Executive Officer Annual Incentive Bonus Plan

Exhibit 10.2

EXECUTIVE OFFICER
ANNUAL INCENTIVE BONUSPLAN

1.     Definitions.When the following terms are used herein with initial capital letters, theyshall have the following meanings:

 

1.1     BaseSalary — a specific dollar amount for each Participant as identified in Schedule A.

 

1.2     CompensationCommittee — the Management Organization and Compensation Committee of the Board ofDirectors of Graco Inc.; it is intended that the Compensation Committee will satisfy therequirements of Section 162(m) of the Code by being comprised of two or more “outsidedirectors.”

 

1.3     Code— the Internal Revenue Code of 1986, as it may be amended from time to time, and anyproposed, temporary or final Treasury Regulations promulgated thereunder.

 

1.4     Company — Graco Inc., a Minnesota corporation, and any of its affiliates that adoptthe Plan.

 

1.5     Eligible Employee — the chief executive officer and any executive officer of theCompany designated by the Compensation Committee.

 

1.6     Participant — an Eligible Employee designated by the Compensation Committee, at anytime ending on or before the 90th day of each Performance Period, as subject to the Plan.

 

1.7     Performance Period — the Company’s fiscal year.

 

1.8     Plan — this Executive Officer Annual Incentive Bonus Plan.

 

1.9     MaximumTargeted Bonus Percentage — the maximum potential bonus payout expressed as apercentage of Participant’s Base Salary as identified in Schedule B.

 

1.10    CompanyPerformance Target(s) — the financial growth target(s) established by theCompensation Committee for a Performance Period and reflected in the percentagesidentified in Schedule C. The Company Performance Target(s) shall be directly andspecifically tied to one or more of the following financial measures: consolidatedpre-tax earnings, net revenues, net earnings, operating income, earnings before interestand taxes, cash flow, return on equity, return on net assets employed or earnings pershare [hereinafter “Financial Measure(s)”]for the applicable PerformancePeriod, all as computed in accordance with generally accepted accounting principles as ineffect from time to time and as applied by the Company in the preparation of itsfinancial statements and subject to other special rules and conditions as theCompensation Committee may establish at any time ending on or before the 90th day of theapplicable Performance Period. Any Financial Measure may be stated in absolute terms oras compared to another company or companies. Such Financial Measures shall constitute thesole bases upon which the Company Performance Targets shall be based.

2.     Administration.

 

2.1     Determinationsmust be made prior to each Performance Period — At any time ending on or before the90th day of each Performance Period, the Compensation Committee shall:

 

(a)     designatethe Participants in the Plan for that Performance Period;

 

(b)     indicatethe Base Pay of each Participant for the Performance Period by amending Schedule A in writing;

 

(c)     establishTargeted Bonus Percentages for the Performance Period by amending Schedule B inwriting;

 

(d)     establishCompany Performance Target(s)s for the Performance Period by amending ScheduleC in writing.

 

2.2     Certification— Following the close of each Performance Period and prior to payment of any bonusunder the Plan, the Compensation Committee must certify in writing that the CompanyPerformance Target(s) and all other factors upon which a bonus is based have beenattained.

 

2.3     ShareholderApproval — The material terms of the Plan shall be disclosed to and approved byshareholders of the Company in accordance with Section 162(m) of the Code. No bonus shallbe paid under the Plan unless such shareholder approval has been obtained.

3.     BonusPayment

 

3.1     Maximum — Each Participant shall receive a bonus payment for each Performance Periodcalculated in accordance with the formula set forth in subparagraph 3.2 and in an amountnot greater than the Participant’s Maximum Targeted Bonus Percentage multiplied bythe Participant’s Base Salary.

 

3.2     Formula — Subject to other provisions of this Plan, each Participant shall receive abonus payment for each Performance Period calculated as follows:

 

(a)     Each of the Company Performance Targets shall be assigned a weight expressed as a percent of the Participant’s Maximum Targeted Bonus Percentage.

 

(b)     Atthe conclusion of each Performance Period, the percent of the Participant’sMaximum Targeted Bonus Percentage achieved for each applicable FinancialMeasure shall be calculated.

 

(c)     Thepercentages achieved by performing the calculation described in subparagraph3.2(b) shall be added together and this sum shall be multiplied by theParticipant’s Maximum Targeted Bonus Percentage.

 

(d)     Theamount obtained by performing the calculation described in subparagraph 3.2(c)shall be multiplied by the Participant’s Base Salary.

 

3.3     Limitations

 

(a)     Nopayment if Company Performance Targets not achieved — In no event shallany Participant receive a bonus payment hereunder if the Company PerformanceTargets and all other factors on which the bonus payment is based are notachieved during the Performance Period.

 

(b)     Nopayment in excess of preestablished amount — No Participant shall receivea payment under the Plan for any Performance Period in excess of One MillionDollars ($1,000,000).

 

(c)     Pro-rationor elimination of Bonus payment — Participation in the Plan ceases withresignation, termination, retirement, death or long-term disability. AParticipant who resigns or is terminated effective during the PerformancePeriod is ineligible for a bonus payment. A Participant who retires, dies orbecomes eligible for long-term disability benefits under the Company’slong-term disability benefit plan during the Performance Period will be paid abonus based on a calculation performed in accordance with the provisions ofsubparagraph 3.2, provided, however, the Participant’s Base Salary shallbe pro-rated to the date of retirement, death or eligibility for long-termdisability benefits.

