REHABCARE GROUP, INC. TERMINATION COMPENSATION AGREEMENT

EXHIBIT 10.3

REHABCARE GROUP, INC.

TERMINATION COMPENSATION AGREEMENT

This agreement (“Agreement”) has been entered into as of the 10th day of March, 2006, by and between RehabCare Group, Inc., a Delaware corporation (the “Company”), and John H. Short, PhD, an individual (the “Executive”).

RECITALS

The Board of Directors of the Company has determined that it is in the best interests of the Company and its stockholders to reinforce and encourage the continued attention and dedication of the Executive to the Company as the Company’s President and Chief Executive Officer and to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility or occurrence of a Change in Control (as defined below). The Board desires to provide for the continued employment of the Executive as President and Chief Executive Officer on terms competitive with those of other corporations, and the Executive is willing to rededicate himself and continue to serve the Company as its President and Chief Executive Officer. Additionally, the Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a potential or pending Change in Control and to encourage the Executive’s full attention and dedication to the Company currently and in the event of any potential or pending Change in Control, and to provide the Executive with compensation and benefits arrangements upon any termination after a Change in Control and certain terminations of employment prior to a Change in Control which ensure that the compensation and benefits expectations of the Executive will be satisfied. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement.

IT IS AGREED AS FOLLOWS:

1.1           Definitions. For purposes of this Agreement, the following words and phrases, whether or not capitalized, shall have the meanings specified below, unless the context plainly requires a different meaning.

1.1(a)      “Accrued Obligations” has the meaning set forth in Section 4.1(a) of this Agreement.

1.1(b)      “Annual Base Salary” has the meaning set forth in Section 2.4(a) of this Agreement.

(i)            The acquisition by any individual, entity or group, or a Person (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) of ownership of thirty percent (30%) or more of either (a) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (b) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); or

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EXHIBIT 10.3

(ii)          Individuals who, as the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however , that any individual becoming a director subsequent to the date hereof whose election, or nomination for election, by the Company’s stockholders was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, as a member of the Incumbent Board, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

(iii)         Approval by the stockholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (a) more than fifty percent (50%) of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (b) no Person beneficially owns, directly or indirectly, thirty percent (30%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation, entitled to vote generally in the election of directors and (c) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation;

(iv)         Approval by the stockholders of the Company of (a) a complete liquidation or dissolution of the Company or (b) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (1) more than forty percent (40%) of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person beneficially owns, directly or indirectly, thirty percent (30%) or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (3) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company.

1.1(f)       “Change in Control Date” means the date that the Change in Control first occurs.

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EXHIBIT 10.3

1.1(g)      “Company” has the meaning set forth in the first paragraph of this Agreement and, with regard to successors, in Section 6.2 of this Agreement.

1.1(i)       “Date of Termination” has the meaning set forth in Section 3.7 of this Agreement. In all cases, a “Date of Termination” shall only occur upon separation from service from the Company and all of its affiliates, as defined in Treasury regulations under Section 409A of the Code.

1.1(k)      “Disability Effective Date” has the meaning set forth in Section 3.2 of this Agreement.

1.1(l)       “Effective Date” means the date of this Agreement specified in the first paragraph of this Agreement.

1.1(m)     “Employment Period” means the period beginning on the Effective Date and ending on the later of (i) December 31, 2007, or (ii) December 31 ^st of any succeeding year during which notice is given by either party (as described in Section 2.1 of this Agreement) of such party’s intent not to renew this Agreement.

1.1(o)      “Excise Tax” has the meaning set forth in Section 4.2(f)(i) of this Agreement.

1.1(q)      “Gross-Up Payment” has the meaning set forth in Section 4.2(f)(i) of this Agreement.

1.1(r)       “Incumbent Board” has the meaning set forth in Section 1.1(e)(ii) of this Agreement.

1.1(s)       “Notice of Termination” has the meaning set forth in Section 3.6 of this Agreement.

1.1(t)       “Other Benefits” has the meaning set forth in Section 4.1(e) of this Agreement.

