Associates Grant.  "Associates Grant" shall have the meaning set forth
          -----------------
     in Section 3.3(c).

          Board.  "Board" means the Board of Directors of the Company.
          -----

          Cause.  "Cause" means the following (as determined by the Committee in
          -----
     its sole discretion):  dishonesty, fraud or misrepresentation; inability to
     obtain or retain appropriate licenses; violation of any rule or regulation
     of any regulatory agency or self-regulatory agency; violation of any policy
     or rule of the Company
<PAGE>

     or any Subsidiary; commission of a crime; or any act or omission
     detrimental to the conduct of the business of the Company or any
     Subsidiary.

          Change of Control.  A "Change of Control" shall be deemed to have
          -----------------
     occurred if:

               (i)   any Person (as defined below) acquires "beneficial
          ownership" (within the meaning of Rule 13d-3 under the Exchange Act),
          directly or indirectly, of securities of the Company representing 25%
          or more of the combined Voting Power (as defined below) of the
          Company's securities; or

               (ii)  within any 24-month period, the Incumbent Directors (as
          defined below) shall cease to constitute at least a majority of the
          Board or the board of directors of any successor to the Company;
          provided, however, that any director elected to the Board, or
          --------  -------
          nominated for election, by a majority of the Incumbent Directors then
          still in office shall be deemed to be an Incumbent Director for
          purposes of this sub clause (ii); or

               (iii) upon the consummation of a Corporate Event (as defined
          below), and immediately following the consummation of which the
          stockholders of the Company immediately prior to such Corporate Event
          do not hold, directly or indirectly, a majority of the Voting Power of
          (x) in the case of a merger or consolidation, the surviving or
           -
          resulting corporation, (y) in the case of a share exchange, the
                                  -
          acquiring corporation or (z) in the case of a division or a sale or
                                    -
          other disposition of assets, each surviving, resulting or acquiring
          corporation which, immediately following the relevant Corporate Event,
          holds more than 25% of the consolidated assets of the Company
          immediately prior to such Corporate Event.

     Notwithstanding the foregoing, a Change of Control shall not be deemed to
     have occurred merely as a result of (i) a reorganization involving the
                                          -
     Company in connection with which the Converted Insurer (as defined below)
     converts from a mutual life insurance company to a stock company whose
     shareholder is the Company; (ii) the Company becoming a direct or indirect
                                  --
     subsidiary of a mutual Parent whose members are primarily persons who were
     policyholders of the Converted Insurer immediately prior to such
     transaction or (iii) an underwritten offering of the equity securities of
                     ---
     the Company where no Person (including any group (within the meaning of
     Rule 13d-5(b) under the Exchange Act)) acquires more than 25% of the
     beneficial ownership interests in such securities.

                                       2
<PAGE>

          Change of Control Price.  "Change of Control Price" means the highest
          -----------------------
     price per share of Common Stock offered in conjunction with any transaction
     resulting in a Change of Control (as determined in good faith by the
     Committee if any part of the offered price is payable other than in cash)
     or, in the case of a Change of Control occurring solely by reason of a
     change in the composition of the Board, the highest Fair Market Value of
     the Common Stock on any of the 30 trading days immediately preceding the
     date on which a Change of Control occurs.

          Code.  "Code" means the Internal Revenue Code of 1986, as amended,
          ----
     including, for these purposes, any regulations promulgated by the Internal
     Revenue Service with respect to the provisions of the Code.

          Committee.  "Committee" means the Compensation Committee of the Board
          ---------
     or such other committee of the Board as the Board shall designate from time
     to time, which committee shall consist of two or more members, each of whom
     shall be a "Non-Employee Director" within the meaning of Rule 16b-3, as
     promulgated under the Exchange Act, and an "outside director" within the
     meaning of section 162(m) of the Code.

          Common Stock.  "Common Stock" means the common stock of the Company,
          ------------
     par value $0.01 per share.

          Company.  "Company" means Prudential Financial, Inc., a New Jersey
          -------
     corporation, and any successor thereto.

          Converted Insurer.  "Converted Insurer" means The Prudential Insurance
          -----------------
     Company of America, an affiliate of the Company.

