Components of Executive Compensation Program

The three components of the Company’s executive compensation program are:

• base salary,
• short-term variable pay, and
• long-term incentives.

Base Salary: Base salary is the only fixed portion of an executive’s compensation. Each executive’s base salary is reviewed annually based on (1) a compensation range which corresponds to the executive’s job responsibilities; and (2) the executive’s individual performance.

Individual performance is measured in large part through the Company’s management appraisal process. This process evaluates performance against a combination of financial and non-financial goals. The management appraisal process also measures an executive’s performance relative to the Company values.

Short-Term Variable Pay: Under the short-term variable pay plan, a target bonus is set annually for each executive. The target, which is a percentage of base salary, varies depending on the executive’s duties and responsibilities. For 2001, target awards ranged from 25% of base salary to 145% of base salary for the CEO.

Despite significant achievements during 2001, Kodak’s financial performance for the year was mixed. The continuing weakness in the global economy along with the tragic events of September 11th and their continuing aftermath posed challenges for Kodak and other global companies that were unparalleled in recent decades. The Performance Graph on page 30 shows the overall impact on both Kodak and others. These factors significantly contributed to the Company’s inability to achieve the plan’s EVA-based 2001 performance goal established by the Committee at the start of the year.

In contrast, the Company dramatically improved 2001 cash flow, prior to dividends and other financing activities, over 2000 by more than $800 million to a total of approximately $1 billion. The Company reduced inventories, net receivables and capital spending by $581, $316 and $202 million, respectively, as compared to 2000. The Company continues to be substantially on target with its restructuring commitments, including $450 million of annual cost savings and headcount reductions of approximately 7,200 employees. The Company realigned its organizational structure along a new business model that matches the way its customers buy.

Looking at these achievements along with the extraordinary environment of 2001, the Committee adjusted the plan’s performance goal through its discretion under the plan. As a result, the plan’s performance formula created an award pool that funded payout at a 40% of target level.

The plan’s award pool for the year will be the smallest in any of the previous five years. When evaluating Company 2001 performance against that achieved in each of these years, the Committee believes the payout is in line with the plan’s awards for the prior years.