Employment Agreement - Kmart Corp. and Charles C. Conaway


                                    AMENDMENT
                                       TO
                              EMPLOYMENT AGREEMENT


                  This FIRST AMENDMENT TO THE EMPLOYMENT AGREEMENT, made and
entered into by and between KMART CORPORATION, a Michigan corporation (together
with its successors and assigns permitted under this Agreement, the "Company"),
and CHARLES C. CONAWAY (the "Executive") effective as of the 15th day of May
2001.

                  WHEREAS, the Executive has entered into an employment
agreement with the Company, dated as of May 30, 2000 (the "Employment
Agreement"), pursuant to which the Executive serves the Company as its Chief
Executive Officer and Chairman.

                  WHEREAS, the Company has determined that it is appropriate and
in the best interests of the shareholders of the Company to provide the
Executive with additional incentive compensation opportunities based on the
achievement by the Company of certain pre-established performance goals;

                  WHEREAS, the Employment Agreement may be amended by the
written agreement of the parties; and

                  WHEREAS, the Company and the Executive now wish to amend the
Employment Agreement to reflect the additional incentive compensation
opportunities.

                  NOW, THEREFORE, in consideration of the premises and the
mutual agreements hereinafter contained, the parties do hereby amend the
Employment Agreement as follows, effective as of the date hereof:

         1. A new item (iv) shall be added at the end of Section 6(b) of the
Employment Agreement to read as follows:

                  "(iv) Performance Option Grant. On May 15, 2001 (the "Grant
Date"), the Committee granted to the Executive a 10-year option to purchase an
aggregate of 2,500,000 shares of Stock (the "Performance Option"). The exercise
price per share of the Performance Option shall be equal to $10.15 per share,
the fair market value of the Stock on the Grant Date. The Performance Option
shall be divided into three tranches, with each tranche being subject to the
performance requirements described below:

                  (1) The performance requirement with respect to the first
tranche, covering 1,250,000 shares of Stock under the Performance Option, shall
be based upon the Company's achieving a target level of earnings per share to be
established by the Committee in consultation with the Executive within 6 months
of the Grant Date, which target must be attained by the Company for any four
consecutive fiscal quarters of the Company ending on or before January 31, 2004;

                  (2) The performance requirement with respect to the second
tranche, covering 750,000 shares of Stock under the Performance Option, shall be
based upon the Company's achieving the "Inventory Turnover" target established
and administered by the Committee for purposes of the Company's Long-Term ELT
Performance Share Plan for the performance period ending as of January 31, 2004;
and

                  (3) The performance requirement with respect to the third
tranche, covering 500,000 shares of Stock under the Performance Option, shall be
based upon the Company's achieving the "Customer Super Service Index" target
established and administered by the Committee for purposes of the Company's
Long-Term ELT Performance Share Plan for the performance period ending as of
January 31, 2004.

In the event of any merger, reorganization, consolidation, recapitalization,
stock dividend, stock split, reverse stock split, spin-off or similar
transaction or other change in corporate structure affecting the calculation of
earnings per share, or any other performance objective established hereunder,
such adjustments and other substitutions shall be made to the performance
requirements established hereunder as the Committee in its sole discretion deems
equitable or appropriate.




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Any tranche of the Performance Option for which the applicable performance
requirement shall have been satisfied shall become vested and exercisable in
three equal installments, each relating to one third of the number of shares
covered by such tranche, on each of January 31, 2004, 2005 and 2006, provided
the Executive remains employed by the Company on the applicable vesting date.
Notwithstanding the failure to satisfy the requirements set forth in the
preceding sentence:

         (a) In the case of a termination of employment that occurs on or prior
to January 30, 2004, all tranches of the Performance Option shall also become
vested and exercisable if, under the circumstances of the Executive's
termination of employment or if there is a Change in Control, any other options
then held by him become vested and exercisable, or would have become vested and
exercisable if such options were not then already vested and exercisable, in
accordance with the provisions of Section 11 hereof (an "Acceleration Event");
and

         (b) In the case of an Acceleration Event that occurs after January 30,
2004 and prior to January 31, 2006, any tranche of the Performance Option as to
which the applicable performance requirement has been satisfied as of January
31, 2004 shall also become vested and exercisable.

All tranches of the Performance Option for which the applicable performance
requirement shall not have been satisfied as of January 31, 2004 shall
nevertheless become vested and exercisable on the ninth (9th) anniversary of the
Grant Date, provided the Executive remains employed by the Company on such date
(notwithstanding the provisions of Section 11 hereof, which shall not apply
after January 31, 2004 to accelerate the vesting of any particular tranche of
the Performance Option to the extent the performance conditions relating to such
tranche were not satisfied as of January 31, 2004, except in the circumstances
set forth in Section 11(e)). Notwithstanding anything to the contrary in this
Section 6(b) or in the 1997 Plan, if the Executive violates the provisions of
Section 12 hereof, the Performance Option shall immediately terminate."

