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                                                                   EXHIBIT 10.12

                              ZymoGenetics, Inc.
                      Incentive Compensation Plan Summary

Purpose: The Incentive Compensation Plan (ICP) is designed to:
-------
 .  provide a flexible system of cash and non-cash incentives and achievement
   awards to all ZGI employees who accomplish scientific and/or business
   objectives;
 .  provide incentives and achievement awards which are competitive with those
   offered by other biotechnology companies;
 .  motivate and reward employees for innovation, creativity, superior
   performance, and completion of major project goals or assignments;
 .  allow managers and supervisors to tailor the incentives and achievement
   awards to the requirements of their particular group.

Plan Year: The Plan year will be from January 1/st/ through December 31/st/.
---------

Eligibility: All ZGI employees except the President are eligible to participate
-----------
in the ICP.
To be eligible for the Plan, participants must be:
 .  a full-time or part-time regular employee;
                            -------
 .  hired into an eligible position on or before June 30/th/ in any Plan year;
 .  employed a minimum of 20 hours per week, and be employed by ZGI at the time
   of the award payment.

Average Maximum Incentive/Achievement Award: The Average Maximum Incentive (AMI)
--------------------------------------------
provides the basis for the incentive budget allocated to each Director and
Manager. The budget is calculated by multiplying the "AMI Target Percent" by a
participant's annual base salary in effect on January 1/st/.

     Category/Title:                                   AMI Target %:
     ---------------                                   -------------

     Non-exempt employees                                   6%

     Supervisors; exempt (non-management) staff             6%

     Associate Directors, Managers, Sr. Scientists,         8%
     Computational Biologists, Attorneys, Principal and
     Sr. Patent Agents

     Sr. Directors, Directors, Principal Scientists        10%

     Sr. Vice Presidents, Vice Presidents                  15%

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Plan Administration: Sr. Vice Presidents, Vice Presidents, Sr. Directors,
--------------------
Directors, Associate Directors, and Managers will be provided with an annual
budget, which can be used to provide both cash and non-cash incentives and
achievement awards to members of their departments. Either cash or non-cash
incentives (such as vacation travel and merchandise) may be awarded by the
responsible manager, based on which type of incentive or award seems most
appropriate.

Executives, Directors and Managers will have broad discretion in utilizing their
budget. The annual budget can be used to encourage both individual and team
performance objectives by providing:

 .  significant incentives to key individuals in the group;
 .  significant rewards to the highest individual performers in the group;
 .  incentives or awards to recognize team members for superior performance;
 .  team-based incentives or awards linked to project milestones or completion;
 .  a combination of team-based incentives, plus individual incentives or
   awards for outstanding individual contributions.

Annual performance incentive goals should be developed for individuals who have
jobs that typically involve projects or individual work product (e.g.,
managers). At the start of the Plan year, from two to five goals should be
agreed upon by the individual and his/her manager. Each goal must be assigned a
dollar value, based upon the average maximum annual incentive available to the
individual.

Goals must:
 .  align with department and/or company business objectives;
 .  be measurable, clearly defined, and have a completion date during the Plan
   year.

A written copy of the goals and their incentive value must be provided to the
Participant, and a copy submitted to the Human Resources department. Goals may
change during the Plan year, as may the dollar value assigned to goals. If goals
are revised or revalued during the year, a copy of the revised goals must be
sent to the Human Resources department.

Individuals and work teams that perform jobs that do not have clearly definable
annual performance goals (e.g., research technicians and laboratory/facilities
support staff) are eligible for achievement awards based on the following
criteria:

 .  superior individual or team performance;
 .  completion of a major project, project milestone, or assignment;
 .  demonstrated innovation and creativity.

The President, ZymoGenetics, Inc., or his assignee(s), will approve all
incentive payments and awards under this Plan.

The President, ZymoGenetics, Inc., will have sole discretion to revise or modify
an incentive payment or award to accommodate special or unusual circumstances.

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Plan Operation: There are four steps to managing the ICP:
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 .  determining and allocating the incentive plan budget;
 .  setting performance goals for the Plan period;
 .  assigning an appropriate incentive award for each performance goal or
   achievement;
 .  evaluating how well goals have been accomplished.

