Form of Performance Share Award to Executive Officers under the 2007 Omnibus Long-Term Compensation Plan (2009 2011 Performance Period)

Section 1.  Background.  Under Article 4 of the Eastman Chemical Company 2007 Omnibus Long-Term Compensation Plan (the "Plan"), the "Committee" (as defined in the Plan), may, among other things, award shares of the $.01 par value common stock ("Common Stock") of Eastman Chemical Company (the "Company") to "Participants" (as defined in the Plan), and such awards may take the form of Performance Awards which are contingent upon the attainment of certain performance objectives during a specified period, and subject to such other terms, conditions, and restrictions as the Committee deems appropriate.  The purpose of this Performance Share Award Subplan (this "Subplan") is to set forth the terms of the award of  performance shares for the 2009-2011 Performance Period specified herein, effective as of January 1, 2009 (the "Effective Date").

Section 2.  Definitions.

(a)	The following definitions shall apply to this Subplan:

(i)	"Actual Grant Amount" means the number of shares of Common Stock to which a participant is entitled under this Subplan, calculated in accordance with Section 6 of this Subplan.

(ii)	“Award Amount” means the performance shares awarded to the Participant under this Subplan at the beginning of the Performance Period.

(iii)

"Award Payment Date" means the date the Committee approves the payout of Common Stock covered by an award under this Subplan to a Participant.

(iv)

"Comparison Group" is the group of companies within the S&P 1500 “Materials Sector” that are classified as Chemical companies.  The S&P “Materials Sector” index is an index of industrial companies selected from the S&P “Super Composite 1500” Index, identified as Global Industry Classification Standard (“GICS”) 15.

(v)	“Cost of Capital” reflects the Company's cost of debt and the cost of equity, expressed as a percentage, reflecting the percentage of interest charged on debt and the percentage of expected return on equity.

(vi)	“Earnings from Continuing Operations” shall be defined as the total sales of the Company minus the costs of all operations of any nature used to produce such sales, including taxes, plus after-tax interest associated with the Company's capital debt.

(vii)

"Maximum Deductible Amount" means the maximum amount deductible by the Company under Section 162(a), taking into consideration the limitations under Section 162(m), of the Internal Revenue Code of 1986, as amended, or any similar or successor provisions thereto.

(viii)

“Participation Date” means October 28, 2008.

(ix)	“Performance Period" means January 1, 2009 through December 31, 2011.

(x)	“Performance Year” means one of the three calendar years in the Performance Period.

(xi)

“Return on Capital” shall mean the return produced by funds invested in the Company and shall be determined as Earnings from Continuing Operations, as defined in Section 2.a.(vi), divided by the Average Capital Employed.  Average Capital Employed shall be derived by adding the Company's capital debt plus equity at the close of the last day of the year preceding the Performance Year, to the Company's capital debt plus equity at the close of the last day of the present Performance Year, with the resulting sum being divided by two.  Capital debt is defined as the sum of borrowing by the Company due within one year and long-term borrowing, as designated on the Company's balance sheet.  The resulting ratio shall be multiplied by One Hundred (100) in order to convert such to a percentage.  Such percentage shall be calculated to the third place after the decimal point (i.e., xx.xxx%), and then rounded to the second place after the decimal point (i.e., xx.xx%).

(xii)

"Target Award Range" means, with respect to any eligible Participant, the number of performance shares within the range specified on Exhibit A hereto for the Salary Grade applicable to such Participant.

(xiii)

“TSR” means total stockholder return, as reflected by the sum of (A) change in stock price (measured as the difference between (I) the average of the closing prices of a company’s common stock on the New York Stock Exchange, or of the last sale prices or closing prices of such stock on another national trading exchange, as applicable, in the period beginning on the tenth trading day preceding the beginning of the Performance Period and ending on the tenth trading day of the Performance Period and (II) the average of such closing or last sale prices for such stock in the period beginning on the tenth trading day preceding the end of the Performance Period and ending on the tenth trading day following the end of the Performance Period) plus (B) dividends declared, assuming reinvestment of dividends, and expressed as a percentage return on a stockholder’s hypothetical investment.

(b)	Any capitalized terms used but not otherwise defined in this Subplan shall have the respective meanings set forth in the Plan.

