KMART CORP, DEF 14A, 1997-04-14

KMART CORP
DEF 14A, 1997-04-14
VARIETY STORES

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<PAGE>
SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934

Filed by the Registrant [X]

Filed by a Party other than the Registrant [_]

Check the appropriate box:

[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))

[X] Definitive Proxy Statement

[_] Definitive Additional Materials

[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

KMART CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

KMART CORPORATION
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)

Payment of Filing Fee (Check the appropriate box):

[_] $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(i), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 11A.

[_] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).

[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

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(2) Aggregate number of securities to which transaction applies:

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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):

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(4) Proposed maximum aggregate value of transaction:

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(5) Total fee paid:

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[_] Fee paid previously with preliminary materials.

[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

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(2) Form, Schedule or Registration Statement No.:

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(3) Filing Party:

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(4) Date Filed:

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<PAGE>

KMART CORPORATION
INTERNATIONAL HEADQUARTERS
TROY, MICHIGAN 48084

April 14, 1997

Dear Stockholder:

You are cordially invited to attend the Annual Meeting of Stockholders of
Kmart Corporation on Tuesday, May 20, 1997. The meeting will be held at the
Fisher Theatre, located in the Fisher Building, 3011 West Grand Boulevard,
Detroit, Michigan and will begin at 10:00 A.M., local time.

The formal notice of meeting, proxy statement and form of proxy accompany
this letter and describe in detail the matters to be acted upon at the
meeting.

As a stockholder, your vote is important. We encourage you to execute and
return your proxy promptly whether or not you plan to attend so that we may
have as many shares as possible represented at the meeting. Returning your
completed proxy will not prevent you from voting in person at the meeting if
you wish to do so.

We hope that you will be able to attend the meeting and look forward to
seeing you there.

Sincerely,
LOGO
Floyd Hall
Chairman of the Board, President
and Chief Executive Officer
<PAGE>

KMART CORPORATION

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD MAY 20, 1997

TO THE STOCKHOLDERS OF
KMART CORPORATION

The Annual Meeting of Stockholders of Kmart Corporation (the "Company") will
be held at the Fisher Theatre, located in the Fisher Building, 3011 West Grand
Boulevard, Detroit, Michigan on Tuesday, the 20th day of May, 1997 at 10:00
A.M., local time, for the following purposes:

1. To elect five Class II directors for a term expiring in 2000 and to
elect one Class III director for a term expiring in 1998, as set forth in
the accompanying Proxy Statement.

2. To act upon a proposal to approve the Company's 1997 Long-Term Equity
Compensation Plan adopted by the Board of Directors on March 18, 1997.

3. To ratify the appointment of Price Waterhouse LLP as independent
accountants of the Company for the 1997 fiscal year.

4-5. To act upon two stockholder proposals, if presented at the meeting,
as set forth in the accompanying Proxy Statement, concerning the
compensation of executives and directors and the stockholder vote required
to elect directors. Both of these stockholder proposals are opposed by the
Board of Directors.

6. To transact such other business as may properly come before the
meeting or any adjournment thereof.

Stockholders of record of Kmart common stock at the close of business on
March 21, 1997 will be entitled to notice of and to vote at the meeting or any
adjournment thereof.

You are cordially invited to attend the meeting in person. However, whether
you plan to attend or not, we urge you to complete, date, sign and return the
enclosed proxy promptly in the envelope provided, to which no postage need be
affixed if mailed in the United States, in order that as many shares as
possible may be represented at the meeting.

Holders of a majority of the Company's outstanding common stock must be
present in person or by proxy for the meeting to be properly held.

If you plan on attending the Annual Meeting, please check the appropriate
box on the proxy card. Directions to the Annual Meeting, as well as your
admission ticket to the Annual Meeting and parking voucher, are on the back
cover.

By order of the Board of Directors
LOGO
Nancie W. LaDuke
Vice President and Secretary

Troy, Michigan
April 14, 1997
<PAGE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information................................................. 1
Security Ownership of Certain Beneficial Owners..................... 2
Proposal 1--Election of Directors................................... 2
Information about Nominees and Directors............................ 3
Stock Ownership of Officers and Directors........................... 5
Committees of the Board............................................. 6
Compensation of Directors........................................... 7
Compensation of Officers............................................ 8
Pension Plan Table.................................................. 10
Employment and Severance Arrangements............................... 11
Compensation and Incentives Committee Report on Executive
Compensation....................................................... 12
Performance Graph................................................... 15
Proposal 2--Approval of 1997 Long-Term Equity Compensation Plan..... 15
Proposal 3--Ratification of Appointment of Independent Accountants.. 19
Stockholder Proposals............................................... 20
Other Business/Future Stockholder Proposals......................... 22
Exhibit A--1997 Long-Term Equity Compensation Plan.................. A-1
Annual Meeting of Stockholders Admission Ticket/Parking Voucher..... Back Cover
</TABLE>
<PAGE>

KMART CORPORATION

PROXY STATEMENT

----------------

GENERAL INFORMATION

April 14, 1997

This Proxy Statement (the "Proxy Statement") is furnished in connection with
the solicitation of proxies by the Board of Directors of Kmart Corporation
(the "Company"), a Michigan corporation, to be used at the Annual Meeting of
Stockholders to be held on Tuesday, May 20, 1997, at 10:00 A.M., local time,
at the Fisher Theatre, located in the Fisher Building, 3011 West Grand
Boulevard, Detroit, Michigan, or any adjournment thereof. This Proxy Statement
and accompanying form of proxy are first being mailed to stockholders on or
about the date shown above. The address of the principal office of the Company
is 3100 West Big Beaver Road, Troy, Michigan 48084-3163.

Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time by notice in writing to the Secretary of the Company
prior to the Annual Meeting, by submitting a subsequent proxy or by attending
and voting in person at the Annual Meeting prior to the close of voting.
Unless the proxy is so revoked, the shares represented thereby will be voted
as specified in such proxy at the Annual Meeting or any adjournment thereof.
Shares for which proxies are marked "abstain" will be treated as shares
present for purposes of determining the presence of a quorum. Proxies relating
to "street name" shares that are voted by brokers on only some of the
Proposals will nevertheless be treated as present for purposes of determining
the presence of a quorum, but will not be entitled to vote on any Proposal as
to which the broker does not have discretionary voting power and has not
received instructions from the beneficial owner ("broker non-votes"). In
tabulating the vote on the election of directors and Proposals 2, 3, 4 and 5,
abstentions and broker non-votes will be disregarded, which will have the
effect of reducing the total number of shares from which any required majority
is calculated.

The Company has adopted a policy providing for confidential voting. Pursuant
to that policy, stockholder proxies will be tabulated by representatives of
the Company's stock transfer agent, The First National Bank of Boston (the
"Bank of Boston"), and, subject to certain limited exceptions, including a
contested proxy solicitation, how a stockholder voted will not be disclosed to
the Company prior to final tabulation of the vote.

The voting securities of the Company consist of common stock, par value
$1.00 per share ("Common Stock"). At the close of business on March 21, 1997,
the record date for the Annual Meeting, there were 485,403,989 shares of
Common Stock outstanding, each of which is entitled to one vote. The presence
of the holders of a majority of the outstanding shares of Common Stock
represented in person or by proxy and entitled to vote at the Annual Meeting
will constitute a quorum at the Annual Meeting.

Boston Safe Deposit and Trust Company is the record holder of shares of
Common Stock for participants in the Kmart Corporation Retirement Savings Plan
including the Kmart Corporation Employee Stock Ownership Plan. Boston Safe
Deposit and Trust has advised that it intends to tender its proxy: (i) with
respect to shares for which voting instructions are received, as instructed by
the participant; and (ii) with respect to shares for which no voting
instructions are received, in the same proportion as the shares for which
voting instructions are received.

The entire cost of soliciting proxies will be borne by the Company. Proxies
may be solicited by mail, telecopy, telegraph or telex, or by directors,
officers and regular employees of the Company in person or by telephone. The
Company has retained D.F. King & Co., Inc. to assist in the distribution of
proxy solicitation materials and with the solicitation of proxies at a cost of
approximately $11,000 plus out of pocket expenses. The Company will also
reimburse brokerage houses and other custodians, nominees and fiduciaries for
their reasonable out-of-pocket expenses for forwarding soliciting material to
the beneficial owners of the Common Stock.

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<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table sets forth certain information concerning persons which
to the knowledge of the Company own more than 5% of the outstanding Common
Stock:

<TABLE>
<CAPTION>
PERCENT
OF COMMON
NAME AND ADDRESS SHARES STOCK
---------------- ---------- ---------
<S> <C> <C>
Barrow, Hanley, McWhinney & Straus, Inc. ......... 33,451,800(1) 6.9%
One McKinney Plaza
3232 McKinney Avenue, 15th Floor
Dallas, Texas 75204-2429
Putnam Investments, Inc. ......................... 31,806,852(2) 6.6%
One Boston Office Square
Boston, Massachusetts 02109
</TABLE>
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(1) Information obtained from Schedule 13G as of December 31, 1996 filed with
the Securities and Exchange Commission by Barrow, Hanley, McWhinney &
Straus, Inc. ("BHMS"). BHMS is a registered investment adviser which has
the sole power to dispose of all of the above shares, has the shared power
to vote or direct the voting of 25,991,200 of the shares and has the sole
power to vote or direct the voting of 7,460,200 of the shares.
(2) Information obtained from the joint statement on Schedule 13G as of
December 31, 1996 filed with the Securities and Exchange Commission by
Putnam Investments, Inc., Marsh & McLennan Companies, Inc., Putnam
Investment Management, Inc., and The Putnam Advisory Company, Inc. Putnam
Investments, Inc., a wholly owned subsidiary of Marsh & McLennan
Companies, Inc., wholly owns two registered investment advisers, Putnam
Investment Management, Inc., and The Putnam Advisory Company, Inc. The
above amount includes 31,427,942 shares of which Putnam Investment
Management, Inc. is the beneficial owner as a result of acting as
investment adviser to the Putnam family of investment funds, and 378,910
shares of which The Putnam Advisory Company, Inc. is the beneficial owner
as a result of acting as investment adviser to Putnam's institutional
clients. Both subsidiaries have the sole power to dispose of the shares as
investment managers, but the trustee of each mutual fund has the power to
vote or direct the voting of the shares held by such funds, and The Putnam
Advisory Company, Inc. has the shared power to vote or direct the voting
of the shares held by institutional clients. Putnam Investments, Inc. and
Marsh & McLennan, Inc. each declare that neither of them has any power to
vote or dispose of, or direct the voting or disposition of, any of the
shares.

PROPOSAL 1--ELECTION OF DIRECTORS

The Company's Articles of Incorporation and By-laws provide that the number
of directors, as determined from time to time by the Board, shall be not less
than seven nor more than twenty-one. The Board has fixed the number of
directors at fifteen, as of May 20, 1997. The Articles and By-laws further
provide that directors shall be divided into three classes (Class I, Class II
and Class III) serving staggered three-year terms, with each class to be as
nearly equal in number as possible.

In accordance with the recommendation of its Nominating Committee, the Board
has nominated Joseph A. Califano, Jr., Enrique C. Falla, J. Richard Munro,
Robin B. Smith and James O. Welch, Jr. for election as Class II directors for
a term expiring at the 2000 annual meeting, and Warren Flick for election as a
Class III director for a term expiring at the 1998 annual meeting, and in each
case until their successors are elected and qualified. All of the nominees are
presently directors of the Company whose terms expire at the 1997 annual
meeting. Mr. Flick and Ms. Smith were elected by the Board of Directors since
the last annual meeting of stockholders. Other directors who are remaining on
the Board will continue in office in accordance with their previous elections
by stockholders until the expiration of their terms at the 1998 or 1999 annual
meeting, as the case may be.

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It is the intention of the persons named in the enclosed form of proxy to
vote such proxies for the election of the nominees listed herein. The proposed
nominees are willing to be elected and serve, but in the event any nominee at
the time of election is unable to serve or is otherwise unavailable for
election, it is intended that the votes will be cast pursuant to the
accompanying proxy for substitute nominees designated by the Board, unless the
Board reduces the number of directors to be elected. The Board is unaware of
any need for substitute nominees.

DIRECTORS ARE ELECTED BY A PLURALITY OF VOTES CAST BY HOLDERS OF COMMON
STOCK WHO ARE PRESENT IN PERSON OR REPRESENTED BY PROXY AND ENTITLED TO VOTE
AT THE MEETING.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF MESSRS.
CALIFANO, FALLA, MUNRO AND WELCH AND MS. SMITH AS CLASS II DIRECTORS AND MR.
FLICK AS A CLASS III DIRECTOR OF THE COMPANY.

INFORMATION ABOUT NOMINEES AND DIRECTORS

The following information is furnished for each person who is nominated for
election as a director or who is continuing as an incumbent director: name;
age; whether such person is a nominee for election ("Nominee") or an incumbent
director whose term does not expire at this Meeting ("Incumbent"); the year in
which his or her term is to expire; principal occupation and employment during
the past five years; boards of directors of other publicly owned companies on
which he or she serves; how long he or she has served as a director of the
Company; and committees of the Board of which he or she is a member.

JAMES B. ADAMSON, 49 (Incumbent--Term to expire in 1999)

Chairman and Chief Executive Officer, Flagstar Companies, Inc. (food
services and restaurant franchises). Previously served as Chief Executive
Officer, Chief Operating Officer and Retail President, respectively, of Burger
King Corporation. Director of Oxford Health Plans. Has served as a director of
Kmart Corporation since 1996. Member of Finance Committee.

LILYAN H. AFFINITO, 65 (Incumbent--Term to expire in 1998)

Former Vice Chairman of the Board of Maxxam Group Inc. (forest products
operations, real estate management and development and aluminum production).
Director of Caterpillar, Inc., Chrysler Corporation, Jostens Inc., Lillian
Vernon Corporation, New England Telephone and Telegraph Company/New York
Telephone Company (subsidiaries of Nynex Corporation) and Tambrands, Inc. Has
served as a director of Kmart Corporation since 1990. Member of Audit,
Executive and Nominating Committees.

STEPHEN F. BOLLENBACH, 54 (Incumbent--Term to expire in 1999)

President and Chief Executive Officer of Hilton Hotels Corporation.
Previously served as Senior Executive Vice President and Chief Financial
Officer of The Walt Disney Company, as President and Chief Executive Officer
of Host Marriott Corporation, as Chief Financial Officer of Marriott
Corporation and as Chief Financial Officer of the Trump Organization. Director
of America West Airlines, Inc. Has served as a director of Kmart Corporation
since 1996. Member of Finance Committee.

JOSEPH A. CALIFANO, JR., 65 (Nominee--Term to expire in 2000)

Chairman and President, The National Center on Addiction and Substance Abuse
at Columbia University, author and health care consultant. Formerly Senior
Partner, Law Firm of Dewey Ballatine, Director of Authentic Fitness Corp.,
Automatic Data Processing, Inc., Chrysler Corporation, New England Telephone
and Telegraph Company/New York Telephone Company (subsidiaries of Nynex
Corporation), The Travelers Inc. and Warnaco, Inc. Has served as a director of
Kmart Corporation since 1990. Member of Finance Committee.