1. Budgeting Process:
   ------------------

Each January, after the annual salary equity review has been completed, each
Vice President will be given an "ICP" budget. This budget will be calculated by
the Finance department, based on the formula described above in the "AMI /
Achievement Award" section. Vice Presidents may then sub-allocate budgets to
their Directors and Managers, who will be responsible for managing their own
sub-budget.

If Vice Presidents want to provide their Directors and Managers with their own
sub-budgets to manage, they must inform the Finance department by January 15th
regarding the distribution of their budget. Vice Presidents and their respective
Directors and Managers will receive their budget worksheets by January 31/st/.

2. Setting Performance Goals For The Plan Period:
   ----------------------------------------------

Each year during the month of January, all supervisors must discuss with their
subordinates how they can earn a bonus. Adhering to the following guidelines
will help ensure that incentive awards are fairly and consistently distributed.

The first step is to determine which employees perform jobs with specific goals
and objectives. For example, many professional employees may have projects or
major assignments that can be defined in measurable terms or goals, and are
therefore suitable for "management by objective". Other positions, such as some
of the operations jobs, have duties that are often similar from day-to-day, and
therefore do not lend themselves to "management by objective".

Setting "management by objective" goals: If the supervisor and his/her
subordinate agree that the subordinate's work can best be guided by specified
objectives, they should jointly determine the goals, how they should be
completed, and when they are to be finished. All goals must support the
company's business or research objectives, be measurable, and provide some
"stretch" for the individual.

Goals may be modified during the Plan period, but when they are first set at the
beginning of the Plan year, they should be very explicit. Then, during the Plan
year, the supervisor and their subordinate  should meet regularly to review
their progress, and modify or replace any goals which may have changed or are no
longer relevant. Supervisors should urge their subordinates to be proactive in
informing them about goals which should be changed. Managing progress   toward
goals is a shared responsibility.

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When the supervisor and their subordinate have determined their performance
goals for the Plan period, a written copy of the goals should be prepared for
the person, and a copy sent to the Human Resources department.

If a person's job is not suitable for the "MBO" approach to goal setting, the
supervisor should talk about the other ways the person can earn an incentive
bonus, such as superior individual or team performance, completion of an
assignment, or demonstrated innovation and creativity. The supervisor should
give the individual a clear idea of what is meant by "superior performance", or
"demonstrated innovation and creativity" so the person has a clear picture of
what is expected to earn an incentive bonus.

Supervisors should also provide the individual with a memo or other written
document that summarizes your discussion, so the person has a record of what
they must do to earn an incentive award. A copy of the document should be sent
to the Human Resources department.

Team incentives may also be established for work or project groups. Team
incentives should only be offered when there is a project or goal for which a
group works toward the same objective. The team objective must be clearly
defined and communicated to all team members.

3. Assigning an Incentive Award for Each Performance Goal or Achievement:
   ----------------------------------------------------------------------

The most important aspect of the incentive award system is for the individual to
know what achievement is required to trigger a bonus payment. Each manager or
supervisor that has an ICP budget has substantial latitude in making awards.
Awards can be either cash or non-cash (such as vacation travel, merchandise,
attendance at a professional seminar, etc.).

For subordinates with "MBO" performance goals, it is recommended that
supervisors assign a specific cash or non-cash award to each goal. It is usually
more motivational if the subordinate is given the opportunity to participate in
deciding the nature of the incentive award, so supervisors are urged to discuss
the nature of the award associated with each goal at the time the goal is
established.

All awards, whether individual or team, are funded from the same budget.
Supervisors should determine at the beginning of the Plan period how much money
they want to allocate to team incentive awards. The remaining portion of the
budget may then be used for individual incentives that can be paid primarily to
superior performers, or more equitably to all members of the group.

For team awards, supervisors may provide the same level of award to all members
of the team, or they may provide different levels of awards to various team
members to distinguish between individual levels of contribution. Generally, it
is advisable to make the same award to each team member, and use the individual
award portion of the ICP budget to recognize distinctions between performance or
contribution levels.