Section 3.  Administration.  This Subplan shall be administered by the Compensation and Management Development Committee of the Board of Directors.  The Committee shall have authority to interpret this Subplan, to prescribe rules and regulations relating to this Subplan, and to take any other actions it deems necessary or advisable for the administration of this Subplan, and shall retain all general authority granted to it under Article 4 of the Plan.  At the end of the Performance Period, the Committee shall approve Actual Grant Amounts awarded to participants under this Subplan.

Section 4.  Eligibility.  The Participants who are eligible to participate in this Subplan are those employees who, as of the Participation Date, are at Salary Grade 49 and 105 and above.  Employees who are promoted during the Performance Period to a position that would meet the above criteria, but who do not hold such position as of the Participation Date, are not eligible to participate in this Subplan.

Section 5.  Form of Payout of Awards.  Subject to the terms and conditions of the Plan and this Subplan, earned Awards under this Subplan shall be paid out in the form of unrestricted shares of Common Stock, except for conversions to cash and deferrals under Section 9 of this Subplan, and except that if a participant is entitled to any fraction of a share of Common Stock, as a result of Section 10 of this Subplan or otherwise, then in lieu of receiving such fraction of a share, the participant shall be paid a cash amount representing the market value of such fraction of a share at the time of payment.

Section 6.  Size of Awards.

(a)

Target Award Range.  Exhibit A hereto shows by Salary Grade the Target Award Range. The Salary Grade to be used in determining the size of any Award Amount to a participant under this Subplan shall be the Salary Grade applicable to the position held by the participant on the Participation Date. The actual size of the Award Amount to the participant shall be determined based on an assessment by his or her senior management (and, in the case of executive officers, by the Committee) of the participant’s past performance and potential for contributions to the Company’s future long term success.  Based on this assessment, the participant may receive no award, the target award amount, or any amount within the Target Award Range in increments of 10 performance shares.  Each member of senior management will have a performance share budget, based on the cumulative award targets for their reports, which must be balanced for their organizations.

(b)

Actual Grant Amount. Subject to the Committee’s authority to adjust the Actual Grant Amount described in Section 12, the Actual Grant Amount awarded to the participant at the end of the Performance Period is determined by applying a multiplier to the participant’s Award Amount.  The multiplier shall be determined by comparing Company performance relative to two measures:

(i)

The Company's TSR during the Performance Period relative to the TSRs of the companies in the Comparison Group during the Performance Period.  The Company and each company in the Comparison Group shall be ranked by TSR, in descending order, with the company having the highest TSR during the Performance Period being ranked number one.  The Comparison Group shall further be separated into quintiles (first 20%, second 20%, etc.) and the Company's position, in relation to the Comparison Group, shall be expressed as a position in the applicable quintile ranking; and

(ii)	(ii)The arithmetic average, for each of the Performance Years during the Performance Period, of the Company’s average Return on Capital minus a Return on Capital target. The Return on Capital target will be determined by the Committee.

An award multiplier table is shown in Exhibit B.  The award multiplier is based on the Company’s performance relative to its quintile ranking relative to the Comparison Group, and its average Return on Capital relative to a target during the Performance Period. The award multipliers range from 3.0 (i.e. 300%), if the Company's TSR is in the top performing quintile (top 20%) of companies in the Comparison Group, and the average Return on Capital minus the target Return on Capital is greater than 10 percentage points, to 0.0 (with no shares of Common Stock being delivered to participants under this Subplan), if the Company does not meet certain levels of performance relative to the two measures.

Section 7.  Composition of Comparison Group.   The Comparison Group is composed of companies relevant for purposes of TSR comparisons under this Subplan.  However, during the Performance Period, a company in the Comparison Group may be dropped from the Comparison Group if a company's common stock ceases to be publicly traded on a national stock exchange or market; or a company is a party to a significant merger, acquisition, or other reorganization. Under these, or similar, circumstances, the company or companies may be removed from the Comparison Group, and may be replaced with another company or companies by Standard & Poor’s, consistent with their established criteria for selection of companies for the Comparison Group.  In any case where the Comparison Group ceases to exist, or is otherwise determined to no longer be appropriate as the basis for a measure under this Subplan, the Committee may designate a replacement Comparison Group. In any such case, the Committee shall have authority to determine the appropriate method of calculating the TSR of such former and/or replacement Comparison Group, whether by complete substitution of the replacement Comparison Group (and disregard of the former Comparison Group) over the entire Performance Period or by pro rata calculations for each Comparison Group or otherwise.