          Corporate Event.  "Corporate Event" means a merger, consolidation,
          ---------------
     share exchange, division, sale or other disposition of all or substantially
     all of the assets of the Company, which has been approved by the
     shareholders of the Company

          Disability.  "Disability" means with respect to any Participant, long-
          ----------
     term disability (but not optional long-term disability coverage) as defined
     under the welfare benefit plan maintained by either the Company or a
     Subsidiary and in which the Participant participates and from which the
     Participant is receiving a long-term disability benefit.  In jurisdictions
     outside of the United States where long-term disability is covered by a
     mandatory or universal program sponsored by the government or an industrial
     association, receipt of long-term disability benefit from such a program is
     considered to have met the disability definition of the Plan.

                                       3
<PAGE>

          Domestic Partner.  "Domestic Partner" means any person qualifying to
          ----------------
     be treated as a domestic partner of a Participant under the applicable
     policies, if any, of the Company or Subsidiary which employs the
     Participant.

          Employee.  "Employee" means any employee (including each officer) of,
          --------
     or insurance agent (whether or not a common law employee or a statutory
     employee) of, the Company or any Subsidiary.

          Exchange Act.  "Exchange Act" means the Securities Exchange Act of
          ------------
     1934, as amended.

          Fair Market Value.  "Fair Market Value" means, on any date, the price
          -----------------
     of the last trade, regular way, in the Common Stock on such date on the New
     York Stock Exchange or, if at the relevant time, the Common Stock is not
     listed to trade on the New York Stock Exchange, on such other recognized
     quotation system on which the trading prices of the Common Stock are then
     quoted (the "Applicable Exchange").  In the event that (i) there are no
                                                             -
     Common Stock transactions on the Applicable Exchange on any relevant date,
     Fair Market Value for such date shall mean the closing price on the
     immediately preceding date on which Common Stock transactions were so
     reported and (ii) the Applicable Exchange adopts a trading policy
                   --
     permitting trades after 5 P.M. Eastern Standard Time ("EST"), Fair Market
     Value shall mean the last trade, regular way, reported on or before 5 P.M.
     EST (or such earlier or later time as the Committee may establish from time
     to time).  Finally, and notwithstanding the foregoing, to the extent any
     Option or SAR granted under the Plan is granted on or as of the effective
     date of any initial public offering of the Common Stock ("IPO"), the Fair
     Market Value for these purposes means the IPO price of such Common Stock.

          Family Member.  "Family Member" means, as to a Participant, any (i)
          -------------                                                    -
     child, stepchild, grandchild, parent, stepparent, grandparent, spouse,
     sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law,
     brother-in-law, sister-in-law (including adoptive relationships), or
     Domestic Partner of such Participant, (ii) trusts for the exclusive benefit
                                            --
     of one or more such persons and/or the Participant and (iii) other entity
                                                             ---
     owned solely by one or more such persons and/or the Participant.

          Incumbent Directors. "Incumbent Directors" means, with respect to any
          -------------------
     period of time specified under the Plan for purposes of determining a
     Change of Control, the persons who were members of the Board at the
     beginning of such period.

                                       4
<PAGE>

         Option (including ISOs and Nonstatutory Stock Options).  "Option"
          ------------------------------------------------------
     means the right to purchase Common Stock at a stated price for a specified
     period of time. For purposes of the Plan, an Option may be either (i) an
                                                                        -
     "Incentive Stock Option" ("ISO") within the meaning of Section 422 of the
     Code or (ii)
              --
     an option which is not an Incentive Stock Option (a "Nonstatutory Stock
     Option").

          Participant.  "Participant" means any Employee designated by the
          -----------
     affirmative action of the Committee (or its delegate) to participate in the
     Plan.

          Person.  "Person" means any person (within the meaning of Section
          ------
     3(a)(9) of the Exchange Act), including any group (within the meaning of
     Rule 13d-5(b) under the Exchange Act)), but excluding any of the Company,
     any Subsidiary or any employee benefit plan sponsored or maintained by the
     Company or any Subsidiary.

          SAR.  "SAR" means a stock appreciation right granted under Section 6
          ---
     in respect of one or more shares of Common Stock that entitles the holder
     thereof to receive, in cash or Common Stock, at the discretion of the
     Committee (which discretion may be exercised at or after grant, including
     after exercise of the SAR), an amount per share of Common Stock equal to
     the excess, if any, of the Fair Market Value on the date the SAR is
     exercised over the Fair Market Value on the date the SAR is granted.

          Settlement Payment.  "Settlement Payment" shall have the meaning set
          ------------------
     forth in Section 7.1.

          Subsidiary.  "Subsidiary" means any corporation or partnership in
          ----------
     which the Company owns, directly or indirectly, more than 50% of the total
     combined voting power of all classes of stock of such corporation or of the
     capital interest or profits interest of such partnership.

