Exhibit 10.1

 

Southwest Royalties Reward Plan

ARTICLE I

Purpose of Plan

1.1          Purpose of Plan.  The purpose of the Southwest Royalties Reward
Plan (the “Plan”) is to reward eligible employees and other service providers of
Clayton Williams Energy, Inc., and its wholly-owned affiliates (the “Employer”)
for continued quality service to the Employer, and to encourage retention of
those employees and service providers, by providing them the opportunity to
receive bonus payments that are based on certain profits derived from a portion
of the Employer’s working interest in the RS Windham C3 well in Upton County
Texas (Amacker Tippet Field) (the “Well”).

ARTICLE II
Definitions and Construction

2.1          Definitions.  Where the following words and phrases appear in the
Plan, each will have the respective meaning set forth below, unless the context
clearly indicates to the contrary.

(a)                                  Acquisition Costs:  The portion of any
costs or expenses incurred by the Employer that are attributable to acquiring
the Well Interest.

(b)                                 Affiliate:  An “Affiliate” of any specified
person means any other person, directly or indirectly, controlling or controlled
by or under direct or indirect common control with such specified person.  For
the purposes of this definition, “control” when used with respect to any person
means the power to direct the management and policies of such person, directly
or indirectly, through the ownership of voting securities, by contract or
otherwise, and the terms “controlling” and “controlled” have meanings
correlative to the foregoing.

(c)                                  Agreed Rate:  4.83% per annum, compounded
quarterly.

(d)                                 Bonus Award:  The right granted to a
Participant to receive payments, if any, under the terms and conditions of the
Plan.

(e)                                  Bonus Percentage:  The designated
percentage set forth in each Participant’s Notice of Bonus Award that is used to
calculate the amount of payments, if any, that such Participant may be entitled
to under the Plan.

(f)                                    Change of Control:  A “Change of Control”
will be deemed to occur as of (i) the date that (A) any “person” or “group” of
related persons (as such terms are used in Sections 13(d) and 14(d) of the
Exchange Act), other than one or more Permitted Holders, is or becomes the
beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that such person or group shall be deemed to have “beneficial ownership”
of all shares that any such person or group has the right to acquire, whether
such right is exercisable immediately or only

  

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                                                after the passage of time),
directly or indirectly, of more than 35% of the total voting power of the Voting
Stock of the Company (or its successor by merger, consolidation or purchase of
all or substantially all of its assets) (for the purposes of this clause, such
person or group shall be deemed to beneficially own any Voting Stock of the
Company held by a parent entity, if such person or group “beneficially owns” (as
defined above), directly or indirectly, more than 35% of the voting power of the
Voting Stock of such parent entity) and (B) the Permitted Holders “beneficially
own” (as defined in Rules 13d-3 and 13d-5 of the Exchange Act), directly or
indirectly, in the aggregate less than 25% of the total voting power of the
Voting Stock of the Company (or its successor by merger, consolidation or
purchase of all or substantially all of its assets) or its parent entity and do
not have the right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the board of directors of the Company (or
such successor) or its parent entity, or (ii) the date of death of Clayton W.
Williams, Jr.

(g)                                 Code:  The Internal Revenue Code of 1986, as
amended from time to time.

(h)                                 Committee:  The Compensation Committee of
the Company’s board of directors.

(i)                                     Company:  Clayton Williams Energy, Inc.

(j)                                     Deferred Bonus Account:  An individual
memorandum bookkeeping account on the books of the Employer that is credited
with the portion of any Quarterly Bonus Payments that are deferred pursuant to
Section 5.2, and that is credited with interest at the Agreed Rate.

(k)                                  Effective Date:  October 25, 2006.

(l)                                     Eligible Person:  Each person who is
employed by the Employer or who performs services for the Employer as a
consultant or independent contractor.

(m)                               Employer:  The Company and its wholly-owned
Affiliates.

(n)                                 Exchange Act:  The Securities Exchange Act
of 1934, as amended.

(o)                                 Full Vesting Date:  October 25, 2011.

(p)                                 Notice of Bonus Award:  The notice provided
to each Participant pursuant to Section 3.1, setting forth, among other things,
the Participant’s Bonus Percentage under the Plan.

(q)                                 Participant:  Each Eligible Person who has
been granted a Bonus Award under the Plan and participates in the Plan in
accordance with the provisions of Article III.

(r)                                    Payment Date:  With respect to each Plan
Quarter, the date that payment, if any, is made to eligible Participants
pursuant to Articles V or VI.

