<PAGE>   1
                                                                   EXHIBIT 10.28


                           PEABODY ENERGY CORPORATION

                              EQUITY INCENTIVE PLAN
                           FOR NON-EMPLOYEE DIRECTORS

         1. PURPOSE AND NATURE OF PLAN. The purpose of this Equity Incentive
Plan for Non-Employee Directors of Peabody Energy Corporation (the "Plan") is to
align the interests of non-employee directors with shareholders through
increased stock ownership in Peabody Energy Corporation (the "Company") with the
goal of increasing shareholders value, and to provide further incentive to serve
as a director of the Company.

         2. DEFINITIONS. The following terms as used in this Plan shall have the
meanings ascribed to them below:

            (a) BOARD shall mean the Board of Directors of Peabody Energy
         Corporation.

            (b) CHANGE IN CONTROL means any one of the following:

                (i) any Person (other than a Person holding securities
            representing 10% or more of the combined voting power of the
            Company's outstanding securities as of the Effective Date, the
            Company, any trustee or other fiduciary holding securities under an
            employee benefit plan of the Company, or any company owned, directly
            or indirectly, by the shareholders of the Company in substantially
            the same proportions as their ownership of stock of the Company),
            becomes the Beneficial Owner, directly or indirectly, of securities
            of the Company, representing 50% or more of the combined voting
            power of the Company's then-outstanding securities;

                (ii) during any period of twenty-four consecutive months (not
            including any period prior to the effective date), individuals who
            at the beginning of such period constitute the Board, and any new
            director (other than (A) a director nominated by a Person who has
            entered into an agreement with the Company to effect a transaction
            described in clause 2(b)(i), (iii) or (iv) or (B) a director
            nominated by any Person (including the Company) who publicly
            announces an intention to take or to consider taking actions
            (including, but not limited to, an actual or threatened proxy
            contest) which if consummated would constitute a Change in Control)
            whose election by the Board or nomination for election by the
            Company's shareholders was approved by a vote of at least
            three-fourths (3/4) of the directors then still in office who either
            were directors at the beginning of the period or whose election or
            nomination for election was previously so approved, cease for any
            reason to constitute at least a majority thereof;

                                      1
<PAGE>   2
                                                      PEABODY ENERGY CORPORATION
                                EQUITY INCENTIVE PLAN FOR NON-EMPLOYEE DIRECTORS
================================================================================

                (iii) the consummation of any merger, consolidation, plan of
            arrangement, reorganization or similar transaction or series of
            transactions in which the Company is involved, other than such a
            transaction or series of transactions which would result in the
            shareholders of the Company immediately prior thereto continuing to
            own (either by remaining outstanding or by being converted into
            voting securities of the surviving entity) more than 50% of the
            combined voting power of the securities of the Company or such
            surviving entity (or the parent, if any) outstanding immediately
            after such transaction(s) in substantially the same proportions as
            their ownership immediately prior to such transaction(s); or

                (iv) the shareholders of the Company approve a plan of complete
            liquidation of the Company or the sale or disposition by the Company
            of all or substantially all of the Company's assets, other than a
            liquidation of the Company into a wholly owned subsidiary.

         As used in herein, "Person" (including a "group"), has the meaning as
such term is used for purposes of Section 13(d) or 14(d) of the Securities
Exchange Act of 1934, as amended (or any successor section thereto).

            (c) ELIGIBLE DIRECTOR shall have the meaning set forth in Section 4.

            (d) FAIR MARKET VALUE of a share of Stock shall mean the fair market
         value of one share of Stock as of a particular day, which shall be the
         closing price per share of Stock on the New York Stock Exchange on that
         day, or, if such day is not a trading day, the last preceding trading
         day.

            (e) RESTRICTED STOCK is Stock issued under the terms of this Plan
         subject to the terms and conditions prescribed in Section 6. A holder
         of Restricted Stock shall be entitled to all dividends paid with
         respect to Restricted Stock during the period of restriction and shall
         not be required to return any such dividends to the Company in the
         event of the forfeiture of the Restricted Stock. A holder of Restricted
         Stock shall be entitled to vote the Restricted Stock during the period
         of restriction. The Board shall determine whether Restricted Stock is
         to be delivered to the Eligible Director with an appropriate legend
         imprinted on the certificate, or if the shares are to be issued in the
         name of a nominee or deposited in escrow pending removal of the
         restrictions.