RICHARD G. CLINE, 62 (Incumbent--Term to expire in 1998)

Chairman, Hawthorne Investors, Inc. (management advisors and personal
investments). Former Chairman and Chief Executive Officer of NICOR, Inc.
(natural gas distribution and containerized shipping). Previously

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<PAGE>

served as Chairman, President and Chief Executive Officer, NICOR, Inc.
Director of Ryerson Tull, Inc. and Whitman Corporation. Has served as a
director of Kmart Corporation since 1995. Member of Compensation and
Incentives, Executive and Nominating Committees.

WILLIE D. DAVIS, 62 (Incumbent--Term to expire in 1998)

President of All Pro Broadcasting, Inc. (radio stations). Director of
Alliance Bank, The Dow Chemical Company, Johnson Controls, Inc., L.A. Gear
Inc., MGM Grand, Inc., Rally's Hamburgers, Inc., Sara Lee Corporation, Strong
Funds and WICOR, Inc. Has served as a director of Kmart Corporation since
1986. Member of Compensation and Incentives Committee.

ENRIQUE C. FALLA, 57 (Nominee--Term to expire in 2000)

Executive Vice President of The Dow Chemical Company. Previously served as
Executive Vice President and Chief Financial Officer of The Dow Chemical
Company. Director of The Dow Chemical Company and Guidant Corporation. Has
served as a director of Kmart Corporation since 1992. Member of Audit
Committee.

JOSEPH P. FLANNERY, 65 (Incumbent--Term to expire in 1998)

Chairman of the Board, President and Chief Executive Officer of Uniroyal
Holding, Inc. (investment management company). Director of APS Holding Corp.,
Arvin Industries, Inc., Ingersoll Rand Company, Newmont Gold Company, Newmont
Mining Corporation and The Scotts Company. Has served as a director of Kmart
Corporation since 1985. Member of Executive, Finance and Nominating
Committees.

WARREN FLICK, 53 (Nominee--Term to expire in 1998)

President and Chief Operating Officer, U.S. Kmart Stores. Previously served
as Executive Vice President and President and General Merchandise Manager,
U.S. Kmart Stores, Chairman and Chief Executive Officer of Sears de Mexico,
Group Vice President, Mens, Kids, Footwear and Home Fashion and Group Vice
President, Mens, Kids and Footwear, respectively of Sears Roebuck and Co. Has
served as a director of Kmart Corporation since November 19, 1996.

FLOYD HALL, 58 (Incumbent--Term to expire in 1999)

Chairman of the Board, President and Chief Executive Officer. Previously
served as Chairman and Chief Executive Officer of Alva Reproductions Inc.
(museum reproductions), Glass Masters Inc. (stained glass products) and The
Museum Co. (retail stores) and as Chairman of Lynx Technologies Inc.
(telecommunications). Prior to that, served as Chairman and Chief Executive
Officer of The Grand Union Company, Target Stores and B. Dalton Booksellers
Inc. Director of Jundt Growth Fund and Jundt Emerging Growth Fund. Has served
as a director of Kmart Corporation since 1995. Member of Executive Committee.

ROBERT D. KENNEDY, 64 (Incumbent--Term to expire in 1999)

Former Chairman and Chief Executive Officer of Union Carbide Corporation
(chemicals and plastics manufacturer). Director of Birmingham Steel
Corporation, General Signal Corporation, Sun Oil Co., Union Carbide
Corporation, Union Camp Corporation and UCAR International Inc. Has served as
a director of Kmart Corporation since 1996. Member of Finance Committee.

J. RICHARD MUNRO, 66 (Nominee--Term to expire in 2000)

Chairman of the Board of Genentech, Inc. (bio-technology). Previously served
as Chairman of the Executive Committee and as Co-Chairman of the Board and Co-
Chief Executive Officer of Time Warner Inc. (entertainment and
communications), and as Chairman of the Board and Chief Executive Officer of
Time Inc. (communications). Director of Genentech, Inc., Kellogg Company,
Mobil Corporation and Time Warner Inc. Has served as a director of Kmart
Corporation since 1990. Member of Compensation and Incentives, Executive and
Nominating Committees.

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<PAGE>

ROBIN B. SMITH, 57 (Nominee--Term to expire in 2000)

Chairman and Chief Executive Officer of Publishers Clearing House
(distribution of publications). Previously served as President and Chief
Executive Officer of Publishers Clearing House. Director of BellSouth Corp.,
Prudential Investments mutual funds, Springs Industries, Inc. and Texaco, Inc.
Has served as a director of Kmart Corporation since November 19, 1996. Member
of Audit Committee.

WILLIAM P. WEBER, 56 (Incumbent--Term to expire in 1999)

Vice Chairman of Texas Instruments Incorporated (diversified electronics
manufacturer). Previously served as Executive Vice President, Components
Sector President of Texas Instruments Corporation. Director of Texas
Instruments Corporation. Has served as a director of Kmart Corporation since
1996. Member of Audit Committee.

JAMES O. WELCH, JR., 65 (Nominee--Term to expire in 2000)

Former Vice Chairman of RJR Nabisco, Inc. and Chairman of Nabisco Brands,
Inc. Director of TECO Energy, Inc. and Vanguard Group of Investment Companies.
Has served as a director of Kmart Corporation since 1995. Member of
Compensation and Incentives Committees.

STOCK OWNERSHIP OF EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth the number of shares of Common Stock owned by
the Company's directors, including nominees for election as directors, each of
the current executive officers named under Compensation of Officers herein and
all of the directors and executive officers as a group, as of March 1, 1997.

<TABLE>
<CAPTION>
NAME SHARES
---- ---------
<S> <C>
James B. Adamson(1)............................................ 5,019
Lilyan H. Affinito(1).......................................... 21,532
Stephen F. Bollenbach(1)....................................... 13,580
Joseph A. Califano, Jr.(1)(2).................................. 10,883
Richard G. Cline(1)............................................ 18,338
Willie D. Davis................................................ 7,033
Enrique C. Falla(1)(2)......................................... 15,928
Joseph P. Flannery(1)(2)....................................... 15,527
Warren Flick(3)................................................ 283,433
Ronald J. Floto(2)(3).......................................... 71,718
Floyd Hall(3).................................................. 1,104,198
Donald W. Keeble(3)............................................ 151,156
Robert D. Kennedy(1)(2)........................................ 17,352
J. Richard Munro(1)............................................ 12,531
Marvin P. Rich(3).............................................. 83,936
Robin B. Smith(1).............................................. 3,792
William P. Weber(1)............................................ 13,819
James O. Welch, Jr.(1)(4)(5)................................... 205,655
Directors and executive officers as a group (51 persons) (1)-
(5)........................................................... 2,995,099
</TABLE>
As of March 1, 1997, none of the directors and executive officers owned 1%
or more of the Common Stock.
- --------
(1) Includes restricted Common Stock units accrued under the Directors Stock
Plan as follows: Mr. Adamson--2,010 units; Ms. Affinito--2,939 units; Mr.
Bollenbach--1,790 units; Mr. Califano--2,449 units; Mr. Cline--2,807
units; Mr. Falla--2,449 units; Mr. Flannery--358 units; Mr. Kennedy--2,010
units; Mr. Munro--2,939 units; Ms. Smith--396 units; Mr. Weber--2,010
units; and Mr. Welch--2,449 units.
(2) Includes shares of Common Stock that can be acquired by conversion of
Kmart Financing I Trust Convertible Preferred Stock as follows: Mr.
Califano--1,333 shares; Mr. Falla--6,666 shares; Mr. Flannery--6,666
shares; Mr. Floto--1,666 shares; Mr. Kennedy--3,333 shares; and all
directors and executive officers as a group--25,994 shares.

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<PAGE>

(3) Includes shares of Common Stock that can be acquired by exercise of stock
options within 60 days of March 1, 1997 as follows: Mr. Flick--83,333
shares; Mr. Floto--66,666 shares; Mr. Hall--300,000 shares; Mr. Keeble--
140,733 shares; Mr. Rich--66,666 shares; and all directors and executive
officers as a group--1,477,235 shares.
(4) Mr. Welch shares voting and investment power as to 32,495,444 shares of
Common Stock, owned by one or more of the Vanguard Group of Investment
Companies of which he is a director. If such additional shares were
included, executive officers and directors as a group would be considered
to beneficially own 35,490,543 shares, or 7.31%, of Common Stock,
including 6.73% for Mr. Welch. Mr. Welch disclaims beneficial ownership of
such shares.
(5) Includes 165,737 shares of Common Stock held by trusts of which Mr. Welch
and/or his wife is a co-trustee and 1,870 shares owned by his wife.

COMMITTEES OF THE BOARD

Following are the committees of the Board, the members of each committee as
of the date hereof, the number of meetings held by each committee during the
Company's fiscal year ended January 29, 1997, and a brief description of the
functions performed by each committee.

Audit Committee

Members: Lilyan H. Affinito (Chair), Enrique C. Falla, Robin B. Smith and
William P. Weber. This Committee is comprised solely of non-employee
directors.

Number of Meetings: 4

Functions: Recommending to the Board the selection of independent
accountants; approving the nature and scope of services performed by the
independent accountants and reviewing the range of fees for such services;
conferring with the independent accountants and reviewing the results of their
audit; reviewing the Company's internal auditing, accounting and financial
controls; and providing assistance to the Board with respect to corporate and
reporting practices of the Company.

Compensation and Incentives Committee

Members: Richard G. Cline (Chair), Willie D. Davis, J. Richard Munro and
James O. Welch, Jr. This Committee is comprised solely of non-employee
directors.

Number of Meetings: 8

Functions: Determining the nature and amount of compensation of all
executive officers of the Company and its subsidiaries; and administering the
Company's Annual Incentive Bonus Plan and executive and director stock plans.
This Committee is assisted as needed by an independent consultant which
reports directly to the Committee.

Executive Committee

Members: Floyd Hall (Chair), Lilyan H. Affinito, Richard G. Cline, Joseph P.
Flannery and J. Richard Munro.

Number of Meetings: 1

Functions: Exercising the power and authority of the Board as may be
necessary during the intervals between meetings of the Board, subject to such
limitations as provided by law or by resolution of the Board.

Finance Committee

Members: Joseph P. Flannery (Chair), James B. Adamson, Stephen F.
Bollenbach, Joseph A. Califano, Jr. and Robert D. Kennedy. This Committee is
comprised solely of non-employee directors.

Number of Meetings: 3

Functions: Reviewing and overseeing corporate operating and financial
policies, procedures and plans; making recommendations to the Board on
dividend policy, corporate financing, the issuance and sale of

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<PAGE>

Company securities and the investment of funds; and reviewing and overseeing
the Employee Pension Plan and Pension Fund and the Retirement Savings
Plan/Profit Sharing Programs and Funds.

Nominating Committee

Members: J. Richard Munro (Chair), Lilyan H. Affinito, Richard G. Cline and
Joseph P. Flannery. This Committee is comprised solely of non-employee
directors.

Number of Meetings: 4

Functions: Recommending to the Board nominees for election as directors. In
performing this function, the Committee will consider nominees recommended by
stockholders. Such recommendation should be submitted in writing to the
Secretary of the Company and should include a description of the proposed
nominee's qualifications, other relevant biographical data and the written
consent of the proposed nominee to serve, if elected. In addition, the By-laws
of the Company establish certain procedures concerning stockholder nominations
for election of directors. The By-laws require that notice of such nominations
be delivered to the Secretary of the Company within the following specified
time limits prior to the stockholders' meeting at which the directors are to
be elected: 90 days in advance of an annual meeting, and the tenth day
following the date on which notice of a special meeting is first given to
stockholders. Each notice of nomination is required to contain the name and
address of the stockholder who intends to make the nomination; the name, age,
business address and written consent of each nominee; and such other
information as would be required to be disclosed with respect to the nominee
in a proxy solicitation.

There were 11 meetings of the Board during the fiscal year ended January 29,
1997. Each director attended at least 86% of the total number of Board and
committee meetings held while he or she served as a director or member of the
committee.

COMPENSATION OF DIRECTORS

Directors who are not employees of the Company or its subsidiaries receive
an annual retainer of $50,000, with no additional amount payable for attending
meetings. Fifty percent (and at the election of the director, up to 100%) of
the annual retainer is paid in Common Stock in lieu of cash pursuant to the
Directors Stock Plan. In addition, under the Directors Stock Plan, restricted
stock units, which are distributed as shares of Common Stock upon termination
of Board service, are accrued for a period of time equal to the director's
Board service, but no more than 10 years, in an amount equal to 50% of the
annual retainer, plus, for Committee chairpersons, an amount equal to 10% of
the annual retainer.

Under the Company's Deferred Compensation Plan for Non-Employee Directors
and the Directors Stock Plan, a director may elect to defer all or any portion
of his or her compensation for services as a director which is payable in cash
or Common Stock. Under these Plans, deferred cash amounts earn interest at a
rate equivalent to the ten-year U.S. Treasury Note rate plus 5% and deferred
shares of Common Stock are credited with an amount equal to any dividends
payable on such shares, which are converted on a quarterly basis to additional
shares.

Effective January 1, 1996, benefits under the Company's Directors Retirement
Plan were terminated with respect to new directors and the accrual of future
benefits for existing directors was terminated. Non-employee directors who
served on the Board prior to December 31, 1995 and who serve until they reach
the mandatory retirement age or for at least five years are entitled to
benefits under the Plan. Upon retirement from the Board or age 62, whichever
is later, such directors will receive an annual benefit equal to the annual
retainer at the time of retirement for a period equal to the director's
accrued years under the Plan, not to exceed ten years. Ms. Affinito and
Messrs. Califano, Davis, Falla, Flannery and Munro have vested benefits under
the Directors Retirement Plan.

Directors who are employees of the Company or its subsidiaries do not
receive the aforesaid compensation or benefits.

7
<PAGE>

COMPENSATION OF OFFICERS

SUMMARY COMPENSATION TABLE. The following table sets forth information
regarding the compensation for services in all capacities to the Company in
fiscal years 1994, 1995 and 1996 of the Chief Executive Officer and each of
the other four most highly compensated executive officers of the Company as of
January 29, 1997.