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(s)                                  Permitted Assignee:  Each Participant’s
spouse, parents, or natural or adoptive lineal descendants, or one or more
trusts or partnerships established exclusively for the benefit of each
Participant’s spouse, parents or natural or adoptive lineal descendants.

(t)                                    Permitted Holder:  Clayton W. Williams,
Jr. and any Affiliate or Related Person thereof.

(u)                                 Plan:  This Southwest Royalties Reward Plan,
as amended from time to time.

(v)                                 Plan Quarter:  Each calendar quarter within
a Plan Year.

(w)                               Plan Year:  Each twelve consecutive month
period beginning each January 1.

(x)                                   Quarterly Bonus Amount:  The amount, if
any, for each Participant with respect to each Plan Quarter that is calculated
in accordance with the provisions of Section 4.3.

(y)                                 Quarterly Bonus Pool:  The bonus pool, if
any, determined as of the end of each Plan Quarter in accordance with the
provisions of Article IV.

(z)                                   Related Person:  With respect to any
Permitted Holder, a “Related Person” means:

(1)                                  any controlling stockholder or a majority
(or more) owned subsidiary of such Permitted Holder or, in the case of an
individual, any spouse, family member (including adopted children), heir or
descendant of such Permitted Holder, any trust created for the benefit of such
individual or such individual’s estate, executor, administrator, committee or
beneficiaries; or

(2)                                  any trust, corporation, partnership or
other entity, the beneficiaries, stockholders, owners or persons beneficially
owning a majority (or more) controlling interest of which consist of such
Permitted Holder and/or such other persons referred to in the immediately
preceding clause (1).

(aa)                            Sale Transaction:  A “Sale Transaction” will be
deemed to occur on (1) any sale, exchange, or other disposition to a third party
(excluding any Affiliate of the Employer) of (i) the Employer’s Well Interest or
of the Employer’s rights or benefits with respect to the Well Interest, or (ii)
all or substantially all of the Company’s assets, or (2) a Change of Control.

(bb)                          Voting Stock:  All classes of the capital stock of
a corporation then outstanding and normally entitled to vote in the election of
directors.

(cc)                            Well:  RS Windham C3 well in Upton County, Texas
(Amacker Tippet Field).

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(dd)                          Well Costs:  The Employer’s share of costs
pursuant to any operating agreement for the drilling, completing, equipping,
deepening, or sidetracking the Well, including, without limitation:  (i) the
costs of surveying and staking the Well, the costs of any surface damages, and
the costs of clearing, coring, testing, logging, and evaluating the Well;
(ii) the costs of casing, cement, and cement services for the Well; (iii) the
cost of plugging and abandoning the Well (including standard and customary
remediation activities associated therewith), if it is determined that the Well
would not produce in commercial quantities and should be abandoned; (iv) all
direct charges and overhead chargeable to the Employer with respect to the Well
under any applicable operating agreement until such time as all operations are
carried out as required by applicable regulations and sound engineering
practices to make such Well ready for production, including such charges and
overhead attributable to the installation and testing of wellhead equipment, or
costs to plug and abandon a dry hole; (v) all costs incurred by the Employer in
recompleting or plugging back the Well; (vi) all costs incurred by the Employer
in reworking the Well if the rework is covered by an authority for expenditure
under the applicable operating agreement; (vii) all costs incurred by the
Employer in locating, drilling, completing, equipping, deepening, or
sidetracking any enhanced recovery producer or injector Well (including the
costs of all necessary surface equipment such as steam generators, compressors,
water treating facilities, injection pumps, flow lines and steam lines); and
(viii) the costs of constructing production facilities, pipelines and other
facilities necessary to develop property acquired pursuant to the terms hereof
and produce, collect, store, treat, deliver, market, sell, or otherwise dispose
of oil, gas, and other hydrocarbons and minerals therefrom; provided, that Well
Costs will not include any Acquisition Costs.

(ee)                            Well Interest:  A 22.5% working interest in the
Well.

(ff)                                Well Interest Profits:  As of the applicable
measurement date, an amount equal to the cumulative cash proceeds earned by the
Employer with respect to the Well Interest, minus the sum of (i) the Acquisition
Costs, Well Costs, and other expenses incurred by the Employer with respect to
the Well Interest, plus (ii) an internal rate of return on such costs equal to
the Agreed Rate.

