AGREEMENT
EXHIBIT 10.3
AGREEMENT
THIS AGREEMENT (the “Agreement”) is made and entered into this 19th day of October, 2006 (the “Effective Date”), by and between EMPLOYERS MUTUAL CASUALTY COMPANY (“EMCC”), an Iowa mutual insurance company, and XXXXXXX X. XXXXXX (“Xxxxxx”), an employee of EMCC.
RECITALS:
X. Xxxxxx is employed as the Executive Vice President and Chief Operating Officer of EMCC and, during the course of his employment, has been granted options to purchase shares of common stock (the “Common Stock”) of EMC Insurance Group Inc. (“Group”) pursuant to the terms of the 1993 Employers Mutual Casualty Company Incentive Stock Option Plan and the 2003 Employers Mutual Casualty Company Incentive Stock Option Plan (collectively, the “Plan”).
B. In order to qualify as incentive stock options under the Internal Revenue Code, the Plan includes certain restrictions that in effect limit the number of options that may be granted to a participant during any given year.
C. EMCC has determined that options in excess of the limits contained in the Plan were issued to Xxxxxx during several years and, consequently, that such options were not issued in accordance with the terms of the Plan.
D. A grant of additional options was authorized for Xxxxxx as part of his compensation arrangement for 2006, which grant was significantly larger than the option grants received by him in past years in recognition of his planned retirement within the next five years and the desire to have his options vest and become exercisable prior to such retirement. Such options were, however, never issued as a result of a determination by EMCC that they would exceed the limits contained in the Plan.
E. EMCC has now determined that it is appropriate to request the surrender of the excess options granted to Xxxxxx and to compensate Xxxxxx for the fair value of those options and to provide for an alternative incentive compensation arrangement in lieu of the options that were authorized for issuance in 2006 but never issued.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants contained herein, EMCC and Xxxxxx do hereby agree as follows:
1. Status of Excess Options. EMCC and Xxxxxx acknowledge that a total of 6,218 options in excess of the limits contained in the Plan have been issued to Xxxxxx (the “Excess Options”) and that none of such Excess Options have been exercised. Xxxxxx currently holds the Excess Options and has agreed to surrender the same to EMCC in exchange for the payment to be made hereunder.
2. Surrender of Excess Options. Xxxxxx hereby surrenders the Excess Options to EMCC and acknowledges that he shall have no further right, title or interest in and to the Excess Options from and after the Effective Date and that the Excess Options may no longer be exercised by him for his benefit. Xxxxxx further acknowledges that the payment to be made to him hereunder shall be in full and final settlement for his surrender of the Excess Options.
3. Representation Concerning Ownership. Xxxxxx hereby represents and warrants to EMCC that he is the registered and beneficial owner of the Excess Options and that the Excess Options are not subject to any lien, pledge, security interest or other encumbrance.
4. 2006 Option Grant. EMCC and Xxxxxx acknowledge that a grant of 37,500 options was authorized for Xxxxxx as part of his 2006 compensation arrangement, but that such options were never issued as a result of the limitations contained in the Plan (the “2006 Option Grant”). Xxxxxx acknowledges that he has no right, title or interest in and to the 2006 Option Grant and that any claim he may have to additional compensation resulting from the non-issuance of the 2006 Option Grant shall be released and settled in full in exchange for the stock appreciation rights arrangement to be established for his benefit in accordance with Section 5(b) hereof.
5. Payment of Fair Value. EMCC acknowledges that the Excess Options and the 2006 Option Grant were authorized as part of the compensation arrangement approved for Xxxxxx by the Senior Executive Compensation and Stock Option Committee of the Board of Directors of EMCC (and, in addition, by the Compensation Committee of the Board of Directors of Group with respect to the Excess Options granted in 2005 and the 2006 Option Grant) and, accordingly, that the Excess Options and 2006 Option Grant were intended to provide Xxxxxx with incentive compensation for his services as an executive officer of EMCC. EMCC further acknowledges that it is therefore appropriate to compensate Xxxxxx for the fair value of the Excess Options being surrendered pursuant to the terms of this Agreement and to provide for an alternative incentive compensation arrangement in lieu of the 2006 Option Grant never received by Xxxxxx, as follows:
(a) Excess Options. As compensation for the Excess Options surrendered by Xxxxxx hereunder, EMCC shall pay Xxxxxx an amount equal to the estimated “bargain element” that would have been received by him had he retained and later exercised the Excess Options, with the bargain element being equal to the difference between the designated exercise price of each Excess Option and the greater of: (i) the average of the high and low market prices for the Common Stock reported as of the close of trading on the Effective Date (the “Market Price”); and (ii) the sum of: (a) the low market price of the Common Stock during the 12-month period ending on the Effective Date; and (b) 75% of the difference between the high and low market prices of the Common Stock during such 12-month period (the “Calculated Price”); provided, however, that: (i) in the event the Effective Date shall fall within any black-out period in which Xxxxxx is restricted from trading in the Common Stock, then the Market Price shall be determined by reference to the average of the high and low market prices for the Common Stock reported as of the close of trading on the last trading day prior to the commencement of such black-out period, and the Calculated Price shall be determined by reference to the
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12-month period ending on that same trading day; and (ii) any high and low market prices for the Common Stock occurring during any black-out periods shall be disregarded for purposes of determining the Calculated Price.