1.1(u)      “Outstanding Company Common Stock” has the meaning set forth in Section 1.1(e)(i) of this Agreement.

1.1(v)      “Outstanding Company Voting Securities” has the meaning set forth in Section 1.1(e)(i) of this Agreement.

1.1(x)      “Person” means any “person” within the meaning of Sections 13(d) and 14(d) of the Exchange Act.

1.1(y)      “Prorated Target Bonus” has the meaning set forth in Section 4.2(a) of this Agreement.

1.1(z)      “Specified Employee” has the meaning set forth in Section 4.9 of this Agreement.

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EXHIBIT 10.3

1.1(aa)    “Target Bonus” has the meaning set forth in Section 2.4(b) of this Agreement.

1.1(bb)    “Term” means the period that begins on the Effective Date and ends on the earlier of: (i) the Date of Termination, or (ii) the close of business on the later of December 31, 2007 or December 31 ^st of any renewal term.

1.2           Gender and Number. When appropriate, pronouns in this Agreement used in the masculine gender include the feminine gender, words in the singular include the plural, and words in the plural include the singular.

1.3           Headings. All headings in this Agreement are included solely for ease of reference and do not bear on the interpretation of the text. Accordingly, as used in this Agreement, the terms “Article” and “Section” mean the text that accompanies the specified Article or Section of the Agreement.

1.4           Applicable Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Missouri, without reference to its conflict of law principles.

2.1           Period of Employment. The Executive shall remain in the employ of the Company throughout the Term of this Agreement in accordance with the terms and provisions of this Agreement. This Agreement will automatically renew for annual one-year periods unless either party gives the other written notice, by September 30, 2007, or September 30 of any succeeding year, of such party’s intent not to renew this Agreement.

2.2(a)     Throughout the Term of this Agreement, the Executive shall serve as President and Chief Executive Officer of the Company subject to the reasonable directions of the Board. The Executive shall have such authority and shall perform such duties as are specified by the Bylaws of the Company and the Board for the office of President and Chief Executive Officer, subject to the control exercised by the Board from time to time. In addition, each year throughout the Term that the Executive serves as the President and Chief Executive Officer of the Company, the Executive shall be nominated by the Compensation and Nominating/Corporate Governance Committee and/or the Board for election as a director at the annual meeting of stockholders of the Company.

2.2(b)     Throughout the Term of this Agreement (but excluding any periods of vacation and sick leave to which the Executive is entitled), the Executive shall devote reasonable attention and time during normal business hours to the business and affairs of the Company and shall use his reasonable best efforts to perform faithfully and efficiently such responsibilities as are assigned to him under or in accordance with this Agreement; provided that, it shall not be a violation of this Section 2.2(b) for the Executive to (i) serve on corporate, civic or charitable boards or committees with or without compensation, (ii) deliver lectures or fulfill speaking engagements, with or without compensation, or (iii) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive’s responsibilities as an employee of the Company in accordance with this Agreement, violate the terms of this Agreement or any other agreement between Executive and the Company, or violate the Company’s conflict of interest policy or any applicable law.

2.3           Situs of Employment. Throughout the Term of this Agreement, the Executive’s services shall be performed at and out of the Company’s executive offices located in the greater St. Louis, Missouri metropolitan area. It is understood and agreed that the President and CEO of the

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EXHIBIT 10.3

Company should be based in and office and work out of the Company’s executive offices in the St. Louis metropolitan area.

2.4(a)      Annual Base Salary. At the date of this Agreement, the Executive will be paid a base salary (“Annual Base Salary”) at an annual rate of Five Hundred Seventy-Eight Thousand Four Hundred Forty-Eight Dollars ($578,448), which shall be paid in equal or substantially equal semi-monthly installments. During the Term of this Agreement, the Annual Base Salary payable to the Executive shall be reviewed at least annually and shall be increased at the discretion of the Board or the Compensation and Nominating/Corporate Governance Committee of the Board but shall not be reduced.