2.2          Number and Gender.  The masculine gender, when used herein,
includes the feminine gender, and, unless context indicates otherwise, the
singular includes the plural and the plural the singular.

 

2.3          Headings.  The headings of Articles and Sections herein are
included solely for convenience, and if there is any conflict between such
headings and the text of the Plan, the text will control.  All references to
Sections and Articles are to this Plan unless otherwise indicated.

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ARTICLE III

Participation

3.1          Selection of Participants and Grant of Bonus Awards.  The
Committee, in its sole discretion, may select which, if any, Eligible Persons
will be granted Bonus Awards and become Participants in the Plan.  Each
Participant’s Bonus Percentage will be determined by, and in the sole discretion
of, the Committee.  Each Bonus Award granted to a Participant will be evidenced
by a Notice of Bonus Award that will specify (a) the Participant’s Bonus
Percentage, (b) the Participant’s effective date of Plan participation, and (c)
such other terms and provisions as the Committee may determine in its sole
discretion.

 

3.2          Commencement of Participation.  Each Eligible Person will become a
Participant upon the effective date of Plan participation specified in his
Notice of Bonus Award, provided that such Eligible Person returns to the Company
an executed Notice of Bonus Award.  Once an Eligible Person becomes a
Participant in the Plan, he will remain a Participant until his Plan
participation terminates in accordance with Section 3.3.

 

3.3          Termination of Participation.  A Participant’s Plan participation
will terminate on the earliest to occur of the following:

(a)                                  The date on which such Participant
terminates employment or service with the Employer for any reason, but only if
such termination date occurs prior to the Full Vesting Date; provided, however,
that with respect to a Participant who is a consultant or independent contractor
and who is not actively performing services for the Employer, such Participant
will, for purposes of the Plan, be deemed to remain in the service of the
Employer unless and until the Committee, in its sole discretion, determines that
such service relationship has been terminated;

(b)                                 The date on which such Participant forfeits
his Bonus Award after the Full Vesting Date pursuant to Section 7.2;

(c)                                  The date of death of such Participant if
there is no Permitted Assignee pursuant to Article VIII; or

(d)                                 The date of termination of the Plan or such
Participant’s Bonus Award pursuant to Article XI.

From and after the date a person’s Plan participation terminates, such person
will not be entitled to receive any payment under the Plan, pursuant to a Bonus
Award or otherwise.

ARTICLE IV

Quarterly Bonus Pool and Quarterly Bonus Amounts

4.1          Calculation of Quarterly Bonus Pool.  As soon as administratively
practicable after the last day of each Plan Quarter, the Committee will
calculate the Quarterly Bonus Pool for such Plan Quarter in the following
manner:

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(a)                                  If Well Interest Profits, determined as of
the last day of the applicable Plan Quarter, equal a negative amount or zero,
the Quarterly Bonus Pool for such Plan Quarter will be deemed to be equal to
zero.

(b)                                 If Well Interest Profits, determined as of
the last day of the applicable Plan Quarter, equal an amount greater than zero,
the Quarterly Bonus Pool for such Plan Quarter will be an amount equal to (i)
Well Interest Profits determined as of the last day of such Plan Quarter, minus
(ii) the sum of the Quarterly Bonus Pools for all preceding Plan Quarters
(taking into account that a Quarterly Bonus Pool will be deemed to be equal to
zero if it would otherwise be a negative amount).

4.2          Calculation of Quarterly Bonus Pool in the Event of a Sale
Transaction.  In the event a Sale Transaction occurs with respect to a Plan
Quarter, the Quarterly Bonus Pool for such Plan Quarter will be calculated in
the manner described in Section 4.1, except that Well Interest Profits will be
deemed to include the amount of net sale proceeds from the Sale Transaction that
the Committee, using any reasonable method it deems appropriate, determines is
attributable to the Well Interest.  In the event that the Sale Transaction does
not result in the receipt of any net sale proceeds (for example, a Change of
Control), the Committee will determine a deemed amount of net sale proceeds
attributable to the Well Interest, taking into account the relevant facts and
circumstances and using any reasonable method it deems appropriate.

 

4.3          Calculation of Participants’ Quarterly Bonus Amounts.  As soon as
administratively practicable after the last day of each Plan Quarter, the
Committee will calculate each Participant’s Quarterly Bonus Amount for such Plan
Quarter, which will be an amount equal to the product of the Participant’s Bonus
Percentage multiplied by the Quarterly Bonus Pool for such Plan Quarter (taking
into account that a Quarterly Bonus Pool will be deemed to be equal to zero if
it would otherwise be a negative amount).