4. Evaluating How Well Goals Have been Accomplished:
   ------------------------------------------------

Evaluating progress toward goals is a process that should be conducted
throughout the Plan year. Sometimes, the individual is unable to achieve their
goals due to circumstances

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beyond their control, but may still deserve an award. Likewise, if someone
partially achieves a goal, the supervisor has the discretion to award all, some,
or none of the award.

Payment and Timing of Incentives/Awards: Awards may be paid at any time during
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the Plan year, but not later than thirty days after the conclusion of the Plan
year.

Plan Revision: The Plan may be terminated or modified at any time by the
--------------
Company, and without the prior notification or consent of any Plan participant
or employee.

Termination of Employment: A participant who is terminated for any reason other
--------------------------
than death, disability (as defined by the Company's Long Term Disability Plan),
or normal or early retirement, forfeits all rights to payment of incentives or
awards under the Plan.

A Participant whose employment is terminated as a result of death, disability,
or normal or early retirement, may be paid an incentive or achievement award at
the discretion of the President, ZymoGenetics, Inc., or his assignee(s).

In the event of death, any award which was to be paid to the Participant will be
paid to the most current beneficiary, or beneficiaries, on file for the Group
Life Insurance Plan.

No Right of Continued Employment: No portion of this Plan is to be construed for
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compensation purposes, or for continued employment with the Company.

Affect on Other Plans: The payment of an award is excluded from, and in no
----------------------
manner affects, the calculation or determination of benefits under any other
Company plan or program.

Assignments and Transfers: The rights and interests of a Participant under the
--------------------------
Plan may not be assigned, encumbered, or transferred, except in the event of the
death of the Participant, to his designated beneficiary, or in the absence of
such designation, by will or the law of descent and distribution.

Effective Date: This Plan document supersedes all other Company incentive plan
---------------
documents, to include the Management Incentive Plan (MIP) and Variable Incentive
Plan (VIP). The effective date for the Incentive Compensation Plan (ICP) is
January 1, 1999.

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                                                                   EXHIBIT 10.13

                              ZymoGenetics, Inc.
                       Key Employee Incentive Plan 2000

Purpose: The "Key Employee Incentive Plan 2000" ("KEIP 2000") is designed to:
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 .  provide to key employees a performance incentive to achieve strategic and
   research objectives for the Company during the Plan period;
 .  retain key executive and research management talent;
 .  provide incentive compensation opportunities for Participants in the Plan
   that are competitive with other biotechnology companies.

Plan Period: The Plan period will be from January 1, 1999, through December 31,
------------
2000.

Eligibility: Participants must meet all of the following criteria:
------------
 .  Employed by ZGI as a Senior Vice President, Vice President, Sr. Research
   Director, Research Director, Administrative Director, or Principal Scientist;
 .  Employed by ZGI in a "regular" status on or before June 30 of either Plan
   year.
 .  Work a minimum of 1000 hours per year;
 .  Employed by ZGI on December 31, 2000, to receive a bonus (employees on
   approved leave-of-absence are eligible to the extent required by law);
 .  Cannot be an expatriate employee covered by a Novo Nordisk International
   Assignment Agreement;
 .  Work performance must be satisfactory.

Performance Measure: Award payments will be based on meeting the criteria set by
--------------------
Senior Management of ZGI.

For Calendar Year 1999:  Generate sufficient biological data indicative of
therapeutic utility for 4 proteins and the necessary reagents to initiate
testing of these proteins at ZGI in clinically-relevant animal models.

 .  Two (2) proteins in 1999 = 50% of eligible bonus amount;
 .  Three (3) proteins in 1999 = 75% of eligible bonus amount;
 .  Four (4) proteins in 1999 = 100% of eligible bonus amount;
 .  Five (5) proteins in 1999 = 125% of eligible bonus amount.
Results for each year of the two-year plan will be calculated independently

For Calendar Year 2000:  Generate sufficient biological data indicative of
therapeutic utility for 4 proteins and the necessary reagents to initiate
testing of these proteins at ZGI in clinically-relevant animal models.  In
addition, ZGI will initiate 2 pivotal preclinical efficacy studies, one of which
provides the data necessary to proceed to an IND.