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------- ------------------------
SECURITIES
NAME AND UNDERLYING RESTRICTED ALL OTHER
PRINCIPAL OPTIONS SHARE COMPENSATION
POSITION YEAR SALARY ($) BONUS ($) (#) AWARDS ($) ($)(3)
--------- ---- ---------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
F. Hall 1996 $1,000,000 1,749,500(1) 900,000 $1,488,200(2) $ 144,542(4)(5)
Chairman of 1995 660,300 1,000,000(6) 3,450,000(6) 6,375,000(6) -0-
the Board, 1994 -0- -0- -0- -0- -0-
President and
Chief
Executive
Officer
W. Flick 1996 687,500 340,300(7) 750,000 -0- 1,156,500(8)(9)
President and 1995 50,000 -0- 400,000 -0- 1,000,000(10)
Chief 1994 -0- -0- -0- -0- -0-
Operating
Officer,
U.S. Kmart
Stores
R. J. Floto 1996 550,000 638,300(11) 200,000 -0- 9,830(5)
Executive 1995 500,000 103,280 140,000 -0- -0-
Vice 1994 166,667 134,349 60,000 -0- -0-
President
and
President,
Super Kmart
Centers
M. P. Rich 1996 550,000 638,300(12) 200,000 -0- 25,477(5)
Executive 1995 500,000 103,280 130,000 -0- 1,250
Vice 1994 146,154 100,000 70,000 -0- -0-
President,
Strategic
Planning,
Finance and
Administration
D. W. Keeble 1996 400,000 461,200(13) 100,000 -0- 35,352(5)
Executive 1995 350,000 74,620 100,000 -0- 10,500
Vice 1994 300,833 -0- 48,000 -0- 9,250
President,
Store
Operations
</TABLE>
- --------
(1) $874,750 of Mr. Hall's 1996 cash bonus was used to purchase restricted
shares of Common Stock at an effective 20% discount pursuant to the
Company's Management Stock Purchase Plan. The value of the stock was
$1,093,438.
(2) This amount represents the value of 140,000 restricted shares of Common
Stock issued under the Company's Performance Restricted Stock Plan (based
on the market price of the stock as of the date of issue).
(3) Except for the 1996 dollar amounts under "All Other Compensation" for
Messrs. Hall and Flick, the value of perquisites, and other personal
benefits, if any, is not included because in each instance the aggregate
incremental cost for such benefits was below the required disclosure
thresholds of the Securities and Exchange Commission.
(4) Benefits received by Mr. Hall included reimbursement of $110,725 in
housing costs and living expense allowance (including $32,649 in taxes
paid in connection therewith).
(5) The dollar amounts under "All Other Compensation" for Messrs. Hall,
Floto, Rich and Keeble include employer contributions under the Company's
Supplemental Retirement Savings Plan and for Mr. Keeble under the
Company's Supplemental Pension Plan. The Supplemental Plans provide
benefits to the extent that the Employee Retirement Income Security Act
(ERISA) limits the amount of employer contributions to which a
participant would otherwise be entitled under the Plans absent such
limitation.
(6) In 1995, Mr. Hall was awarded a cash bonus (all of which was used to
purchase restricted shares of Common Stock under the Company's Management
Stock Purchase Plan), stock options for 3,450,000 shares of Common Stock
and 500,000 shares of restricted Common Stock pursuant to Mr. Hall's
employment agreement with the Company.

8
<PAGE>

(7) All of Mr. Flick's 1996 cash bonus was used to purchase restricted shares
of Common Stock at an effective 20% discount pursuant to the Company's
Management Stock Purchase Plan. The value of the stock was $425,375.
(8) In November 1996, Mr. Flick repaid a loan of $1 million which was to be
forgiven over time pursuant to his December 1995 employment agreement. In
consideration of such repayment, $1 million was credited to his deferred
compensation account, which accrues interest at the 10-year U.S. Treasury
Note rate plus 5%.
(9) Benefits received by Mr. Flick included reimbursement of $71,629 in
moving costs and living expense allowance (including $34,507 in taxes
paid in connection therewith) and $51,775 in imputed interest on a loan
of $1 million pursuant to his December 1995 employment agreement.
(10) In 1995, Mr. Flick received a one-time hiring payment of $1,000,000 (all
of which was used to purchase shares of Common Stock) pursuant to his
December 1995 employment agreement with the Company. He also purchased an
additional 100,000 shares of Common Stock in July 1996.
(11) $127,660 of Mr. Floto's 1996 cash bonus was used to purchase restricted
shares of Common Stock at an effective 20% discount pursuant to the
Company's Management Stock Purchase Plan. The value of the stock was
$159,575.
(12) $127,660 of Mr. Rich's 1996 cash bonus was used to purchase restricted
shares of Common Stock at an effective 20% discount pursuant to the
Company's Management Stock Purchase Plan. The value of the stock was
$159,575.
(13) $92,240 of Mr. Keeble's 1996 cash bonus was used to purchase restricted
shares of Common Stock at an effective 20% discount pursuant to the
Company's Management Stock Purchase Plan. The value of the stock was
$115,300.

OPTION GRANTS IN FISCAL YEAR 1996. The following table shows all grants to
each of the executive officers named under Compensation of Officers herein in
fiscal 1996.

<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS GRANTED GRANT DATE
OPTIONS GRANTED TO EMPLOYEES IN EXERCISE PRICE EXPIRATION PRESENT VALUE
(#) (1) FISCAL 1996 ($/SH) (2) DATE ($) (3)
--------------- --------------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
F. Hall................. 900,000 13.85% $10.63 3/19/06 $4,122,000
W. Flick................ 750,000(4) 11.55 7.81(250,000) 3/12/06 835,000
10.00(500,000) 10/29/06 2,195,000
R. J. Floto............. 200,000 3.08 7.81 3/12/06 668,000
M. P. Rich.............. 200,000 3.08 7.81 3/12/06 668,000
D. W. Keeble............ 100,000 1.54 7.81 3/12/06 334,000
</TABLE>
- --------
(1) Options shown above will become exercisable in three equal annual
installments commencing one year from date of grant.
(2) All options were granted at a price equal to 100% of the market value of
the Common Stock on date of grant (March 18, 1996 for Mr. Hall; March 11,
1996 (250,000 shares) and October 28, 1996 (500,000 shares) for Mr. Flick;
and March 11, 1996 for Messrs. Floto, Rich and Keeble). The exercise price
may be paid in cash, already owned shares or a combination of both.
(3) This column represents the present value of the options on the date of
grant using the Black-Scholes option pricing model for the Common Stock,
utilizing the following assumptions: five-year stock price volatility of
.3780, .3780 and .3875 for grants made on March 11, 1996, March 18, 1996
and October 28, 1996, respectively; dividend yield of 0.00%; five-year
option life; 6%, 6.16% and 6.29% risk-free interest rates for grants made
on March 11, 1996, March 18, 1996 and October 28, 1996, respectively; and
no adjustment for non-transferability or forfeiture. The actual value, if
any, that an executive officer may realize will depend on the excess of
the market price over the exercise price on the date the option is
exercised so that there is no assurance that the value realized by an
executive will be at or near the value estimated by the Black-Scholes
model, which is based on arbitrary assumptions as to the variables of
stock price volatility, future dividend yield and interest rate.
(4) Mr. Flick was granted options for 250,000 shares on March 11, 1996
pursuant to his December 1995 employment agreement, and for 500,000 shares
on October 28, 1996 when he was promoted to President and Chief Operating
Officer, U.S. Kmart Stores, which option grant was in lieu of a 1997
option grant.

9
<PAGE>

OPTION EXERCISES IN FISCAL YEAR 1996 AND OPTION VALUES AT FISCAL YEAR END.
The following table provides information as to options exercised by each of
the executive officers named under Compensation of Officers herein in fiscal
1996 and the value of options held by such executive officers at fiscal year
end measured in terms of the closing price of the Common Stock on January 29,
1997.

<TABLE>
<CAPTION>
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS AT 1/29/97 OPTIONS AT 1/29/97
(#) ($)
SHARES ACQUIRED AGGREGATE VALUE ANNUAL VALUE EXERCISABLE/ EXERCISABLE/
ON EXERCISE (#) REALIZED ($) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
--------------- --------------- ------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
F. Hall................. -0- $-0- $-0- -0-/ 4,350,000 $ -0-/ 445,500
W. Flick................ -0- $-0- $-0- -0-/ 1,150,000 -0-/2,989,250
R. J. Floto............. -0- $-0- $-0- -0-/ 400,000 -0-/ 663,000
M. P. Rich.............. -0- $-0- $-0- -0-/ 400,000 -0-/ 663,000
D. W. Keeble............ -0- $-0- $-0- 59,400/ 248,000 110,500/ 221,000
</TABLE>

PENSION PLAN TABLE(1)

The following table illustrates the estimated annual benefits payable under
the combined Employee Pension Plan and Supplemental Pension Benefit Plan
described below under the final average compensation formula (prior to the
applicable Social Security reduction) for employees at various levels of
compensation and years of service after age 21 and assumes that the Plans will
continue in their present form until the employee's retirement and that the
employee will continue in the employ of the Company or a participating
subsidiary until age 65.

<TABLE>
<CAPTION>
YEARS OF SERVICE(3)
--------------------------------------------
REMUNERATION(2) 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
--------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 125,000.................. $ 28,125 $ 37,500 $ 46,875 $ 56,250 $ 65,625
150,000.................. 33,750 45,000 56,250 67,500 78,750
200,000.................. 45,000 60,000 75,000 90,000 105,000
250,000.................. 56,250 75,000 93,750 112,500 131,250
300,000.................. 67,500 90,000 112,500 135,000 157,500
350,000.................. 78,750 105,000 131,250 157,500 183,750
400,000.................. 90,000 120,000 150,000 180,000 210,000
450,000.................. 101,250 135,000 168,750 202,500 236,250
500,000.................. 112,500 150,000 187,500 225,000 262,500
600,000.................. 135,000 180,000 225,000 270,000 315,000
700,000.................. 157,500 210,000 262,500 315,000 367,500
800,000.................. 180,000 240,000 300,000 360,000 420,000
900,000.................. 202,500 270,000 337,500 405,000 472,500
</TABLE>
- --------
(1) The accrual of benefits under the Company's tax-qualified Employee
Pension Plan was frozen as of January 31, 1996. Therefore, service after
January 31, 1996 is not recognized for benefit calculation purposes, but
is recognized for vesting purposes. The Plan will provide benefits
computed under (i) a career average formula at 1.25% of the employee's
compensation for each year of credited service prior to January 31, 1996,
or (ii) a final average compensation formula at 1.50% of the average of
the employee's best five compensation years multiplied by years of
service after age 21 and prior to January 31, 1996 up to 35 years minus
2% of the employee's Social Security benefit for each year of service up
to 30 years, whichever formula provides the greater benefit. Since the
formula described in (ii) provides the greater benefit to any eligible
executive officer named under Compensation of Officers herein, the
Pension Plan Table illustrates the estimated annual benefits payable
under that formula (prior to the applicable Social Security reduction).
The Company has also adopted a Supplemental Pension Benefit Plan which
provides benefits to the extent that ERISA limits the pension to which an
employee would otherwise be entitled under the Employee Pension Plan absent
such limitation; provided, however, that the maximum annual benefit payable
under

10
<PAGE>

the Plans on a combined basis is $642,240, as adjusted by any increase in
the urban consumer price index after January 1, 1997 to the date of
retirement.
The amounts shown are based on the pension being paid only during the
lifetime of the retired employee and would be reduced on an actuarially
equivalent basis in the event of a survivor benefit or optional form of
payment. Of the executive officers named under Compensation of Officers
herein, only D.W. Keeble is eligible to receive benefits under the Plan.
Mr. Keeble has 26 years of service under the Plan after age 21.
(2) "Remuneration" is the average compensation of an employee during the 5
highest years preceding January 31, 1996. Compensation covered by the
Plans for executive officers is the sum of their annual salary and bonus.
(3) The pension amounts shown in the table are subject to reduction by 2% of
the employee's Social Security benefit for each year of service prior to
January 31, 1996 up to a maximum of 30 years. The maximum reduction at age
65 is currently $9,596.

The Company also has adopted a Supplemental Executive Retirement Plan for
the purpose of providing supplemental retirement income to executive officers
of the Company who retire prior to age 65 or who are hired by the Company
later in their careers, whom the Board of Directors approves as eligible to
receive benefits under the Plan. Benefits are determined by the Board of
Directors based on the position, responsibilities and rate of compensation of
the employee, benefits payable or which would have been payable under other
plans, and such other factors as the Board may deem relevant.

EMPLOYMENT AND SEVERANCE ARRANGEMENTS. The Company has entered into
employment or severance agreements with the executive officers named under
Compensation of Officers herein. Mr. Hall's agreement, which has a term ending
June 3, 2000, provides for an annual salary of at least $1 million, an annual
on-plan incentive bonus opportunity of at least $1 million (guaranteed for
fiscal 1996 and based on the attainment of performance goals thereafter) and
the 1995 grants of stock options and restricted shares described under
Compensation of Officers herein. (Mr. Hall used all of his 1996 $1 million
bonus to purchase restricted shares of Common Stock under the Company's
Management Stock Purchase Plan.) If his employment is terminated by the
Company other than for cause or disability or if he terminates for good
reason, he will be entitled to receive monthly severance payments equal to his
monthly base salary at the time of termination, plus 1/12th the annual on-plan
bonus for the year in which termination occurred (the "severance payments").
The severance payments will be made during a severance period equal to the
term remaining on his employment agreement at the time of termination, but in
no event for less than 12 months nor more than 36 months. In addition, if his
employment is terminated without cause and within two years of a change in
control of the Company, he would be entitled to receive a lump sum payment
equal to the severance payments. The agreements entered into with the other
executive officers named under Compensation of Officers, other than Mr. Flick,
contain substantially similar severance provisions and provide that, if
employment is terminated by the Company, other than for cause or disability,
or if the executive officer terminates employment for good reason, he will be
entitled to receive severance payments in monthly installments during a two
year severance period following termination equal to his monthly base salary
at the time of termination, plus 1/12th the annual on-plan bonus targeted for
the year in which termination occurred, which payments will be reduced by the
amount of compensation received from other employment. (The executive officer
has an obligation to seek such other employment.) In the event of termination
for cause or disability, the executive officer would not receive any severance
payments under the agreement.

The Company also entered into an employment agreement in December 1995 with
Mr. Flick to serve as Executive Vice President of the Company and President
and General Merchandise Manager, U.S. Kmart Stores. The terms of the agreement
provided for a one-time hiring payment of $1,000,000, an annual salary of at
least $600,000, an annual on-plan incentive bonus opportunity (guaranteed in
the amount of $300,000 for 1996 and based on the attainment of performance
goals thereafter) and the 1995 and March 1996 stock options described under
Compensation of Officers herein. (Mr. Flick purchased 100,000 shares of Common
Stock with his one-time hiring payment, and he also purchased an additional
100,000 shares of Common Stock in July 1996.) When Mr. Flick was promoted to
President and Chief Operating Officer, U.S. Kmart Stores in November 1996, the

11
<PAGE>

agreement was amended to provide for the October 1996 stock option grant
described under Compensation of Officers herein (in lieu of a 1997 stock
option grant), an annual salary of at least $800,000 and a grant of 200,000
shares of restricted Common Stock in March 1997. In the event Mr. Flick's
employment is terminated by the Company other than for cause or disability or
if he terminates for good reason, severance payments are provided under the
agreement for up to 24 months equal to his monthly base salary at the time of
termination plus 1/12th the annual on-plan bonus for the year in which
termination occurred. As a component of the compensation package offered to
Mr. Flick, the agreement also provided for an interest-free loan of $1 million
which was, subject to certain conditions, to be forgiven incrementally over
the term of Mr. Flick's employment. Pursuant to the amended agreement, the
loan was repaid in its entirety by Mr. Flick in November 1996 and $1 million
was credited to Mr. Flick's deferred compensation account under the Executive
Deferred Compensation Plan, which amount will, pursuant to the Plan, earn
interest at a rate equivalent to the 10-year U.S. Treasury Note rate plus 5%.

