KADANT (KAI)

Components of Executive Compensation

Our compensation program meets our executive compensation objectives by using the following pay and benefit elements:

Our compensation committee believes that the combination of these elements rewards performance, through an assessment of individual performance and company financial measures, aligns the interests of management with our stockholders, and assists in the retention of our executives. The majority of the compensation for our named executive officers is in the form of performance-based pay, consisting of the cash incentive and equity incentive compensation elements of our compensation program.

Components of Executive Compensation

Our compensation program meets our executive compensation objectives by using the following pay and benefit elements:

The combination of these elements reward performance, through an assessment of individual performance and company financial measures, align the interests of management with our stockholders, and assist in the retention of our executives. The majority of the compensation for our named executive officers is in the form of performance-based pay, consisting of the cash incentive and equity incentive compensation elements of our compensation program.

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Table of Contents

Components of Executive Compensation

Our compensation program meets our executive compensation objectives by using the following elements:

The combination of these elements reward performance, through an assessment of individual performance and company financial measures, align the interests of management with our stockholders, and assist in the retention of our executives. The majority of the compensation for our named executive officers is in the form of performance-based pay, consisting of the cash incentive and equity incentive compensation elements of our compensation program.

Components of Executive Compensation

The company’s executive compensation program consists of the following key elements:

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We review and determine the components of executive compensation for the executive officers as described below.

Base Salary. Base salary levels are determined by the executive’s job responsibilities and competitive compensation rates for executives with similar roles in the marketplace. Base salaries are reviewed and adjusted annually based on a variety of factors, including general or regional economic conditions, cost of living changes, executive performance and changes in market rates of pay for comparable executives.

Bonus. The annual incentive component of executive compensation links pay to objective financial measures and achievement of subjective goals that we believe enhance stockholder value. At the beginning of each year, we determine a reference bonus for each executive based on a competitive range, which reflects the executive’s job responsibilities and competitive market conditions. At year-end, we determine the actual bonus to be paid to the executive based on our company’s overall performance and the performance of the businesses reporting to the executive, as well as our assessment of the achievement of stated subjective goals, which vary for each executive. In 2005, we measured our company’s performance on pre-determined growth in earnings per share and return on stockholders’ equity objectives, and individual businesses were measured on pre-determined growth in operating income and return on net assets.

Long-Term Incentive Compensation. We use stock-based awards to link long-term incentive compensation to long-term increases in stockholder value. Historically, we have used stock options or restricted stock awards to accomplish this goal. Our determination of the number of stock options to be granted or restricted stock to be awarded is based on competitive practices and the executive’s level of responsibility. We also give consideration to the number of stock options or shares of restricted stock previously granted to an executive in determining an appropriate award level. We did not grant stock options in 2005 to our executive officers, except to Mr. Leerentveld pursuant to his employment agreement. We intend to consider the grant of stock-based incentive awards, incorporating specific performance goals or objectives, for our senior management in the event the 2006 equity incentive plan is approved by our stockholders at this annual meeting.

Components of Executive Compensation

Our executive compensation program consists of the following elements:

We review and determine the components of executive compensation for the executive officers as described below.

Base Salary. Base salary is annual cash compensation and is determined by the executive’s job responsibilities and competitive market factors, including general or regional economic conditions and cost of living changes. Base salary is reviewed and adjusted annually based on a salary range, which reflects competitive salaries for executives with similar responsibilities.

Bonus. The annual incentive component of executive compensation links pay to objective financial measures and achievement of subjective goals that we believe enhance stockholder value. At the beginning of each year, we determine a reference bonus for each executive based on a competitive range, which reflects the executive’s job responsibilities and competitive market conditions. At year-end, we determine the actual bonus to be paid to the executive based on our company’s overall performance and the performance of the businesses reporting to the executive, as well our assessment of the achievement of stated subjective goals, which vary for each executive. In 2004, we measured our company’s performance on growth in earnings per share and return on stockholders’ equity, and individual businesses were measured on growth in their operating income and return on net assets. There are no targeted, minimum or maximum levels of annual incentive compensation.

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Long-Term Incentive Compensation. We use stock-based compensation in the form of stock options or restricted stock to link long-term executive compensation to long-term increases in stockholder value. Our determination of the number of stock options to be granted or restricted stock to be awarded is based on competitive practices and the executive’s level of responsibility. We give consideration to the number of stock options or shares of restricted stock previously granted to an executive in considering the appropriate size of an award. We did not grant stock options or restricted stock in 2004 to our executive officers.