(b) 2006 Option Grant. In lieu of the 2006 Option Grant, EMCC shall establish for Xxxxxx’x benefit a stock appreciation rights arrangement that will provide him with the opportunity to achieve the same approximate levels of incentive compensation, based on the performance of the Common Stock, that would have been possible had he received the 2006 Option Grant. The terms and conditions of the arrangement have been incorporated into a Stock Appreciation Rights Agreement (the “SAR Agreement”). The SAR Agreement will be executed by EMCC and Xxxxxx on the Effective Date.
6. Tax Gross-Up Payment. The payment to be made to Xxxxxx pursuant to Section 5(a) hereof shall be increased by a tax “gross-up” payment to take into account: (i) the differential between the combined federal and state tax rate applicable to such payment (which will be considered ordinary income for federal and state income tax purposes) and the combined federal and state tax rate applicable to long-term capital gains that would have been recognized had Xxxxxx retained and later exercised the Excess Options and sold the Common Stock received upon exercise after holding such Common Stock for a period of more than one year; (ii) FICA/Medicare taxes payable on the amounts paid under Section 5(a) hereof; and (iii) an additional gross-up payment to take into account the federal and state income taxes owing on the “gross-up” payment itself.
7. Calculation of Payment Amounts and Payment. EMCC shall calculate the amount owing to Xxxxxx pursuant to the terms of this Agreement and provide Xxxxxx with a copy of such calculations for his review prior to payment. Payment of all amounts owing to Xxxxxx hereunder shall be made in immediately available funds no later than three business days after the Effective Date.
8. EMCC Benefit Plans. EMCC and Xxxxxx acknowledge and agree that the payment received by Xxxxxx hereunder shall not be eligible for deferral under any of EMCC’s non-qualified plans or trigger contributions on his behalf under any of EMCC’s employee or executive benefit plans. Similarly, the payment received by Xxxxxx hereunder will also not be taken into account in calculating any benefits accruing to Xxxxxx under any EMCC employee or executive benefit plan.
9. Public Disclosure. Xxxxxx acknowledges that the terms of this Agreement must be publicly disclosed by Group through filings with the Securities and Exchange Commission ("SEC") and that a copy of this Agreement and the SAR Agreement must also be filed with the SEC.
10. Further Assurances. Xxxxxx shall, from time to time, after the Effective Date, at the request of EMCC, and without any further consideration, execute and deliver such other instruments as EMCC may reasonably request to more effectively assign, transfer and surrender the Excess Options to EMCC.
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11. Successors and Assigns. All the terms and provisions of this Agreement shall be binding upon, and shall inure to the benefit of, and shall be enforceable by, the parties hereto, their heirs, beneficiaries, representatives, successors and assigns.
12. Entire Agreement. This Agreement contains all the terms, conditions and representations agreed upon by the parties relating to the subject matter of this Agreement and supersedes all prior agreements and understandings between the parties with respect to the subject matter hereof. This Agreement may be amended only by written instrument duly executed by the parties hereto.
13. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Iowa.
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the Effective Date.
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EMPLOYERS MUTUAL CASUALTY COMPANY |
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By: |
/s/ Xxxxxxx X. Xxxxxxxx |
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Name: |
XXXXXXX X. XXXXXXXX |
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Title: |
Vice President and General Counsel |
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/s/ Xxxxxxx X. Xxxxxx |
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XXXXXXX X. XXXXXX |
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