The Company estimates that if the employment of Messrs. Hall, Flick, Floto,
Rich and Keeble were terminated in 1997, and severance payments were due them
under their severance agreements, the total payments due for the entire
severance period (assuming no reduction for other employment) would be
approximately $12,236,000.

COMPENSATION AND INCENTIVES COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Company's executive compensation program is administered by the
Compensation and Incentives Committee of the Board of Directors. The Committee
is comprised of four independent non-employee directors.

The primary goal of the Committee is to assure that the compensation
provided to the Company's executives is tied to the Company's business
strategies and objectives, thereby aligning the financial interests of senior
executives with those of the stockholders. Other objectives of the Committee's
compensation strategy are to attract and retain the best possible executive
talent, to motivate those executives to obtain optimum performance for the
Company, to link executive and stockholder interests through equity based
plans and to provide compensation that recognizes individual contributions as
well as overall business results.

Each year the Committee conducts a review of the Company's executive
compensation program, assisted as needed by an independent compensation
consultant, in order that the Committee may assure that the Company's
compensation program is properly integrated with both the Company's annual and
longer term objectives and is competitive with compensation programs of other
companies with which the Company must directly compete for executive talent.

The Committee's policy with respect to each of the components of the
Company's executive compensation program is discussed below. Through these
programs, a very significant portion of the Company's executive compensation
is linked to performance and the alignment of executive interests with those
of stockholders.

The Committee has also adopted a policy that, while maintaining an
appropriately competitive compensation program, it will endeavor to take the
necessary steps so that all compensation paid to executive officers will be
tax deductible to the Company under Section 162(m) of the Internal Revenue
Code.

Base Salary

To establish the 1996 base salaries of executive officers, each position was
matched to a comparable position in the competitive marketplace or, for
positions unique to the Company, to a position with a comparable level of
responsibility within the Company, and it was slotted into a structure of
graduated salary levels that was established by reference to an executive
compensation survey in which the Company and 53 other major U.S. retailers
participated. The range for each position consisted of minimum, mid-point and
maximum salary levels. Generally, the salary goals for executive officers were
targeted at the average salaries for comparable positions within the companies
participating in the survey (unless an employment agreement provided otherwise
or it was necessary to meet a specific competitive offer). Any annual salary
adjustment, within each applicable position/salary grade, was determined based
on the performance of the individual (including the achievement of

12
<PAGE>

his or her annual objectives). The retail companies included in the survey
represented a narrower group than the companies included in the Standard &
Poor's Retail Stores Composite Index, contained in the Company's stock
performance graph below. The Committee believes that the means by which
comparative salary levels were determined were appropriate since they enabled
the Company's executive salary structure to reflect the practice of other
retailers that are comparable to the Company in size and complexity. The
Committee intends periodically to assess the continued suitability of this
approach and to modify it if appropriate.

Annual Incentive Bonus

Executive officers have an opportunity to earn annual bonuses based on
performance against corporate and business unit goals approved by the
Committee. In addition, the Committee may approve adjustments to the bonus
formula as necessary from time to time to insure against unmerited windfalls
or penalties due to accounting changes or other non-operating factors.

The Company's goal for 1996, and the funding of 1996 incentive bonuses of
executive officers, was based solely on the achievement of consolidated after-
tax 1996 financial results (exclusive of results of certain subsidiaries and
certain one-time charges).

Participants were assigned threshold, target and maximum bonus levels, with
funding depending on the level of achievement of the annual goal--zero if
achievement was below the threshold level of 80% of goal, and increasing
incrementally from 25% of the targeted bonus at 80% achievement to 100% of the
targeted bonus at 100% achievement to a maximum of 225% of the targeted bonus
at achievement of 150% or greater.

The 1996 targeted bonus opportunity for each executive officer was based on
a percentage of the salary range midpoint for a comparable position within the
companies participating in the above-described executive compensation survey--
with the largest targeted bonus opportunity being granted to the CEO (70% of
such salary range midpoint) and the targeted bonus opportunity granted to
other executive officers decreasing incrementally based on their
position/salary grade (down to 26.67% of the applicable salary range
midpoint). Generally, the on-plan incentive bonus for executive officers was
targeted at the average bonus for comparable positions within the companies
participating in the survey (unless an employment agreement provided otherwise
or it was necessary to meet a specific competitive offer).

Bonus payouts were based on the achievement of individual financial and
personal performance objectives approved and subsequently evaluated by the
senior officer to whom the executive officer reported (and, in the case of the
CEO, by the Board of Directors).

Stock Purchases and Options

The Company's long-term incentive plans for executive officers and other key
executives consisted of the Management Stock Purchase Plan and the Stock
Option Plan.

The Committee has long believed that aligning management's interests with
those of stockholders is an important element of the Company's executive
compensation program and that encouraging increased levels of ownership in the
Company's Common Stock is a key ingredient in achieving this goal. The
Management Stock Purchase Plan, which was approved by stockholders, provides
for the use of any annual incentive bonus earned by the executive officers and
other executive participants under the Annual Incentive Bonus Plan to be used
to purchase shares of Common Stock at an effective 20% discount, such shares
to be restricted from sale or transfer for a period of three years. A
participant may choose to use less than 100% of his or her annual bonus to
purchase such restricted shares, but in no event may use less than 20% of the
performance based portion of the bonus.

The Company's Stock Option Plan also enables executive officers and other
key executives to develop and maintain a substantial stock ownership position
in the Company's Common Stock, and creates a direct link between executive
compensation and stockholder return. Under the Stock Option Plan, which was
approved by stockholders, options for Common Stock were granted in 1996 to
3,400 executives.

13
<PAGE>

Generally, the 1996 stock option grants for executive officers ranged from
28% to 97% of the applicable salary range midpoint depending on their position
and salary grade, and were targeted at the average grant levels for comparable
positions at the companies participating in the above described executive
compensation survey (unless an employment agreement provided otherwise, or a
specific competitive offer was met, or the Committee determined otherwise
based on its own assessment of the situation).

The 1996 grants for the executive officers named in the Summary Compensation
Table on page 8, other than CEO, were made by the Committee based on its
assessment that these individuals had made material contributions to the
significant accomplishments of the Company in 1996; and, additionally, with
respect to Mr. Flick, based on his November 1996 promotion to President and
Chief Operating Officer, U.S. Kmart Stores and the fact that his grant at the
time of his promotion was in lieu of a 1997 stock option grant.

Stock options were granted with an exercise price equal to the market price
of the Common Stock on the date of grant, will expire after ten years and will
vest over a three year period at the rate of one-third of the shares per year.

To support its strategies and to provide management throughout the
organization with incentives to achieve the Company's goals, the Company also
implemented a Stock Exchange Program in 1996 for active associates who
participate in its stock option plans. This program allowed participants below
the senior management team level a one-time opportunity to exchange their
outstanding out-of-the money stock options for fewer new options (calculated
based on a Black Scholes pricing model) with an exercise price of $7.81 per
share, the market price of Kmart Common Stock at the time of the exchange. A
total of 14.7 million out-of-the-money option shares were exchanged for 5.7
million new option shares pursuant to the exchange. None of the officers named
in the Summary Compensation Table were eligible to participate in the
exchange.

CEO Compensation

Mr. Hall's 1996 cash compensation included a base salary of $1,000,000 which
equaled the average salary of the other CEO's of companies participating in
the above described executive compensation survey, and a target bonus of
$777,560, which was the average target bonus awarded to such CEO's. Mr. Hall's
bonus payout for 1996 was $1,749,510, or 225% of his target bonus, as a result
of the Company's significantly exceeding its 1996 financial goal and Mr.
Hall's achievement of his individual financial and personal performance
objectives. The Committee also granted Mr. Hall stock options to purchase
900,000 shares of Common Stock and awarded him 140,000 shares of restricted
Common Stock. These awards were made by the Company based on its assessment
that Mr. Hall was successfully leading the Company through a particularly
difficult period, during which the Company had achieved, or was achieving,
many significant accomplishments including, among others: a significant
reduction in Company expenses; the divestiture of numerous non-core assets;
the development of a new management team; the formulation of the Company's new
high-frequency strategy; the closing of over 200 unproductive stores; the
elimination of approximately $700 million in unproductive inventory; the
reduction of capital expenditures by approximately one-half by slowing the
store opening program; and significant progress toward a capital restructuring
of the Company through a $1 billion public securities offering and a new $3.7
billion credit agreement.

The Committee is also mindful that the market value of the Company's Common
Stock doubled over the course of fiscal 1996.

Compensation and Incentives
Committee

R. G. Cline, Chair
W. D. Davis
J. R. Munro
J. O. Welch, Jr.

The Compensation and Incentives Committee Report shall not be deemed
incorporated by reference into any filings by the Company under the Securities
Act of 1933 or the Securities Exchange of 1934, except to the extent that the
Company specifically incorporated this information by reference, and shall not
otherwise be deemed filed under such Acts.

14
<PAGE>

PERFORMANCE GRAPH

Set forth below is a graph comparing the total returns (assuming dividend
reinvestment) of the Company's Common Stock, the Standard & Poor's ("S&P") 500
Composite Index and the S&P Retail Stores Composite Index for the five-year
period commencing January 31, 1992.

COMPARISON OF CUMULATIVE TOTAL RETURN/JANUARY 1992 TO JANUARY 1997*

TOTAL SHAREHOLDER RETURNS

LOGO

Assumes $100 invested on January 31, 1992 lCompany's Common Stock
in the Company's Common Stock, sS&P 500 Composite Index
S&P 500 Composite Index and S&P nS&P Retail Stores Composite
Retail Stores Composite Index Index

*Total Return Assumes Reinvestment of Dividends.

The graphs and related disclosure contained in this section of the Proxy
Statement shall not be deemed incorporated by reference into any filings by
the Company under the Securities Act of 1933 or the Securities Exchange Act of
1934, except to the extent that the Company specifically incorporates this
information by reference, and shall not otherwise be deemed filed under the
Acts.

PROPOSAL 2--APPROVAL OF 1997 LONG-TERM EQUITY COMPENSATION PLAN

On March 18, 1997, the Board of Directors (the "Board") approved the Kmart
Corporation 1997 Long-Term Equity Compensation Plan (the "Plan") in the form
attached as Exhibit A. In general, the Plan provides for the grant of awards
of stock options, stock appreciation rights, restricted stock and performance
units and performance shares (the "Awards") to officers and key employees of
the Company and its subsidiaries (the "Company"), as well as non-employee
directors. It is estimated that approximately 3,100 employees, 38 officers,
and 13 non-employee directors will be eligible to participate in the Plan (the
"Participants"). The Plan is designed to attract and retain outstanding
individuals in key positions and to furnish incentives linked to the
performance of the Company and its stock. The Plan will replace the 1992 Stock
Option Plan, under which essentially no shares remain available for grant. All
grants to officers and directors and any grants of incentive stock options
under the Plan will be subject to stockholder approval of the Plan. (See
"Other Information" below regarding grants made on March 17, 1997.) The Board
of Directors believes that the Awards will provide performance incentives to
Participants to the benefit of the Company and its stockholders and recommends
approval of the Plan by stockholders.

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The Plan is designed to meet the requirements for tax deductibility under
Section 162(m) of the Internal Revenue Code (the "Code") with respect to
certain compensation.

The following summary of provisions of the Plan is qualified by reference to
the text of the Plan attached as Exhibit A.

Plan Administration

The Plan will be administered by the Compensation and Incentives Committee
of the Board, which is comprised of non-employee directors who meet the
applicable requirements of "non-employee director" under Rule 16b-3 of the
Rules and Regulations of the Securities and Exchange Commission and of an
"outside director" under Section 162(m) of the Internal Revenue Code of 1986,
as amended (the "Code"), except that Awards to non-employee directors will be
administered by the Board. For convenience sake, all references hereinafter to
the Plan administrator will be to the Compensation and Incentives Committee
(the "Committee").

The Committee will have the discretion, in accordance with the provisions of
the Plan, to determine to whom an Award is granted and the terms and
conditions of the Award. In making such determinations, the Committee may
consider the position and responsibilities of the Participant, the nature and
value to the Company of his or her services and accomplishments, his or her
present and potential contribution to the Company and such other factors as
may be deemed relevant. No Award may be granted to a Participant who owns more
than 5% of the outstanding Stock.

Shares Reserved for Issuance

The total number of shares of Kmart Corporation Common Stock, par value
$1.00 ("Stock") which may be subject to Awards or be issued under the Plan
will not exceed 24,000,000 shares, of which no more than 5,000,000 shares may
be issued as restricted stock. The Plan permits adjustments to that number for
events like: a corporate capitalization such as a stock split; a corporate
transaction such as a merger, consolidation, spin-off or other distribution of
stock or property; any reorganization; or a liquidation of the Company. The
Plan also permits Stock not acquired due to cancellation, expiration or
termination of an Award to become available for reissuance. No Awards may be
granted under the Plan after March 17, 2007. Awards granted prior thereto may
extend beyond such date, and the provisions of the Plan will continue to apply
thereto.

Stock Options

The Plan permits the Committee to grant Awards of stock options to
Participants and to determine the timing and amount of such Awards, provided
that no individual can receive options for more than 1,000,000 shares of Stock
in any fiscal year, subject to equitable adjustment as set forth above. The
exercise price for an option cannot be less than 100% of the fair market value
of the Stock underlying the option at the time of grant. The Committee may
grant either non-qualified stock options or incentive stock options (as that
term is defined in Code Section 422A). Non-qualified stock options will be
exercisable for a period up to ten years and two days from the date of grant,
and incentive stock options will be exercisable for a period up to ten years
from the date of grant. The Plan also permits the Committee to require a
period of employment or service before options will be vested and to establish
time periods for exercise in the event of termination of employment or
service. Except as otherwise provided by the Committee with respect to non-
qualified stock options, options cannot be transferred other than by will or
the laws of descent and distribution.

Stock Appreciation Rights

The Plan permits the Committee to award stock appreciation rights ("SARs")
to Participants and to determine the timing and amount of such Awards,
provided that no individual can receive more than 1,000,000 SARs in any fiscal
year, subject to equitable adjustment as set forth above. The Committee may
grant freestanding SARs or SARs in tandem with a related stock option ("Tandem
SAR") or a combination of both.

