<PAGE>
                                                                    EXHIBIT 10.4

                            NATURAL RESOURCE PARTNERS
                       ANNUAL INCENTIVE COMPENSATION PLAN

1. INTENT.

         The purpose of this Annual Incentive Compensation Plan (the "Plan") is
to motivate the key employees of GP Natural Resource Partners LLC (the
"Company") and its affiliates who perform services for Natural Resource Partners
L.P. (the "Partnership") and its subsidiaries to produce outstanding results,
encouraging superior performance, increasing productivity, and to aid in the
ability to attract and retain such key employees.

2. PLAN GUIDELINES.

         The administration of the Plan and any potential financial remuneration
to come as a result of its implementation is subject to the determination by the
Compensation Committee of the Company's Board of Directors that the performance
goals for the applicable period have been achieved. The Plan is an additional
compensation program designed to encourage Plan participants (designated by the
Company's Compensation Committee) to exceed specified objective performance
targets for the designated period. The Compensation Committee will review the
performance results for the designated period and thereafter determine the
payments due under the Plan, if any.

3. PERFORMANCE TARGETS.

         3.1 Designation of Performance Targets. The Compensation Committee
shall determine the performance target or targets to be used for each calendar
year (a "Plan Year") for determining the bonuses to be paid as a result of this
Plan. Performance targets may be based on Partnership, business units and/or
individual achievements, criteria and/or goals and/or incentive distribution
rights of the Company with respect to the Partnership or any combination or
weighting of the same or on such other factors as the Compensation Committee may
determine, whether subjective or objective. Different performance targets may be
established for different participants or groups of participants for any Plan
Year. Except as provided in Section 3.3, satisfactory results as determined by
the Compensation Committee, in its sole discretion, must be achieved in order
for a performance payment to occur under the Plan.

         3.2 Equitable Adjustment to Performance Targets. The performance
targets applicable to any participant for a Plan Year shall be subject to
equitable adjustment at the sole discretion of the Compensation Committee to
reflect the occurrence of any unexpected significant events during the Plan
Year.

         3.3 Waiver of Performance Targets. The Compensation Committee may
waive, in whole or in part, the requirement that performance targets be achieved
in order to pay a bonus under this Plan whenever the Compensation Committee
determines such a bonus payment will be in the best interests of the
Partnership.



<PAGE>

4. PARTICIPANTS.

         Employees of the Company and its affiliates eligible to participate in
the Plan shall be designated annually by the Compensation Committee and may be
based on the recommendation of the Company's President and Chief Executive
Officer.

5. PARTICIPATION LEVELS.

         A participant's designated level of participation in the Plan will be
determined under criteria established or approved by the Compensation Committee
for that Plan Year or designated performance period. Levels of participation in
the Plan may vary according to a participant's position and the relative impact
such participant can have on the Company's and/or affiliates' operations. Care
will be used in communicating to any participant his performance targets and
potential performance amount for a Plan Year. The amount of bonus a participant
may receive for any Plan Year will depend upon the performance level(s) achieved
(unless waived) for that Plan Year, as determined by the Compensation Committee.
No participant shall have any claim to be granted any award under the Plan, and
there is no obligation for uniformity of treatment of participants. The terms
and conditions of awards need not be the same respecting each participant.

6. AWARD PAYOUT.

         Earned awards will be determined after the end of the Plan Year or
designated performance period. Awards will be paid in cash as soon as reasonably
practical following the Compensation Committee's determination, unless otherwise
determined by the Compensation Committee. The Compensation Committee will have
the discretion, by participant and by grant, to reduce or increase the amount of
any award that otherwise would be payable to an individual by reason of the
satisfaction of the applicable performance targets. In making any such
determination, the Compensation Committee is authorized to take into account
such factors it determines are appropriate.

7. TERMINATION OF EMPLOYMENT.

         A participant's termination of employment for any reason prior to a
performance payment under the Plan will result in the participant's forfeiture
of any right, title or interest in receiving a performance payment under the
Plan, except to the extent waived by the Compensation Committee, in its sole
discretion.