          Total Allocable Shares.  "Total Allocable Shares" means, as defined in
          ----------------------
     The Prudential Insurance Company of America Plan of Reorganization dated as
     of December 15, 2000, the number of "Allocable Shares" (the notional shares
     of Common Stock allocable among "Eligible Policyholders" under the
     Reorganization of The Prudential Insurance Company of America from a mutual
     insurance company to a stock insurance company, divided among the following
     forms of consideration: (a) Common Stock actually issued to such Eligible
     Policyholders, as well as (b) cash and "policy credits" issued to Eligible
     Policyholders under the terms of the Plan of Reorganization).

                                       5
<PAGE>

     2.2  Gender and Number.  Except when otherwise indicated by the context,
          -----------------
words in the masculine gender used in the Plan shall include the feminine
gender, the singular shall include the plural, and the plural shall include the
singular.

                                  ARTICLE III
                            POWERS OF THE COMMITTEE
                           ------------------------

     3.1  Power to Grant.  The Committee shall determine those Employees to whom
          --------------
Options or SARs shall be granted and the terms and conditions of any and all
such Options or SARs.  The Committee may establish different terms and
conditions for different Participants and for the same Participant for each
Option or SAR such Participant may receive, whether or not granted at different
times.

     3.2  Administration.
          --------------

          (a) Rules, Interpretations and Determinations.  The Committee shall
              -----------------------------------------
     administer the Plan.  The Committee shall have full authority to interpret
     and administer the Plan, to establish, amend, and rescind rules and
     regulations relating to the Plan, to provide for conditions deemed
     necessary or advisable to protect the interests of the Company, to construe
     the respective Option and/or SAR agreements and to make all other
     determinations necessary or advisable for the administration and
     interpretation of the Plan in order to carry out its provisions and
     purposes.  Determinations, interpretations, or other actions made or taken
     by the Committee shall be final, binding, and conclusive for all purposes
     and upon all persons.

          (b) Agents and Expenses.  The Committee may appoint agents (who may be
              -------------------
     officers or employees of the Company) to assist in the administration of
     the Plan and may grant authority to such persons to execute agreements or
     other documents on its behalf.  All expenses incurred in the administration
     of the Plan, including, without limitation, for the engagement of any
     counsel, consultant or agent, shall be paid by the Company.

          (c) Delegation of Authority.  The Committee may delegate to the
              -----------------------
     Company's Chief Executive Officer the power and authority to make and/or
     administer awards under the Plan with respect to individuals who are below
     the position of Senior Vice President (or analogous title), pursuant to
     such conditions and limitations as the Committee may establish; provided
                                                                     --------
     that only the Committee or the Board may select, and grant Options and/or
     SARs to, Participants who are subject to Section 16 of the Exchange Act or
     exercise any other discretionary authority under the Plan in respect of
     Options or SARs granted to such Participants.

                                       6
<PAGE>

     3.3  Certain Rules Relating to Grants.
          --------------------------------

          (a) Maximum Individual Grants.  During any five (5) year period, no
              -------------------------
     individual Participant may be granted Options or SARs to acquire more than
     5% of the total shares available under the Plan; provided that, to the
                                                      -------- ----
     extent that SARs are granted in tandem with an Option, so that only one may
     be exercised with the other terminating upon such exercise, the number of
     shares of Common Stock subject to such tandem Option and SAR award shall
     only be taken into account once (and not as to both awards) for purposes of
     this limit.

          (b) Repricing or Substitution of Options.  The Committee shall not
              ------------------------------------
     have the right to reprice outstanding Options or SARs or to grant new
     Options or SARs under the Plan in substitution for or upon the cancellation
     of Options or SARs previously granted.

          (c) Broad Based Grants.  Notwithstanding anything else to the contrary
              ------------------
     contained herein, the Committee may authorize the grant of Nonstatutory
     Stock Options to a broad based group of Employees, including all Employees
     or all Employees other than such class or classes of Employees as the
     Committee shall determine ("Associates Grants").  Unless the Committee
     shall otherwise determine, any such Associates Grant shall be made on terms
     and conditions that are substantially the same for all Employees (or all
     Employees in a specified classification of Employees) receiving such grant.