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The grant price of a freestanding SAR is the fair market value of a share of
Stock on the date of grant and of a Tandem SAR is the exercise price of the
related stock option. No SAR will be exercisable after ten years and two days
from the date of grant. Upon exercise of each SAR, the holder is entitled to
receive the excess of the fair market value of the Stock on the date of
exercise over the grant price. At the discretion of the Committee, the payment
upon exercise of an SAR may be in cash, in Stock or a combination of both. The
Plan also permits the Committee to determine the holder's right to exercise
SARs following termination of employment or service. Except as otherwise
provided by the Committee, SARs cannot be transferred other than by will or
the laws of descent and distribution.

Restricted Stock

The Plan permits the Committee to grant Awards of restricted stock to
Participants and to determine the timing, amount and conditions of such
Awards, provided that no individual can receive more than 500,000 shares of
restricted stock in any fiscal year, subject to equitable adjustment as set
forth above. Shares awarded as restricted stock would be issued subject to
such restrictions as the Committee determines, including, without limitation,
restrictions: that require the Participant's payment of a stipulated purchase
price; that are based upon the achievement of specific performance goals; that
are based on time-based vesting and/or restrictions under applicable federal
or state securities laws. During the restriction period, the Participant is
not entitled to delivery of the Stock, restrictions are placed on the Stock's
transferability, and the Stock may be forfeited in the event of termination of
employment or service. A holder of restricted stock will generally have the
rights and privileges of a stockholder including the right to vote the Stock.
The Committee has discretion to remove restrictions if it deems that to be
appropriate in a particular case. Upon expiration of the restriction period,
the appropriate number of shares of Stock will be issued to the Participant.

Performance Units/Shares

The Plan permits the Committee to grant Awards of Performance Units and/or
Performance Shares to Participants based upon Company performance over a
period of time (a "Performance Period") determined by the Committee. At the
time the Committee establishes a Performance Period for a particular Award, it
will also establish Company performance measures ("Performance Measures")
applicable to the Award and targets that must be attained relative to those
measures. Performance Measures may be based on any of the following, alone or
in combination, as the Committee deems appropriate for the Company, its
subsidiaries, its affiliates and/or any subdivisions thereof: (i) return on
equity, assets, capital, sales or investment; (ii) pre-tax or after-tax
profit; (iii) implementation of processes or projects; (iv) expense reduction
levels; (v) changes in the market price of the Stock; (vi) total shareholder
return; and (vii) cash flow. Performance targets may include a minimum,
maximum and target level of performance, with the size of Award based on the
level attained. Upon completion of a Performance Period, the Committee will
determine performance in relation to the performance targets for that period.
Following determination of the level of performance, the Committee may in its
discretion adjust upward or downward the payment which otherwise would have
been made except no upward adjustment will be made if to do so would
disqualify the payment as performance based compensation under Code Section
162(m). The Committee may also make adjustments in the terms and conditions
and the criteria included in Awards in recognition of unusual or non-recurring
events whenever the Committee determines that such adjustments are appropriate
in order to prevent dilution or enlargement of the intended benefit of the
Award except no such adjustment will be made if to do so would disqualify the
payment as performance based compensation under Code Section 162(m).

Awards may be paid in cash, Stock or a combination of both following the end
of the Performance Period. The aggregate maximum amount that can be paid with
respect to Performance Unit Awards to any individual in respect of any
Performance Period under the Plan may not have a value in excess of the value
of 500,000 shares of Stock and the maximum number of Performance Share Awards
that can be awarded to any individual in respect of any Performance Period
under the Plan may not exceed 500,000 shares of Stock, subject to equitable
adjustment as set forth above. The fair market value of the Stock will be
determined by the average of the high

17
<PAGE>

and low sales price, regular way, of a share of Stock on the last day of the
Performance Period, as reported on the Composite Transactions reporting
systems. In the event of termination of employment or service prior to
attaining the Performance target, the Performance Units/Shares will be
forfeited unless the Committee in its discretion otherwise determines.

Change of Control

In the event of a change of control of the Company: (i) all options and SARs
then outstanding under the Plan will become fully exercisable and remain so
throughout their term; (ii) all restriction periods and non-performance based
terms and conditions imposed on Restricted Stock then outstanding will lapse;
and (iii) the target payout opportunities attainable under all outstanding
Awards of performance based Restricted Stock, Performance Units and
Performance Shares will be deemed to have been fully earned for the entire
Performance Period(s) as of the effective date of the change in control. The
vesting of all Awards denominated in Stock will be accelerated as of the
effective date of the change in control, and there will be paid out to
Participants within 30 days following the effective date of the change in
control a pro rata number of shares of Stock (or their cash equivalent) based
upon an assumed achievement of all relevant targeted performance goals and
upon the length of time within the Performance Period which has elapsed prior
to the change in control. Awards denominated in cash will be paid pro rata to
Participants in cash within 30 days following the effective date of the change
in control, with the proration determined as a function of the length of time
within the Performance Period which has elapsed prior to the change in
control, and based on an assumed achievement of all relevant targeted
performance goals.

A change of control occurs if: (i) any person becomes a beneficial owner of
33 1/3 percent or more of the combined voting power of the Company; (ii) the
Company's stockholders approve a definitive agreement to merge or consolidate
the Company with or into another corporation or to sell or otherwise dispose
of substantially all of its assets or to adopt a plan of liquidation; (iii)
during any three consecutive years, there ceases to be a majority of the Board
comprised of individuals who at the beginning of that period constituted the
Board (unless the election, or nomination for election by the stockholders, of
each new director was approved by a vote of at least a majority of the
directors then still in office who were directors at the beginning of such
period or whose election or nomination was previously so approved).

Plan Amendment or Termination

The Board may terminate or suspend the Plan in whole or in part, at any
time, with respect to all past and future grants and Awards.

Current Federal Tax Consequences

A Participant who has been granted an incentive stock option will not
realize taxable income and the Company will not be entitled to a deduction at
the time of the grant or exercise of that option. If the optionee does not
dispose of the Stock acquired pursuant to an incentive stock option within two
years from the date of grant, or within one year of transfer of the Stock to
the optionee, any gain or loss realized on a subsequent disposition will be
treated as long-term capital gain or loss. Under these circumstances, the
Company will not be entitled to a deduction for federal income tax purposes.
If these holding periods are not satisfied, the optionee will generally
realize ordinary income at the time of disposition in an amount equal to the
lesser of (i) the excess of the fair market value of the Stock on the date of
exercise over the option price or (ii) the excess of the amount realized upon
disposition of the Stock, if any, over the option price, and the Company will
be entitled to a corresponding deduction.

A Participant will not realize taxable income at the time of grant of an
option that does not qualify as an incentive stock option, and the Company
will not be entitled to a deduction at that time. Upon exercise, however, of
that non-qualified option, the optionee will realize ordinary income in an
amount measured by the excess, if any, of the fair market value of the Stock
on the date of exercise over the option price, and the Company will be
entitled to a corresponding deduction. Upon a subsequent disposition of Stock,
the optionee will realize short-term or long-term capital gain or loss with
the basis for computing such gain or loss equal to the option price plus the
amount of ordinary income realized upon exercise.

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A Participant who has been granted an SAR will not realize taxable income,
and the Company will not be entitled to a deduction, at the time of grant.
Upon exercise, however, of that SAR, the holder will realize ordinary income
in an amount equal to any cash payment and/or the market value of any Stock
distributed, and the Company will be entitled to a corresponding deduction.

A Participant granted a restricted stock award will not realize taxable
income at the time of grant, and the Company will not be entitled to a
deduction at that time, assuming that the restrictions constitute a
substantial risk of forfeiture for federal income tax purposes. Upon the
vesting of that Stock, the holder will realize ordinary income in an amount
equal to the fair market value of the Stock at that time less any amount paid
for the Stock, and the Company will be entitled to a corresponding deduction.
Dividends paid to the holder during the restriction period will also be income
to the holder and the Company will be entitled to a corresponding deduction.

A Participant granted performance units or performance shares will not
realize income at the time a performance period is established, and the
Company will not be entitled to a deduction at that time. The Participant will
have income at the time a Performance Award is paid out if that payment is in
cash, and the Company will be entitled to a corresponding deduction. If a
Performance Award is paid in restricted stock, the tax impact will be that
discussed above with respect to restricted stock.

With respect to any income tax withholding requirements imposed upon the
occurrence of a taxable event to a Participant, the Company can require the
payment of such tax liability in cash, or subject to the Committee's approval,
in Stock.

Other Information

On March 17, 1997, a broad based grant of non-qualified stock options for
6.1 million shares of Stock was made to 38 officers and 3,100 other key
employees of the Company. Options for an aggregate of 3.57 million shares were
granted under the existing 1992 Stock Option Plan including the following: F.
Hall--1 million shares; R. J. Floto--150,000 shares; M. P. Rich--150,000
shares; D. W. Keeble--70,000 shares; officers as a group--2.31 million shares;
and non-officers as a group--1.26 million shares. Options for the remaining
2.53 million shares were granted to non-officers under the 1997 Long-Term
Equity Compensation Plan. All options were granted at a price of $12.125 per
share, the fair market price of the Stock on the date of grant. On the same
date, a grant of Restricted Stock was made under the existing Performance
Restricted Stock Plan as follows: W. Flick--225,000 shares; and grants of
Restricted Stock were made under the 1997 Long-Term Equity Compensation Plan,
subject to stockholder approval of the Plan, as follows: F. Hall--225,000
shares; R. J. Floto--85,000 shares; M. P. Rich--85,000 shares; D. W. Keeble--
50,000 shares; and officers as a group--535,000 shares.

The closing price of the Company's Common Stock reported on the New York
Stock Exchange for March 31, 1997 was $12.00 per share.

APPROVAL OF PROPOSAL 2 WILL REQUIRE THE AFFIRMATIVE VOTE OF A MAJORITY OF
THE VOTES CAST BY HOLDERS OF COMMON STOCK WHO ARE PRESENT IN PERSON OR
REPRESENTED BY PROXY AND ENTITLED TO VOTE AT THE ANNUAL MEETING. IF SUCH
APPROVAL IS NOT OBTAINED, NO GRANTS TO OFFICERS AND DIRECTORS NOR ANY GRANTS
OF INCENTIVE STOCK OPTIONS WILL BE EFFECTIVE UNDER THE PLAN.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE KMART
CORPORATION 1997 LONG-TERM EQUITY COMPENSATION PLAN.

PROPOSAL 3--RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS

Subject to stockholder ratification, the firm of Price Waterhouse LLP has
been appointed by the Board as independent accountants to audit the Company's
books for fiscal 1997, upon recommendation of the Audit Committee.
Representatives of Price Waterhouse LLP will be present at the Annual Meeting,
will have the opportunity to make a statement if they desire to do so and will
be available to respond to appropriate questions from stockholders.

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APPROVAL OF THE RATIFICATION OF THE APPOINTMENT OF PRICE WATERHOUSE LLP AS
INDEPENDENT ACCOUNTANTS WILL REQUIRE THE AFFIRMATIVE VOTE OF A MAJORITY OF THE
VOTES CAST BY HOLDERS OF COMMON STOCK WHO ARE PRESENT IN PERSON OR REPRESENTED
BY PROXY AND ENTITLED TO VOTE AT THE MEETING.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 3.

PROPOSAL 4--STOCKHOLDER PROPOSAL

The Company has been advised that Edward S. George, EdD, who is the
beneficial owner of 10,000 shares of Common Stock of the Company, intends to
present the following proposal at the Annual Meeting of Stockholders:

"WHEREAS the dividend is the first casualty in any economic downturn and
the stockholder is the first casualty and the last to benefit from an
upturn, be it

RESOLVED: That when a dividend is cut, it is recommended that no salaries
will be increased or any stock options allowed to executives or directors
until the dividend is restored to its original amount before the cut."

STOCKHOLDER'S SUPPORTING STATEMENT

"The bullet must be large enough to enable executives and directors as well
as stockholders to get their teeth on it.

The administration will maintain that the increases in salary and stock
options are necessary to attract and hold good people. This cliche belongs
with the one "The check is in the mail," the New York Legislature and certain
elected officials to justify an increase in their salaries, and "I'm from the
government and I'm here to help."

BOARD OF DIRECTORS STATEMENT OPPOSING STOCKHOLDER PROPOSAL

THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST THIS PROPOSAL. Salary and
stock options constitute important elements in the compensation package
offered to executives--both those that the Company is trying to attract and
those that the Company needs to retain. This is especially true for companies
in a turnaround mode. To implement this proposal would put the Company in an
uncompetitive position with respect to other employers seeking talented retail
executives. While the Board appreciates stockholder concerns regarding the
elimination of the Company's Common Stock dividend, adoption of draconian
compensation measures that would foreseeably repel new hires and generate an
exodus of existing executives from the Company would not be prudent or in the
best interests of the Company and its stockholders.

APPROVAL OF PROPOSAL 4 WILL REQUIRE THE AFFIRMATIVE VOTE OF A MAJORITY OF
THE VOTES CAST BY THE HOLDERS OF COMMON STOCK WHO ARE PRESENT IN PERSON OR
REPRESENTED BY PROXY AND ENTITLED TO VOTE AT THE MEETING.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST PROPOSAL 4.

PROPOSAL 5--STOCKHOLDER PROPOSAL

The Company has been advised that Gerald J. Switzer, an ex-employee, who is
the beneficial owner of 13,355 shares of Common Stock of the Company, intends
to present the following proposal at the Annual Meeting of Shareholders.

"RESOLVED: That the Board of Directors is hereby requested to take the
necessary steps to adopt and implement the following, relating to the election
of Directors:

All directors shall be required to receive 50.1% or more of the votes cast
in order to remain in office. Any director not receiving 50.1% or more of
the votes cast shall cease to be a director effective the day after the

20
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Annual Meeting except that, in order to provide continuity of the Board, no
more than three directors can be unseated due to a lack of sufficient votes
in any one election."

STOCKHOLDER'S SUPPORTING STATEMENT

"The ability to elect directors is the single most important right of the
stockholders. This right has been significantly impaired because of plurality
voting and the establishment of a class system for bringing directors up for
election. In fact, our vote for directors is now meaningless when no
opposition is present. Consequently, instead of the stockholders controlling
the Board of Directors, the Board of Directors is controlling the
stockholders.

Currently, directors need only receive a plurality of the votes cast to
remain in office. This means the current directors will automatically be re-
elected, if no opposition is present, regardless of how few votes each
director receives. To oppose the existing directors requires those comprising
the opposition to go through an expensive proxy solicitation process which is
why opposition rarely occurs.

As stockholders we cannot lose sight of the reasons our once proud company
is in the situation it's in. I believe there was ample time over the last
several years to take proper corrective action had there been stronger, more
astute leadership by our Board of Directors. As stockholders, we had no power
to make the changes to our Board and subsequently our management team that may
have been desirable at that time.