ARTICLE V

Payment and Deferral of Quarterly Bonus Amounts
Prior to Full Vesting Date

5.1          Payment of 2/3 Portion of Quarterly Bonus Amounts.  With respect to
each Plan Quarter that ends prior to the Full Vesting Date, each Participant
whose Plan participation has not terminated as of the Payment Date for such Plan
Quarter will be entitled to receive a payment, if any, equal to two-thirds (2/3)
of his Quarterly Bonus Amount for such Plan Quarter.  Such payment will be made
by the Employer in cash in a single sum as soon as administratively practicable
following the last day of the applicable Plan Quarter, but in no event later
than two and one-half (2½) months following the last day of the Plan Year in
which such Plan Quarter ends.

 

5.2          Deferral of 1/3 Portion of Quarterly Bonus Amounts.  With respect
to each Plan Quarter that ends prior to the Full Vesting Date, each Participant
whose Plan participation has not terminated as of the Payment Date for such Plan
Quarter will be entitled to receive a credit to his Deferred Bonus Account in an
amount equal to one-third (1/3) of his Quarterly Bonus Amount for such Plan
Quarter.  Such credit will be made to each Participant’s Deferred

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Bonus Account as soon as administratively practicable following the last day of
the applicable Plan Quarter.  Each Participant will be entitled to receive a
payment in respect of his Deferred Bonus Account only if the terms and
conditions set forth in Section 5.3 or Section 6.1 are satisfied.

 

5.3          Payment of Quarterly Bonus Amounts and Deferred Bonus Accounts in
the Event of a Sale Transaction.  In the event a Sale Transaction occurs prior
to the Full Vesting Date, then, notwithstanding any provision of Section 5.1 or
Section 5.2 to the contrary, with respect the Plan Quarter for which the
Committee determines that the Sale Transaction relates, each Participant whose
Plan participation has not terminated as of a date determined by the Committee
to be the effective date of the Sale Transaction will be entitled to receive a
payment, if any, equal to the sum of (i) one hundred percent (100%) of his
Quarterly Bonus Amount for such Plan Quarter, plus (ii) the amount, if any, that
is credited to his Deferred Bonus Account.  Subject to the terms of Section
12.7, such payment will be made by the Employer in cash in a single sum as soon
as administratively practicable following the last day of the applicable Plan
Quarter, but in no event later than two and one-half (2½) months following the
last day of the Plan Year in which such Plan Quarter ends.

ARTICLE VI

Payment of Deferred Bonus Account and Quarterly Bonus Amounts
After Full Vesting Date

6.1          Payment of Deferred Bonus Account.  As soon as administratively
practicable following the first Plan Quarter that ends after the Full Vesting
Date, each Participant whose Plan participation has not terminated as of the
Payment Date for such Plan Quarter will be entitled to receive a payment equal
to the amount, if any, that is credited to his Deferred Bonus Account.  Subject
to the terms of Section 12.7, such payment will be made by the Employer in cash
in a single sum as soon as administratively practicable following the last day
of the applicable Plan Quarter, but in no event later than two and one-half (2½)
months following the last day of the Plan Year in which the Full Vesting Date
occurs.

 

6.2          Payment of Quarterly Bonus Amounts.  With respect to each Plan
Quarter that ends after the Full Vesting Date, each Participant whose Plan
participation has not terminated as of the Payment Date for such Plan Quarter
will be entitled to receive a payment, if any, equal to one hundred percent
(100%) of his Quarterly Bonus Amount for such Plan Quarter.  Subject to the
terms of Section 12.7, such payment will be made by the Employer in cash in a
single sum as soon as administratively practicable following the last day of the
applicable Plan Quarter, but in no event later than two and one-half (2½) months
following the last day of the Plan Year in which such Plan Quarter ends.

ARTICLE VII
Forfeiture of Bonus Awards

7.1          Forfeiture of Bonus Award Prior to Full Vesting Date.  If a
Participant’s Plan participation terminates in accordance with Section 3.3 prior
to the Full Vesting Date, such Participant’s Bonus Award (including, without
limitation, any amount credited to his Deferred Bonus Account) will be forfeited
as of the date that his Plan participation terminates.  By way of

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example and not limitation, a Participant who terminates employment with the
Employer prior to the Full Vesting Date will forfeit his Bonus Award (including,
without limitation, any amount credited to his Deferred Bonus Account) as of the
date of such termination of employment.

