EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of the 28th day of January 1997, by and between The Ryland Group, Inc., a Maryland corporation (the 'Company'), and R. Chad Dreier (the 'Executive'). In consideration of the mutual covenants and agreements of the parties set forth in this Agreement, and other good and valuable consideration the receipt and sufficiency of which are acknowledged, the parties agree as follows: 1. Replacement of Prior Employment Agreement. This Employment Agreement replaces and supercedes the Employment Agreement dated as of December 31, 1994 between the Company and the Executive which upon the effective date of this Employment Agreement is terminated and no longer effective. 2. Term of Employment. The Company agrees to employ the Executive for a period of four (4) years commencing as of January 1, 1997. This Agreement shall be automatically renewed for a one (1) year period at the end of the initial four (4) year term or at the end of each renewal period until terminated in accordance with the terms of this Agreement. Either party may terminate this Agreement at the end of the initial four (4) year term or at the end of each one (1) year renewal period by giving the other party written notice of termination delivered at least one hundred eighty (180) days prior to the end of the initial term or any renewal period. If at any time during the initial term or any renewal period, a Change of Control of the Company occurs (as defined in Section 7.2 below), the term of this Agreement shall be the longer of (a) three (3) years beyond the effective date of the Change of Control or (b) the term as provided in this Section 2. 3. Position and Responsibilities. The Executive shall serve as the Chairman of the Board of Directors, President and Chief Executive Officer of the Company. In his capacity as Chairman of the Board, President and Chief Executive Officer, the Executive shall be the Company's highest ranking executive officer and shall have full authority and responsibility for formulating and administering the plans and policies of the Company subject to the control of the Board of Directors. 4. Performance of Duties. The Executive shall devote his full time attention and energies to the Company's business and will not engage in consulting work or any business for his own account or for any person, firm or corporation. The Executive may serve as a director of other companies so long as this service does not interfere with the performance of his duties with the Company. 5. Compensation. For all services to be rendered by the Executive during the term of this Agreement, the Company shall pay and provide to the Executive: 5.1 Base Salary. The Company shall pay the Executive a Base Salary in an amount which shall be established from time to time by the Board of Directors, provided the Base Salary shall not be less than six hundred fifty-five thousand dollars ($655,000) per year. This Base Salary is paid in installments consistent with the normal payroll practices of the Company and reviewed annually to determine whether, in the judgment of the Board of Directors, it should be increased based on the performance of the Executive and any other factors deemed appropriate. 5.2 Annual Bonus. The Executive is eligible to receive an annual cash bonus (the 'Bonus') in respect of each fiscal year during the term of this Agreement equal to one percent (1.0%) of the Ordinary Course Pre-Tax Income. 'Ordinary Course Pre-Tax Income' is the consolidated pre-tax income of the Company and its subsidiaries as reflected in the audited consolidated financial statements of the Company, as adjusted in good faith by the Compensation Committee to eliminate the effect of nonrecurring gains and losses and other items not reflective of the ongoing ordinary course of business and operating performance of the Company. The Bonus shall be payable to the Executive in cash within sixty (60) days after the end of each fiscal year during the term of this Agreement. 5.3 Incentive Plans. The Executive shall participate in any stock option and incentive award programs available to executive officers of the Company. This participation is on a basis which is commensurate with the Executive's position with the Company. 5.4 Other Benefits. The Executive is entitled to receive other employee benefits, such as disability, group life, sickness, accident and health insurance programs, split-dollar life insurance programs and other perquisites that are available to executive officers of the Company. This participation is on a basis which is commensurate with the Executive's position with the Company. 5.5 Stock Option (a) Grant of Option Pursuant to the terms and conditions of The Ryland Group, Inc. 1992 Equity Incentive Plan (the 'Plan), the Company grants to the Executive during the period ending at the close of business on January 28, 2007 (the 'Option Period'), the option to purchase (the 'Option') from the Company at a price of $12.75 per share up to 150,000 shares of the Company's Common Stock. THE OPTION GRANTED SHALL NOT BE TREATED AS AN 'INCENTIVE STOCK OPTION' WITHIN THE MEANING OF SECTION 422 OF THE INTERNAL REVENUE CODE OF 1986. AS AMENDED. The option is governed and controlled by all terms of the Plan. (b) Exercise of Option. The Option may be exercised in whole or in part in accordance with the following vesting schedule: The aggregate number of shares of Common Stock optioned by this Agreement shall be dividend into 3 installments. The first installment for 50,000 shares may be exercised in whole or in part beginning 1/29/98 The second installment for 50,000 shares may be exercised in whole or in part beginning 1/29/99 The third installment for 50,000 shares may be exercised in whole or in part beginning 1/29/00 In case an installment is not immediately exercisable, the Board of Directors or the Compensation Committee of the Board may in its discretion accelerate the time at which the installment may be exercised. To the extent not exercised, installments shall accumulate and be exercisable by the Executive during the Option Period. Continued accrual and vesting of installments shall cease immediately upon termination of employment for any reason whatsoever, subject to acceleration by the Board of Directors or the Compensation Committee. (c) Payment of Exercise Price. The Executive shall pay the exercise price in the following ways: (I) cash payment (by certified check, bank draft or money order payable to the order of the Company). (ii) if approved by the Company, cash payment may be made from the proceeds of an immediate sale of Common Stock receivable upon the exercise of the Option; or (iii) if approved by the Company, delivery of Common Stock (including executed stock powers attached thereto); The payment of the exercise price shall be delivered with a notice of exercise, which notice will be in a form provided by the Company. The Company shall, subject to the receipt of withholding tax, issue to the Executive the stock certificate for the number of shares of Common Stock with respect to which the Option is exercised. The value of shares of Common Stock used as payment for the exercise of an Option shall be the closing price of such shares on the New York Stock Exchange on the date of exercise of an Option or as otherwise determined by the Company, the Board of Directors or the Compensation Committee of the Board of Directors. (d) Termination The Option shall terminate upon the happening of the earliest of the following events: (i) January 28, 2007 (ii) The expiration of 90 days after the date of termination of the Executive's employment, except in the case of death, Disability (defined below) or retirement. During this period, the Executive shall have the right to exercise the Option to the extent it is exercisable on the termination date. (iii) The expiration of three (3) years after the date of death of the Executive if death occurs during the term of this Agreement. During this period, the Executive's estate, personal representative or beneficiary shall have the right to exercise the Option to the extent it is exercisable on the date of death. (iv) The expiration of three (3) years after the date the Executive's employment is terminated due to Disability or retirement. During this period, the Executive shall have the right to exercise the Option to the extent it is exercisable on the date of termination. (e) Merger, Consolidation or Share Exchange. After any merger, consolidation or share exchange in which the Company is the surviving or resulting corporation, the Executive shall be entitled, upon the exercise of an Option, to receive the number and class of shares of stock or other consideration to which the Executive would have been entitled, if, immediately prior to such merger, consolidation or share exchange, the Executive had exercised the Option in accordance with and subject to the terms of this Agreement and the Plan. If the Company is not the surviving or resulting corporation in any merger, consolidation or share exchange, the surviving or resulting corporation shall tender stock options to purchase its shares on terms and conditions that substantially preserve the rights and benefits under this Option. 5.6 Stock Units
Employment Agreement - The Ryland Group Inc. and R. Chad Dreier
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