<PAGE>   1
                                                                    EXHIBIT 10.3

             PRINCIPAL FINANCIAL GROUP INCENTIVE PAY PLAN (PRINPAY)
                  AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2001

                       SECTION 1. INTRODUCTION AND PURPOSE

The Principal Financial Group Incentive Pay Plan (the "Plan") is designed to
motivate employees who work for the Principal Financial Group(R) to perform at
levels which will ensure the success of the Company. The Plan is intended to pay
financial rewards based on performance. The Plan was originally adopted by
Principal Life Insurance Company of Des Moines, Iowa on January 1, 1995 and has
since been amended from time to time. Prior to the date of this restatement, the
Plan was amended and restated on January 1, 1999. This amended and restated
version of the Plan has been adopted and assumed by the Company as of January
1, 2001 The Plan remains in effect until amended, suspended or terminated.

                              SECTION 2. PLAN YEAR

The Plan Year is the calendar year beginning on January 1 and ending on December
31.

                             SECTION 3. DEFINITIONS

For the purposes of this Plan, the following terms shall have the meanings
indicated, unless the context clearly indicates otherwise:

"Adjusted Consolidated GAAP Equity" for any period means the ending equity of
the Company and its consolidated subsidiaries, taken as a whole, as determined
in accordance with GAAP, adjusted for accumulated other comprehensive income or
loss, as defined by GAAP, unless otherwise determined by the Committee.

"Award Component" means one of the following: corporate, business unit or
individual performance weighted for a Participant.

"Award Opportunity" means the percentage of a Participant's Fixed Salary
earnable under the Plan if target performance for the Plan Year is met.

"Award Opportunity Scale" means the percentage of the Award Opportunity earnable
under the Plan if minimum, maximum or any other scale factors that have been
identified are met. The Award Opportunity Scale is a percentage of the Award
Opportunity. The Award Opportunity Scale may be any that the Committee shall
deem appropriate, provided that, for the Plan Year commencing in 2001 and,
unless otherwise specified by the Committee by March 15 of the relevant Plan
Year, the Award Opportunity scale shall be 0%, 50%, 100%, 150% and 200%
(maximum) of the Award Opportunity.

"Beneficiary" or "Beneficiaries" means the person, persons or entity entitled
under Section 7 to receive any Plan benefits payable after a Participant's
death, If a Participant dies before receiving an award to which he or she is
entitled, the award will be paid to the person(s) or entity designated as the
beneficiary for the Participant's life insurance benefit through The Principal
Trust for Life Insurance Benefits for Employees.

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Amended and Restated as of January 1, 2001.
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"Board" means the Board of Directors of the Company, or the successor thereto.

"Cause" shall mean any one or more of the following:

     (i)   a Participant's commission of a felony or other crime involving
           fraud, dishonesty or moral turpitude;

     (ii)  a Participant's willful or reckless material misconduct in the
           performance of the Participant's duties;

     (iii) A Participant's habitual neglect of duties; or

     (iv)  A Participant's willful or intentional breach of obligations to an
           Employer, provided that, if such breach involved an act, or failure
           to act, which was done, or omitted to be done, by a Participant in
           good faith and with a reasonable belief that a Participant's act, or
           failure to act, was in the best interest of the Company or was
           required by applicable law or administrative regulation, such breach
           shall not constitute Cause, if, within 30 days after a Participant is
           given written notice of such breach that specifically refers to this
           definition, a Participant cures such breach to the fullest extent
           that it is curable;

provided, however, that Cause shall not include any one or more of the
following:

     (i)   a Participant's negligence, other than a Participant's habitual
           neglect of duties or gross negligence; or

     (ii)  any act or omission believed by a Participant in good faith to have
           been in or not opposed to the interest of the Company (without intent
           of the Participant to gain, directly or indirectly, a profit to which
           the Participant was not legally entitled).

"Committee" means the Human Resources Committee of the Board or such other
committee of the Board as the Board shall designate from time to time, which
committee shall be composed of two or more outside directors.

"Company" means Principal Mutual Holding Company and its successors and assigns
and any company which shall acquire substantially all of its assets.