I am also concerned about the accountability of our Board to the
stockholders. Two years ago, I proposed eliminating the class system of
bringing directors up for election and the stockholders passed that proposal
with 61% of the voting shares. Last year, a similar proposal was passed. Yet,
as of the date of this writing, December 1, 1996 we have seen no action by the
Board to implement the results of our vote.

It is only prudent, given the current circumstances, that we as Stockholders
place ourselves in the best possible position to make the Board accountable to
the Stockholders and to promote changes to the Board should that become
necessary. I urge your support of this proposal."

BOARD OF DIRECTORS STATEMENT OPPOSING STOCKHOLDER PROPOSAL

THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST THIS PROPOSAL. At no
election in the history of the Company has a director nominee received less
than 78% of the votes cast by stockholders and, in 1996, all director nominees
received at least 98% of the votes cast. Therefore, requiring that directors
be elected by at least 50.1% of the votes cast, when all directors have been
elected by a far larger percentage, serves no useful purpose, and the time and
money expended in amending the Company's articles of incorporation to so
provide would be ill spent.

The Board is firmly committed to accountability to stockholders and to
making changes in its membership as appropriate and in the best interest of
the Company. In this regard, the Board has adopted a tenure policy that
directors will not stand for re-election to the Board after age 70 or four
three-year terms, whichever is earlier. In addition, it is noteworthy that
nine of the 15 directors have joined the Board during the past two-year
period. The present method of electing directors by a plurality of the votes
cast by stockholders, as is the general rule under Michigan law, should be
continued.

APPROVAL OF PROPOSAL 5 WILL REQUIRE THE AFFIRMATIVE VOTE OF A MAJORITY OF
THE VOTES CAST BY THE HOLDERS OF COMMON STOCK WHO ARE PRESENT IN PERSON OR
REPRESENTED BY PROXY AND ENTITLED TO VOTE AT THE MEETING.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST PROPOSAL 5.

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OTHER BUSINESS/FUTURE STOCKHOLDER PROPOSALS

The Board of Directors knows of no other matters to be voted upon at the
Meeting. If any other matters properly come before the Meeting, it is the
intention of the persons named in the enclosed form of proxy to vote such
proxy in accordance with their judgment on such matters.

No person is authorized to give any information or to make any
representation other than that contained in this Proxy Statement, and if given
or made, such information may not be relied upon as having been authorized.

Pursuant to the General Rules under the Securities Exchange Act of 1934,
proposals of stockholders intended to be presented to the 1998 Annual Meeting
of Stockholders must be received by the Secretary of the Company on or before
December 15, 1997 to be considered for inclusion in the proxy materials for
that meeting. In addition, the By-laws of the Company contain requirements
relating to the timing and content of the notice which stockholders must
provide to the Secretary of the Company for any matter or any director
nomination to be properly presented at a stockholders meeting.

A copy of the Company's 1996 Annual Report on Form 10-K will be furnished
without charge to any stockholder upon written request. All written requests
should be directed to: Kmart Corporation, Financial Reporting Department, 3100
West Big Beaver Road, Troy, Michigan 48084-3163.

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EXHIBIT A

KMART CORPORATION 1997 LONG-TERM EQUITY COMPENSATION PLAN

ARTICLE 1. ESTABLISHMENT, OBJECTIVES, AND DURATION

1.1. Establishment of the Plan. Kmart Corporation, a Michigan corporation
(hereinafter referred to as the "Company"), hereby establishes an incentive
compensation plan to be known as the "Kmart Corporation 1997 Long-Term Equity
Compensation Plan" (hereinafter referred to as the "Plan"), as set forth in
this document. The Plan permits the grant of Nonqualified Stock Options,
Incentive Stock Options, Stock Appreciation Rights, Restricted Stock,
Performance Shares and Performance Units.

The Plan shall become effective as of March 18, 1997 (the "Effective Date")
and shall remain in effect as provided in Section 1.3 herein. All grants to
officers and directors and any grants of incentive stock options under the
Plan shall be subject to stockholder approval of the Plan.

1.2 Objectives of the Plan. The objectives of the Plan are to optimize the
profitability and growth of the Company through incentives which are
consistent with the Company's goals and which link the personal interests of
Participants to those of the Company's stockholders; to provide Participants
with an incentive for excellence in individual performance; and to promote
teamwork among Participants.

The Plan is further intended to provide flexibility to the Company in its
ability to motivate, attract, and retain the services of Participants who make
significant contributions to the Company's success and to allow Participants
to share in the success of the Company.

1.3. Duration of the Plan. The Plan shall commence on the Effective Date set
forth in Section 1.1 herein, and shall remain in effect, subject to the right
of the Board of Directors to amend or terminate the Plan at any time pursuant
to Article 15 herein, until all Shares subject to it shall have been purchased
or acquired according to the Plan's provisions. However, in no event may an
Award be granted under the Plan after March 17, 2007. Awards granted prior
thereto, however, may extend beyond such date and the provisions of the Plan
shall continue to apply thereto.

ARTICLE 2. DEFINITIONS

Whenever used in the Plan, the following terms shall have the meanings set
forth below, and, when the meaning is intended, the initial letter of the word
shall be capitalized:

2.1. "Affiliate" has the meaning ascribed to such term in Rule 12b-2 of the
General Rules and Regulations under the Exchange Act.

2.2. "Award" means, individually or collectively, a grant under the Plan of
Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation
Rights, Restricted Stock, Performance Shares or Performance Units.

2.3. "Award Agreement" means an agreement evidencing and setting forth the
terms of an Award granted under the Plan, in such form as the Committee may,
from time to time, approve.

2.4. "Beneficial Owner" or "Beneficial Ownership" has the meaning ascribed
to such term in Rule 13d-3 of the General Rules and Regulations under the
Exchange Act.

2.5. "Board" or "Board of Directors" means the Board of Directors of the
Company.

2.6. "Change in Control" of the Company is deemed to have occurred as of the
first day that any one or more of the following conditions shall have been
satisfied:

(a) The "Beneficial Ownership" of securities representing more than
thirty-three percent (33%) of the combined voting power of the Company is
acquired by any "person" as defined in Sections 13(d) and 14(d)

A-1
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of the Exchange Act (other than the Company, any trustee or other fiduciary
holding securities under an employee benefit plan of the Company, or any
corporation owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of stock
of the Company); or

(b) The stockholders of the Company approve a definitive agreement to
merge or consolidate the Company with or into another corporation or to
sell or otherwise dispose of all or substantially all of its assets, or
adopt a plan of liquidation; or

(c) During any period of three consecutive years, individuals who at the
beginning of such period were members of the Board cease for any reason to
constitute at least a majority thereof (unless the election, or the
nomination for election by the Company's stockholders, of each new director
was approved by a vote of at least a majority of the directors then still
in office who were directors at the beginning of such period or whose
election or nomination was previously so approved).

2.7. "Code" means the Internal Revenue Code of 1986, as amended from time to
time.

2.8. "Committee" means the Compensation and Incentives Committee of the
Board, unless and until another committee is appointed by the Board in its
discretion to administer Awards to Employees, as described in Article 3
herein.

2.9. "Director" means any individual who is a member of the Board of
Directors of the Company; provided, however, that any Director who is employed
by the Company shall be considered an Employee under the Plan.

2.10. "Employee" means any employee of the Company or its Subsidiaries or
Affiliates. Directors who are employed by the Company shall be considered
Employees under this Plan.

2.11. "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor act thereto.

2.12. "Fair Market Value" is deemed to be the mean of the highest price and
lowest price at which the Shares shall have been sold, regular way, on the
date in question or on the next preceding day on which there were such sales
of Shares if no such sales shall have been made on the date in question, as
reported on the Composite Transactions reporting system.

2.13. "Freestanding SAR" means an SAR that is granted to a Participant
independently of any Option pursuant to Article 7 herein.

2.14. "Incentive Stock Option" or "ISO" means an option to purchase Shares
granted to a Participant pursuant to Article 6 herein and which is designated
as an Incentive Stock Option and which is intended to meet the requirements of
Code Section 422.

2.15. "Nonemployee Director" means a Director who is not also an Employee.

2.16. "Nonqualified Stock Option" or "NQSO" means an option to purchase
Shares granted to a Participant pursuant to Article 6 herein and which is not
intended to meet the requirements of Code Section 422.

2.17. "Option" means an Incentive Stock Option or a Nonqualified Stock
Option granted to a Participant pursuant to Article 6 herein.

2.18. "Option Price" means the price at which a Share may be purchased by a
Participant pursuant to an Option.

2.19. "Participant" means an Employee or Director who has been selected to
receive an Award or one who has an outstanding Award granted under the Plan.

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2.20. "Performance-Based Exception" means the performance-based exception
from the tax deductibility limitations of Code Section 162(m).

2.21. "Performance Share" means an Award granted to a Participant pursuant
to Article 9 herein.

2.22. "Performance Unit" means an Award granted to a Participant pursuant to
Article 9 herein.

2.23. "Period of Restriction" means the period during which the transfer of
Shares of Restricted Stock is limited in some way (based on the passage of
time, the achievement of performance goals, or upon the occurrence of other
events as determined by the Committee, in its discretion), and the Shares are
subject to a substantial risk of forfeiture, as provided in Article 8 herein.

2.24. "Restricted Stock" means an Award granted to a Participant pursuant to
Article 8 herein.

2.25. "Shares" means the shares of common stock of the Company.

2.26. "Stock Appreciation Right" or "SAR" means an Award, granted to a
Participant alone or in connection with a related Option, designated as an
SAR, pursuant to Article 7 herein.

2.27. "Subsidiary" means any corporation, partnership, joint venture, or
other entity in which the Company directly or indirectly has a majority
interest.

2.28. "Tandem SAR" means an SAR that is granted to a Participant in
connection with a related Option pursuant to Article 7 herein, the exercise of
which shall require forfeiture of the right to purchase a Share under the
related Option (and when a Share is purchased under the Option, the Tandem SAR
shall similarly be canceled).

ARTICLE 3. ADMINISTRATION

3.1. General. The Plan shall be administered by the Committee, or by any
committee appointed by the Board; provided, however, that the Board shall
administer the Plan with respect to Awards granted to Directors. Any such
Committee shall be comprised entirely of Nonemployee Directors who meet the
applicable requirements of a "nonemployee director" under Rule 16b-3 of the
General Rules and Regulations under the Exchange Act and of an "outside
director" under Section 162(m) of the Code. The members of the Committee shall
be appointed from time to time by, and shall serve at the discretion of, the
Board of Directors. To the extent that the administration of the Plan remains
with the Board or any other committee designated by the Board, all applicable
references to the Committee in the Plan shall be to the Board or other
committee, as applicable. The Committee shall have the authority to delegate
administrative duties to officers or Directors of the Company.

3.2. Authority of the Committee. Except as limited by law or by the Articles
of Incorporation or Bylaws of the Company, and subject to the provisions
herein, the Committee, or the Board where applicable, shall have full power
to: select Employees and Directors who shall participate in the Plan;
determine the sizes and types of Awards; determine the terms and conditions of
Awards in a manner consistent with the Plan; construe and interpret the Plan
and any agreement or instrument entered into under the Plan; establish, amend,
or waive rules and regulations for the Plan's administration; and amend the
terms and conditions of any outstanding Award as provided in the Plan.
Further, the Committee shall make all other determinations which may be
necessary or advisable for the administration of the Plan. As permitted by law
(and subject to Section 3.1 herein), the Committee may delegate its authority
as specified herein.

3.3. Decisions Binding. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders and
resolutions of the Committee shall be final, conclusive, and binding on all
persons, including the Company, its stockholders, Employees, Directors,
Participants, and their estates and beneficiaries.

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ARTICLE 4. SHARES SUBJECT TO THE PLAN AND MAXIMUM AWARDS

4.1. Number of Shares Available for Grants. Subject to adjustment as
provided in Section 4.2 herein, the number of Shares which may be issued to
Participants under the Plan shall be twenty-four million (24,000,000), of
which no more than five million (5,000,000) may be granted in the form of
Restricted Stock. Shares issued or subject to an Award under the Plan may be
either authorized and unissued Shares or issued Shares which have been
reacquired by the Company. No Award may be granted under the Plan to an
Employee or Director who owns more than five percent (5%) of the outstanding
Shares. In the event that any Award or portion thereof expires or is canceled,
surrendered, forfeited, or terminated for any reason, such Shares shall again
become available for issue under the Plan.

The following rules shall apply to grants of such Awards under the Plan:

(a) Stock Options: The maximum aggregate number of Shares that may be
granted in the form of Stock Options, pursuant to Awards granted in any one
fiscal year to any one Participant, shall be one million (1,000,000).

(b) SARs: The maximum aggregate number of Shares that may be granted in
the form of Stock Appreciation Rights, pursuant to Awards granted in any
one fiscal year to any one Participant, shall be one million (1,000,000).

(c) Restricted Stock: The maximum aggregate number of Shares that may be
granted in the form of Restricted Stock, pursuant to Awards granted in any
one fiscal year to any one Participant, shall be five hundred thousand
(500,000).

(d) Performance Shares: The maximum aggregate number of Shares that may
be granted in the form of Performance Shares, pursuant to Awards granted in
any one fiscal year to any one Participant, shall be five hundred thousand
(500,000).

(e) Performance Units: The maximum aggregate payout (determined as of the
end of the applicable Performance Period), with respect to Awards of
Performance Units granted in any one fiscal year to any one Participant,
shall be equal to the value of five hundred thousand (500,000) Shares.

4.2. Adjustments in Authorized Shares. In the event of: any change in
corporate capitalization, such as a stock split; a corporate transaction, such
as any merger, consolidation, separation, including a spin-off, or other
distribution of stock or property of the Company; any reorganization (whether
or not such reorganization comes within the definition of such term in Code
Section 368); or any partial or complete liquidation of the Company, such
adjustment shall be made in the number and class of Shares which may be
delivered under Section 4.1 herein, in the number and class of and/or price of
Shares subject to outstanding Awards granted under the Plan, and in the Award
limits set forth in subsections 4.1(a) through (e) herein, as may be
determined to be appropriate and equitable by the Committee, in its
discretion, to prevent dilution or enlargement of rights; provided, however,
that the number of Shares subject to any Award shall always be a whole number.

ARTICLE 5. ELIGIBILITY AND PARTICIPATION

The Committee may, from time to time, grant Awards under the Plan to
Participants. The Committee shall determine in its discretion, in accordance
with the provisions of the Plan, to whom an Award is granted and the terms and
conditions of the Award. In making such determinations, the Committee may
consider the position and responsibilities of the Participant, the nature and
value to the Company of his or her services and accomplishments, his or her
present and potential contribution to the Company, and such other factors as
the Committee may deem relevant.

ARTICLE 6. STOCK OPTIONS

6.1. Grant of Options. Subject to the terms and conditions of the Plan, the
Committee, at any time, and from time to time, may grant Options to
Participants in such amounts and upon such terms as the Committee shall
determine in its discretion. Options granted under the Plan shall be subject
to and governed by the

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provisions of the Plan and by such other terms and conditions, not
inconsistent with the Plan, as shall be determined by the Committee.