 .  Two (2) proteins; 1 preclinical efficacy study in 2000 = 50% of eligible
   bonus amount;
 .  Three (3) proteins; 2 preclinical efficacy studies in 2000 = 75% of eligible
   bonus amount;
 .  Four (4) proteins; 2 preclinical efficacy studies; data for 1 IND in 2000 =
   100% of eligible bonus amount;
 .  Five (5) proteins; 3 preclinical efficacy studies; data for 1 IND in 2000; OR
                                                                              --
   Four (4) proteins, 2 preclinical efficacy studies; data for 2 INDs in 2000 =
   125% of eligible bonus amount.

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Participant Incentive Percentage:
---------------------------------

Senior Vice Presidents, Vice Presidents = 25%

Senior Directors, Directors, Principal Scientists = 15%.

Calculation of Award: The award formula is the Participant Incentive Percentage
---------------------                          --------------------------------
for the Plan period, multiplied by the Aggregate Base Salary of the Participant
                                       ---------------------
for the Plan period, multiplied by the Performance Measure:
                                       -------------------

     Incentive % x Aggregate Base Salary for Plan Period x Criteria %.

For example, a Sr. Director is participating in the Plan and has an aggregate
base salary of $250,000 for the two-year Plan period. Four proteins were
achieved in each year during the Plan period. Hence, the following award payment
will be made to this individual:

     Incentive Award = 15% x $250,000 x 100% = $37,500.

Payment and Timing of Incentive Awards: Incentive awards will be paid in a lump
---------------------------------------
sum no later than thirty days following the end of the Plan period, and will be
subject to federal withholding tax as required by law.

Plan Administration: The President, with approval of the Board of Directors of
--------------------
ZymoGenetics, will evaluate Plan performance, determine and authorize payment of
awards from the Plan, change participation in the Plan, and implement changes to
the terms and conditions of the Plan as necessary. The Plan may be terminated or
modified at any time with the recommendation of the President and the approval
by the Board of Directors of ZymoGenetics, without notice by the Company, and
without the consent of any Participant in the Plan. The right to revise, modify,
or terminate an award to accommodate special or unusual circumstances remains
the sole discretion of the President of ZymoGenetics, Inc., subject to approval
by the Board of Directors.

Termination of Employment: A Participant whose employment is terminated for any
--------------------------
reason other than death, disability (as defined by the Company's Long Term
Disability Plan), normal or early retirement, or cancellation of their
employment contract, forfeits all rights to payment of awards under the Plan.

A Participant who is terminated as a result of normal or early retirement, or
who transfers to another Novo Nordisk affiliate, may be paid an incentive award
at the discretion of the President of ZymoGenetics, Inc.  In the event of death,
a normal award will be paid on behalf of the Participant to the most current
beneficiary, or beneficiaries, specified in the Participant's Group Life
Insurance Plan.  The award payment will be based on a normal award amount
accrued through the end of the Plan period, utilizing most recent base salary.
In the event of disability (as defined by the Company's Long Term Disability
Plan), a normal award payment will be paid to the Participant based on the
normal award amount accrued through the end of the Plan period, utilizing most
recent base salary.

No Right of Continued Employment: No portion of this Plan is to be construed as
---------------------------------
a contract for the purposes of compensation or for continued employment by the
Company.

Affect on Other Plans: The payment of an award is excluded from, and in no
----------------------
manner affects, the calculation or determination of benefits under any other
Company plan or program.

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Assignments and Transfers: The rights and interests of a Participant under the
--------------------------
Plan may not be assigned, encumbered, or transferred, except in the event of
death of a Participant, to his designated beneficiary, or in the absence of such
designation, by will or the law of descent and distribution.

Confidentiality: Participants shall treat the terms of the "KEIP 2000" as
----------------
confidential business information. Participants shall not disclose to third
parties the Participant's eligibility for or earnings under "KEIP 2000", except
as it is necessary for legitimate business purposes.