            (f) STOCK shall mean common stock, $0.01 par value, of the Company.

         3. ADMINISTRATION. The Plan shall be administered by the full Board.
Subject to the provisions of the Plan, the Board shall be authorized to
interpret the Plan, to establish, amend, and rescind any rules and regulations
relating to the Plan, and to make all other determinations necessary or
advisable for the administration of the Plan. The determination of the Board in
the administration of the Plan shall be conclusive and binding upon all persons
including, without


                                      -2-
<PAGE>   3
                                                      PEABODY ENERGY CORPORATION
                                EQUITY INCENTIVE PLAN FOR NON-EMPLOYEE DIRECTORS
================================================================================

limitation, the Company, its stockholders and Eligible Directors granted options
and other benefits under the Plan. The Secretary of the Company shall be
authorized to implement the Plan in accordance with its terms and to take such
actions of a ministerial nature as shall be necessary to effectuate the intent
and purposes of the Plan. The validity, construction, and effect of the Plan
shall be determined in accordance with the laws of the State of Delaware.

         4. PARTICIPATION IN THE PLAN. A director of the Company who is not an
employee of the Company or any affiliate of the Company on the date an award is
granted (an "Eligible Director") shall be eligible to participate in the Plan.

         5. SHARES SUBJECT TO THE PLAN. Subject to adjustment as provided in
Section 8, an aggregate of 200,000 shares Stock shall be available for issuance
under the Plan. The shares of Stock issued under the Plan may be made available
from authorized but unissued shares or shares reacquired by the Company,
including shares purchased in the open market or in private transactions. Shares
of Restricted Stock may again become available for the grant under the Plan if
such Restricted Stock is forfeited. If any option granted under the Plan shall
expire or terminate for any reason without having been exercised in full and
without compensation therefor, the shares subject to, but not delivered under,
such option may again become available for the grant of other options under the
Plan.

         6. RESTRICTED STOCK. Each Eligible Director elected or appointed as a
director of the Company after April 1, 2001 will be granted shares of Restricted
Stock when such Eligible Director is first elected or appointed as a director of
the Company. Such Restricted Stock shall be subject to the following terms and
conditions:

            (a) VESTING. Such grant of Restricted Stock shall become vested on
         the third anniversary of the date of grant; provided that all shares of
         Restricted Stock shall become vested immediately upon a Change in
         Control.

            (b) FORFEITURE FOR VOLUNTARY TERMINATION OR TERMINATION FOR CAUSE.
         In the event an Eligible Director voluntarily terminates his or her
         service with the Board without the consent of the Board, other than on
         account of permanent disability, or is involuntarily terminated for
         cause, before the third anniversary of the date of grant of such
         Restricted Stock, the Eligible Director shall forfeit his or her shares
         of Restricted Stock that are not vested on the date of such a
         termination of service on the Board, and such forfeited Restricted
         Stock shall be returned to the Company.

            (c) INVOLUNTARY TERMINATION, DISABILITY OR DEATH. In the event of
         the involuntary termination of service of an Eligible Director without
         cause, voluntary termination of an Eligible Director's service with the
         consent of the Board, or the death or permanent disability of an
         Eligible Director, all outstanding shares of Restricted Stock of such
         holder shall become fully vested immediately.

                                      -3-
<PAGE>   4
                                                      PEABODY ENERGY CORPORATION
                                EQUITY INCENTIVE PLAN FOR NON-EMPLOYEE DIRECTORS
================================================================================

            (d) DELIVERY OF VESTED STOCK. An Eligible Director shall have the
         right to delivery of a certificate representing shares of Restricted
         Stock only after such shares have become vested as provided in this
         Section.

         7. STOCK OPTIONS. Each Eligible Director shall be awarded an option to
purchase shares of Stock as of each annual meeting of the Board. In addition, an
Eligible Director first elected or appointed as a director on a date other than
the annual meeting of the Board shall be awarded an option to purchase shares of
Stock when such Eligible Director is first elected or appointed as a director of
the Company. All options granted under the Plan shall be non-statutory options
not intended to qualify under Section 422 of the Internal Revenue Code of 1986,
as amended. Each option granted under this Plan shall be evidenced by a written
agreement in such form as the Board shall from time to time approve, which
agreements shall comply with and be subject to the following terms and
conditions:

            (a) PURCHASE PRICE. The purchase price per share of Stock for which
         each option is exercisable shall be the fair market value per share of
         Stock on the date the option is granted.