                                  ARTICLE IV
                         COMMON STOCK SUBJECT TO PLAN
                         ----------------------------

     4.1  Number.  Subject to the provisions of Section 4.3, the number of
          ------
shares of Common Stock issuable under the Plan in its entirety shall not exceed
seven percent (7%) of the Company's Total Allocable Shares in the aggregate.  Of
that percentage, two percent (2%) of the Company's Total Allocable Shares are
reserved for any Associates Grants under the Plan, with the remaining five
percent (5%) available for the general grant of Options and SARs under the Plan.
The number of shares of Common Stock reflecting these percentages will be set
forth in Exhibit A to the Plan once such numbers are capable of calculation.
The number of shares of Common Stock issuable under the Plan described above is
reduced by the number of shares of Common Stock, if any, subject to outstanding
options granted to, or that were subject to options that have been exercised by,
(i) any individual who is (or was, at the time of the grant of such options) a
member of the Board and not an Employee or (ii) an individual or entity whose
rights in respect of such options derived from such a member of the Board.  When
a SAR is granted in tandem with an Option, so that only one may be exercised
with the other terminating upon such exercise, the number of shares of Common
Stock subject to the

                                       7
<PAGE>

tandem Option and SAR award shall only be taken into account once (and not as to
both awards) for purposes of this limit (and for purposes of the provisions of
Section 4.2. The shares to be delivered under the Plan may consist, in whole or
in part, of treasury Common Stock or authorized but unissued Common Stock, not
reserved for any other purpose.

     4.2  Canceled or Terminated Options or SARs.  Any shares of Common Stock
          --------------------------------------
subject to an Option or SAR which for any reason expires without having been
exercised, is canceled or terminated or otherwise is settled without the
issuance of any Common Stock (including, but not limited to, shares tendered to
exercise outstanding Options or shares tendered or withheld for taxes) shall
again be available for grants of Options or SARs under the Plan.
Notwithstanding the foregoing, in the event that any SARs are exercised for cash
or shares of Common Stock, the number of shares of Common Stock as to which such
SARs have been exercised (and not just the number of shares actually issued)
shall be deemed issued for purposes of determining the limit under Section 4.1
and shall not again be available for issuance pursuant to this Section 4.2.

     4.3  Adjustment in Capitalization.  In the event of any Common Stock
          ----------------------------
dividend or Common Stock split, recapitalization (including, but not limited, to
the payment of an extraordinary dividend), merger, consolidation, combination,
spin-off, distribution of assets to stockholders (other than ordinary cash
dividends), exchange of shares, or other similar corporate change, the aggregate
number of shares of Common Stock available for Options or SARs under Section 4.1
or subject to outstanding Options or SARs and the respective exercise prices or
base prices applicable to outstanding Options or SARs may be appropriately
adjusted by the Committee, in its discretion, and the Committee's determination
shall be conclusive.

                                   ARTICLE V
                                 STOCK OPTIONS
                                 -------------

     5.1  Grant of Options.  Subject to the provisions of Section 4.1, Options
          ----------------
may be granted to Participants at such time or times as shall be determined by
the Committee.  Options granted under the Plan may be of two types:  (i) ISOs
                                                                      -
and (ii) Nonstatutory Stock Options.  Except as otherwise provided herein, the
     --
Committee shall have complete discretion in determining the number of Options,
if any, to be granted to a Participant, except that ISOs may only be granted to
Employees who are common law employees of the Company or one of its majority
owned subsidiaries (within the meaning of Section 424 of the Code).  Each Option
grant shall be evidenced by an Option agreement that shall specify the type of
Option granted, the exercise price, the duration of the Option, the number of
shares of Common Stock to which the Option pertains, and such other terms and
conditions as the Committee shall determine which are not inconsistent with the
provisions of the Plan.

                                       8
<PAGE>

     5.2  Exercise Price.  Nonstatutory Stock Options and ISOs granted pursuant
          --------------
to the Plan shall have an exercise price no less than the Fair Market Value of a
share of Common Stock on the date the Option is granted.

     5.3  Exercise of Options. Unless the Committee shall impose a different
          -------------------
schedule requiring a longer or shorter period of service to exercise in full any
Option granted hereunder, one-third of each Nonstatutory Stock Option or ISO
granted pursuant to the Plan shall become exercisable on each of the first three
anniversaries of the date such Option is granted; provided that the Committee
                                                  --------
may establish performance-based criteria for exercisability that can accelerate
the exercisability of all or any portion of any Option. Subject to the
provisions of this Article V, once any portion of any Option has become
exercisable it shall remain exercisable for its full term. The Committee shall
determine the term of each Nonstatutory Stock Option or ISO granted, but, except
as expressly provided below, in no event shall any such Option be exercisable
for more than 10 years after the date on which it is granted.