4.     Timeand Form of Payments; Taxability — Subject to any deferred compensationelection pursuant to any such plans of the Company, a bonus payment shall bemade to the Participant in one or more cash payments as soon as determined bythe Compensation Committee after it has certified that the Company PerformanceTarget(s) and all other factors upon which the bonus payment for theParticipant is based have been achieved.

 

4.1     Nontransferability— Participants and beneficiaries shall not have the right to assign, encumber orotherwise anticipate the payments to be made under the Plan, and the benefits providedhereunder shall not be subject to seizure for payment of any debts or judgments againstany Participant or any beneficiary.

 

4.2     TaxWithholding — In order to comply with all applicable federal or state income taxlaws or regulations, the Company may take such action as it deems appropriate to ensurethat all applicable federal or state payroll, withholding, income or other taxes, whichare the sole and absolute responsibility of a Participant, are withheld or collected fromsuch Participant.

5.     Amendmentand Termination — The Compensation Committee may amend the Planprospectively at any time and for any reason deemed sufficient by it withoutnotice to any person affected by the Plan and may likewise terminate or curtailthe benefits of the Plan, both with regard to persons expecting to receivebenefits hereunder in the future and persons already receiving benefits at thetime of such action, provided that no amendment to the Plan shall be effectivewhich would increase the maximum amount payable to a Participant underparagraph 3.3(b), which would change the Financial Measures upon which CompanyPerformance Targets must be based as set forth in subparagraph 1.10 of thisPlan or which would modify the requirements for eligibility under subparagraph1.5, unless the shareholders of the Company shall have approved such change inaccordance with the requirements of Section 162(m).

6.     Miscellaneous

 

6.1     EffectiveDate — January 1, 2004

 

6.2     Termof the Plan — Unless the Plan shall have been discontinued or terminated, the Planshall terminate on December 31, 2007. No bonus shall be granted after the termination ofthe Plan; provided, however, that a payment with respect to a Performance Period whichbegins before such termination may be made thereafter. In addition, the authority of theCompensation Committee to amend the Plan shall extend beyond the termination of the Plan.

 

6.3     Headings— Headings are given to the Sections and subsections of the Plan solely as aconvenience to facilitate reference. Such headings shall not be deemed in any waymaterial or relevant to the construction or interpretation of the Plan or any provisionthereof.

 

6.4     Applicabilityto Successors — The Plan shall be binding upon and inure to the benefit of theCompany and each Participant, the successors and assigns of the Company, and thebeneficiaries, personal representatives and heirs of each Participant. If the Companybecomes a party to any merger, consolidation or reorganization, this Plan shall remain infull force and effect as an obligation of the Company or its successors in interest.

 

6.5     EmploymentRights and Other Benefit Programs — The provisions of the Plan shall not give anyParticipant any right to be retained in the employment of the Company. In the absence ofany specific agreement to the contrary, the Plan shall not affect any right of theCompany, or of any affiliate of the Company, to terminate, with or without cause, theParticipant’s employment at any time. The Plan shall not replace any contract ofemployment, whether oral or written, between the Company and any Participant, but shallbe considered a supplement thereto. The Plan is in addition to, and not in lieu of, anyother employee benefit plan or program in which any Participant may be or become eligibleto participate by reason of employment with the Company. Receipt of benefits hereundershall have such effect on contributions to and benefits under such other plans orprograms as the provisions of each such other plan or program may specify.

 

6.6     NoTrust or Fund Created — The Plan shall not create or be construed to create a trustor separate fund of any kind or a fiduciary relationship between the Company or anyaffiliate and a Participant or any other person. To the extent that any person acquires aright to receive payments from the Company or any affiliate pursuant to the Plan, suchright shall be no greater than the right of any unsecured general creditor of the Companyor of any affiliate.

 

6.7     GoverningLaw — The validity, construction and effect of the Plan or any bonus payable underthe Plan shall be determined in accordance with the laws of the State of Minnesota.

 

6.8     Severability— If any provision of the Plan is or becomes or is deemed to be invalid, illegal orunenforceable in any jurisdiction such provision shall be construed or deemed amended toconform to applicable laws, or if it cannot be so construed or deemed amended without, inthe determination of the Compensation Committee, materially altering the purpose orintent of the Plan, such provision shall be stricken as to such jurisdiction, and theremainder of the Plan shall remain in full force and effect.

 

6.9     QualifiedPerformance-Based Compensation — All of the terms and conditions of the Plan shallbe interpreted in such a fashion as to qualify all compensation paid hereunder asqualified performance-based compensation within the meaning of Section 162(m) of the Code.

SCHEDULE A

BASE SALARY FORPERFORMANCE PERIOD
BEGINNING ON                   AND ENDINGON                   

Name Base Salary
   
  Actual paid salary for the calendar year that most closely coincides with Company fiscal year but not in excess of $1,250,000

SCHEDULE B

TARGETED BONUSPERCENTAGE FOR PERFORMANCE PERIOD
BEGINNING ON                   AND ENDINGON                   

Name Minimum Targeted Bonus Percentage
as a Percentage of
Base Salary

Maximum Targeted Bonus Percentage
as a Percentage of
Base Salary

     
     
     

SCHEDULE C

COMPANY PERFORMANCETARGETS
FOR PERFORMANCE PERIOD
BEGINNING ON                   AND ENDINGON                   

Financial Measure(s) Company
Performance
Target(s)
Weight


Minimum Company
Performance Target(s)
Maximum Company
Performance Target(s)
       
         % $               $              
         % $               $