**Exhibit 10.3**

 

**Douglas Dynamics, Inc.**

**Annual Incentive Plan**

 

1)              The Douglas Dynamics, Inc.Annual Incentive Plan (“Plan”) is designed to provide an opportunity for thePresident and the other executive officers of the Company selected toparticipate in the Plan (collectively, the “Participants”) to earn a cash bonusupon the achievement of the performance targets established under the Plan.

 

a)              The performance metrics andweightings used under the Plan for 2010 will be (provided that the CompensationCommittee of the Board of Directors (the “Committee”) has the authority tochange the performance metrics and/or weightings used under the Plan forsubsequent years):

 

i)                                         OperatingIncome - 70% weighting

ii)                                      Free Cash Flow(“FCF”) - 30% weighting

 

b)             Target Bonus:

 

i) President - 100% ofannual base salary

ii) Other Participants - 75%of annual base salary

 

c)              Plan will be subject tooverall maximum bonus:

 

i)                                         President -150% of annual base salary

ii)                                      OtherParticipants - 125% of annual base salary

 

Notwithstanding anythingherein to the contrary, the Committee has the authority to change the targetand maximum bonuses under the Plan for subsequent years.

 

2)              Operating Income

 

a)              For purposes of the Plan,Operating Income is defined as EBITDA less depreciation, plus other expense,adjusted for non recurring expenses, as approved by the Committee

 

b)             Targeted Operating Incomewill be set annually****by theCommittee

 

c)              Performance is measured bythe degree to which Operating Income achieves, exceeds, or falls short of,Targeted Operating Income

 

d)             Achievement of TargetedOperating Income will result in a bonus as a % of annual base salary equal tothe Target Bonus multiplied by the weighting of the Operating Incomemetric.  For 2010 this would result in abonus of:

 

i)                                         President - 70%of annual base salary (100% target x 70% weighting)

ii)                                      OtherParticipants - 52.5% of annual base salary (75% target x 70% weighting)

 

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e)              If Operating Income fallsbelow 70% of Targeted Operating Income, no Operating Income bonus will beearned

 

f)                If Operating Income fallsbetween 70% and 100% of Targeted Operating Income, bonus earned will be reducedlinearly from the amount determined under Section 2(d) for each 1 %reduction in Operating Income below Targeted Operating Income.  For 2010, the reduction would be as followsfor each 1% reduction in Operating Income below Targeted Operating Income:

 

i)                                         2.33% forPresident

ii)                                      1.75% for OtherParticipants

 

g)             If Operating Income exceedsTargeted Operating Income, the Operating Income bonus earned will be increasedlinearly for each 1% increase in Operating Income above Targeted OperatingIncome by 1.4% (for both President and other Participants)

 

3)              Free Cash Flow (FCF)

 

a)              For purposes of the Plan,FCF is defined as cash generated by operating activities, less net cash used ininvesting activities, adjusted for non recurring items, as approved by theCommittee

 

b)             Targeted FCF will be setannually by the Committee

 

c)              Performance is measured bythe degree to which FCF achieves, exceeds, or falls short of, Targeted FCF

 

d)             Achievement of Targeted FCFwill result in a bonus as a % of annual base salary equal to the Target Bonusmultiplied by the weighting of the FCF metric. For 2010 this would result in a bonus of:

 

i)                                         President -30.0% of annual base salary (100% target x 30% weighting)

ii)                                      OtherParticipants - 22.5% of annual base salary (75% target x 30% weighting)

 

e)              If FCF falls below theamount required to meet the Company’s stated annual dividend, then no FCF bonuswill be earned (and no annual incentive bonus will be paid at all under thePlan)

 

f)                If FCF falls between theamount required to meet the Company’s stated annual dividend and 100% ofTargeted FCF, then the bonus earned will be reduced linearly from the amountsdetermined under Section 3(d), which, for 2010 would be:

 

i)                                         President — theFCF bonus reduced linearly from 30% to 0% of annual base salary

 

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ii)                                      OtherParticipants — the FCF bonus reduced linearly from 22.5% to 0% of annual basesalary

 

g)             If FCF exceeds Targeted FCF,then the FCF bonus earned will be increased linearly for each $1 millionincrease in FCF above Targeted FCF by 0.833% (for both President and otherParticipants)

 

4)              Overall Bonus Earned

 

a)              For 2010, the total bonusthat may be earned under the Plan is subject to a cap:

 

i)                                         President -150% of annual base salary

ii)                                      OtherParticipants - 125% of annual base salary

 

As noted above, theCommittee has the authority to change the maximum bonuses under the Plan forsubsequent years.

 

b)             If FCF is belowthe amount required to meet the Company’s stated annual dividend, then noannual incentive bonus will be paid under the Plan

 

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