     5.4  Payment. The Committee shall establish procedures governing the
          -------
exercise of Options. No shares shall be delivered pursuant to any exercise of an
Option unless arrangements satisfactory to the Committee have been made to
assure full payment of the exercise price therefor. Without limiting the
generality of the foregoing, payment of the exercise price may be made: (a) in
                                                                         -
cash or its equivalent (b) by exchanging shares of Common Stock (which are not
                        -
the subject of any pledge or other security interest) which have been owned by
the person exercising the Option for at least six (6) months at the time of
exercise; (c) through an arrangement with a broker approved by the Company
           -
whereby payment of the exercise price is accomplished with the proceeds of the
sale of Common Stock; or (iv) by any combination of the foregoing; provided that
                          --                                       --------
the combined value of all cash and cash equivalents paid and the Fair Market
Value of any such Common Stock so tendered to the Company, valued as of the date
of such tender, is at least equal to such exercise price. The Company may not
make a loan to a Participant to facilitate such Participant's exercise of any of
his or her Options.

     5.5  ISOs. Notwithstanding anything in the Plan to the contrary, no Option
          ----
that is intended to be an ISO may be granted after the tenth anniversary of the
effective date of the Plan and no term of this Plan relating to ISOs shall be
interpreted, amended or altered, nor shall any discretion or authority granted
under the Plan be so exercised, so as to disqualify the Plan under Section 422
of the Code, or, without the consent of any Participant affected thereby, to
disqualify any ISO under such Section 422.

     5.6  Termination of Employment.
          -------------------------

          (a)  Due to Death. In the event a Participant's employment terminates
               ------------
     by reason of death, any Options granted to such Participant shall become

                                       9
<PAGE>

     immediately exercisable in full and may be exercised by the Participant's
     estate or as may otherwise be provided for in accordance with the
     requirements of Section 9.2, at any time prior to the later of (i) the
                                                                     -
     first anniversary of the Participant's death or (ii) the earlier to occur
                                                      --
     of (A) the expiration of the term of the Options or (B) the third
         -                                                -
     anniversary (or such earlier date as the Committee shall determine at the
     time of grant) of the Participant's death.

          (b)  Due to Disability. In the event a Participant's employment is
               -----------------
     terminated by his or her employer by reason of Disability, any Options
     granted to such Participant shall become immediately exercisable in full
     and may be exercised by the Participant (or, in the event of the
     Participant's death after termination of employment when the Option is
     exercisable pursuant to its terms, by the Participant's designated
     beneficiary, and if none is named, by the person determined in accordance
     with the requirements of Section 9.2), at any time prior to the expiration
     date of the term of the Options or within three (3) years (or such shorter
     period as the Committee shall determine at the time of grant) following the
     Participant's termination of employment, whichever period is shorter.

          (c)  Due to Approved Retirement. In the event a Participant's
               --------------------------
     employment terminates by reason of Approved Retirement, any Options granted
     to such Participant which are then outstanding shall become immediately
     exercisable in full and may be exercised by the Participant (or, in the
     event of the Participant's death after termination of employment when the
     Option is exercisable pursuant to its terms, by the Participant's estate or
     as otherwise may be provided for in accordance with Section 9.2), at any
     time prior to the expiration date of the term of the Options or within five
     (5) years (or such shorter period as the Committee shall determine at the
     time of grant) following the Participant's Approved Retirement, whichever
     period is shorter.

          (d)  Termination of Employment For Cause or Resignation. In the event
               --------------------------------------------------
     a Participant's employment is terminated by the Company or any Subsidiary
     for Cause or by the Participant other than due to his death, Disability,
     Approved Retirement or within 12 months of a Change of Control, any Options
     granted to such Participant that are then not yet exercised shall expire at
     the time of such termination and not be exercisable thereafter.

          (e)  Termination of Employment for Any Other Reason. Unless otherwise
               ----------------------------------------------
     determined by the Committee at or following the time of grant, in the event
     the employment of the Participant shall terminate for any reason other than
     one described in Section 5.6 (a) through (d), any Options granted to such

                                       10
<PAGE>

     Participant which are exercisable at the date of the Participant's
     termination of employment may be exercised by the Participant (or, in the
     event of the Participant's death after termination of employment when the
     Option is exercisable pursuant to its terms, by the Participant's estate or
     as may otherwise be provided for in accordance with the requirements of
     Section 9.2) at any time prior to the expiration of the term of the Options
     or the ninetieth day following the Participant's termination of employment,
     whichever period is shorter, and any Options that are not exercisable at
     the time of termination of employment shall expire at the time of such
     termination and not be exercisable thereafter.