Dispute Resolution Process: The parties agree to final and binding arbitration
---------------------------
of any and all disputes between the parties and the Company relating to the
"KEIP 2000 Plan", except that if the Company seeks injunctive relief for the
parties' violation of the confidentiality provisions of this Agreement, it may
seek injunctive relief from a court for violation of the confidentiality
provisions. In any event, it need not be first submitted to arbitration. The
prevailing in any arbitration or judicial proceeding shall be entitled to
reasonable attorneys fees and all reasonable fees for experts and taxable costs.
Any arbitration shall be conducted in accordance with the law and procedures
detailed below.

     (a) Notice. In the event that the parties or the Company seek to arbitrate
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     any dispute, they must so inform the other in writing be certified mail
     within ninety (90) days of notice of the incident or the event which is the
     subject of arbitration. Failure to provide such notification shall
     constitute a waiver of the claim and shall operate as a complete bar to the
     assertion of the claim either affirmatively or as a counter-claim or setoff
     and that bar shall apply in all arbitration and/or judicial proceedings.
     Although a claim may be barred if timely notice is not given, that may not
     preclude evidence of the incident being admitted in another proceeding at a
     later date. The arbitrator shall apply the Washington rules of evidence in
     making the determination as to admissibility.

     (b) Reply and Arbitrator Selection. Upon receipt of a written notice of
         -------------------------------
     intent to arbitrate any issue, the responding party shall have fourteen
     (14) days from receipt to specify in writing by certified mail any
     additional issues to be arbitrated. The parties also shall have thirty (3)
     days from receipt of the initial notice of intent to arbitrate to mutually
     agree on an arbitrator. If they are unable to do so in this time period,
     either party may apply to the Presiding Judge, King County Superior Court,
     to appoint an arbitrator. Any arbitrator selected by the parties or
     appointed by the Court must be an attorney with ten (10) or more years of
     experience in the practice of law.

     (c) Scheduling of Hearing. The arbitrator will schedule a hearing, which
         ----------------------
     normally will be held in King County within sixty (60) days of the initial
     notice of intent to arbitrate. Before the arbitration hearing each party
     shall have the right to take only one deposition of the other party, as
     well as the deposition of any expert designated by the other party. Once
     the hearing begins it shall proceed on consecutive days to conclusion
     unless the parties agree otherwise. The parties and the Company will have
     the right at the hearing to call witnesses, present documents, and argue
     their respective positions to the arbitrator. The parties will follow the
     Commercial Arbitration Rules and procedures of the AAA, except to the
     extent the parties have provided for other rules and procedures in the
     Agreement, but the parties need not submit the dispute to the AAA for
     administration. Each party shall bear one half of the AAA fee, arbitrator
     fee, and hearing costs.

     (d) Confidentiality. The arbitration proceeding shall be confidential. The
         ----------------
     parties and the arbitrator shall keep all matters in connection with the
     arbitration proceeding and the underlying dispute confidential and
     consistent with the need to prepare and present their case.

     (e) Governing Law. The arbitrator shall apply the then current substantive
         --------------
     law of the State of Washington and the Ninth Judicial Court. All claims,
     defenses and remedies under these laws are

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     applicable, unless expressly excluded under this Agreement. The arbitration
     procedure set out in this arbitration agreement shall be the exclusive
     method available to the parties to raise any dispute with the Company.

     (f) Enforcement. The parties agree that any action to enforce this
         ------------
     Agreement to arbitrate or to enforce or vacate the arbitrator's award shall
     be governed by the law of the Federal Arbitration Act, which shall be
     applied by whatever court, state or federal, which has jurisdiction over
     enforcement or vacation of the award.

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                              ZymoGenetics, Inc.
                   Employee Acknowledgment Form and Release

The undersigned Employee hereby acknowledges that he/she has been designated to
participate in the "Key Employee Incentive Plan 2000" for the period from
January 1, 1999 through December 31, 2000. Employee, as a condition of
participation, hereby waives and releases any claim Employee may have, whether
known or unknown, under any prior bonus or incentive plan.

__________________                                     _____________

Employee                                               Date

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