"Disability" means, with respect to any Participant, long-term disability as
defined under any long-term disability plan maintained by the Company or a
Subsidiary in which the Participant participates. In the event of any question
as to whether a Participant has a Disability, the plan administrator of the
relevant long-term disability plan shall determine whether a disability exists,
in accordance with such plan.

"Employer" means the Company and any Subsidiary whose employees are designated
as Participants under the Plan.

"Exempt" means an employee who is not subject to the minimum wage and overtime
pay provisions of the Fair Labor Standards Act. These employees include
executives, administrative employees, professional employees and those engaged
in outside sales.

"Fair Labor Standards Act" means 29 U.S.C. Section 201 et seq.


                                        2

Amended and Restated as of January 1, 2001.

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"Final Warning" means a disciplinary action designated to be a final warning.

"Fixed Salary" means the gross amount of earnings received for base salary, lump
sum merit, Personal Time Off, shift differential, on-call pay, holiday pay,
overtime and short-term disability coverage during the Plan Year. Fixed Salary
does not include the award earned under this Plan or any other bonus, incentive
or commission and paid in the current Plan Year.

"GAAP" means generally accepted accounting principles, consistently applied.

"Individual Goals" means one or more financial or non-financial measure
established for the Plan Year between the Participant and the Participant's
leader, at 100% performance, which may also have written Award Opportunity
Scales.

"Job Level" means an Employer's internal hierarchical level of a job that is
used to determine eligibility and participation in corporate programs and
amenities.

"Non-exempt" means an employee who is subject to the minimum wage and overtime
pay provisions of the Fair Labor Standards Act.

"Operating Earnings" means operating earnings of the Company and its
consolidated subsidiaries, consistent with GAAP principles, unless otherwise
determined by the Committee.

"Participant" means an employee who has met the eligibility requirements for the
Plan Year. For the purposes of Section 8, "Participant" shall include only an
employee who was employed by an Employer before the date of the applicable
Change of Control.

For purposes of Section 8 "Executive Participant" means an employee at the level
of vice president or equivalent and above who has met the eligibility
requirements for the Plan Year. For the purposes of Section 8, "Executive
Participant" shall include only an employee who was employed by an Employer
before the date of the applicable Change of Control.

"Performance Measures" means one or more financial or non-financial measures
established for the Plan Year. The Committee shall establish performance levels
of achievement for the Award Opportunity Scale, in order to reflect the level of
recognition to be afforded to partial achievement of, or to surpassing, the
level of achievement targeted for such objective for such Plan Year. The
corporate and business unit Performance Measures shall be selected from such
measures as the Committee or Plan Administrator shall deem appropriate,
including, without limitation, ROE, Operating Earnings, earnings before
interest, taxes, depreciation and amortization ("EBITDA"), budget, customer
satisfaction and total shareholder return.

"Plan" means the Principal Financial Group Incentive Pay Plan, as currently in
effect and as the same may be amended from time to time,

"Plan Administrator" means the committee, committees or persons in Section 9,
that have been designated by the Chief Executive Officer and approved by the
Committee.

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Amended and Restated as of January 1, 2001.


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"Retirement" means a termination of a Participant's employment for any reason
other than death, Disability or Cause and qualifying to retire under the terms
of any pension plan maintained by the Company or a Subsidiary.

"ROE" means, with respect to any calendar year, Operating Earnings divided by
the average Adjusted Consolidated GAAP Equity for the year (prior 12-month
period ending Adjusted Consolidated GAAP Equity plus end of 12-month period
Adjusted Consolidated GAAP Equity, divided by two) unless otherwise determined
by the Committee.

"Pro-Ration Factor" means the number of days as a Participant under the Plan
divided by 365 days.

"Subsidiary" means (1) any corporation in which the Company owns, directly or
indirectly, at least 50% of the outstanding equity interests and over which the
Company has effective control, or (2) any other entity or joint venture,
domestic or non-domestic, in which the Company, directly or indirectly, owns an
interest and that is designated in writing as a "Subsidiary" by the Plan
Administrator for purposes of this Plan.