 

7.2          Forfeiture of Vested Bonus Award for Cause.  Each Participant will
forfeit his Bonus Award (including, without limitation, any amount credited to
his Deferred Bonus Account) if such Participant:

(a)                                  with respect to time periods during which
such Participant is employed by or performing (or deemed to be performing)
services for the Employer, (1) materially breaches the terms of his employment
agreement or other services agreement with the Employer or any of its
Affiliates, (2) materially breaches the terms of any corporate policy or code of
conduct established by the Employer or any of its Affiliates, or (3) the
Committee, in its sole discretion, determines that such Participant has engaged
in gross negligence or willful misconduct in the performance of services for the
Employer or any of its Affiliates, including, without limitation, a willful
refusal without proper legal reason to perform his duties and responsibilities,
or

(b)                                 at any time, including time periods during
which such Participant is not employed by or performing (or deemed to be
performing) services for the Employer, (i) admits or enters a plea of no contest
to or is convicted of a felony against the Employer or any of its Affiliates,
(ii) materially breaches any provision of any agreement with the Employer or any
of its Affiliates, or (iii) engages in dishonest or fraudulent conduct with
respect to the business, reputation or affairs of the Employer or any of its
Affiliates.

The forfeiture provisions of this Section 7.2 will apply regardless of whether a
Participant’s employment or service relationship with the Employer was
terminated as a result of conduct described in subsections (a) or (b) above, and
regardless of whether such Participant continued Plan participation through the
Full Vesting Date.

7.3          Forfeiture of Bonus Award on Account of Participant’s Death if No
Permitted Assignee.  A Participant will forfeit his Bonus Award (including,
without limitation, any amount credited to his Deferred Bonus Account) upon the
Participant’s date of death if the Committee determines that the deceased
Participant’s Bonus Award was not transferred to a Permitted Assignee pursuant
to Article VIII or that no Permitted Assignee exists.

 

7.4          Consequences of Forfeiture of Bonus Award.  From and after the date
a Participant forfeits his Bonus Award, such person will not be entitled to
receive any payment under the Plan pursuant to a Bonus Award or otherwise.

ARTICLE VIII

Permitted Assignees of Vested Bonus Award Upon Participant’s Death

8.1          Permitted Assignees of Vested Bonus Award Upon Participant’s Death.

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(a)                                  On or after the Full Vesting Date, all or
any portion of each Participant’s Bonus Award may be transferred, by operation
of will or applicable law, to a Permitted Assignee upon such Participant’s
death.

(b)                                 Each Permitted Assignee who is entitled to
receive payments from the Plan under this Section 8.1, if any, will receive and
hold only those rights and interests, and be subject to the same terms and
conditions that would apply if such Permitted Assignee were a Participant in the
Plan, including, without limitation, the restrictions on the transfer of a
Participant’s Bonus Award.  As a condition to receipt of any rights and
interests under this Section 8.1, a Permitted Assignee may be required to
provide the Committee with any information necessary for the Committee to effect
a transfer of such rights and interests, and to execute and deliver a written
agreement with the Company agreeing to be bound by the terms of the Plan. 
Notwithstanding whether a Permitted Assignee has executed and delivered such an
agreement, the acceptance of distributions from the Plan by a Permitted Assignee
will be deemed to be an agreement by such Permitted Assignee to be bound by the
Plan’s terms.

(c)                                  To the extent that a payment is made under
the Plan to an individual who the Committee determines in good faith is a
Permitted Assignee with respect to a deceased Participant’s Bonus Award, any and
all obligations with respect to such payment will be discharged and neither the
Plan nor the Employer will have any obligation to another person claiming to be
the Participant’s Permitted Assignee with respect to such payment,
notwithstanding any subsequent determination by the Committee, a court of law,
or otherwise, that such payment was made based on a mistake of fact or a mistake
of law.

(d)                                 In the event that there is a dispute or
uncertainty regarding the identity of the Permitted Assignee(s) to whom a
deceased Participant’s Bonus Award may have been transferred, the Committee will
be permitted to retain any payment that would otherwise be payable with respect
to such Bonus Award until the identity of such Permitted Assignee(s) can be
determined.  The amount of any such retained payment will be credited with
interest at the Agreed Rate from the time such amount would otherwise be payable
until the time such amount is paid.  In addition, in the case of any bona fide
dispute between parties concerning the right to a payment under the Plan, the
Committee may, in its discretion, file an interpleader action in a court of
competent jurisdiction, naming the parties to the dispute and, if applicable,
may pay the disputed amount into the court to be distributed in accordance with
the court’s decision or take such other action as it determines, in its sole
discretion, constitutes an appropriate way to resolve or otherwise settle the
dispute.