            (b) EXERCISABILITY OF OPTIONS. Each option granted under the Plan
         generally shall become exercisable in three equal annual installments,
         commencing on the first anniversary of the date of grant and annually
         thereafter on subsequent anniversaries of the date of grant, as
         follows:

                (i) One-third of the shares to which each option relates
            (rounded down to the nearest whole share) may be purchased
            commencing on the first anniversary of the date of grant;

                (ii) An additional one-third of the shares to which each option
            relates (rounded down to the nearest whole share), on a cumulative
            basis, may be purchased commencing on the second anniversary of the
            date of grant; and

                (iii) The balance of the shares to which each option relates, on
            a cumulative basis, may be purchased commencing on the third
            anniversary of the date of grant.

         Notwithstanding the above, all options shall be exercisable immediately
upon a Change in Control.

            (c) TERM OF OPTIONS. Each option granted under the Plan shall expire
         ten years from the date of the grant, and shall be subject to earlier
         termination as hereinafter provided.

            (d) VOLUNTARY TERMINATION OR TERMINATION FOR CAUSE. In the event an
         Eligible Director voluntarily terminates his or her service with the
         Board without the
                                      -4-
<PAGE>   5
                                                      PEABODY ENERGY CORPORATION
                                EQUITY INCENTIVE PLAN FOR NON-EMPLOYEE DIRECTORS
================================================================================

         consent of the Board before the third anniversary of the date of grant
         of such option, or is involuntarily terminated for cause, the Eligible
         Director shall forfeit his or her options that are not exercisable on
         the date of such a termination of service on the Board. Such a former
         director may exercise options granted under this Plan that are
         exercisable on the date of such a termination of service on the Board
         no later than ninety days after such a termination of service.

            (e) INVOLUNTARY TERMINATION, DISABILITY OR DEATH. In the event of
         the involuntary termination of service of an Eligible Director without
         cause, voluntary termination of an Eligible Director's service with the
         consent of the Board, or the permanent disability of an Eligible
         Director, each of the then outstanding options of such holder will
         continue to become exercisable in accordance with paragraph (c) above
         and the holder may exercise the exercisable installments at any time
         within five years after such termination of service but in no event
         after the expiration date of the term of the option. In the event of
         the death of the holder of any option while serving on the Board, each
         of the then outstanding options of such holder shall immediately become
         exercisable in full and may be exercised by the holder's legal
         representative at any time within a period of five years after death,
         but in no event after the expiration date of the term of the option.
         However, if the holder dies within five years following termination of
         service on the Board, such option shall be exercisable for two years
         after the holder's death or five years after termination of service,
         whichever is longer, or until the expiration date of the term of the
         option, if earlier.

            (f) PAYMENT. Options may be exercised only upon payment to the
         Company in full of the purchase price of the shares to be delivered.
         Such payment shall be made in cash, in Stock beneficially owned by the
         holder for at least six months before the date of exercise ("Mature
         Stock") or in a combination of cash and Mature Stock. The sum of the
         cash and the fair market value of such Mature Stock shall be at least
         equal to the aggregate price of the shares to be delivered.

         8. ADJUSTMENT UPON CHANGES IN STOCK. If there shall be any change in
the Stock subject to the Plan by reason of merger, consolidation,
reorganization, recapitalization, stock dividend, stock split, exchange of stock
or other change in the corporate structure, appropriate adjustments shall be
made to the aggregate number and kind of shares of Stock or other securities
subject to the Plan, Restricted Stock awards and outstanding option grants, to
the purchase price of outstanding options, and to other terms of the Plan or
awards, as the Board determines to reflect such changes.