"Threshold Objectives" means one or more minimal performance objectives
established hereunder that must be achieved in order for any payment to be made
for the Plan Year. Such Threshold Objectives may be any measure of performance
that the Committee shall deem appropriate, provided that, for the Plan Year
commencing in 2001 and, unless otherwise specified by the Committee by March 15
of the relevant Plan Year, the Threshold Objectives shall be:

     (1)   The Principal must maintain the minimum claims paying/financial
           strength rating from 2 of the 3 rating agencies: Fitch AA-, Moody's
           Aa3 and Standard & Poors AA-; and

     (2)   Adjusted Consolidated GAAP Equity for the end of the Plan Year,
           stated as a percentage of the general account assets of Principal
           Life Insurance Company, must be at least 6%; and

     (3)   Principal Life Insurance Company must have a Risk Based Capital Ratio
           (as defined by the National Association of Insurance Commissioners)
           of at least 150%.

                             SECTION 4. ELIGIBILITY

Exempt employees of an Employer are Participants in the Plan on their date of
hire. Non-exempt employees of an Employer are eligible to participate in the
Plan if they work at least 20 hours per week on a regularly scheduled basis and
become a Participant after completing six months of employment.

Unless pre-approved by the Plan Administrator in writing, an employee who is a
Participant in the Plan is not eligible to participate in any other Company or
Subsidiary annual incentive, bonus or commission plan. Unless pre-approved by
the Plan Administrator in writing, employees who are participants in other
annual incentives, bonus or commission plans are not eligible to be Participants
in the Plan.


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Amended and Restated as of January 1, 2001.

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      SECTION 5. TARGET AWARD OPPORTUNITY, PERFORMANCE MEASURES AND SCALES


Participants will be assigned an Award Opportunity based on their job or Job
Level with an Employer . The Award Opportunity will be paid if stated target
Performance Measures are achieved. The Plan Administrator will approve the Award
Opportunity and Award Opportunity Scale for Participants at and below the Vice
President level. The Committee will approve the Award Opportunity and Award
Opportunity Scale for Participants at the Senior Vice President level or above.

Each Participant's Award Opportunity and Award Opportunity Scale will be
segmented into one or more of the following Award Components: corporate,
business unit and/or individual, as determined by the Plan Administrator for
Participants at and below the Vice President Level, and by the Committee for
Participants at the Senior Vice President level or above. The weighting of these
components will be determined by the Plan Administrator or the Committee as the
case may be. One component's performance will not directly affect the portion of
the Award Opportunity earnable from another component except as it relates to
the Threshold Objectives.

At the start of each Plan Year, Performance Measures that correspond to the
Award Opportunity Scale will also be determined. Corporate Performance Measures
will be approved by the Committee. Business Unit Performance Measures will be
approved by the Plan Administrator. Individual Goals will be set jointly between
the Participant and the Participant's leader. The Individual Goals for the Chief
Executive Officer of The Principal shall be established by the Committee. The
Individual Goals can vary from year to year, from one position to another, and
from one incumbent to another. Where the development of appropriate Individual
Goals for a partial year would be impractical, eligibility for the individual
component may be delayed until the following Plan Year or paid at the Award
Opportunity level with approval by the leader.

                         SECTION 6. AWARD DETERMINATION

Unless otherwise determined by the Plan Administrator in writing, the
Participant's Award Opportunity for calculation of the annual award is
determined by the Participant's job or Job Level and business unit with an
Employer held on the last day of the Plan Year and will be applied for the
entire Plan Year.

Unless otherwise determined by the Plan Administrator, Pro-Ration Factor will be
applied to a Participant's award if the Participant transfers to or from a
ineligible position within the Plan Year.

When needed, interpolated performance levels for Corporate Performance Measures,
Business Unit Performance Measures, and where appropriate, Individual Goals will
be established on a straight-line basis in the Award Opportunity Scale. If
actual performance falls below the minimum Performance Measure set forth for a
particular Award Component, that Award Component will be zero, If actual
performance is above the maximum Performance Measure for a particular Award
Component, that Award Component will be the maximum determined by the Committee.