2.4(b)      Incentive Bonuses. In addition to Annual Base Salary, the Executive shall be awarded the opportunity to earn an incentive bonus on an annual basis under any incentive compensation plan which is generally available to other peer executives of the Company. The Board of Directors or the Compensation and Nominating/Corporate Governance Committee shall establish at the beginning of each calendar year a target incentive award equal to a designated percentage of the Executive’s Annual Base Salary paid during that plan year, which percentage shall not be less than sixty percent (60%) for each of the calendar years 2006 and 2007 (the “Target Bonus”). The Board and/or the Compensation and Nominating/Corporate Governance Committee may also establish minimum and maximum incentive bonus opportunities on an annual basis in addition to the Target Bonus, provided that the maximum incentive bonus for each of 2006 and 2007 shall not be less than one hundred eighty percent (180%) of Executive’s Target Bonus. The Board of Directors shall be exclusively responsible for decisions relating to administration of the executive incentive plans.

2.4(c)      Incentive, Savings and Retirement Plans. Throughout the Term of this Agreement, the Executive shall be entitled to participate in all equity incentive, savings and retirement plans generally available to other peer executives of the Company; provided, however, that the nature and level of any equity incentive awards shall be solely determined by the Board or the Compensation and Nominating/Corporate Governance Committee in its discretion. Also, during the Term, the Executive shall be eligible to participate in the Company’s long term cash incentive plan. During the Term, the percentage of Executive’s Annual Base Salary upon which a potential long term incentive award shall be established by the Board or the Compensation and Nominating/Corporate Governance Committee in its discretion; provided that the potential award for the long term performance periods commencing in 2004 and 2005, respectively, shall not be less than $262,500, and the potential award for the long term performance period commencing in 2006 shall not be less than seventy-five percent (75%) of Executive’s Annual Base Salary. For each three (3) year performance period during the Term and under the plan, the financial metrics for receiving a payout will be established by the Board or the Committee in its discretion and otherwise determined by the terms of the plan. Payment of awards under the long term cash incentive plan, and eligibility to receive any payment, will be determined under and according to the terms of that plan and based upon performance criteria established annually by the Board or the Committee under the plan. Nothing herein prevents the Company from terminating or changing the long term cash incentive plan in its discretion, subject to a participant’s right under the plan as to any incentive award which has already been earned.

2.4(d)      Welfare Benefit Plans. Throughout the Term of this Agreement (and thereafter, subject to Section 4.1(d) or 4.2(d) hereof), the Executive and/or the Executive’s family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent generally available to

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EXHIBIT 10.3

other peer executives of the Company. Throughout the Term, the Executive also will be eligible to participate in any nonqualified supplemental retirement program hereafter established for senior executives of the Company generally, subject to and on the same terms applicable to such other senior executives generally.

2.4(e)      Expenses. Throughout the Term of this Agreement, the Executive shall be entitled to receive prompt reimbursement for all reasonable business expenses incurred by the Executive in accordance with the policies, practices and procedures of the Company.

2.4(f)       Fringe Benefits. Throughout the Term of this Agreement, the Executive shall be entitled to such fringe benefits as generally are provided to other peer executives of the Company.

2.4(g)      Office and Support Staff. Throughout the Term of this Agreement, the Executive shall be entitled to an office or offices at the Company’s executive offices in the greater St. Louis, Missouri metropolitan area of a size and with furnishings and other appointments, and to personal secretarial and other assistance, as are generally provided to other peer executives of the Company.

2.4(h)      Vacation. Throughout the Term of this Agreement, the Executive shall be entitled to paid vacation in accordance with the plans, policies, programs and practices as are generally provided to other peer executives of the Company.

3.1           Death. The Executive’s employment shall terminate automatically upon the Executive’s death during the Employment Period.

3.2           Disability. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), the Company may give to the Executive written notice in accordance with Section 7.2 of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company shall terminate effective on the thirtieth (30th) day after receipt of such notice by the Executive (the “Disability Effective Date”), provided that, within the thirty (30) days after such receipt, the Executive shall not have returned to full-time performance of the Executive’s duties. For purposes of this Agreement, “Disability” shall mean that the Executive has been unable with reasonable accommodation to perform the services required of the Executive hereunder on a full-time basis for a period of one hundred eighty (180) consecutive business days by reason of a physical and/or mental condition. “Disability” shall be deemed to exist when certified by a physician selected by the Company and acceptable to the Executive or the Executive’s legal representative (such agreement as to acceptability not to be withheld unreasonably). The Executive will submit to such medical or psychiatric examinations and tests as such physician deems necessary to make any such Disability determination.

