Executive Employment and Severance/Non-compete Agreement - Gerald F. Kelly

Exhibit 10.35

Executive Employment
And
Severance/Non-Compete Agreement

In this Executive Employment and Severance/Non-Compete Agreement dated as of October , 2002 (the " Agreement" ), Sears, Roebuck and Co., including its subsidiaries (collectively referred to as " Sears" ), and Gerald F. Kelly, Jr. (" Executive" ), intending to be legally bound and for good and valuable consideration, agree as follows:

1. Employment Period.

(a) Sears hereby agrees to employ the Executive, and the Executive hereby accepts such employment, pursuant to the terms and conditions set forth in this Agreement, for a period commencing on October , 2002 (the " Commencement Date" ) and ending on October , 2005, unless terminated earlier as provided herein (the " Initial Employment Period" ), provided that the Initial Employment Period, upon mutual agreement of Sears and Executive, shall be extended for successive one (1) year periods (" Additional Periods" ) unless terminated earlier as provided herein or a party gives written notice to the other party of non-extension at least ninety (90) days prior to the end of the Initial Employment Period or the then Additional Period. A notice of non-extension by Sears shall be deemed a termination without Cause as of the end of the then Initial Employment Period or Additional Period or such earlier date after notice as the Executive shall elect. A notice of non-extension by Executive shall be deemed a voluntary termination. The period of Executive' s actual employment hereunder after the Commencement Date shall be referred to herein as the " Employment Period."

2. Position and Duties.

(a) During the Employment Period, the Executive shall be employed as Senior Vice President and Chief Information Officer Sears, Roebuck and Co. reporting to the Executive Vice President and Chief Financial Officer of Sears, Roebuck and Co.

(b) The Executive shall devote his full business time, attention and best efforts to his duties and responsibilities hereunder and shall comply with Sears written rules and policies including, without limitation, Sears Code of Conduct. It shall not be a violation of this section for the Executive to (i) manage his personal investments, (ii) be involved in charitable, civic and professional activities, provided that the activities referred to in subparts (i) through (ii) do not interfere with the performance of the Executive' s responsibilities as an employee of Sears or violate Sears written rules and policies. In the event the President and Chief Executive Officer of Sears notifies Executive in writing that any such activity presents a conflict, or an appearance of a conflict of interest with Sears, or violates Sears written rules and policies, the Executive shall cease the activity as soon as reasonably practicable.

3. Salary, Bonus and Benefits.

(a) During the Employment Period, the Executive shall receive an annual base salary of $400,000.00 with periodic increases based upon performance (" Annual Base

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Salary" ). The Annual Base Salary shall be payable pursuant to Sears normal payroll practices.

(b) Executive shall receive a one-time sign-on bonus payable within 30 days after Agreement is executed in the amount of $50,000.00, less applicable withholding taxes and any legal deductions.

(c) During the Employment Period, Executive shall be eligible for an annual bonus consisting of payments made under the Annual Incentive Compensation Plan or any successor annual incentive program. The Executive' s annual target incentive opportunity shall be equal to 80% of base salary and shall be increased or reduced in accordance with the pay-out formula if established target performance goals are exceeded or not met, except for the 2002 annual incentive payable in 2003, for which Executive is guaranteed an annual incentive award of no less than 50% of his annual incentive target. The annual incentive performance objective for Executive' s position may be based on a combination of earnings per share and business financial performance, as well as other relevant strategic or operational goals. Any incentive earned will be paid typically by March 15 of the year following the end of the performance cycle.

(d) During the Employment Period, the Executive will be an eligible participant in the Long-Term Performance Incentive Program, as conformed and restated through August 14, 2002 and subject to the terms and conditions of the Long-Term Performance Incentive Program.

(e) During the Employment Period, the Executive shall be entitled to participate in all employee pension and welfare benefit plans and programs made available to Sears senior level executives or its employees generally, as such plans or programs may be in effect from time to time, including, without limitation, pension, savings, and other retirement plans or programs, medical, dental, hospitalization, short-term disability, long term-disability and life insurance plans, travel accident insurance, vacation, and any other pension or retirement plans or programs and any other employee welfare benefit plans or programs that may be sponsored by Sears, including plans that supplement the above-listed types of plans or programs, whether funded or unfunded.

(f) During the Employment Period, Executive shall participate in all benefits and perquisites available to senior executives of Sears at levels, and on terms and conditions, that are commensurate with his position and responsibilities at Sears.

(g) Executive shall be eligible for relocation assistance benefits in accordance with the relocation program and that are provided to senior executives of Sears, including reimbursement for temporary living expenses and the purchase of Executive' s home, if required.

4. Equity Awards.

(a) As soon as practical following the commencement of employment with Sears, Executive shall be granted a non-qualified stock option for 20,000 shares of common stock of Sears that will vest in three equal installments from the date of grant as

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follows: 6,666 shares will vest one year from the date of grant; 6,666 shares will vest two years from the date of grant; and 6,668 shares will vest three years from the date of grant.

(b) As soon as practical following the commencement of employment with Sears, Executive shall be granted 20,000 shares of restricted stock that will vest if he is actively employed by Sears on the third year anniversary of the grant date.

(c) As soon as practical following the commencement of employment with Sears, Executive shall be granted 11,000 performance shares as part of the Sears Long-Term Incentive Program (" LTPIP" ). In accordance with the terms of the LTPIP, these performance shares may entitle a participant to an equal, lower or higher number of Sears shares depending on performance measured against strategic goals, relative stock price performance, and continuing eligibility as part of the Executive leadership team.