6.2 Option Agreement. Each Option grant shall be evidenced by an Award
Agreement that shall specify the Option Price, the duration of the Option, the
number of Shares to which the Option pertains, and such other provisions as
the Committee shall determine. The Award Agreement also shall specify whether
the Option is an ISO or an NQSO.

6.3. Option Price. The Option Price for each grant of an Option under the
Plan shall be not less than the Fair Market Value of a Share on the date the
Option is granted.

6.4. Duration of Options. An Option granted under the Plan may not be
exercised after the earlier of (a) the date specified by the Committee, which
shall be a maximum of ten years from the date of grant as to an ISO and a
maximum of ten years and two days from the date of grant as to an NQSO or (b)
the applicable time limit specified in the second paragraph of Section 6.5
herein. Any Option not exercised within these time periods shall automatically
terminate at the expiration of such period.

6.5 Exercise and Payment. Options granted pursuant to this Article 6 shall
be exercised by the delivery of a written notice of exercise to the Company
(in the form prescribed by the Company), setting forth the number of Shares
with respect to which the Option is to be exercised and by full payment for
the Shares.

The Option Price upon exercise of any Option shall be payable to the Company
in full either: (a) in cash or its equivalent (in U.S. dollars), or (b) by
tendering previously acquired Shares having an aggregate Fair Market Value at
the time of exercise equal to the Option Price (provided that the Shares which
are tendered must have been held by the Participant for at least six (6)
months prior to exercise of the Option), or (c) by a combination of cash and
Shares equal to the Option Price. Shares used in payment shall be valued as of
the date notice of exercise is received by the Company. Any Shares delivered
in payment shall be in such form as is acceptable to the Company.

6.6 Exercisability of Options. Options granted pursuant to this Article 6
shall be exercisable at such times and be subject to such restrictions and
conditions as the Committee shall in each instance approve, which need not be
the same for each grant or for each Participant.

An Option may be exercised by an optionee only while such optionee is an
Employee or Director or within three months thereafter (or such longer period
thereafter as determined by the Committee in its discretion or as provided in
Section 14.1 herein), and only if the Option is otherwise exercisable prior to
termination of employment or service; provided, however, if at the date of
termination of employment or service, the optionee has ten or more years of
full-time service as an Employee or Director or if such termination results
from death or total and permanent disability as defined in the Company's
Employee Pension Plan, such three-month period shall be extended to three
years. Except as otherwise provided by the Committee, any Option that is not
exercisable at the date of termination shall be forfeited and reacquired by
the Company and all rights of the optionee shall terminate to the extent of
the forfeiture without further obligation on the part of the Company.

An Option granted with a maximum exercise period of more than three years
may not be exercised earlier than in three equal annual installments
commencing on the first anniversary of the date of grant (or such other period
as determined by the Committee in its discretion); provided, however, this
limitation shall be removed if termination of employment or service of the
optionee results from death or total and permanent disability as defined in
the Company's Employee Pension Plan, or if termination of employment or
directorship of the optionee occurs at or after age 65 and the optionee has
ten or more years of full-time service as an Employee or Director, or if and
to the extent the Committee may so determine in its discretion, or as provided
in Section 14.1 herein. An Option granted with a maximum exercise period of
three years or less is not subject to the limitation contained in the
preceding sentence.

6.7 Other Restrictions. The Committee may impose such conditions and/or
restrictions on any Shares acquired pursuant to the exercise of an Option
granted pursuant to this Article 6 as it may deem advisable,

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including, without limitation, restrictions under applicable federal
securities laws, under the requirements of any stock exchange or market upon
which such Shares are then listed and/or traded, and under any blue sky or
state securities laws applicable to such Shares.

6.8. Nontransferability of Options. Except as otherwise determined by the
Committee in its discretion, with respect to NQSOs, no Option or any rights
with respect thereto shall be subject to any debts or liabilities of an
optionee, nor be assignable or transferable except by will or the laws of
descent and distribution, nor be exercisable during the optionee's lifetime
other than by him or her, nor shall Shares be issued to or in the name of one
other than the optionee; provided, however, that an Option may, after the
death or total and permanent disability of an optionee, be exercised pursuant
to Article 11 herein; and provided further that any Shares issued to an
optionee hereunder may, at the request of the optionee, be issued in the name
of the optionee and one other person, as joint tenants with right of
survivorship and not as tenants in common, or in the name of a trust for the
benefit of the optionee or for the benefit of the optionee and others.

ARTICLE 7. STOCK APPRECIATION RIGHTS

7.1. Grant of SARs. Subject to the terms and conditions of the Plan, the
Committee, at any time, and from time to time, may grant SARs to Participants
in such amounts and upon such terms as the Committee shall determine in its
discretion. The Committee may grant Freestanding SARs, Tandem SARs, or any
combination of these forms of SARs. SARs granted under the Plan shall be
subject to and governed by the provisions of the Plan and by such other terms
and conditions, not inconsistent with the Plan, as shall be determined by the
Committee.

The grant price of a Freestanding SAR shall equal the Fair Market Value of a
Share on the date of grant of the SAR. The grant price of Tandem SARs shall
equal the Option Price of the related Option.

7.2. SAR Agreement. Each SAR grant shall be evidenced by an Award Agreement
that shall specify the grant price, the term of the SAR, the number of SARs,
and such other provisions as the Committee shall determine.

7.3. Payment of SAR Amount. Upon exercise of an SAR, a Participant shall be
entitled to receive payment from the Company in an amount determined by
multiplying:

(a) The difference between the Fair Market Value of a Share on the date
of exercise over the grant price; by

(b) The number of Shares with respect to which the SAR is exercised.

At the discretion of the Committee, the payment upon exercise of an SAR may
be in cash, in Shares of equivalent value, or in some combination thereof.

7.4. Term of SARs. The term of an SAR granted under the Plan shall be
determined by the Committee, in its discretion; provided, however, that such
term shall not exceed ten (10) years and two (2) days.

7.5. Exercise of Tandem SARs. Tandem SARs may be exercised for all or part
of the Shares subject to the related Option upon the surrender of the right to
exercise the equivalent portion of the related Option. A Tandem SAR may be
exercised only with respect to the Shares for which its related Option is then
exercisable.

Notwithstanding any other provision of this Plan to the contrary, with
respect to any Tandem SAR granted in connection with an ISO: (i) the Tandem
SAR will expire no later than the expiration of the underlying ISO; (ii) the
value of the payment with respect to the Tandem SAR may be no more than one
hundred percent (100%) of the difference between the Option Price of the
underlying ISO and the Fair Market Value of the Shares subject to the
underlying ISO at the time the Tandem SAR is exercised; and (iii) the Tandem
SAR may be exercised only when the Fair Market Value of the Shares subject to
the ISO exceeds the Option Price of the ISO.

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7.6. Exercise of Freestanding SARs. Freestanding SARs may be exercised upon
whatever terms and conditions the Committee, in its discretion, imposes upon
them.

7.7. Termination of Employment/Directorship. Each SAR Award Agreement shall
set forth the extent to which the Participant shall have the right to exercise
the SAR following termination of the Participant as an Employee or Director.
Such provisions shall be determined in the discretion of the Committee, shall
be included in the Award Agreement entered into with the Participant, need not
be uniform among all SARs issued pursuant to this Article 7, and may reflect
distinctions based on the reasons for termination.

7.8. Other Restrictions. The Committee may impose such conditions and/or
restrictions on any Shares issued pursuant to the exercise of any SAR granted
pursuant to this Article 7 as it may deem advisable, including, without
limitation, restrictions under applicable federal securities laws, under the
requirements of any stock exchange or market upon which such Shares are then
listed and/or traded, and under any blue sky or state securities laws
applicable to such Shares.

7.9. Nontransferability of SARs. Except as otherwise determined by the
Committee in its discretion, no SAR or any rights with respect thereto shall
be subject to any debts or liabilities of a Participant, nor be assignable or
transferable except by will or the laws of descent and distribution, nor be
exercisable during the Participant's lifetime other than by him or her, nor
shall Shares be issued to or in the name of one other than the Participant;
provided, however, that any Shares issued to a Participant pursuant to an SAR
hereunder may at the request of the Participant be issued in the name of the
Participant and one other person as joint tenants with right of survivorship
and not as tenants in common, or in the name of a trust for the benefit of the
Participant or for the benefit of the Participant and others.

ARTICLE 8. RESTRICTED STOCK

8.1. Grant of Restricted Stock. Subject to the terms and conditions of the
Plan, the Committee, at any time, and from time to time, may grant Restricted
Stock to Participants in such amounts and upon such terms as the Committee
shall determine in its discretion. Restricted Stock granted under the Plan
shall be subject to and governed by the provisions of the Plan and by such
other terms and conditions, not inconsistent with the Plan, as shall be
determined by the Committee.

8.2. Restricted Stock Agreement. Each Restricted Stock grant shall be
evidenced by an Award Agreement that shall specify the Period(s) of
Restriction, the number of Shares of Restricted Stock granted, and such other
provisions as the Committee shall determine.

8.3. Termination of Employment/Directorship. Except as otherwise provided in
the Plan or in the Award Agreement, unless and until the restrictions and
other terms and conditions applicable to a Restricted Stock Award expire or
are terminated or otherwise satisfied, such Award and the Shares and any
dividends or other rights applicable thereto shall be forfeited and reacquired
by the Company if the Participant ceases to be an Employee or Director, and
all rights of the Employee or Director shall terminate to the extent of the
forfeiture without further obligation on the part of the Company.

8.4. Other Restrictions. Subject to Article 10 herein, the Committee may
impose such conditions and/or restrictions on any Shares of Restricted Stock
granted pursuant to this Article 8 as it may deem advisable, including,
without limitation, restrictions requiring the Participant's payment of a
stipulated purchase price for each Share of Restricted Stock, restrictions
based upon the achievement of specific performance goals, time-based
restrictions on vesting, and/or restrictions under federal or state securities
laws applicable to such Shares.

As soon as practicable following the grant of Shares of Restricted Stock,
either (i) a stock certificate or certificates representing such Shares shall
be registered in the Participant's name and shall bear an appropriate legend
referring to the restrictions applicable thereto, which certificates may be
held in the custody of the Company or its designee for the account of the
Participant; or (ii) the Company's stock transfer agent or its designee shall
credit such Shares to the Participant's Restricted Stock Account, which Shares
shall be subject to the restrictions applicable thereto.

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If and to the extent that the restrictions and other terms and conditions
applicable to a Restricted Stock Award are not satisfied, such Award and the
Shares and any dividends or other rights applicable thereto shall be forfeited
and reacquired by the Company, and all rights of the Participant shall
terminate to the extent of the forfeiture without further obligation on the
part of the Company.

The Committee may in its discretion terminate, shorten, or accelerate any
period of restriction or waive any terms or conditions applicable to all or
any portion of a Restricted Stock Award.

Upon the expiration or termination of the restrictions and the satisfaction
of any other terms and conditions applicable to a Restricted Stock Award, a
stock certificate or certificates representing Shares free from the
restrictions and any legend, except as may be imposed by law, shall be issued
to the Participant or to the Participant's beneficiary, estate or legal
representative, as the case may be, along with any dividends applicable
thereto which have been withheld by the Company.

8.5. Nontransferability of Restricted Stock. Except as otherwise provided in
this Article 8 or determined by the Committee in its discretion, no Shares of
Restricted Stock or any rights with respect thereto shall be subject to any
debts or liabilities of a Participant, nor be assignable or transferable until
the expiration or termination of the restrictions and the satisfaction of any
other terms and conditions applicable to the Award, nor shall any rights with
respect to Restricted Stock be available during a Participant's lifetime other
than to him or her.

8.6. Shareholder Rights. Except as provided in the Plan or in the Award
Agreement, a Participant to whom Restricted Stock is issued, shall generally
have the rights and privileges of a stockholder as to the Restricted Stock,
including the right to vote such Shares.

At the discretion of the Committee, dividends declared with respect to
Shares of Restricted Stock may either be paid to the Participant or withheld
by the Company for the Participant's account, and interest may be paid on any
dividends withheld at a rate determined by the Committee. The Committee may
apply any restrictions to the dividends that the Committee deems appropriate.
Without limiting the generality of the preceding sentence, if the grant or
vesting of Restricted Shares is designed to comply with the requirements of
the Performance-Based Exception, the Committee may apply any restrictions it
deems appropriate to the payment of dividends declared with respect to such
Restricted Shares, such that the dividends and/or the Restricted Shares
maintain eligibility for the Performance-Based Exception.

ARTICLE 9. PERFORMANCE UNITS AND PERFORMANCE SHARES

9.1. Grant of Performance Units/Shares. Subject to the terms and conditions
of the Plan, the Committee, at any time, and from time to time, may grant
Performance Units and/or Performance Shares to Participants in such amounts
and upon such terms as the Committee shall determine in its discretion.
Performance Units and Performance Shares granted under the Plan shall be
subject to and governed by the provisions of the Plan and by such other terms
and conditions, not inconsistent with the Plan, as shall be determined by the
Committee.

9.2. Value of Performance Units/Shares. Each Performance Unit shall have an
initial value that is established by the Committee at the time of grant. Each
Performance Share shall have an initial value equal to the Fair Market Value
of a Share on the date of grant. Subject to Article 10 herein, the Committee
shall set performance goals in its discretion which, depending on the extent
to which they are met, shall determine the number and/or value of Performance
Units/Shares that shall be paid out to the Participant. For purposes of this
Article 9, the time period during which the performance goals must be met
shall be called a "Performance Period."

9.3. Earning of Performance Units/Shares. Subject to the terms of the Plan
and the Award Agreement, after the applicable Performance Period has ended,
the holder of Performance Units/Shares shall be entitled to receive a payout
on the number and value of Performance Units/Shares earned by the Participant
over the Performance Period, to be determined as a function of the extent to
which the corresponding performance goals have been achieved.

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9.4. Form and Timing of Payment of Performance Units/Shares. Payment of
earned Performance Units/Shares shall be made in a single lump sum following
the close of the applicable Performance Period. Subject to the terms of the
Plan, the Committee, in its discretion, may pay earned Performance
Units/Shares in the form of cash or in Shares (or in a combination thereof)
which have an aggregate Fair Market Value equal to the value of the earned
Performance Units/Shares at the close of the applicable Performance Period.
Such Shares may be granted subject to any restrictions deemed appropriate by
the Committee.

At the discretion of the Committee, Participants may be entitled to receive
any dividends declared with respect to Shares which have been earned in
connection with grants of Performance Units and /or Performance Shares, but
not yet distributed to Participants (such dividends shall be subject to the
same accrual, forfeiture, and payout restrictions as apply to dividends earned
with respect to Shares of Restricted Stock, as set forth in Section 8.6
herein). In addition, Participants may, in the discretion of the Committee,
have the rights and privileges of a stockholder as to the Shares, including
the right to vote such Shares.