     5.7  Restrictive Covenants and Other Conditions. Without limiting the
          ------------------------------------------
generality of the foregoing, the Committee may condition the grant of any Option
under the Plan upon the Employee to whom such Option would be granted agreeing
in writing to certain conditions in addition to the provisions regarding
exercisability of the Option (such as restrictions on the ability to transfer
the underlying shares of Common Stock) or covenants in favor of the Company
and/or one or more Subsidiaries (including, without limitation, covenants not to
compete, not to solicit employees and customers and not to disclose confidential
information, that may have effect following the termination of the Employee's
employment with the Company and its Subsidiaries and after the Option has been
exercised, including, without limitation, the requirement that the Employee
disgorge any profit, gain or other benefit received in respect of the exercise
of the Option prior to any breach of any such covenant by the Employee).
Notwithstanding the foregoing, no Associates Grant shall contain any such
restrictions or covenants.

                                  ARTICLE VI
                       STOCK APPRECIATION RIGHTS (SARs)
                       --------------------------------

     6.1  Grant of SARs. SARs may be granted to any Participants, all
          -------------
Participants or any class of Participants at such time or times as shall be
determined by the Committee. SARs may be granted in tandem with an Option, or
may granted on a freestanding basis, not related to any Option. A grant of a SAR
shall be evidenced in writing, whether as part of the agreement governing the
terms of the Option, if any, to which such SARs relate or pursuant to a separate
written agreement with respect to freestanding SARs, in each case containing
such provisions not inconsistent with the Plan as the Committee shall approve.

     6.2  Terms and Conditions of SARs. Notwithstanding the provisions of
          ----------------------------
Section 6.1, unless the Committee shall otherwise determine the terms and
conditions (including, without limitation, the exercise period of the SAR, the
vesting schedule applicable thereto and the impact of any termination of service
on the Participant's rights with respect to the SAR) applicable with respect to
(i) SARs granted in tandem with an
 -

                                       11
<PAGE>

Option shall be substantially identical (to the extent possible taking into
account the differences related to the character of the SAR) to the terms and
conditions applicable to the tandem Options and (ii) freestanding SARs shall be
                                                 --
substantially identical (to the extent possible taking into account the
differences related to the character of the SAR) to the terms and conditions
that would have been applicable under Section 5 were the grant of the SARs a
grant of an Option.

     6.3  Exercise of Tandem SARs. SARs which are granted in tandem with an
          -----------------------
Option may only be exercised upon the surrender of the right to exercise such
Option for an equivalent number of shares and may be exercised only with respect
to the shares of Stock for which the related Option is then exercisable.

     6.4  Payment of SAR Amount. Upon exercise of a SAR, the holder shall be
          ---------------------
entitled to receive payment, in cash, in shares of Common Stock or in a
combination thereof, as determined by the Committee, of an amount determined by
multiplying:

          (a)  the excess, if any, of the Fair Market Value of a share of Stock
     at the date of exercise over the Fair Market Value of a share of Common
     Stock on the date of grant, by

          (b)  the number of shares of Common Stock with respect to which the
     SARs are then being exercised;

provided, however, that at the time of grant, the Committee may establish, in
-----------------
its sole discretion, a maximum amount per share which will be payable upon
exercise of a SAR.

                                  ARTICLE VII
                               CHANGE OF CONTROL
                               -----------------

     7.1  Accelerated Vesting and Payment. Subject to the provisions of Section
          -------------------------------
7.2, in the event of a Change of Control each Option and SAR then outstanding
shall be fully exercisable regardless of the exercise schedule otherwise
applicable to such Option and/or SAR and, in connection with such a Change of
Control, the Committee may, in its discretion, provide that each Option and/or
SAR shall, upon the occurrence of such Change of Control, be canceled in
exchange for a payment per share (the "Settlement Payment") in an amount equal
to the excess, if any, of the Change of Control Price over the exercise price
for such Option or the base price of such SAR. Such Settlement Payment shall be
in the form of cash, unless the transaction which constitutes the Change of
Control is intended to qualify for treatment as a "Pooling of Interests" under
APB No. 16 (or any successor thereto), in which case such Settlement Payment
shall be in registered stock of the same class as is otherwise provided to the
shareholders of the Company.