Notwithstanding anything else contained in this Plan to the contrary, all
Threshold Objectives with respect to such Plan Year must be met in order for any
award to be made under this Plan.

The Committee approves corporate and business unit Performance Measure results.
Leaders approve Individual Goal results.


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Amended and Restated as of January 1, 2001.

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At the end of the Plan Year the value of the actual awards is calculated by
completing the following steps. Step 1: Determination of the Component Score.
The Component Score is the corporate, business unit or individual component
percentage that is the weighted average of the scores of the Performance
Measures for one or more Performance Measures and Individual Goals established
for each component. Step 2: Determination of Award Score. The Award Score is the
weighted average of Component Scores for the appropriate components (corporate,
business unit, individual). Step 3: Determination of Participant award. The
annual award paid to each will be calculated by multiplying, 1) the
Participant's Fixed Salary earnings received during the Plan Year; by 2) the
Award Opportunity, by (3) Award Score, and by (4) the Pro-Ration Factor.

In comparing actual performance against the Performance Measures, the Committee,
by recommendation of the Chief Executive Officer may exclude from such
comparison any extraordinary gains, losses, charges, or credits which appear on
the Company's books and records as it deems appropriate. An extraordinary item
may include, without limiting the generality of the foregoing, an item in the
Company's financial statements reflecting an accounting rule, tax law, or major
legislative change not taken into consideration in the establishment of the
Performance Measures. In addition, the impact of a material disruption in the
U.S. economy or a substantive change in the Company's business plans also may be
deemed to be such an extraordinary item.

In no event will the sum of all annual awards paid to Participants under the
Plan exceed 6% of pre-tax GAAP operating earnings of the Company for the Plan
Year. If the awards calculated for the year would so exceed 6% of operating
earnings, all calculated awards under the plan shall be proportionately reduced
so the awards aggregate to no more than 6% of operating earnings.

                            SECTION 7. DISTRIBUTIONS

No payment shall be made to any Participant who is on Final Warning any time
during the Plan Year.

Award payments shall be made following the release of audited results after the
end of the Plan Year in which they are earned, but no later than March 15.

Upon a Participant's death prior to the end of the Plan Year, the Participant's
Beneficiary (or, if none is named, the Participant's estate) shall receive an
early distribution based on the Fixed Salary received during the Plan Year,
multiplied by the Award Opportunity. Upon a Participant's death following the
close of the Plan Year, but prior to an Award payment, the Participant's
Beneficiary (or, if none is named, the Participant's estate) shall receive a
distribution at the same times as other Participants and the amount payable
shall be calculated according to Section 6.

Unless otherwise determined by the Plan Administrator in writing, upon a
Participant's Disability, Retirement, or involuntary termination due to office
closing, downsizing or outsourcing, the Participant shall receive a distribution
at the same time as other Participants and the amount payable shall be
calculated according to Section 6.

If a Participant terminates and is rehired during a Plan Year, the Participant's
eligibility will be restored as if they had not terminated and there will be no
Pro-Ration Factor of the award payable to the Participant. Non-exempt employees
who have not completed the 6-month employment period to be a

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Amended and Restated as of January 1, 2001.


<PAGE>   7
Participant in the Plan will use the adjusted service date to determine when
they are eligible to be a Participant in the Plan.

If a Participant is separated from employment for Cause, as determined by the
Company, the Participant shall not be entitled to receive any further payment
under the Plan with respect to any Plan Year.

Except as provided in Section 8, if a Participant's employment is terminated for
any other reason other than those otherwise outlined above, the Participant
shall not be entitled to receive any payment in respect to any Plan Year that
had not ended prior to the date of the Participant's termination of employment.

                          SECTION 8. CHANGE OF CONTROL

Capitalized words used in this Section 8 have the meaning ascribed to them under
the Principal Severance Pay Plan for Senior Executives as amended from time to
time, unless the context clearly indicates otherwise. Notwithstanding the
foregoing, the following terms shall have the meanings ascribed to them in
Section 3 hereof: Board, Company, Disability, Employer, Executive Participant,
Participant, Plan.