9.5. Termination of Employment/Directorship. Except as otherwise provided in
the Plan or in the Award Agreement, unless and until the terms and conditions
applicable to an Award of Performance Units/Shares are met, such Award and the
Performance Units/Shares and any dividends or other rights applicable thereto
shall be forfeited to the Company if the Participant ceases to be an Employee
or Director, and all rights of the Employee or Director shall terminate to the
extent of the forfeiture without further obligation on the part of the
Company; provided, however, that the Committee may in its discretion waive any
terms or conditions or permit a payout with respect to all or any portion of
an Award of Performance Units/Shares.

9.6. Other Restrictions. The Committee may impose such conditions and/or
restrictions on any Shares issued pursuant to this Article 9 as it may deem
advisable, including, without limitation, restrictions under applicable
federal securities laws, under the requirements of any stock exchange or
market upon which such Shares are then listed and/or traded, and under any
blue sky law or state securities laws applicable to such Shares.

If and to the extent that no payout is earned with respect to an Award of
Performance Units/Shares in accordance with the terms and conditions of the
Award, such Award and the Performance Units/Shares and any dividends or other
rights applicable thereto shall be forfeited to the Company, and all rights of
the Participant shall terminate to the extent of the forfeiture without
further obligation on the part of the Company.

9.7. Nontransferability of Performance Units/Shares. Except as otherwise
determined by the Committee in its discretion, no Performance Units/Shares or
any rights with respect thereto shall be subject to any debts or liabilities
of a Participant, nor be assignable or transferable except by will or the laws
of descent and distribution, nor be exercisable during the Participant's
lifetime other than by him or her, nor shall Shares be issued to or in the
name of one other than the Participant; provided, however, that any Shares
issued to a Participant hereunder may at the request of the Participant be
issued in the name of the Participant and one other person, as joint tenants
with right of survivorship and not as tenants in common, or in the name of a
trust for the benefit of the Participant or for the benefit of the Participant
and others.

ARTICLE 10. PERFORMANCE MEASURES

The performance measure(s) to be used for purposes of granting performance-
based Awards shall be chosen from among the following, with respect to the
Company, its Subsidiaries, its Affiliates, subdivisions thereof, or any
combination thereof:

(a) Return on equity, assets, capital, sales, or investment;

(b) Pretax or after-tax profit levels;

(d) Implementation of processes or projects;

(e) Changes in the market price of Shares;

(f) Total shareholder return; and

(g) Cash flow.

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This measure may be expressed as a concrete goal, in terms of an increase or
decrease or in comparison to the Company's competitors, the industry, or some
other comparator group.

The Committee shall have the authority to set a threshold level of
performance below which no payment shall be made, levels of performance at
which specified percentages of payment shall be made, and a maximum level of
performance above which no additional payment shall be made.

Following the determination of the level of performance, the Committee may
in its discretion adjust (upward or downward) the payment which would
otherwise have been made; provided, however, no upward adjustment shall be
authorized to the extent that it would disqualify the payment under the
Performance-Based Exception.

To the extent applicable, any such performance goal shall be determined in
accordance with generally accepted accounting principles and reported upon by
the Company's independent accountants.

The Committee may make adjustments in the terms and conditions of, and the
criteria included in, Awards in recognition of unusual or nonrecurring events
(including, without limitation, the events described in Section 4.2 herein)
affecting the Company or the financial statements of the Company or of changes
in applicable laws, regulations, or accounting principles, whenever the
Committee determines that such adjustments are appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made available under the Awards; provided, however, that no such adjustment
shall be authorized to the extent that it would disqualify the Awards under
the Performance-Based Exception.

ARTICLE 11. BENEFICIARY DESIGNATION/LEGAL REPRESENTATIVE

In the event one who holds an outstanding Award dies, either before or after
termination of his or her status as Employee or Director, any Award which is
otherwise exercisable or payable may be exercised by or paid to the person or
persons whom the Participant shall have designated as beneficiary in writing
on forms prescribed by and filed with the Company, or if no designation has
been made, by the person or persons entitled thereto through the Participant's
estate. In the event of the disability of a Participant, an Award which is
otherwise exercisable or payable may be exercised by or paid to the
Participant's legal representative or guardian. The Company may require an
indemnity and/or such evidence or other assurances as it may deem necessary in
connection with an exercise of an Award by or payment of an Award to a
beneficiary, estate, heir, legal representative, or guardian.

ARTICLE 12. DEFERRALS

The Committee may permit or require a Participant to defer such
Participant's receipt of the payment of cash or the delivery of Shares that
would otherwise be due to such Participant by virtue of the exercise of an
Option or SAR, the lapse or waiver of restrictions with respect to Restricted
Stock, or the satisfaction of any requirements or goals with respect to
Performance Units/Shares. If any such deferral election is required or
permitted, the Committee shall, in its discretion, establish rules and
procedures for such payment deferrals.

ARTICLE 13. EMPLOYMENT/MISCONDUCT

13.1. Employment. No provision of the Plan, nor any term or condition of any
Award, nor any action taken by the Committee, the Company, a Subsidiary, or an
Affiliate pursuant to the Plan, shall give or be construed as giving a
Participant any right to be retained in the employ of or remain a director of
the Company, a Subsidiary, or an Affiliate, or affect or limit in any way the
right of the Company, a Subsidiary, or an Affiliate to terminate his or her
employment or directorship. Employment with or directorship of a Subsidiary or
an Affiliate shall be deemed terminated on the date such Subsidiary or
Affiliate ceases to be a Subsidiary or an Affiliate of the Company.

13.2. Participation. No Employee or Director shall have the right to be
selected to receive an Award under this Plan, or, having been so selected, to
be selected to receive a future Award.

A-10
<PAGE>

13.3. Misconduct. Notwithstanding anything contained in the Plan or in an
Award Agreement to the contrary, all rights with respect to all Awards of a
Participant are subject to the conditions that the Participant not engage or
have engaged (i) in fraud, dishonesty, conduct in violation of Company policy,
or any similar act at any time while an Employee or Director; or (ii) in
activity directly or indirectly in competition with any business of the
Company, a Subsidiary, or an Affiliate, or in other conduct inimical to the
best interests of the Company, a Subsidiary, or an Affiliate, during or
following the Participant's employment with the Company, a Subsidiary, or an
Affiliate or directorship with the Company. If it is determined by the
Committee or the Committee's designee, either before or after termination of
employment or directorship of a Participant, that there has been a failure of
any such condition, all Awards and all rights with respect to all Awards
granted to such Participant shall immediately terminate and be null and void.

ARTICLE 14. CHANGE IN CONTROL

14.1. Treatment of Outstanding Awards. Subject to Section 14.3 herein, upon
the occurrence of a Change in Control:

(a) Any and all Options and SARs granted hereunder shall become
immediately exercisable and shall remain exercisable throughout their
entire term;

(b) Any restriction periods and restrictions imposed on Restricted Shares
which are not performance-based shall lapse;

(c) The target payout opportunities attainable under all outstanding
Awards of performance-based Restricted Stock, Performance Units, and
Performance Shares shall be deemed to have been fully earned for the entire
Performance Period(s) as of the effective date of the Change in Control.
The vesting of all Awards denominated in Shares shall be accelerated as of
the effective date of the Change in Control, and there shall be paid out to
Participants within thirty (30) days following the effective date of the
Change in Control a pro rata number of Shares (or their cash equivalents)
based upon an assumed achievement of all relevant targeted performance
goals and upon the length of time within the Performance Period which has
elapsed prior to the Change in Control. Awards denominated in cash shall be
paid pro rata to participants in cash within thirty (30) days following the
effective date of the Change in Control, with the proration determined as a
function of the length of time within the Performance Period which has
elapsed prior to the Change in Control, and based on an assumed achievement
of all relevant targeted performance goals.

14.2. Termination, Amendment, and Modifications of Change-in-Control
Provisions. Notwithstanding any other provision of the Plan or any Award
Agreement provision, the provisions of this Article 14 may not be terminated,
amended, or modified on or after the date of an event which is likely to give
rise to a Change in Control to affect adversely any Award theretofore granted
under the Plan without the prior written consent of the Participant with
respect to said Participant's outstanding Awards.

14.3. Pooling of Interests Accounting. Notwithstanding anything contained in
the Plan to the contrary, in the event that the consummation of a Change in
Control is contingent on using pooling of interests accounting methodology,
the Board may, in its discretion, take any action necessary to preserve the
use of pooling of interests accounting.

ARTICLE 15. AMENDMENT, MODIFICATION, AND TERMINATION

15.1. Amendment, Modification, and Termination. Except as provided in
Section 14.2 herein, the Committee may from time to time alter, amend,
suspend, or terminate the Plan in whole or in part. Any such amendment may be
effective in respect of all past and future Awards granted hereunder in the
discretion of the Committee.

ARTICLE 16. WITHHOLDING

16.1. Tax Withholding. The Company shall have the power and the right to
deduct or withhold, or require a Participant to remit to the Company, an
amount sufficient to satisfy federal, state, and local taxes, domestic or

A-11
<PAGE>

foreign, required by law or regulation to be withheld with respect to any
taxable event arising as a result of this Plan.

16.2. Share Withholding. With respect to withholding required upon the
exercise of Options or SARs, upon the lapse of restrictions on Restricted
Stock, or upon any other taxable event arising as a result of Awards granted
hereunder, the Committee may in its discretion permit a Participant to elect,
in such form and at such time as the Committee may prescribe, to satisfy the
withholding requirement, in whole or in part, by electing to (i) have the
Company withhold whole Shares or (ii) deliver other whole Shares owned by the
Participant having a Fair Market Value equal to the amount to be withheld.

ARTICLE 17. SUCCESSORS

All obligations to the Company under the Plan with respect to Awards granted
hereunder shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation, or otherwise of all or substantially all of the
business and/or assets of the Company.

ARTICLE 18. LEGAL CONSTRUCTION

18.1. Gender and Number. Except where otherwise indicated by the context,
any masculine term used herein shall include the feminine; the plural shall
include the singular; and the singular shall include the plural.

18.2. Severability. If any provision of the Plan, or any term or condition
of any Award or Award Agreement or form executed or to be executed thereunder,
or any application thereof to any person or circumstance is invalid or would
result in an ISO failing to meet the requirements of Code Section 422, such
provision, term, condition, or application shall to that extent be void, or,
in the discretion of the Committee, such provision, term, or condition may be
amended so as to avoid such invalidity or failure, and shall not affect other
provisions, terms, conditions, or applications thereof, and to this extent
such provision, term, or condition is severable.

18.3. Requirements of Law. The granting of Awards and the issuance of Shares
under the Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.

18.4. Securities Law Compliance. The Plan is intended to comply with all
applicable conditions of Rule 16b-3 or its successors under the Exchange Act
and shall be construed to so comply.

18.5. Governing Law. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of Michigan
without reference to principles of conflict of laws.

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<PAGE>

LOGO
<PAGE>

[Kmart LOGO]

DIRECTIONS TO ANNUAL MEETING

Fisher Theatre [MAP APPEARS HERE]
Fisher Building
3011 West Grand Boulevard
Detroit, Michigan 48202

Stockholder parking will be made available at
no charge at the parking structure located just
west of the Fisher Building upon submission of
the parking voucher on the back cover of the
proxy statement.

There are two entrances to the parking structure
one from Lothrop (the street on the north side
of the Fisher Building) and one from East
Grand Boulevard (the street on which the
Fisher Building fronts). Parking in the parking
structure will be reserved exclusively for
stockholders with parking vouchers.

V FOLD AND DETACH HERE V

KMART CORPORATION
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD May 20, 1997

- -------------------------------------------------------------------------------

The signer(s) hereby appoint(s) Floyd Hall, Nancie W. LaDuke and Anthony N.
Palizzi, or any one of them, with power of substitution in each, proxies to vote
all common stock of the signer(s) in Kmart Corporation at the Annual Meeting of
Stockholders to be held at the Fisher Theatre in the Fisher Building, 3011 West
Grand Boulevard, Detroit, Michigan 48202, on Tuesday, May 20, 1997 at 10:00 a.m.
(local time), and at all adjournments thereof, as specified on the matters
indicated on the reverse side hereof, and in their discretion on any other
business that may properly come before such Meeting. This proxy is solicited on
behalf of the Board of Directors.

|--------------|
| SEE |
| REVERSE SIDE |
|--------------|

<PAGE>

[KMART LOGO]
Kmart Corporation
Annual Meeting of Stockholders
10:00 a.m., Tuesday, May 20, 1997
Fisher Theatre
Fisher Building
3011 West Grand Boulevard
Detroit, Michigan 48202

PROPOSALS

Proposal 1: To elect each of six directors for a term expiring in the year
indicated:
1998 - Warren Flick
2000 - Joseph A. Califano, Jr.
- Enrique C. Falla
- J. Richard Munro
- Robin B. Smith
- James O. Welch, Jr.

Proposal 2: To approve the Company's Long-Term Equity Compensation Plan.

Proposal 3: To ratify the appointment of Price Waterhouse as independent
accountants of the Company for the 1997 fiscal year.

Proposal 4: To act upon a stockholder proposal concerning compensation of
executives and directors.

Proposal 5: To act upon a stockholder proposal concerning the stockholder vote
required to elect directors.

The Annual Meeting Admission Ticket and Parking Voucher are on the back cover of
the proxy statement.

V FOLD AND DETACH HERE V
(See reverse side for directions)

[X] Please mark votes as in this example.
Where no voting instructions are given, the shares represented by this Proxy
will be VOTED FOR Proposals 1, 2 and 3 and VOTED AGAINST Proposals 4 and 5 as
set forth in the Proxy Statement.
- --------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR Proposals 1, 2, and 3.
- --------------------------------------------------------------------------------
1. Election of Directors WITHHOLD
FOR FROM ALL FOR AGAINST ABSTAIN
[_] [_] Proposal 2 [_] [_] [_]

Proposal 3 [_] [_] [_]

-----------------------------------------------------
If you do not wish your shares to be voted "FOR" a
particular nominee, write the nominee(s) name above.
Your shares will be voted for the remaining nominees.
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
The Board of Directors recommends a vote
AGAINST Proposals 4 and 5.
- --------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
Proposal 4 [_] [_] [_]

Proposal 5 [_] [_] [_]
- --------------------------------------------------------------------------------

--------------------------------------------------------------------
For Change of
Address Mark Here If You Plan To Attend Meeting,
And Note at Left. [_] Mark Here. [_]
--------------------------------------------------------------------

Receipt is hereby acknowledged of the Kmart Notice of Meeting and
Proxy Statement.
IMPORTANT: Please sign exactly as your name or names appear on this
Proxy. Where shares are held jointly, both holders should sign. When
signing as attorney, executor, administrator, trustee or guardian,
please give your full title as such. If the holder is a corporation,
execute in full corporate name by authorized officer.

Signature __________________________________________ Date ______________________

Signature __________________________________________ Date ______________________
Please Sign This Proxy as Name(s) Appear Above.