Section 8.  Preconditions to Payout Under Award.

(a)	Continuous Employment.  Except as specified in paragraph (b) below, to remain eligible for payout under an Award under this Subplan, a Participant must remain continuously employed with the Company or a Subsidiary at all times from the Effective Date through the Award Payment Date.

(b)

Death, Disability, Retirement, or Termination for an Approved Reason Before the Award Payment Date.  If a Participant's employment with the Company or a Subsidiary is terminated due to death, disability, retirement, or any approved reason as determined by the Committee (in the case of an executive officer) or the executive officer responsible for Human Resources (in the case of non-executive officers)  (including reduction in force, divestiture, special separation, termination by mutual consent) prior to the Award Payment Date, the participant shall receive, subject to the terms and conditions of the Plan and this Subplan, an Award representing a prorated portion of the Actual Grant Amount to which such participant otherwise would be entitled, with the precise amount of such Award to be determined by multiplying the Actual Grant Amount by a fraction, the numerator of which is the number of full calendar months employed in the Performance Period from the Effective Date through and including the effective date of such termination, and the denominator of which is 36 (the total number of months in the Performance Period).

Section 9.  Manner and Timing of Award Payments.

(a)	Timing of Award Payment.  Except for deferrals under Section 9(c), if any Awards are payable under this Subplan, the payment of such Awards to Participants shall be made as soon as is administratively practicable after the end of the Performance Period and final approval by the Committee.

(b)

Tax Withholding.  The Company may withhold or require the grantee to remit a cash amount sufficient to satisfy federal, state, and local taxes (including the participant’s FICA obligation) required by law to be withheld.  Further, either the Company or the grantee may elect to satisfy the withholding requirement by having the Company withhold shares of Common Stock having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction.

(c)

Deferral of Award in Excess of the Maximum Deductible Amount.  If payment of the Award would, or could in the reasonable estimation of the Committee, result in the participant's receiving compensation in excess of the Maximum Deductible Amount in a given year, then such portion (or all, as applicable) of the Award as would, or could in the reasonable estimation of the Committee, cause such participant to receive compensation from the Company in excess of the Maximum Deductible Amount may, at the sole discretion of the Committee, be converted into the right to receive a cash payment, which shall be deferred until after the participant retires or otherwise terminates employment with the Company and its Subsidiaries, provided that such deferral is compliant with the requirements of Internal Revenue Code Section 409A and Treasury Regulations and guidance thereunder.

(d)

Award Deferral to the EDCP.  In the event that all or any portion of an Award is converted into a right to receive a cash payment pursuant to Section 9(c) (except as otherwise provided in this Section with respect to Participants who are subject to Section 16(a) of the 1934 Act),  an amount representing the Fair Market Value, as of the date the shares of Common Stock covered by the Award otherwise would be issued to the participant, of the Actual Grant Amount (or the deferred portion thereof) will be credited to the Stock Account of the Executive Deferred Compensation Plan (the “EDCP”), and hypothetically invested in units of Common Stock. Notwithstanding the foregoing, for each Participant who is subject to Section 16(a) of the 1934 Act. the deferrable amount, when initially credited to the participant's EDCP Account, shall be held in a participant's Interest Account until the next date that dividends are paid on Common Stock, and on such date the deferrable amount that would have been initially credited to the participant's Stock Account but for this sentence shall be transferred, together with allocable interest thereon, to the participant's Stock Account, subject to provisions set forth in the EDCP. Thereafter, such amount shall be treated in the same manner as other investments in the EDCP and shall be subject to the terms and conditions thereof.

Section 10.  No Rights as Stockholder.  No certificates for shares of Common Stock shall be issued under this Subplan, nor shall any participant have any rights as a stockholder as a result of participation in this Subplan, until the Actual Grant Amount has been determined and such participant has otherwise become entitled to an Award under the terms of the Plan and this Subplan. In particular, no participant shall have any right to vote or to receive dividends on any shares of Common Stock under this Subplan until certificates for such shares have been issued as described above.

Section 11.  Application of Plan.  The provisions of the Plan shall apply to this Subplan, except to the extent that any such provisions are inconsistent with specific provisions of this Subplan.

Section 12.  Adjustment of Actual Grant Amount.  The Committee may, in its sole discretion, adjust the Actual Grant Amount to reflect overall Company performance and business and financial conditions.