8. AMENDMENT AND TERMINATION.

         The Company's Compensation Committee, at its sole discretion, may amend
the Plan in whole or in part and may terminate the Plan at any time.

9. ADMINISTRATION OF PLAN.

         9.1 Administration. The Compensation Committee may delegate all or part
of the responsibility for the administration of the Plan to the President and
Chief Executive Officer of the Company and other employees. The Compensation
Committee (or the person(s) to which



                                      -2-
<PAGE>

such administrative authority has been delegated) shall have the authority to
interpret and construe any and all provisions of the Plan, including all
performance targets and whether and to what extent achieved. Any determination
made by the Compensation Committee (or the person(s) to which administrative
authority has been delegated) shall be final and conclusive and binding on all
persons.

         9.2 Indemnification. Neither the Company, any participating affiliate,
the Board of Directors, any member or any committee thereof, nor any employee of
the Company or any participating affiliate shall be liable for any act,
omission, interpretation, construction or determination made in connection with
the Plan in good faith; and the members of the Company's Board of Directors, the
Compensation Committee and the employees of the Company and any participating
affiliate shall be entitled to indemnification and reimbursement by the Company
to the maximum extent permitted by law in respect of any claim, loss, damage or
expense (including counsel's fees) arising from their acts, omission and conduct
in their official capacity with respect to the Plan if taken or omitted in good
faith.

10. GENERAL PROVISIONS.

         10.1 Non-Guarantee of Employment. Nothing contained in this Plan shall
be construed as a contract of employment between the Company and/or a
participating affiliate and a participant, and nothing in this Plan shall confer
upon any participant any right to continued employment with the Company or a
participating affiliate, or to interfere with the right of the Company or a
participating affiliate to discharge a participant, with or without cause.

         10.2 Interests Not Transferable. No interest or payment under the Plan
shall be subject in any manner to alienation, sale, transfer, assignment,
pledge, attachment or other legal process, or encumbrance of any kind, and any
attempt to do so shall be void.

         10.3 Facility Payment. Any amounts payable hereunder to any person
under legal disability or who, in the judgment of the Compensation Committee or
its designee, is unable to properly manage his financial affairs, may be paid to
the legal representative of such person, or may be applied for the benefit of
such person in any manner which the Compensation Committee or its designee may
select, and each participating affiliate shall be relieved of any further
liability for payment of such amounts.

         10.4 Tax Withholding. The Company and/or any participating affiliate
may withhold from any payments otherwise due under this Plan to a participant
(or beneficiary) all amounts required by law to be withheld for purposes of
federal, state or local taxes.

         10.5 Gender and Number. Words in the masculine gender shall include the
feminine gender, the plural shall include the singular and the singular shall
include the plural.

         10.6 Controlling Law. The law of the State of [_______________],
without regard to its conflict of laws principles, shall be controlling in all
matters relating to the Plan.

         10.7 No Rights to Award. No person shall have any claim to be granted
any award under the Plan, and there is no obligation for uniformity of treatment
of participants. The terms and conditions of awards need not be the same with
respect to each recipient.



                                      -3-
<PAGE>

         10.8 Severability. If any provision of the Plan or any award is or
becomes or is deemed to be invalid, illegal, or unenforceable in any
jurisdiction or as to any person or award, or would disqualify the Plan or any
award under the law deemed applicable by the Compensation Committee, such
provision shall be construed or deemed amended to conform to the applicable
laws, or if it cannot be construed or deemed amended without, in the
determination of the Compensation Committee, materially altering the intent of
the Plan or the award, such provision shall be stricken as to such jurisdiction,
person or award and the remainder of the Plan and any such award shall remain in
full force and effect.

         10.9 No Trust or Fund Created. Neither the Plan nor any award shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company or any participating affiliate and a
participant or any other person. To the extent that any person acquires a right
to receive payments from the Company or any participating affiliate pursuant to
an award, such right shall be no greater than the right of any general unsecured
creditor of the Company or any participating affiliate.

         10.10 Headings. Headings are given to the Sections of the Plan solely
as a convenience to facilitate reference. Such headings shall not be deemed in
any way material or relevant to the construction or interpretation of the Plan
or any provision thereof.



                                      -4-