Within ten (10) days following the later of a Change Date or Merger of Equals
Cessation Date ("Trigger Date"), the Company shall pay each Executive
Participant an amount equal to the Executive Participant's Target Annual Bonus
for the year in which the Trigger Date occurs multiplied by fraction, the
numerator of which is the number of days elapsed in the year up to and including
the Trigger Date, and the denominator of which is 365, in satisfaction of the
Company's obligations under the Plan for the period prior to the Trigger Date,

If, during the Post-Change Period (other than during a Post-Merger of Equals
Period) an Executive Participant's employment is terminated other than for Cause
or Disability, or an Executive Participant terminates employment for Good
Reason, the Company shall pay the Executive Participant the Executive
Participant's Target Annual Bonus for the year in which such termination occurs
multiplied by a fraction, the numerator of which is the number of days elapsed
in the year up to and including the Termination Date, and the denominator of
which is 365, in satisfaction of the Company's obligations under the Plan for
the period prior to the Termination Date, Any amounts payable under this
paragraph shall be reduced (but not below zero) by the amount of any annual
bonus paid to the Executive Participant with respect to the Employer's fiscal
year in which the Termination Date occurs. If an Executive Participant receives
a payment pursuant to this third paragraph of this Section 8, the Executive
Participant may not also receive payment pursuant to the fourth paragraph of
this Section 8.

If the Plan is terminated on or after the Trigger Date, within the same Plan
year as the Trigger Date, or any amendment to the Plan is adopted that adversely
affects the rights of any Participant or Beneficiary, the Company shall pay the
Participant the Participant's Target Annual Bonus for the year in which such
amendment or Plan termination occurs multiplied by a fraction, the numerator of
which is the number of days elapsed in the year up to and including the
amendment or Plan termination, and the denominator of which is 365, in
satisfaction of the Company's obligations under the Plan for the period prior to
the amendment or Plan termination. Any amounts payable under this paragraph
shall be reduced (but not below zero) by the amount of any annual bonus paid to
an Executive Participant with

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Amended and Restated as of January 1, 2001.

<PAGE>   8
respect to the Employer's fiscal year in which the Trigger Date occurs. If an
Executive Participant receives a payment pursuant to this fourth paragraph of
this Section 8, the Executive Participant may not also receive payment pursuant
to the third,paragraph of this Section 8.

Any amounts payable under this Section 8 shall be reduced (but not below zero)
by the amount of any annual bonus paid to an Executive Participant with respect
to the Employer's fiscal year in which the Trigger Date occurs.

                            SECTION 9. ADMINISTRATION

The Plan Administrator shall maintain such procedures and records as will enable
the Plan Administrator to determine the Participants and their Beneficiaries who
are entitled to receive benefits under the Plan and the amounts thereof.

The Plan Administrator shall have the exclusive right, power, and authority, in
its sole, full and absolute discretion, to interpret any and all of the
provisions of the Plan, to supervise the administration and operation of the
Plan, and to consider and decide conclusively any questions (whether fact or
otherwise) arising in connection with the administration of the Plan or any
claim for benefits arising under the Plan. Any decision or action of the Plan
Administrator shall be conclusive and binding on all parties, including the
Participants. The Plan Administrator shall also have the discretion and
authority to adopt and revise rules and procedures relating to the Plan, to
correct any defect or omission or reconcile any inconsistency in this Plan or
any payment hereunder, and to make any other determinations that it believes
necessary or advisable in the administration of the Plan.

                  SECTION 10. AMENDMENT AND TERMINATION OF PLAN

The Committee shall have the authority to amend the Plan at any time and from
time to time. Any such amendments must be made by written instrument, and notice
of such amendment shall be provided to Participants as soon as practical after
adoption.

The Company reserves the right to terminate the Plan in any respect and at any
time and may do so at any time pursuant to a written resolution of the
Committee.

Notwithstanding anything else to the contrary set forth in the Plan, no
amendment or termination of the Plan may adversely affect the rights of any
Participant or Beneficiary in respect to an award determined or earned with
respect to a Plan Year.