Section 13.  Amendments.  The Committee may, from time to time, amend this Subplan in any manner.

ON FILE IN GLOBAL COMPENSATION

 

 

Recipient:

Performance Period: 2009 – 2011

Target Award:

1.         Award of Performance Shares.  This Award Notice serves to notify you that the Compensation and Management Development Committee of the Board of Directors (the “Committee”) of Eastman Chemical Company ("Company") has awarded to you, under the 2009-2011 Performance Share Award Subplan ("Subplan") of the 2007 Omnibus Long-Term Compensation Plan ("Plan"), on the terms and conditions set forth in the Subplan and the Plan, the number of performance shares (the "Performance Shares") of its $.01 par value Common Stock ("Common Stock") specified above.  The Performance Shares are rights to receive Awards in the form of shares of Common Stock, subject to the attainment of specified performance conditions by the Company.  Subject to satisfaction of the minimum performance conditions and the other terms of the Subplan, Awards under the Subplan will ultimately be paid in the form of unrestricted shares of Common Stock.

This Award Notice provides a summary of the terms and conditions of your performance shares, all of which terms and conditions are contained in the Subplan and the Plan.  Capitalized terms not defined herein have the respective meanings set forth in the Subplan and the Plan, as applicable.

2.         Performance Conditions.  The performance conditions for the Subplan involve: 1)  a comparison of the total stockholder return (referred to in the Subplan as "TSR," and reflecting both the change in stock price and the amount of dividends declared) of the Company during the period from January 1, 2009 through December 31, 2011 (the "Performance Period"), to the TSRs of the companies in the Comparison Group (the group of companies within the Standard and Poor’s “Materials Sector” that are classified as Chemical companies.  The S&P “Materials Sector” index, identified as Global Industry Classification Standard (“GICS”) 15, is an index of industrial companies selected from the S&P “Super Composite 1500” index; and 2) the arithmetic average for each of the Performance Years during the Performance Period, of the Company’s average Return on Capital minus a Return on Capital target.   The specific terms of the performance conditions are summarized in Section 3 of this Award Notice and are detailed in Section 6 of the Subplan.

3.         Number of Performance Shares Awarded.  The number of Performance Shares that you have been awarded is shown above (the "Target Award").  However, the actual number of shares of Common Stock to which you will be entitled under the Subplan (the "Actual Grant Amount") may be more or less than the Target Award, depending upon the quintile ranking of the Company's TSR when ranked among the TSRs of the Comparison Group, and the Company’s average Return on Capital relative to a Return on Capital target for each of the Performance Years during the Performance Period.  The Company’s performance relative to these measures shall determine a multiplier to be applied to the Target Grant Amount.  Multipliers range from 3.0 (i.e. 300%), if the Company’s TSR is ranked in the top performing quintile (top 20%) of companies in the Comparison Group, and the average Return on Capital minus the target Return on Capital is greater than 10 percentage points, to 0.0 (with no shares of Common Stock being delivered to participants), if the Company does not meet certain levels of performance relative to the two measures.  The award multiplier table is shown in Exhibit A.  Subject to the Committee’s authority to adjust the Actual Grant Amount described in Section 12 of this Award Notice, your Actual Grant Amount is determined by applying the multiplier corresponding to the Company’s performance (Exhibit A) to your Target Award.

 

 

 

4.         Payment of Award.  If you are entitled to payment of an Award under the Subplan, such payment will be made as soon as administratively practicable after the end of the Performance Period and final approval by the Committee; provided, however, that if payment of the Award could, in the reasonable estimation of the Committee, result in your receiving compensation, in the year of scheduled payment, in excess of the amount deductible by the Company under Section 162(m) of the Internal Revenue Code, then such portion (or all, as applicable) of the Award as could, in the reasonable estimation of the Committee,  create such excess compensation, may, at the sole discretion of the Committee, be converted into the right to receive a cash payment, which will be deferred until after you terminate employment with the Company and its Subsidiaries, provided that such deferral is compliant with the requirements of Internal Revenue Code Section 409A and Treasury Regulations and guidance thereunder, as specified in Section 9 of the Subplan.

If any portion of an Award is converted into a right to receive a cash payment as described above, an amount representing the Fair Market Value of the deferred portion of the Actual Grant Amount will be credited to the Stock Account of the Executive Deferred Compensation Plan (the “EDCP”) and hypothetically invested in units of Common Stock.  Thereafter, such amount will be treated in the same manner as other investments in the EDCP, all as specified in Section 9 of the Subplan.

