Exhibit 10.7


 


Monaco Coach Corporation


 


Annual Incentive Plan


 


Introductory Note


 


The
following Annual Incentive Plan (the “AIP Program was approved by the
Compensation Committee (the “Committee”) of the Board of Directors (the “Board”)
of Monaco Coach Corporation (the “Company”) on March 28, 2005.  “Awards” under the AIP Program will be
granted pursuant to the accomplishment of pre-established performance measures.


 


The
description provided herein sets forth the specific terms and conditions of the
AIP Program covering eligibility, performance measures, performance period and
other key factors.  Each fiscal year a
new annual performance period will commence.


 


Purpose


 


The
purpose of the AIP Program is to provide a means for rewarding employees for
their contributions in helping the business to achieve the objectives which
directly tie to stockholder value creation.


 


Eligibility


 


All
salaried employees of the Company or one of its wholly-owned subsidiaries are
eligible to participate in the AIP Program, unless otherwise specifically
excluded.  Each employee participating in
the AIP Program is referred to as a “Participant.”  To be eligible to receive an Award payment,
an employee must be actively employed by the Company or a subsidiary of the
Company through the end of the Performance Period and until the date the actual
award payment is made.  Participation for
less than the full Performance Period under certain circumstances set forth
herein or upon the occurrence of a Change in Control will allow a Participant
to receive all or a portion of his or her Award for a particular Performance
Period.  An employee who becomes eligible
to participate in the AIP Program after the commencement of a Performance
Period will be eligible for a pro-rated Award for such Performance Period.


 


Termination
of Employment and Change in Control


 


In
the event a Participant ceases to be an employee as the result of such
Participant’s death, Disability or Retirement, Participant will be entitled to
receive a pro-rated amount of the Award that would have actually been earned
during the Performance Period had Participant remained an employee through the
end of the Performance Period based on the amount of time Participant was an employee
during the Performance Period.  The Award
will be settled at the time it would have otherwise been paid had Participant
remained employed through the end of the Performance Period.  In addition, in the event of a Change in
Control that occurs during the Performance Period while a Participant is an
employee, an Award will be deemed earned and paid out as if all performance
objectives under the AIP Program had been earned at target, which will be
settled upon consummation of the Change in Control.


 

















 


Performance
Period


 


A
“Performance Period” will begin on the first day of each fiscal year and end on
the last day of the same fiscal year.


 


Award


 


Each
Participant in the AIP Program has a target Award opportunity for the
Performance Period. The Award opportunity is established for each salaried pay
grade level considering competitive award opportunities for comparable
positions in a comparator group of other companies. Participants will have
their actual Award payment determined based upon the Company’s performance,
adjusted at management’s discretion for individual performance.


 


Performance
Goals


 


The
performance goals established for a Performance Period and the formula for
determining the AIP award will be established in the first quarter of the
Performance Period.  The Committee will
review and approve the performance goals.


 


Section 162(m) Participant
Performance Goals


 


Performance
goals for individuals who are participating in the Executive Variable
Compensation Plan must be established no later than the latest possible date
that will allow an Award to qualify as performance-based compensation under Section 162(m) of
the Internal Revenue Code of 1986, as amended. 
The target performance goals are determined by the Committee.  The Committee will designate those
individuals who participate in the Executive Variable Compensation Plan.  In the event any provisions set forth herein
are inconsistent with the terms of the Executive Variable Compensation Plan,
the terms of the Executive Variable Compensation Plan will control.


 


AIP
Award Formula


 


Participants
are limited to a maximum Award equal to 200% of the target Award established
for each Participant.  Competitive target bonus opportunities have been established and are defined
as a percent of base pay, except for bonuses under the Executive Variable
Compensation Plan, which are established consistent with the Executive Variable
Compensation Plan and the formula set forth in the proposal for the Executive
Variable Compensation Plan set forth in the proxy for the Company’s 2004 Annual
Meeting.  A bonus equal to a multiple of
a Participant’s target bonus will be paid as follows:


 


	
  ·

  	
  Threshold
  (50% of established Target Performance Goal(s))

  	
   

  	
  No
  Bonus

  
	
  ·

  	
  75%
  of Target Performance Goal(s)

  	
   

  	
  50%
  of Target Bonus

  
	
  ·

  	
  Target
  (100% of Target Performance Goal(s))

  	
   

  	
  100%
  of Target Bonus

  
	
  ·

  	
  125%
  of Target Performance Goal(s)

  	
   

  	
  150%
  of Target Bonus

  
	
  ·

  	
  Maximum
  (150% of Target Performance Goal(s))

  	
   

  	
  200%
  of Target Bonus

  



 

















 


Tax
Withholding


 


The
Award is considered wages and is therefore subject to tax withholding at the
time of payment.


 


Audit
and Approval of Awards


 


The
Chief Financial Officer will review the financial calculations necessary to
determine the performance against target performance goals as well as other
steps in determining the actual Award before Awards are settled and will report
his findings to the Committee. The Committee will certify the extent to which
the performance goals have been satisfied for any respective Performance Period
and approve the final payout.


 


Payment


 


Awards
will be paid as soon as practicable following the completion of the Performance
Period and after the Committee has certified in writing that the performance
goals and other material terms are satisfied.


 


Definitions


 


“Change
in Control” means the occurrence of any of the following events:


 


(i)    Any “person” (as such term
is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the “beneficial
owner” (as defined in Rule 13d-3 of the Exchange Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the total voting power represented by the Company’s then outstanding
voting securities; or


 


(ii)   The consummation of the
sale or disposition by the Company of all or substantially all of the Company’s
assets; or


 


(iii)  A change in the composition
of the Board occurring within a two-year period, as a result of which fewer
than a majority of the directors are Incumbent Directors.  “Incumbent Directors” means directors who
either (A) are Directors as of the effective date of the Plan, or (B) are
elected, or nominated for election, to the Board with the affirmative votes of
at least a majority of the Incumbent Directors at the time of such election or
nomination (but will not include an individual whose election or nomination is
in connection with an actual or threatened proxy contest relating to the
election of directors to the Company); or


 


(iv)  The consummation of a merger
or consolidation of the Company with any other corporation, other than a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity or its parent) at least fifty percent (50%) of the total
voting power represented by the voting securities of the Company or such surviving
entity or its parent outstanding immediately after such merger or
consolidation.


 


“Disability” means
total and permanent disability as defined in Section 22(e)(3) of the
Code.


 

















 


“Retirement” means
an Employee who retires on or after age sixty-two (62) and such individual has
been an Employee at least five (5) years at the date of retirement.  In addition, the  Committee may in its discretion grant an
eligible retirement that does not otherwise meet the criteria.