Exhibit 10.3


 


 


 


 


 


 


 


Carbon
Natural Gas Company


 


 


Annual
Incentive Plan


 


 


2017


 


 


 




     


     


    




 


Carbon
Natural Gas Company


2017
Annual Incentive Plan


 



Plan
Objectives


 


The Annual
Incentive Plan is designed to meet the following objectives:


 


		●	Provide
                                         an annual incentive plan that is performance driven and is focused on objectives which
                                         are critical to the success of Carbon Natural Gas Company and to the creation of value
                                         for shareholders.



 


		●	Offer
                                         competitive cash compensation for employees.



 


		●	Reward
                                         outstanding achievement.



 


		●	Recruit
                                         and retain key employees.



 


Plan
Outline


 


The
Plan provides for Annual Incentive Awards which will be determined on the basis of the Company’s achievement of Financial
and Operating Performance Measures.


 


60
percent of the Incentive Award will be based on Financial and Operating Performance Measures selected by the Board of Directors.


 


40
percent of the Incentive Award will be a Discretionary Award determined by the Board of Directors.


 


The
Plan period is from January 1, 2017 to December 31, 2017.


 


Performance
Measures and Weighting


 


The
Board of Directors will establish the Financial and Operating Performance Measures, the Threshold, Target and Outstanding performance
levels and the weighting for each Performance Measure.


 






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Carbon
Natural Gas Company


2017
Annual Incentive Plan


 



The
Financial and Operating Performance Measures and Targets for the 2017 Annual Incentive Plan are set forth below:


 
	Performance Measure	 	Weighting	 	 	Threshold	 	 	Target	 	 	Outstanding	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Debt to Adjusted EBITDA Ratio	 	 	25	%	 	 	3.0	 	 	 	2.7	 	 	 	2.4	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net Annual Production (MMcfe)	 	 	25	%	 	 	5,350	 	 	 	5,850	 	 	 	6,250	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Lease Operating Expenses ($/unit)	 	 	25	%	 	$	1.16	 	 	$	1.05	 	 	$	.94	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	G&A per Unit of Net Production	 	 	25	%	 	$	.95	 	 	$	.83	 	 	$	.72	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total of Performance Measures	 	 	100.00	%	 	 	 	 	 	 	 	 	 	 	 	 



 


Board
of Directors Discretionary Component_40% of Award


 


The discretionary
component is designed to address notable achievements which may not be captured in the Performance Measures component of the Plan.


 


	Range of Board Discretionary Incentive Award:	 	 	0% - 200%	 



 


Plan
Administration


 


The
Plan will be administered by the Compensation, Nominating and Governance Committee. The Chief Financial Officer will verify the
calculations for the financial and operating measures.


 


The
Board may not increase payout amounts above the outstanding level for performance categories which depend on the achievement
of specific Company targets. Payments related to performance categories that are tied to the achievement of specific targets
are capped once the highest level is achieved. The Board can, in its discretion, reduce or increase the payout amounts for
performance categories after taking into account special or unusual factors that may have contributed to the achievement of
target performance measures including acquisitions, commodity prices or other factors considered appropriate by the
Board.


 






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Carbon
Natural Gas Company


2017
Annual Incentive Plan


 


Award
Achievement Levels


 


Award
Achievement Levels for the Plan will be:


 


	 	●	Threshold
    	Level
    at which Minimum Award payout occurs
	 	 	 	 
	 	●	Target	Level at which
the Target Award percentage is authorized.
	 	 	 	 
	 	●	Outstanding
    	Level
    at which 200% of the Target Award is authorized.


 


Achievement
percentages between Threshold, Target and Outstanding will be determined by linear interpolation.


 


Targets
maybe adjusted for material changes made during the year to the business plan. Increases or decreases to the capital expenditure
budget will cause the affected measures and results to be proportionately adjusted.


 


Performance
Targets


 


Performance
targets will be set for each Measure. Performance results below the Threshold in any one Measure will equate to a zero completion
percentage for that Measure.


 


A
minimum 30% overall completion achievement is required for the total Plan in order for any Incentive Award payments to be made
under the Plan, subject to the discretion of the Board.


 


Achievement
Calculation


 


Achievement
percentages for each individual Measure will be equal to the calculated completion percentage of the Measure times the weighting
for that Measure. The overall completion percentage for the Plan for Financial and Operating Measures will be the sum of the weighted
completion percentages for each individual Measure.


 


The
Board will determine the Discretionary Award which may range from 0% to 200% achievement and which will account for 40% of the
overall Incentive Award.


 






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Carbon
Natural Gas Company


2017
Annual Incentive Plan


 


Participants


 


The
CEO shall determine which employees are to be participants in the Plan.


 


The
Target Award percentages for the CEO and the named executive officers of the Company (Exhibit A) are established by the Board
of Directors. The Board of Directors shall determine Award levels for the Chief Executive Officer, Chief Financial Officer, President
and the Staff Pool. The CEO is authorized to establish and adjust at his discretion the Target Award percentages for Staff Pool
participants and the allocation of Incentive awards to the Staff Pool Participants.


