Exhibit 10.2


 


 


 


Carbon Natural
Gas Company


 


Annual Incentive
Plan


 


2015








 






    	 



    	 



    

 


Carbon Natural Gas Company


2015 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 focused on objectives that are critical to the success
                                         of Carbon Natural Gas Company and the creation of value for shareholders.



 


		●	Offer competitive cash compensation opportunities to
                                         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 on 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 based upon discretion of the Board of Directors.


 


The Plan period is from January 1, 2015 to December 31, 2015.








 






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Carbon Natural Gas Company


2015 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 2015 Annual Incentive Plan are set forth below:


 


Performance Measure


 


	 	 	Weighting	 	 	Threshold	 	 	Target	 	 	Outstanding	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Lease Operating Expense $ / unit of Production	 	 	33	%	 	$	1.10	 	 	$	.87	 	 	$	.74	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	General & Administrative Expenses	 	 	33	%	 	$	5,700,000	 	 	$	5,400,000	 	 	$	5,100,000	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Debt / EBITDA Ratio	 	 	33	%	 	 	2.2	 	 	 	1.6	 	 	 	0.9	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total of Performance Measures	 	 	100	%	 	 	 	 	 	 	 	 	 	 	 	 



 






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Carbon Natural Gas Company


2015 Annual Incentive Plan 



 


Board of Directors Discretionary Component – Weighting
70% of Award


 


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


2015 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 in consultation with the President, who shall
be responsible for the estimation of the Company’s oil and gas reserves.


 


The CEO will establish the Incentive Award
Pool for the non-officer employees and will allocate Incentive Awards to the Pool Participants.


 


The Board cannot increase payout amounts above
the outstanding level under 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


2015 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
other 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 non-officer Plan 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


2015 Annual Incentive Plan


 



	Performance
    Measure	Lease
    Operating Expenses $ / unit of Net Production
	 	 
	Objective	Lease
    Operating Expenses of $.87 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 15 mcf of natural gas.
	 	 
	Definition	Actual
    cash Lease Operating Expenses.
	 	 
	Award
    Levels	●   Threshold
                     $1.10 per Unit
	 	 
	 	●  Target
                           $  .87
    per Unit
	 	 
	 	●  Outstanding
         
       $  .74
    per Unit


 






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Carbon Natural Gas Company


2015 Annual Incentive Plan


 






	Performance Measure	General & Administrative Expenses
	 	 
	Objective	General &
    Administrative Expenses of $5,400,000
	 	 
	Definition	Actual cash General and Administrative expenses.
	 	 
	Award Levels	
        ·   Threshold
                     $5,700,000

	 	 
	 	
        ·    Target
                           $5,400,000

	 	 
	 	·    Outstanding
         
      $5,100,000 




 



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Carbon Natural Gas Company


2015 Annual Incentive Plan


 






	Performance Measure	Debt / EBITDA Ratio
	 	 
	Objective	Debt to EBITDA Ratio of 1.6
	 	 
	Definition	Debt/Annual EBITDA.
	 	 
	 	Debt shall be defined as bank debt.  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.
	 	 
	 	EBITDA shall exclude non-cash stock based compensation expense and shall be adjusted to exclude the current period effects to EBITDA related to the mark to market valuation for derivative contracts for periods subsequent to 2015 and will include cash settlements related to current period derivative contracts.
	 	 
	Award Levels	
        ·   Threshold
                    2.2

	 	 
	 	
        ·    Target
                          1.6

	 	 
	 	·    Outstanding                 0.9







 






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Carbon Natural Gas Company


2015 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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