ARTICLE IX

Administration

9.1        Committee Administration.  The Plan will be administered by the
Committee.

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9.2        Meetings.  The Committee will hold meetings upon such notice and at
such time and place as it may from time to time determine.  Notice to a member
will not be required if waived in writing by that member.  A majority of the
members of the Committee duly appointed will constitute a quorum for the
transaction of business.  All resolutions or other actions taken by the
Committee at any meeting where a quorum is present will be by vote of a majority
of those present at such meeting and entitled to vote.  Resolutions may be
adopted or other action taken without a meeting upon written consent signed by
all of the members of the Committee.  Members of the Committee may participate
in meetings by means of telephone conference or similar communication whereby
all persons participating in the meeting can hear and speak to each other.

 

9.3        Discretion to Interpret Plan.  The Committee has absolute discretion
to construe any and all provisions of the Plan, including, but not limited to,
the discretion to resolve ambiguities, inconsistencies, or omissions
conclusively.  The decisions of the Committee upon all matters within the scope
of its authority will be binding and conclusive upon all persons.

 

9.4        Powers and Duties.  In addition to the powers described in Section
9.3 and all other powers specifically granted under the Plan, the Committee will
have all powers necessary or proper to administer the Plan and to discharge its
duties under the Plan, including, but not limited to, the following powers:

(a)                                  To make and enforce such rules,
regulations, and procedures as it may deem necessary or proper for the orderly
and efficient administration of the Plan;

(b)                                 To enter into an agreement with any
individual or entity to perform services with respect to the Plan;

(c)                                  In its discretion, to interpret and decide
all matters of fact in determining the amount of and authorizing payments with
respect to Bonus Awards under the Plan, its interpretation and decision thereof
to be final and conclusive on all persons claiming a right with respect to such
Bonus Awards;

(d)                                 In its discretion, to determine eligibility
under the terms of the Plan, its determination thereof to be final and
conclusive on all persons;

(e)                                  To prepare and distribute information
explaining the Plan;

(f)                                    To obtain from the Employer and
Participants (or the assignee of a Participant) such information as may be
necessary for the proper administration of the Plan;

(g)                                 To sue or cause suit to be brought in the
name of the Plan; and

(h)                                 To establish a claims procedure and any
other procedures for implementation of the Plan.

9.5          Expenses.  The Employer will pay the reasonable expenses incident
to the administration of the Plan, including, but not limited to, the
compensation of any legal counsel, advisors, or other technical or clerical
assistance as may be required; the payment of any bond or

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security required by applicable law; and any other expenses incidental to the
operation of the Plan that the Committee determines are proper.

 

9.6          Reliance on Reports, Certificates, and Participant Information. 
The Committee is entitled to rely conclusively upon all tables, valuations,
certificates, opinions, and reports furnished by an actuary, accountant,
controller, counsel, insurance company, or other person who is employed or
engaged for such purposes.  Moreover, the Committee will be entitled to rely
upon information furnished to the Committee or the Employer by a Participant (or
a Permitted Assignee), including, but not limited to, such person’s current
mailing address.

 

9.7          Right to Delegate.  The Committee, in its sole discretion, may
delegate to one or more employees or agents of the Employer its day-to-day
ministerial duties and powers (but only its day-to-day ministerial duties and
powers) under the Plan.

 

9.8          Indemnification.  The Company will indemnify and hold harmless each
member of the Committee, and each employee or agent of the Employer who is a
delegate of the Committee, against any and all expenses and liabilities arising
out of such individual’s administrative functions or other responsibilities,
including, but not limited to, any expenses and liabilities that are caused by
or result from an act or omission constituting the negligence of such individual
in the performance of such functions or responsibilities, but excluding expenses
and liabilities arising out of such individual’s own gross negligence or willful
misconduct.  Expenses against which such person will be indemnified hereunder
include, but are not limited to, the amounts of any settlement, judgment, costs,
counsel fees, and related charges reasonably incurred in connection with a claim
asserted or a proceeding brought.  Notwithstanding the foregoing provisions of
this Section, this Section will not apply to, and the Company will not indemnify
against, any expense that was incurred without the consent or approval of the
Company, unless such consent or approval has been waived in writing by the
Company.

