Exhibit 10.1


 





 


 


 


 


Carbon
Natural Gas Company


 


Annual
Incentive Plan


 


2016


 


 




    


     


    

 





Carbon
Natural Gas Company


2016
Annual Incentive Plan




 


Plan
Objectives


 


The
Annual Incentive Plan (the “Plan”) is designed to meet the following objectives:


 


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



 


		●	Offer
                                         industry competitive cash compensation opportunities 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 results of Financial and
Operating Performance Measures.


 


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


 


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


 


The
Plan period is from January 1, 2016 to December 31, 2016.


 




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Carbon
Natural Gas Company


2016
Annual Incentive Plan


 


Performance
Objective 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.


 


The
Financial and Operating Performance Measures and Targets for the 2016 Annual Incentive Plan are set forth below:


 


	Performance Measure	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Weighting	 	 	Threshold	 	 	Target	 	 	Outstanding	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Lease Operating Expenses $ / unit of Production	 	 	33.33	%	 	$	1.25	 	 	$	1.11	 	 	$	1.00	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	General & Administrative Expenses	 	 	33.33	%	 	$	4,500,000	 	 	$	4,200,000	 	 	$	4,000,000	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Year End Bank Debt	 	 	33.33	%	 	$	9,500,000	 	 	$	9,045,000	 	 	$	8,600,000	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total Performance Measures	 	 	100	%	 	 	 	 	 	 	 	 	 	 	 	 



 


Board
of Directors Discretionary Component - Weighting_70% of Award


 


The
discretionary component is designed to address notable achievements not reflected in the Performance Measures component of the
Plan Award.


 





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





 






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Carbon
Natural Gas Company


2016
Annual Incentive Plan




 


Plan
Administration


 


The
Plan will be administered by the Compensation, Nominating and Governance Committee and the Chief Executive Officer (for all positions
except his own). The Chief Financial Officer will verify the performance calculation for the financial and operating measures.


 


The
Board of Directors shall determine Award levels for the Chief Executive Officer, Chief Financial Officer, President and the Staff
Pool. The CEO will allocate Incentive Awards to the Pool Participants.


 


The
Board cannot 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 such as acquisitions, commodity prices or other factors considered appropriate by the Board.


 





Award Achievement Levels


 


Award Achievement Levels for the Plan
will be:


 


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




 


Completion
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 or scope thereof, including changes to the capital
expenditure budget.


 






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Carbon
Natural Gas Company


2016
Annual Incentive Plan




 


Performance
Levels


 


Performance
levels 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.


 


Completion
Calculation


 


Completion
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 70% of the
overall Incentive Award.


 


Participants


 


The
CEO shall determine which employees are to be participants in the Plan. If a participant’s employment with the Company terminates
for any reason prior to payment, the bonus award (if any) will be paid at the discretion of the Board of Directors.


 


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 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 Pool Participants. All Awards to officers under the Plan are subject to approval
of the Board.


 


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 a worker’s
compensation issue.


 






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Carbon
Natural Gas Company


2016
Annual Incentive Plan




 





	Performance
    Measure	Lease
    Operating Expenses $ / unit of Net Production
	 	 
	Target	Lease
    Operating Expenses of $1.11 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 6 mcf of natural gas.
	 	 
	Definition	Actual
cash Lease Operating Expenses.
	 	 
	Award Levels	●     Threshold                   $1.25 per Unit
	 	 
	 	●     Target                         $1.11
        per Unit
	 	 
	 	●     Outstanding                $1.00
        per Unit




 






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Carbon
Natural Gas Company


2016
Annual Incentive Plan


 





	Performance
    Measure	General
    & Administrative Expenses
	 	 
	Target	General
    & Administrative Expenses of $4,200,000
	 	 
	Definition	Actual
    cash General and Administrative expenses.
	 	 
	 	For
    purposes of the Plan, Annual Incentive Plan Award amounts shall be excluded from cash General and Administrative expenses.




  





	Award Levels	●     Threshold                   $4,500,000
	 	 
	 	●     Target                         $4,200,000
	 	 
	 	●     Outstanding                $4,000,000


 






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Carbon
Natural Gas Company


2016
Annual Incentive Plan




 





	Performance
    Measure	Year
    End Bank Debt
	 	 
	Target	Year
    End Bank Debt of $9,045,000
	 	 
	Definition	Bank
    Debt at December 31, 2016
	 	 
	 	Bank
    debt shall be defined as outstanding borrowings on the Company’s credit facility.  The Board of Directors
    may consider adjusting bank debt to include changes in working capital (if such adjustments have a material effect on the
    ratio) or if the Company completes corporate or asset acquisitions during the year.




 





	Award Levels	●     Threshold                   $9,500,000
	 	 
	 	●     Target                         $9,045,000
	 	 
	 	●     Outstanding                $8,600,000


 






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Carbon
Natural Gas Company


2016
Annual Incentive Plan




 


Exhibit
A


 





	Target Bonus Award Levels	 	 	 	%
	 	 	 	 	 
	Patrick
    M. McDonald	 	Chief
    Executive Officer	 	100
	Kevin
    D. Struzeski	 	Chief
    Financial Officer	 	65
	Mark
    D. Pierce	 	President	 	65





 


 


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