5. Severance Pay.

(a) Should Executive be involuntarily terminated from Sears during the Employment Period for any reason other than Cause (as defined below in Section 6(b)), death, total and permanent disability, or voluntary retirement, and other than a Change in Control Termination (as defined below in Section 6(b)), Sears agrees to pay, in lieu of any salary or bonus that Executive may be entitled to during the Employment Period pursuant to Section 3, severance, subject to the provisions of Sections 12(e) and 16 herein, to Executive in an amount equal to: (i) an annual bonus, based on actual results for the year in which active employment ends, pro rata through the date active employment ends, plus (ii) one (1) year of salary continuation, which will include annual base salary plus annual bonus at target as determined for the year in which active employment ends. Any such annual bonus amounts shall be paid at the same time as the annual bonus for that year is paid to Sears executives generally. The " annual bonus" consists of payments made under the Annual Incentive Compensation Plan or any successor annual incentive program. A lump sum payment will be made for any vacation benefits that accrued prior to the end of active employment. No vacation will accrue after the date active employment ends. All salary continuation payments, benefits and annual bonus payments will terminate and forever lapse if Executive is employed by a " Sears Competitor" as defined in Section 12(b) herein.

(b) During the salary continuation period, Executive will be placed on a leave of absence status and be entitled to all benefits (other than as specified above) for which Executive was eligible to participate prior to the end of active employment, with the exception of Long-Term Disability, Flexible Spending Accounts and (if applicable) financial planning. Executive and eligible dependents shall be entitled to continue to participate in medical and dental plans to the same extent and on the same cost-sharing basis as if Executive' s employment with Sears had continued during such period. However, in the event Executive becomes employed by another employer and is covered by such employer' s health benefits plan or program, the medical and dental benefits provided by Sears hereunder shall be secondary to such employer' s health benefits plan or program in accordance with the terms of Sears health benefit plans.

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(c) Any stock options, stock appreciation rights, or restricted stock, except as otherwise provided for herein, granted to Executive prior to the date active employment ends, will continue to vest during the salary continuation period. Executive shall have the right to exercise any outstanding and fully vested stock option, stock appreciation right, or other exercisable equity-based award in accordance with its respective grant letter. Any restricted stock grant that has not yet vested by the end of the salary continuation period will be governed by the terms of its respective grant letter.

(d) At the beginning of the salary continuation period, Executive will be immediately eligible for outplacement services at Sears expense. Sears and Executive will mutually agree on which outplacement firm, among current vendors used by Sears, will provide these services. Such services will be provided for up to one (1) year from the beginning of the salary continuation period or until employment is obtained, whichever occurs first.

6. Change in Control.

(a) Sears shall pay to Executive, and Executive shall be entitled to receive, the Change in Control Severance Pay described in Section 7, if Executive' s employment is terminated under the circumstances described below (a " Change in Control Termination" ), provided, however, that notwithstanding the foregoing, a termination by reason of death, disability or voluntary retirement, by Sears for Cause, or by the Executive without Good Reason, shall not be deemed to be a Change in Control Termination.

(b) For purposes of this Agreement, the following terms shall have the definitions as set forth below:

(i) " Change in Control Termination" means the termination of Executive' s employment with Sears and all of its subsidiaries which is: (1) on the day of, or within 24 months after, the occurrence of a Change in Control, as such term is defined in Appendix A; (2) prior to a Change in Control but at the request of any third-party participating in or causing the Change in Control; (3) by Sears without Cause during a " Potential Change in Control Period" (as defined below), provided that a Change in Control occurs before the Potential Change in Control Period lapses; or (4) by Executive for Good Reason during a Potential Change in Control Period, provided that a Change in Control occurs before the Potential Change in Control Period lapses; (The parties agree and understand that a termination described in Section 5(a) during a Potential Change in Control Period may later become a Change in

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Control Termination and entitle the Executive to any additional benefits set forth in Section 6(a).) (ii) " Cause" shall mean (1) a material breach by Executive (other than a breach resulting from Executive' s incapacity due to a mental or physical disability) of Executive' s duties and responsibilities (which upon a Change in Control, shall not differ (except with the consent of Executive) in any material respect from Executive' s duties and responsibilities during the ninety (90) day period immediately prior to the Change in Control or any Potential Change in Control Period during which a Change in Control occurs), which breach is demonstrably willful and deliberate on Executive' s part, is committed in bad faith or without reasonable belief that such breach is in the best interests of Sears and is not remedied in a reasonable period of time after receipt of written notice from Sears specifying such breach, (2) the commission by Executive of a felony involving moral turpitude, or (3) dishonesty or willful misconduct in connection with Executive' s employment; and

(iii) " Good Reason" shall mean a significant reduction in Executive' s responsibilities, title, annual base salary, annual incentive compensation target or long-term incentive compensation opportunity from those in effect immediately prior to the Change in Control (or to the Potential Change in Control Period during which the Change in Control occurs), or Executive' s mandatory relocation to an office more than 50 miles from the primary location at which Executive is required to perform Executive' s duties immediately prior to the Change in Control (or to the Potential Change in Control Period during which the Change in Control occurs), and which reduction or relocation is not remedied in a reasonable period of time (which shall not be greater than thirty (30) days) after receipt of written notice from Executive specifying that " Good Reason" exists for purposes of this Agreement. " Good Reason" shall also include failure of a successor company to assume or fulfill the obligations under this Agreement, including the prompt payment of any amounts due to Executive hereunder.

(iv) " Potential Change in Control Period" shall commence upon the occurrence of a " Potential Change in Control" (as defined below) and shall lapse immediately following the first to occur of (a) a Change in Control, or, (b) the one-year anniversary of the occurrence of a Potential Change in Contr ...