ARTICLE X

Nature of the Plan

10.1        Unfunded, Unsecured Plan.  The Plan will constitute an unfunded,
unsecured obligation of the Employer to make payments of incentive rewards to
certain persons from its general assets in accordance with the Plan.  Each Bonus
Award granted under the Plan merely constitutes a mechanism for measuring such
incentive compensation and does not constitute any property right or interest in
the Company or any of its Affiliates, or in the Well or the Well Interest. 
Neither the establishment of the Plan, the granting of Bonus Awards, nor any
other action taken in connection with the Plan will be deemed to create an
escrow or trust fund of any kind.

 

10.2        No Rights of Participant.  No Participant will have any security or
other interest in any assets of the Employer or any of its Affiliates as a
result of a Bonus Award.  Further, no Participant will have any right to receive
a property interest in the Well or the Well Interest.  Participants and all
persons claiming under Participants (including Permitted Assignees) will rely
solely on the unsecured promise of the Employer set forth herein, and nothing in
the Plan or a Notice of Bonus Award will be construed to give a Participant or
anyone claiming under a Participant (including a Permitted Assignee) any right,
title, interest, or claim in or to any

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specific asset, fund, entity, reserve, account, or property of any kind
whatsoever owned by the Employer or any of its Affiliates, or in which any such
entity may have an interest now or in the future, and each Participant will have
the right to enforce any claim hereunder only in the same manner as a general
creditor.  Neither the establishment of the Plan nor the granting of any Bonus
Award will create any right in any Participant to make any decision, or provide
input with respect to any decision, relating to the business of the Employer or
any of its Affiliates.

ARTICLE XI

Amendment and Termination

11.1        Amendment of Plan. Notwithstanding any provision of any other
communication, either oral or written, made by the Employer or any of its
Affiliates, the Committee, or any other individual or entity to Eligible Persons
or to any other individual or entity, the Company reserves the absolute and
unconditional right to amend the Plan from time to time.  All amendments to the
Plan will be in writing, and any oral statements or representations made by the
Employer or any of its Affiliates, the Committee, or any other individual or
entity that alter, modify, amend, or are inconsistent with the written terms of
the Plan will be invalid and unenforceable and may not be relied upon by any
Eligible Person, Permitted Assignee, service provider, or other individual or
entity.  All amendments will be executed by such person or persons as the
Company in its discretion authorizes.

 

11.2        Right to Terminate.  Notwithstanding any provision of any other
communication, either oral or written, made by the Employer or any of its
Affiliates, the Committee, or any other individual or entity to any Eligible
Person, Permitted Assignee, service provider, or other individual or entity, the
Company reserves the absolute and unconditional right to terminate the Plan, in
whole or in part, and to terminate the Bonus Awards of some or all Participants
and each Permitted Assignee of such Participants, with such termination to be
effective as of the date selected by the Company in its sole discretion.

 

11.3        Effect of Termination.  In the event of a termination of the Plan or
a termination of the Bonus Award with respect to one or more Participants
pursuant to Section 11.2, each such affected Participant (or his Permitted
Assignee(s)) will receive a final payment under the Plan reflecting such
Participant’s Bonus Award as of the date of such termination.  The Committee
will determine, in its sole discretion and using any reasonable method and
manner which it deems appropriate, the final payment amount that each
Participant (or his Permitted Assignee(s)) is entitled to upon such termination,
taking into account, in the manner it deems appropriate, such information which
is available to the Committee as of the date that it makes its determination.  A
final payment pursuant to this Section 11.3 will be distributed to a Participant
(or his Permitted Assignee(s)) as soon as administratively practicable after
such termination and in no event later than two and one-half (2½) months
following the last day of the Plan Year in which such termination occurs;
provided, however, that, notwithstanding the foregoing to the contrary, to the
extent that such termination and final payment would be subject to section 409A
of the Code, such termination and final payment will be made in accordance with
the applicable requirements of section 409A of the Code and the authority
thereunder.

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ARTICLE XII

General Provisions

12.1        No Guarantee of Employment.  Nothing contained in the Plan will
grant any Eligible Person, or other individual who is an employee of the
Employer or any of its Affiliates, or who otherwise performs services for the
Employer or any of its Affiliates, the right to be retained in the service of
the Employer or any of its Affiliates, nor will anything contained in the Plan
limit in any way the right of the Employer or any of its Affiliates to discharge
or terminate the service of any individual, including an Eligible Person, at any
time, without regard to the effect such discharge or termination may have on any
of such individual’s rights under the Plan.