                                       12
<PAGE>

     7.2  Alternative Awards. Notwithstanding Section 7.1, no cancellation,
          ------------------
acceleration of exercisability, vesting, cash settlement or other payment shall
occur with respect to any Option or SAR if the Committee reasonably determines
in good faith prior to the occurrence of a Change of Control that such Option or
SAR shall be honored or assumed, or new rights substituted therefore (such
honored, assumed or substituted award hereinafter called an "Alternative
Award"), by a Participant's employer (or the parent or an affiliate of such
employer) immediately following the Change of Control; provided that any such
                                                       --------
Alternative Award must:

          (a)  be based on stock which is traded on an established securities
     market;

          (b)  provide such Participant with rights and entitlements
     substantially equivalent to or better than the rights, terms and conditions
     applicable under such Option or SAR, including, but not limited to, an
     identical or better exercise or vesting schedule and identical or better
     timing and methods of payment;

          (c)  have substantially equivalent economic value to such Option or
     SAR (determined at the time of the Change in Control); and

          (d)  have terms and conditions which provide that in the event that
     the Participant's employment is involuntarily terminated for any reason
     (including, but not limited to a termination due to death, Disability or
     for Cause) or constructively terminated (as described below), all of such
     Participant's Options and/or SARs shall be deemed immediately and fully
     exercisable and shall be settled for a payment per each share of stock
     subject to the Alternative Award in cash, in immediately transferable,
     publicly traded securities or in a combination thereof, in an amount equal
     to the excess of the Fair Market Value of such stock on the date of the
     Participant's termination over the corresponding exercise or base price per
     share.

For this purpose, a "constructive termination" shall mean a termination of
employment by a Participant following a material reduction in the Participant's
base salary or a Participant's incentive compensation opportunity, in either
case without the Participant's written consent.

     7.3  Accounting Issues. In applying the provisions of this Article VII to
          -----------------
a Pooling of Interests, the provisions related to business combinations under
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of APB Opinion No. 25" (including any
interpretations and modifications thereof) shall be taken into account.

                                       13
<PAGE>

                                 ARTICLE VIII
               AMENDMENT, MODIFICATION, AND TERMINATION OF PLAN
               ------------------------------------------------

     8.1  General. The Board may, at any time and from time to time amend,
          -------
modify, suspend, or terminate this Plan, in whole or in part, without notice to
or the consent of any participant or employee; provided, however, that any
                                               --------  -------
amendment which would (i) increase the number of shares available for issuance
                       -
under the Plan or (ii) lower the minimum exercise price at which an Option (or
                   --
the base price at which a SAR) may be granted shall be subject to the approval
of the Company's shareholders. No amendment, modification, or termination of the
Plan shall in any manner adversely affect any Option or SAR theretofore granted
under the Plan, without the consent of the Participant.

     8.2  Non-U.S. Employees. With respect to any Subsidiary of the Company
          ------------------
which employs Participants who reside outside of the United States, the
Committee may in its sole discretion amend or vary the terms of this Plan in
order to conform such terms with the requirements of local law to meet the
objectives and purpose of this Plan, and the Committee may, where appropriate,
establish one or more sub-plans to reflect such amended or varied provisions.

                                  ARTICLE IX
                           MISCELLANEOUS PROVISIONS
                           ------------------------

          9.1  Transferability of Options or SARs. No Options or SARs granted
               ----------------------------------
under the Plan may be sold, transferred, pledged, assigned, or otherwise
alienated or hypothecated, other than by will or by the laws of descent and
distribution; provided that the Committee may, in the Option agreement or
              --------
otherwise, permit transfers of Nonstatutory Stock Options with or without tandem
SARs and freestanding SARs to Family Members (including, without limitation,
transfers effected by a domestic relations order).

     9.2  Treatment of Any Outstanding Rights or Features Upon Participant's
          ------------------------------------------------------------------
Death. Any Options, SARs, rights or features remaining unexercised or unpaid at
-----
the Participant's death shall be paid to, or exercised by, the Participant's
estate except where otherwise provided by law, or when done in accordance with
other methods (including a beneficiary designation process) put in place by the
Committee or a duly appointed designee from time to time. Except as otherwise
provided herein, nothing in this Plan is intended or may be construed to give
any person other than Participants any options, rights or remedies under this
Plan.