         9. NONTRANSFERABILITY. An Eligible Director may not sell, transfer,
pledge or otherwise dispose of or encumber his or her Restricted Stock (other
than by will or by the laws of descent and distribution) until after such
Restricted Stock becomes vested. Each option and all rights thereunder shall be
non-assignable and non-transferable other than by will or the laws of descent
and distribution and shall be exercisable during the holder's lifetime only by
the holder or the holder's guardian or legal representative; provided, however,
options granted under the



                                      -5-
<PAGE>   6
                                                      PEABODY ENERGY CORPORATION
                                EQUITY INCENTIVE PLAN FOR NON-EMPLOYEE DIRECTORS
================================================================================

Plan may be transferred, without consideration, to a Permitted Transferee (as
defined below). In the event of the death of a participant, exercise or payment
shall be made only:

            (a) By or to the Permitted Transferee, executor or administrator of
         the estate of the deceased participant or the person or persons to whom
         the deceased participant's rights under the benefit shall pass by will
         or the laws of descent and distribution; and

            (b) To the extent that the deceased participant or the Permitted
         Transferee, as the case may be, was entitled thereto at the date of his
         death.

For purposes of this Section, "Permitted Transferee" shall include (i) one or
more members of the participant's family, (ii) one or more trusts for the
benefit of the participant and/or one or more members of the participant's
family, or (iii) one or more partnerships (general or limited), corporations,
limited liability companies or other entities in which the aggregate interests
of the participant and members of the participant's family exceed 80% of all
interests. For this purpose, the participant's family shall include only the
participant's spouse, children and grandchildren.

         10. BENEFICIARY. An Eligible Director may designate one or more persons
(concurrently, contingently or successively) to whom Restricted Stock will be
distributed and by whom stock options will be exercisable if the Eligible
Director dies before receiving complete payment of such amounts. Any such
designation must be made on a form acceptable to the Company for this purpose,
will be effective on the date received by the Company and may be revoked by the
Eligible Director by a subsequent written designation delivered to the Company
while the Eligible Director is alive. If the Eligible Director fails to
designate a beneficiary or if no designated beneficiary survives the Eligible
Director, then any such benefit shall be transferred to the Eligible Director's
estate.

         11. LIMITATION OF RIGHTS.

             (a) NO RIGHT TO CONTINUE AS A DIRECTOR. Neither the Plan, nor the
         granting of Restricted Stock or an option, nor any other action taken
         pursuant to the Plan, shall constitute or be evidence of any agreement
         or understanding, express or implied, that the Eligible Director has a
         right to continue as a director for any period of time, or at any
         particular rate of compensation.

             (b) NO STOCKHOLDERS' RIGHTS FOR OPTIONS. Except with respect to
         adjustments upon changes in the Stock as set forth in this Plan, an
         Eligible Director shall have no rights as a stockholder with respect to
         the shares covered by options granted hereunder until the date of the
         issuance of a stock certificate therefor.

         12. EFFECTIVE DATE AND DURATION OF PLAN. The Plan shall become
effective immediately following approval by the stockholders of the Company. The
period during which grants of Restricted Stock and options shall be made under
the Plan shall terminate on the day following the tenth anniversary of the
meeting or action by written consent of stockholders at



                                      -6-
<PAGE>   7
                                                      PEABODY ENERGY CORPORATION
                                EQUITY INCENTIVE PLAN FOR NON-EMPLOYEE DIRECTORS
================================================================================

which the Plan was approved (unless the Plan is extended or terminated at an
earlier date by stockholders) but such termination shall not affect the terms of
any then outstanding shares of Restricted Stock or options.

         13. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN. The Board may
suspend or terminate the Plan or revise or amend it in any respect whatsoever;
provided, however, that to the extent necessary to comply with or get an
exemption from any provision of the Code, including regulations thereunder, or
of the Securities Exchange Act of 1934, as amended, approval of the stockholders
will be required for any revision or amendment that shall change the selection
or eligibility of Eligible Directors to receive Restricted Stock or options
under the Plan, the number of shares of Stock subject to any such options or
Restricted Stock or the purchase price thereunder, or materially increase the
benefits accruing to Eligible Directors under the Plan.

         14. NOTICE. Any written notice to the Company required by any of the
provisions of this Plan shall be addressed to the Secretary of the Company and
shall become effective when it is received.

         15. USE OF PROCEEDS. Proceeds from the sale of Stock pursuant to
options granted under the Plan shall constitute general funds of the Company.

         The undersigned hereby certifies that this Peabody Energy Corporation
Equity Incentive Plan for Non-Employee Directors was adopted by the Board of
Directors of the Company on ______________________, 2001.

                            By:      ____________________________________

                            Title:   ____________________________________

                            Date:    ____________________________________





                                      -7-