                            SECTION 11. MISCELLANEOUS

No Participant or other employee shall at any time have a right to be selected
for participation in the Plan, despite having previously participated in the
Plan or any other incentive or bonus plan of the Company or any of it
affiliates.




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Amended and Restated as of January 1, 2001.

<PAGE>   9
The existence of this Plan, as in effect at any time or from time to time, or
participation under the Plan, shall not be deemed to constitute a contract of
employment between the Company or any Subsidiary and any employee or
Participant, nor shall it constitute a right to remain in the employ of the
Company or it's Subsidiary.

Any notice required or permitted under the Plan shall be sufficient if in
writing and hand delivered, sent by first class, registered or certified mail,
or by such other means as the Committee, in its sole discretion, may deem
appropriate. Such notice shall be deemed as given as of the date of delivery or,
if delivery is made by mail, as of the date shown on the postmark or on the
receipt for registration or certification. Mailed notice to the Committee shall
be directed to the Company's address, c/o the Plan Administrator. Mailed notice
to a Participant or Beneficiary shall be directed to the individual's last known
home address in the Participant's Employer's records.

Nothing contained in the Plan shall constitute a guaranty by any Employer or any
other person or entity that the assets of such entity will be sufficient to pay
any benefit hereunder.

Subject to the provisions of applicable law, no interest of any person or entity
in any award, or any right to receive any distribution or other benefit under
the Plan, shall be subject in any manner to sale, transfer, assignment, pledge,
attachment, or other alienation or encumbrance of any kind; nor may such
interest in any award, or right to receive any distribution or any benefit under
the Plan, be taken, either voluntarily or involuntarily, for the satisfaction of
the debts of, or other obligations or claims against, such person or entity,
including (but not limited to) claims for separate maintenance and claims in
bankruptcy proceedings.

The Plan shall be construed and administered under the laws of the State of
Iowa.

The Employer shall have the right to deduct, from amounts payable pursuant to
the Plan or from amounts otherwise payable to the Participant (or payable to the
beneficiary of the Participant, if the Participant is deceased), any taxes
required by law to be withheld from such awards.

Nothing contained in this Plan shall be construed to prevent the Company, or any
Subsidiary, from taking any corporate action which is deemed by it to be
appropriate, or in its best interest, whether or not such action would have an
adverse effect on this Plan, or any awards made under this Plan. No employee,
beneficiary, or other person shall have any claim against the Company, or a
Subsidiary, as a result of any such action.

Nothing express or implied in this Plan is intended or may be construed to give
any person other than Participants and Beneficiaries any rights or remedies
under this Plan.

A recipient of any payment under this Plan who is not a current employee of an
Employer, shall have the obligation to inform the Company of his or her current
address, or other location to which payments are to be sent. Neither the Company
nor any Subsidiary shall have any liability to such recipient, or any other
person, for any failure of such recipient, or person, to receive any payment if
it sends such payment to the address provided by such recipient by first class
mail, postage paid, or other comparable delivery method. Notwithstanding
anything else in this Plan to the contrary, if a recipient of any payment cannot
be located within 120 days following the date on which such payment is due after
reasonable efforts by the Company or a Subsidiary, such payments and all future
payments owing to


                                        9

Amended and Restated as of January 1, 2001.

<PAGE>   10
such recipient shall be forfeited without notice to such recipient. If, within
two years (or such longer period as management, in its sole discretion, may
determine), after the date as of which payment was forfeited (or, if later, is
first due), the recipient, by written notice to the Company, requests that such
payment and all future payments owing to such recipient be reinstated and
provides satisfactory proof of their identity, such payments shall be promptly
reinstated. To the extent the due date of any reinstated payment occurred prior
to such reinstatement, such payment shall be made to the recipient (without any
interest from its original due date) within 90 days after such reinstatement.

On behalf of the Human Resources Committee of the Board of Directors of the
Company, this Amended and Restated Incentive Pay Plan has been executed this
_______ day of _____________, 2001.





By:
   -----------------------------
C. Daniel Gelatt, Jr., Chair
















                                       10

Amended and Restated as of January 1, 2001.