                                       14
<PAGE>

     9.3  Deferral of Payment. The Committee may, in the Option agreement or
          -------------------
otherwise, permit a Participant to elect, upon such terms and conditions as the
Committee may establish, to defer receipt of shares of Common Stock that would
otherwise be issued upon exercise of a Nonstatutory Stock Option with or without
tandem SARs or freestanding SARs. Notwithstanding anything else contained herein
to the contrary, deferrals shall not be permitted hereunder in a way which will
result in the Company or any Subsidiary being required to recognize a financial
accounting charge due to such deferral which is substantially greater than the
charge, if any, that was associated with the underlying Options or SARs.

     9.4  No Guarantee of Employment or Participation. The terms or existence
          -------------------------------------------
of this Plan, as in effect at any time or from time to time, or any grant of
Options or SARs under the Plan, shall not interfere with or limit in any way the
right of the Company or any Subsidiary to terminate any Participant's employment
at any time, nor confer upon any Participant any right to continue in the employ
of the Company or any Subsidiary or any other affiliate of the Company. Except
to the extent expressly selected by the Committee to be a Participant, no person
(whether or not an Employee or a Participant) shall at anytime have a right to
be selected for (or additional) participation in the Plan, despite having
previously participated in an incentive or bonus plan of the Company or an
affiliate. The existence of the Plan shall not be deemed to constitute a
contract of employment between the Company or any affiliate and any Employee or
Participant, nor shall it constitute a right to remain in the employ of the
Company or any affiliate.

     9.5  Tax Withholding. The Company, Subsidiary or an affiliate shall have
          ---------------
the right to deduct from all payments or distributions hereunder any federal,
state, or local taxes or other obligations required by law to be withheld with
respect thereto. The Company may defer issuance of Common Stock upon the
exercise of an Option or a SAR until such requirements are satisfied. The
Committee may, in its discretion, permit a Participant to elect, subject to such
conditions as the Committee shall impose, (a) to have shares of Common Stock
                                           -
otherwise issuable under the Plan withheld by the Company or (b) to deliver to
                                                              -
the Company previously acquired shares of Common Stock, in either case for the
greatest number of whole shares having a Fair Market Value on the date
immediately preceding the date of exercise not in excess of the minimum amount
required to satisfy the statutory withholding tax obligations upon the
corresponding exercise of an Option or a SAR settled in Common Stock.

     9.6  No Limitation on Compensation; Scope of Liabilities. Nothing in the
          ---------------------------------------------------
Plan shall be construed to limit the right of the Company to establish other
plans if and to the extent permitted by applicable law. The liability of the
Company, Subsidiary or any affiliate under this Plan is limited to the
obligations expressly set forth in the Plan, and no term or provision of this
Plan may be construed to impose any further or additional

                                       15
<PAGE>

duties, obligations, or costs on the Company or any affiliate thereof or the
Committee not expressly set forth in the Plan.

     9.7  Requirements of Law. The granting of Options or SARs and the issuance
          -------------------
of shares of Common Stock shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.

     9.8  Term of Plan. The Plan shall be effective upon its adoption by the
          ------------
Board and approval by the New Jersey Commissioner of Banking and Insurance. The
Plan shall continue in effect, unless sooner terminated pursuant to Article
VIII, until no more shares are available for issuance under the Plan.

     9.9   Governing Law. The Plan, and all agreements hereunder, shall be
           -------------
construed in accordance with and governed by the laws of the State of New
Jersey, without regard to principles of conflict of laws.

     9.10  No Impact On Benefits. Except as may otherwise be specifically
           ---------------------
stated under any employee benefit plan, policy or program, Options and SARs
shall not be treated as compensation for purposes of calculating an Employee's
right under any such plan, policy or program.

     9.11  No Constraint on Corporate Action. Except as provided in Article
           ---------------------------------
VIII, nothing contained in this Plan shall be construed to prevent the Company,
or any affiliate, from taking any corporate action (including, but not limited
to, the Company's right or power to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure, or to merge or
consolidate, or dissolve, liquidate, sell, or transfer all or any part of its
business or assets) which is deemed by it to be appropriate, or in its best
interest, whether or not such action would have an adverse effect on this Plan,
or any awards made under this Plan. No employee, beneficiary, or other person,
shall have any claim against the Company, any Subsidiary, or any of its
affiliates, as a result of any such action.

     9.12  Captions. The headings and captions appearing herein are inserted
           --------
only as a matter of convenience. They do not define, limit, construe, or
describe the scope or intent of the provisions of the Plan.

                                       16

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