As soon as practicable following the date hereof, the Company and the Executive
will enter into a stock option agreement with terms and conditions consistent in
all respects with the provisions of this Section 6(b)(iv) and this Employment
Agreement and otherwise substantially the same as nonqualified stock options
granted under the of the Company's 1997 Long-Term Equity Compensation Plan, as
amended (the "1997 Plan"). Such option shall be issued either under the terms of
the 1997 Plan or outside the terms of the 1997 Plan, in which case the Company
will take all necessary actions to file, on or before the first anniversary of
the Grant Date, and to keep effective, a registration statement on Form S-8
covering the sale of Stock by the Company pursuant to the exercise of the
Performance Option.

         2. A new subsection (c) shall be added at the end of Section 6 of the
Employment Agreement to read as follows:

                  "(c) Executive Loan. As soon as practicable following the
effective date hereof, the Company will provide the Executive a loan in the
principal amount of $5,000,000 (the "Loan") that shall be due and payable on
February 1, 2006 and that shall bear interest at the minimum rate necessary on
the date the loan is extended to avoid imputation of tax under Section 7872 of
the Internal Revenue Code of 1986, as amended. The Company and the Executive
will enter into a full recourse, unsecured promissory note with respect to the
Loan, with customary terms and conditions consistent in all respects with the
provisions of this Section 6(c). Interest on the Loan accruing during the term
of the Loan shall be compounded annually and shall be deferred until January 31,
2006.

The outstanding principal and accrued interest under the Loan shall
automatically and without further action on the part of the Company or the
Executive be forgiven in full by the Company, provided the Executive remains
employed by the Company through January 31, 2006. All principal and accrued
interest on the Loan shall also be forgiven, without further action on the part
of the Company or the Executive, upon the earlier to occur of the following
prior to February 1, 2006: (i) the Company's delivery to the Executive of a
notice of non-extension pursuant to Section 2, hereof, or (ii) the Executive's
termination of employment from the Company under any circumstance that results
in acceleration of vesting prior to the scheduled vesting date of any stock
options then held by the Executive pursuant to the provisions of Section 11
hereof (the applicable event being a "Loan Forgiveness Event").

In the event of Executive's termination of employment prior to January 31, 2006
under circumstances not constituting a Loan Forgiveness Event, unpaid principal
and accrued interest under the Loan shall be repayable in full upon such
termination in accordance with the terms of the promissory note and any cash
compensation then owed to the Executive by the Company may be offset against any
amounts then owed by



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the Executive to the Company with respect to the Loan; provided, however, that
in the event there is any dispute between the Company and the Executive as to
whether the underlying circumstances of termination constitute a Loan
Forgiveness Event, no offset shall be applied by the Company until such dispute
has been finally resolved in accordance with the provisions of Section 26
hereof.

The Executive shall be solely responsible for his personal tax liability arising
as a result of the Loan and any forgiveness of principal or interest under the
Loan. Notwithstanding the foregoing, in the event that the Internal Revenue
Service determines at any time that principal or interest under the Loan should
be taken into account as taxable income by the Executive at the time it is
entered into, any resulting tax, including any resulting state and local taxes
(collectively "Associated Taxes"), and any related interest and penalties, will
be either paid by the Company or advanced to the Executive, at his election,
when due. In addition, the Company shall make additional payments to the
Executive to hold him harmless from: (i) any tax liabilities attributable to its
payment of any related interest and penalties (but not of the Associated Taxes),
and (ii) any imputed income associated with interest-free component of the
Executive's repayment obligation referred to in the next succeeding paragraph
(the "Hold Harmless Payments").

Should the Company wish to contest, together with the Hold Harmless Payments the
accelerated inclusion of such income, then the Executive shall reasonably
cooperate with the Company as to such contest, and the Associated Taxes, and any
amounts due with respect to related interest and penalties, may be paid by the
Company or, at his election advanced to the Executive, at such later time as is
agreed to by the Executive, together with the Hold Harmless Payments. Any such
Associated Taxes shall be repaid by the Executive to the Company (without
interest), either at the time the Loan is otherwise repayable by the Executive,
or at the time such loan is forgiven in accordance with this Section 6(c),
whichever is applicable. Any such Hold Harmless Payments shall be the sole
responsibility of the Company."

         3. Defined Terms used herein and not otherwise defined in this
Amendment shall have the same meaning as when used under the Employment
Agreement.

         4. Except as amended and modified hereby, the terms of the Employment
Agreement shall remain in full force and effect.


                  IN WITNESS WHEREOF, the parties hereto have entered into the
First Amendment to Employment Agreement as of the day and year first written
above.

                         EXECUTIVE



                         /s/ Charles C. Conaway
                         ---------------------------------------------
                         Charles C. Conaway



                         KMART CORPORATION



                         /s/ Robert D. Kennedy
                         ---------------------------------------------
                         By: Robert D. Kennedy
                         Title: Chairman, Compensation and Incentives Committee