 

12.2        Withholding.  The Employer will at all times be entitled with
respect to a payment due under the Plan:  (a) to withhold, or cause to be
withheld, from such payment to a Participant (or Permitted Assignee), or from
any other payment to such Participant (or Permitted Assignee), an amount
necessary to satisfy any and all tax withholding obligations or other deductions
with respect to any wages or other payments made to a Participant (or Permitted
Assignee), which arise under applicable law or are authorized by the Participant
(or Permitted Assignee), and (b) to take any other action as may in its opinion
be necessary to satisfy all obligations for the payment of such taxes or such
other deductions.

 

12.3        Offset of Amounts Owed to the Employer.  Whenever a Participant (or
Permitted Assignee) would be otherwise due any payment pursuant to the Plan, the
Employer will be entitled to deduct from such payment any amounts that the
Participant (or Permitted Assignee) owes the Employer or any of its Affiliates,
including, without limitation, overpayments made under the Plan to either the
Participant or a Permitted Assignee, before payment of such amount to such
Participant (or Permitted Assignee).

 

12.4        Agreement to be Bound by Plan.  Through the acceptance of payments
pursuant to the Plan, each Participant agrees to be bound by the terms and
conditions of the Plan.

 

12.5        Nonalienation of Benefits.

(a)                                  Except as provided in Section 8.1, Section
12.3, and Section 12.5(b), or as the Committee may otherwise permit, in writing,
in its sole discretion, no interest in or benefit payable under the Plan will be
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, or charge, and any action by a Participant to anticipate,
alienate, sell, transfer, assign, pledge, encumber, or charge the same will be
void and of no effect; nor will any interest in or benefit payable under the
Plan be in any way subject to any legal or equitable process, including, but not
limited to, garnishment, attachment, levy, seizure, or the lien of any person. 
This provision will be construed to provide each Participant, or other person
claiming any interest or benefit in the Plan through a Participant, with the
maximum protection afforded such Participant’s interest in the Plan (and the
benefits provided thereunder) by law against alienation, encumbrance, and any
legal and equitable process, including, but not limited to, attachment,
garnishment, levy, seizure, or other lien.

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(b)                                 Notwithstanding Section 12.5(a), the
Committee will comply with the terms and provisions of a “qualified domestic
relations order” as defined in section 414(p) of the Code.

12.6        Unknown Whereabouts.  It will be the affirmative duty of each
Participant (and Permitted Assignee) to inform the Committee of, and to keep on
file with the Committee, his current mailing address.  If a Participant (or
Permitted Assignee) fails to inform the Committee of his current mailing
address, neither the Committee, the Employer, or any Affiliate will be
responsible for any late payment or loss of benefits or for failure of any
notice to be provided or provided timely under the terms of the Plan to such
Participant (or Permitted Assignee).

 

12.7        Code Section 409A.  To the extent that the Plan is (or becomes)
subject to Code section 409A, or any successor provision, as amended from time
to time, the Committee may at all times interpret and construe the Plan’s terms
to conform and comply with the requirements of Code section 409A (or any
successor provision).  Further, notwithstanding any other provision of the Plan
to the contrary, the Committee retains the right to amend the Plan to conform
and comply with the requirements of Code section 409A (or any successor
provision).

 

12.8        Jurisdiction.  Except to the extent that any federal law applies to
the Plan and preempts state law, the Plan and all actions arising our of or in
connection with the Plan shall be governed by and construed, enforced, and
administered according to the laws of the state of Texas, without regard to the
conflict of law provisions of the State of Texas or of any other state or
jurisdiction.

 

12.9        Severability.  In case any provision of the Plan is held to be
illegal, invalid, or unenforceable for any reason, such illegal, invalid, or
unenforceable provision will not affect the remaining provisions of the Plan,
but the Plan will be construed and enforced as if such illegal, invalid, or
unenforceable provision had not been included therein.

 

12.10      Successors.  The rights and obligations of the Company hereunder
shall be binding upon and inure to the benefit of the Company and its successors
and assigns.

Executed on this 15th day of January 2007.

 

.

Clayton Williams Energy, Inc

 

 

 

 

 

 

 

 

 

 

 

 

 

By

:

/s/ L. Paul Latham

 

 

 

 

 

 

L. Paul Latham

 

 

 

 

Executive Vice President

 

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