EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the 'Agreement'), made as of the 5th day of January, 1999 is entered into by Hasbro, Inc., a corporation with its principal place of business at Pawtucket, Rhode Island (the 'Company'), and Herbert M. Baum (the 'Employee'). WHEREAS, the Company desires to employ the Employee as President and Chief Operating Officer of the Company and the Employee desires to be employed by the Company as President and Chief Operating Officer; NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties agree as follows: 1. Term of Employment ------------------ The Company hereby agrees to employ the Employee, and the Employee hereby accepts employment with the Company, upon the terms set forth in this Agreement, for the period commencing on January 5, 1999 (the 'Commencement Date') and ending on January 5, 2002, unless sooner terminated in accordance with the provisions of Section 5 or extended as hereinafter provided in this Section 1 (such period, as it may be extended or terminated, the 'Employment Period'). The Employment Period may be extended not later than January 5, 2002 for an additional one year period from the then current expiration date of the Employment Period provided the Employee and the Company mutually agree in writing to extend the Employment Period. 2. Title; Capacity --------------- The Company will employ the Employee, and the Employee agrees to work for the Company, as its President and Chief Operating Officer of the Company and in such other senior executive positions with the Company and with domestic and foreign subsidiaries of the Company as the Company's Board of Directors (the 'Board') and the Chairman of the Board and Chief Executive Officer of the Company may reasonably determine from time to time. The Employee shall be based at the Company's headquarters in Pawtucket, Rhode Island and shall undertake such domestic and foreign business travel as shall be reasonably required to fulfill his duties. The Employee shall report directly to the Chairman of the Board and Chief Executive Officer of the Company. The Employee shall have authorities, duties and responsibilities commensurate with his position of President and Chief Operating Officer (including but not limited to, responsibility for all operating functions and units of the Company with all of said functions and units reporting directly or, with his consent, indirectly to him) and shall have such other authorities, duties and responsibilities commensurate with his position as the Board shall from time to time reasonably assign to him. The Employee shall devote substantially his full business time in the performance of the foregoing services, except that he may serve on the boards of directors of other businesses, trade associations and charitable organizations, engage in charitable activities and community affairs and manage his personal investments and affairs as long as these activities present no conflict of interest and do not materially interfere with the performance of his duties hereunder. The Employee agrees to abide in all material respects with the policies of the Company applicable to senior executives, officers and members of the Board and any changes therein which may be adopted from time to time by the Company with regard to conflicts of interest. 3. Member of the Board ------------------- During the Employment Period, the Company agrees that it shall recommend to the Board the election of the Employee as a Director of the Company on the Commencement Date or as soon as practical thereafter. Upon the expiration of his term as a Director during the Employment Period, the Company agrees to use its best efforts to cause him to be re-nominated for election and to recommend his election. 4. Compensation and Benefits ------------------------- 4.1 Salary ------ During the Employment Period, the Company shall pay the Employee, in weekly installments one week in arrears, an annual base salary of not less than $750,000 (the 'Base Salary'). Such Base Salary shall be considered for upward adjustment annually in accordance with the Company's salary increase guidelines based upon the Employee's achievement of individual performance goals but subject to recommendation by the Chairman and Chief Executive Officer and approval by the Compensation and Stock Option Committee of the Board (the 'Compensation Committee'). Once increased, Base Salary shall not be reduced and shall thereafter be the 'Base Salary' hereunder. 4.2 Bonus ----- During the Employment Period, the Employee shall be eligible to participate in the Company's management incentive bonus arrangement with a target bonus of not less than 45% of Base Salary. The Employee's actual bonus may be greater or less than his target bonus for such year depending upon the Company's and the Employee's actual performance during the applicable bonus year. In the event Employee's employment is terminated prior to the completion of a bonus year due to (I) his death or Disability, (ii) a termination by the Employee for 'Good Reason,' or (iii) a termination by the Company without 'Cause,' the Company will pay the Employee a pro rata bonus for such year equal to at least the bonus for such year he would have received based on assuming his individual performance was the same as that of the prior year and the actual Company performance for such year multiplied by a fraction, the numerator of which is the number of days during such bonus year that the Employee is employed by the Company, and the denominator of which is three hundred sixty-five (365). If such pro rata bonus is for 1999, the entire bonus shall be based on the actual Company performance for such year. 4.3 Stock Options ------------- (a) Subject to the approval of the Compensation Committee of the Board the Company shall grant to the Employee options (the 'Options') to purchase 175,000 shares of the Company's Common Stock (the 'Shares') on the Commencement Date, or as soon thereafter as practical, at the then-current Fair Market Value of the Company Shares as of the date of the grant under and according to the terms of the Company's Stock Incentive Performance Plan and the applicable Stock Option Agreement. During the Employment Period, Options to purchase 58,333 shares shall vest on each of the first two anniversaries of the Commencement Date and the remaining Options to purchase 58,334 shares shall vest on January 5, 2002, the last day of the initial three year Employment Period. (b) Subsequent grants of regular stock options may be made subject to the Company's standard practice and policy in making such grants, except that the Employee will not have any right to participate in the Company's premium priced stock option program. Subsequent stock option grants will be subject to not less favorable vesting and exercise provisions than those set forth in this Section 4.3. (c) Unless the termination of Employee's employment is for Cause, the Employee will have three (3) years from the date on which his employment terminates or, if earlier, until the expiration of stated term of the Options, to exercise all unexercised vested Options. (d) If the Employee's employment with the Company terminates upon or after the expiration of the initial three year Employment Period for any reason whatsoever other than Cause, provided the Employee executes a non-compete agreement in the form of Exhibit A hereto, the Options shall become fully vested on the date of termination. In the event the prior sentence does not apply and the Employee is terminated by the Company without Cause or the Employee terminates his employment with or without Good Reason either during or after the initial three year Employment Period, the Options shall continue to vest during the period which the Employee is receiving severance payment from the Company.
Employment Agreement - Hasbro Inc. and Herbert M. Baum
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