The Company may withhold or require you to remit a cash amount sufficient to satisfy federal, state, and local taxes (including your FICA obligation) required by law to be withheld.  Further, either the Company or you may elect to satisfy the withholding requirement by having the Company withhold shares of common stock having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction.

5.         Nontransferability.  Unless and until unrestricted shares of Common Stock are delivered or, if applicable, an amount is credited  under the EDCP to you in payment of an earned Award of the Performance Shares, the Performance Shares are not transferable except by will or by the laws of descent and distribution, and may not be sold, assigned, pledged or encumbered in any way, whether by operation of law or otherwise.

6.         Limitation of Rights.  You  will not have any rights as a stockholder with respect to the Performance Shares unless and until certificates for shares of Common Stock have been issued to you.  No such certificates will be issued under the Subplan until the Actual Grant Amount has been determined and you have otherwise become entitled to payment of an Award under the terms of the Plan and the Subplan.    Neither the Plan, the Subplan, the granting of these Performance Shares nor this Award Notice gives you any right to remain employed by the Company and its Subsidiaries.

7.         Termination.  Upon termination of your employment with the Company and its Subsidiaries by reason of death, disability or retirement, or for another approved reason (e.g., reduction in force, divestiture, special separation, termination by mutual consent), as determined by the Committee (in the case of executive officers) or the executive officer responsible for Human Resources (in the case of non-executive employees), you will receive, subject to the terms and conditions of the Plan and the Subplan, an Award representing a prorated portion of the Actual Grant Amount to which you otherwise would be entitled, based on the number of full calendar months from January 1, 2009 through the effective date of such termination.  Upon termination of your employment with the Company and its Subsidiaries for a reason other than death, disability, retirement or another approved reason prior to the date the shares of Common Stock covered by the Award are delivered to you, you will not be eligible or entitled to receive any Award under the Subplan.

8.         Noncompetition; Confidentiality.  You will not, without the written consent of the Company, either during your employment by the Company or thereafter, disclose to anyone or make use of any confidential information which you have acquired during your employment relating to any of the business of the Company, except as such disclosure or use may be required in connection with your work as an employee of the Company.  During your employment by the Company, and for a period of two years after the termination of such employment, you will not, either as principal, agent, consultant, employee or otherwise, engage in any work or other activity in competition with the Company in the field or fields in which you have worked for the Company.  The agreement in this Section 8 applies separately in the United States and in other countries but only to the extent that its application shall be reasonably necessary for the protection of the Company.  You will forfeit all rights under this Award Notice to or related to the Performance Shares if,. in the determination of the Committee (in the case of executive officers) or of the executive officer responsible for Human Resources (in the case of non-executive employees), you have violated any of the provisions of this Section 8, and in that event any issuance of shares, payment or other action with respect to the Performance Shares shall be made or taken, if at all, in the sole discretion of the Committee or the executive officer responsible for Human Resources

9.         Restrictions on Issuance of Shares.  If at any time the Company determines that listing, registration or qualification of the shares covered by an Award upon any securities exchange or under any state or federal law, or the approval of any governmental agency, is necessary or advisable prior to the delivery of any certificate for shares of Common Stock subject to the Award, no such certificate may be delivered unless and until such listing, registration, qualification or approval shall have been effected or obtained free of any conditions not acceptable to the Company.

10.         Change in Ownership; Change in Control.  Article 14 of the Plan contain certain special provisions that will apply in the event of a Change in Ownership or Change in Control, respectively.

11.         Adjustment of Terms.  The adjustment provisions Article 15 of the Plan will control in the event of a nonreciprocal transaction between the company and its stockholders that causes the per-share value of the Common Stock to change (including, without limitation, any stock dividend, stock split, spin-off, rights offering, or large nonrecurring cash dividend) or upon the occurrence of in anticipation of any other corporate event or transaction involving the Company (including, without limitation, any merger, combination, or exchange of shares).

12.         Adjustment of Actual Grant Amount.  The Committee may, in its sole discretion, adjust the Actual Grant Amount to reflect overall Company performance and business and financial conditions.

13.         Plan and Subplan Control.  In the event of any conflict between the provisions of the Plan or the Subplan and the provisions of this Award Notice, the provisions of the Plan or the Subplan, as applicable, will be controlling and determinative.