 


Incentive
Awards will be calculated based upon the participant’s average base salary during the Plan year or earned salary during
the Plan year if the Participant was a new hire during the year, took a leave of absence, or was absent due to an unforeseen circumstance.


 


If
a participant’s employment with the Company terminates for any reason prior to payment of the Incentive Award, the Incentive
Award (if any) may be authorized and paid at the discretion of the Board of Directors.


 






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Carbon
Natural Gas Company


2017
Annual Incentive Plan


 


	Performance
    Measure	 	Debt
    to Adjusted EBITDA Ratio
	 	 	 
	Target	 	Year End Debt
    to Adjusted EBITDA Ratio of 2.7
	 	 	 
	Definition	 	Debt to Adjusted
    EBITDA Ratio at December 31, 2017
	 	 	 
	 	 	Bank debt
    shall be defined as outstanding borrowings on the Company’s credit facility.  
	 	 	 
	 	 	Adjusted EBITDA
    will include cash settlements related to current period derivative contracts and exclude the effects related to mark to market
    valuations.
	 	 	 
	 	 	The Board
    may consider adjusting the ratio due to changes in working capital or to corporate or asset acquisitions during the year.
	 	 	 
	 	 	Adjusted EBITDA
    shall be defined as the Adjusted EBITDA for the fourth quarter of 2017 multiplied by 4.


 


	Award
    Levels	 	●	Threshold	3.0
	 	 	 	 	 
	 	 	●	Target	2.7
	 	 	 	 	 
	 	 	●	Outstanding	2.4


 






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Carbon
Natural Gas Company


2017
Annual Incentive Plan


 



	Performance
    Measure	 	Net
    Annual Production
	 	 	 
	Target	 	Net annual
    proved developed production of 5,850 MMcfe.
	 	 	 
		 	For
purposes of the Plan, net equivalent production shall be measured by calculating the natural gas equivalent value as determined
by the ratio of one barrel of oil equal to 15 mcf of natural gas.
	 	 	 
	Definition	 	Net proved
    developed production from January 1, 2017 to December 31, 2017.  The Board may consider adjusting proved developed
    production to include changes due to corporate or asset acquisitions during the year (if such adjustments have a material
    effect on production).


 


	Awards
    Level	 	●	Threshold	5,350
    MMcfe
	 	 	 	 	 
	 	 	●	Target	5,850
    MMcfe
	 	 	 	 	 
	 	 	●	Outstanding	6,250
    MMcfe


 




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Carbon
Natural Gas Company


2017
Annual Incentive Plan


 



	Performance
    Measure	 	Lease
    Operating Expenses $ per unit of Net Production
	 	 	 
	Target	 	Lease
    Operating Expenses of $1.05 per unit of net production equivalent. 
	 	 	 
		 	For
    purposes of the Plan, net equivalent production shall be measured by calculating the natural gas equivalent value as determined
    by the ratio of one barrel of oil equal to 15 mcf of natural gas. 
	 	 	 
	 	 	The
Board may consider adjusting lease operating expense per unit of net production equivalent to include changes due to corporate
or asset acquisitions during the year (if such adjustments have a material effect on the per unit expense).
	 	 	 
	Definition	 	Actual Cash
Lease Operating Expenses.


 


	Award
    Levels	 	●	Threshold	$1.16
    per Unit
	 	 	 	 	 
	 	 	●	Target	$1.05
    per Unit
	 	 	 	 	 
	 	 	●	Outstanding	$.94
    per Unit


 




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Carbon
Natural Gas Company


2017
Annual Incentive Plan


 



	Performance
    Measure	 	G&A
    Cost $/unit of Net Production
	 	 	 
	Target	 	Actual
    Cash General and Administrative Expense of $.83 per unit of Net Proved Developed Production Equivalent.
	 	 	 
	 	 	For
    purposes of the Plan, Annual Incentive Plan Award amounts shall be excluded from cash general and administrative expenses
    and net equivalent production shall be measured by calculating the natural gas equivalent value as determined by the ratio
    of one barrel of oil equal to 15 mcf of natural gas.  
	 	 	 
	 	 	The
    Board may consider adjusting cash general and administrative expense per unit of net proved developed production equivalent
    to include changes due to corporate or asset acquisitions during the year (if such adjustments have a material effect on per
    unit expense).
	 	 	 
	Definition	 	Actual
    Cash General and Administrative Expenses.


 


	Awards
    Level	 	●	Threshold	$
    .95 per Unit
	 	 	 	 	 
	 	 	●	Target	$
    .83 per Unit
	 	 	 	 	 
	 	 	●	Outstanding	$
    .72 per Unit


 






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Carbon
Natural Gas Company


2017
Annual Incentive Plan


 


Exhibit
A


 


	Name	 	Title	 	Target Bonus Award %	 
	 	 	 	 	 	 
	Patrick R. McDonald	 	Chief Executive Officer	 	 	100	 
	Kevin D. Struzeski	 	Chief Financial Officer	 	 	65	 
	Mark D. Pierce	 	President	 	 	65	 



 


 


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