3.3           Termination for Cause or without Cause. The Company may terminate the Executive’s employment during the Employment Period for “Cause,” which shall mean termination based upon: (i) the Executive’s willful and continued failure to substantially perform his duties with the Company (other than as a result of incapacity due to physical or mental condition), after a written demand for substantial performance is delivered to the Executive by the Company, which specifically identifies the manner in which the Executive has not substantially performed his duties, (ii) the Executive’s commission of an act constituting a criminal offense that would be classified as a felony under the applicable criminal code or involving moral turpitude, dishonesty, or breach of trust, or (iii) the Executive’s material breach of any provision of this Agreement. For purposes of this Section, no act or failure to act on the Executive’s part shall be considered “willful” unless done, or omitted to be

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EXHIBIT 10.3

done, without good faith and without reasonable belief that the act or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until (i) he receives a Notice of Termination from the Company, (ii) he is given the opportunity, with counsel, to be heard before the Board, and (iii) the Board finds, in its good faith opinion, that the Executive was guilty of the conduct set forth in the Notice of Termination. The Company also may terminate the Executive’s employment at any time during the Employment Period without Cause.

3.4           Termination by Executive for Good Reason. The Executive may terminate his employment with the Company during the Employment Period for “Good Reason,” which shall mean termination based upon: (i) the assignment to the Executive of any duties inconsistent in any respect with the position (including status, offices, titles and reporting requirements), authority, duties and responsibilities held by the Executive as of the date of this Agreement or any other action by the Company which results in a material diminution in such position, authority, duties and responsibilities; (ii) the Company’s requiring the Executive to have any office arrangements for performing his duties which are different than the arrangements in effect as of the date of this Agreement; (iii) any reduction in Executive’s Annual Base Salary; (iv) any reduction in Executive’s annual Target Bonus; or (v) a material breach by the Company of any provision of this Agreement. Any termination of the Executive’s employment based upon a good faith determination of “Good Reason” made by the Executive shall be subject to a delivery of a Notice of Termination by the Executive to the Company in the manner prescribed in Section 3.6 and subject further to the ability of the Company to remedy promptly any action not taken in bad faith by the Company that may otherwise constitute Good Reason under this Section 3.4.

3.5           Voluntary Termination by the Executive. The Executive may voluntarily terminate his employment with the Company for any reason or for no reason at any time during the Employment Period.

3.6           Notice of Termination. Any termination by the Company for Cause, without Cause, or Disability, or by the Executive for any reason or no reason, shall be communicated by Notice of Termination to the other party, given in accordance with Section 7.2. For purposes of this Agreement, a “Notice of Termination” means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated, and (iii) if the Date of Termination (as defined in Section 3.7 hereof) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than fifteen (15) days after the giving of such notice). The failure of the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Cause shall not waive any right of the Company hereunder or preclude the Company from asserting such fact or circumstance in enforcing the Company’s rights hereunder.

3.7           Date of Termination. “Date of Termination” means (i) if the Executive’s employment is terminated by the Company for Cause, the Date of Termination shall be the date of receipt by the Executive of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive’s employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be, or (iii) if the Executive’s employment is voluntarily terminated by the Executive for any reason or no reason, the Date of Termination shall be a date specified in the Notice of Termination, (iv) if the Executive’s employment is terminated by the Company other than for Cause, death, or Disability, the Date of Termination shall be the date of receipt by the Executive of the Notice of Termination.

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EXHIBIT 10.3

4.1           Termination Without Cause or Timely Termination for Good Reason Prior to a Change in Control. Subject to the provisions of Section 4.9, if, prior to a Change in Control during the Employment Period, the Company terminates the Executive’s employment without Cause or the Executive terminates his employment