ALLIANCE FINANCIAL CORPORATION STOCK-BASED DEFERRAL PLAN

Exhibit 10.3

ALLIANCE FINANCIAL CORPORATION

STOCK-BASED DEFERRAL PLAN

This Alliance Financial Corporation Stock-Based Deferral Plan (the “Plan”) provides Directors and certain Eligible Officers of Alliance Financial Corporation and its affiliates with the opportunity to elect to defer compensation received for their service and, thereby, accumulate additional shares of Alliance Financial Corporation common stock. The Plan is intended to constitute a deferred compensation plan that satisfies the requirements of Section 409A of the Code.

As used in the Plan, the following terms have the meanings indicated:

Board means the Board of Directors of the Company.

Change in Control shall mean a change in control as defined in Internal Revenue Code Section 409A and rules, regulations, and guidance of general application thereunder issued by the Department of the Treasury, including –

Code means the Internal Revenue Code of 1986, as amended.

Committee means the Compensation Committee of the Board or any other committee of the Board designated as the administrator of the Plan.

Company means Alliance Financial Corporation, a New York corporation.

Company Stock means the common stock of the Company.

Compensation means (i) in the case of a Participant who is a Director, the cash retainer fees, meeting (board and committee) fees and other cash compensation payable to the Participant in connection with his or her service on the Board or the board of directors of any affiliate of the Company for any Plan Year and (ii) in the case of a Participant who is an Eligible Officer, base salary and any cash incentive compensation.

Deferred Stock Account means a bookkeeping account reflecting the investment of a Participant’s deferred Compensation in Company Stock Units and any adjustments thereto.

Director means a member of the Board.

Effective Date means March 11, 2008, the date of Board approval of the Plan.

Eligible Officer means an officer of the Company or an affiliate of the Company who is designated by the Board as eligible to defer Compensation through the Plan.

Participant means a Director (including a former Director eligible to participate in the Plan pursuant to Section 17) or Eligible Officer who elects to defer Compensation through the Plan.

Plan Year means the calendar year.

Separation from Service is intended to have the same meaning as under Code section 409A and any regulations or guidance issued under such provision.

Stock Unit means a hypothetical share of Company Stock. Each Stock Unit held in a Deferred Stock Account shall be deemed to have the same value, from time to time, as a share of Company Stock.

Trust means a trust created for the purposes specified in Section 10.

A Director serving on the Board of the Company shall be eligible to participate in the Plan as of the Effective Date. A Director who formerly served on the Board may participate in the Plan pursuant to Section 17. A Director who joins the Board following the Effective Date shall be eligible to participate in the Plan upon his or her first day of service as a Participant. An officer of the Company or an affiliate shall participate in the Plan only upon designation as an Eligible Officer by the Board. Participation in the Plan by a Director or Eligible Officer shall commence upon the submission of a timely deferral election form to the Committee in the manner prescribed below.

(b) A deferral election must be in writing and be delivered to the Company prior to the start of the Plan Year (or, in the case of an Eligible Officer who elects to defer performance-based incentive compensation, not later than June 30 of the year to which the compensation relates) to which it pertains; provided, however, that a Participant who first becomes eligible to participate in the Plan on or after the Effective Date shall have 30 days to submit a deferral election covering Compensation payable over the balance of the Plan Year. A deferral election shall be irrevocable and may not be amended with respect to the Plan Year to which it pertains. A deferral election may be made only for a single Plan Year or may be made applicable to all future Plan Years until revoked. Any revocation or amendment of a deferral election shall be effective as of the first day of the next Plan Year after the revocation or amendment is made.

(c) All amounts deferred under the Plan shall be held as Stock Units. With respect to all amounts for which a deferral election is made, the Company shall transfer such amounts to the Trust as soon as is reasonably practicable after the time when the Compensation otherwise would have been payable in cash to the Participant (or pursuant to a Participant’s election under Section 17) or at such other times as the Committee, in its sole discretion, shall determine. Thereafter, the trustee of the Trust shall determine the number of Stock Units to be credited to an individual Participant’s Deferred Stock Account by reference to the total number of shares of Company Stock acquired by the Trust with the proceeds of each transfer and the proportion that the Participant’s Compensation included in such transfer bears to the total of all Compensation transferred.

(a) All Stock Units credited to a Participant’s Deferred Stock Account shall be credited with hypothetical cash dividends equal to the cash dividends that are declared and paid on Company Stock. On each record date, the Company shall determine the amount of cash dividends to be paid per share of Company Stock. On the payment date of such dividend, the Company shall credit an equal amount of hypothetical cash dividends to each Stock Unit. The hypothetical cash dividends shall be converted into Stock Units by reference to the reinvestment of such dividends by the trustee of the Trust as set forth in Section 7.

(b) Stock Units may not be sold, assigned, transferred, disposed of, pledged, hypothecated or otherwise encumbered.

In addition, a Participant may make a separate election for distributions to commence at a Change in Control.

(b) If a Participant does not make an election under subsection (a)(ii), distribution of the Participant’s Deferred Stock Account shall commence at Separation from Service. Prior to Separation from Service, a Participant who has previously elected commencement at Separation from Service (or made no previous election) may make one subsequent election. The subsequent election must be submitted at least twelve months prior to Separation from Service and shall take effect twelve months after the date on which it is submitted. The subsequent distribution election must elect the specified time under subsection (a)(ii) as five years after Separation from Service. The Committee may establish additional procedures, conditions, and limitations relating to the submission of a subsequent election.

Notwithstanding any other provision in this Plan to the contrary, the time or schedule for any payment of a Participant’s Deferred Stock Account under this Plan shall not be accelerated under any circumstances.

In the event of a stock dividend, stock split or combination of shares, recapitalization or merger in which the Company is the surviving corporation or other change in the Company’s capital stock, the number and kind of shares of Company Stock to be subject to the Plan and the maximum number of shares which are authorized for distribution under the Plan shall be appropriately adjusted by the Board, whose determination shall be binding on all persons.

The Committee shall administer, construe and interpret the Plan. Any decision of the Committee with respect to the Plan shall be final, conclusive and binding upon all Participants. The Committee may act by a majority of its members. The Committee may authorize any member of the Committee or any officer of the Company to execute and deliver documents on behalf of the Committee. The Committee may consult with counsel, who may be counsel to the Company, and shall not incur any liability for action taken in good faith in reliance upon the advice of counsel. The Committee may designate an officer of the Company to be authorized to take or cause to be taken such actions of a ministerial nature as necessary to effectuate the intent and purposes of the Plan, including issuing Company Stock for the Plan, maintaining records of the Plan, and arranging for distributions in accordance with this Plan document. The Committee shall interpret this Plan for all purposes in accordance with Code Section 409A and the regulations thereunder and any provision of the Plan shall be deemed modified to the extent necessary to comply with Code Section 409A and the regulations thereunder.

The Plan shall become effective as of the Effective Date and continue in effect unless terminated by action of the Board. Any termination of the Plan by the Board shall not alter or impair any of the rights or obligations for any benefit previously deferred under the Plan.

The Board may suspend or terminate the Plan or revise or amend the Plan in any respect; provided, any amendment or termination of the Plan shall not adversely affect a Participant with respect to any benefit previously deferred under the Plan; provided, however, that approval of an amendment to the Plan by the stockholders of the Company shall be required to the extent, if any, that stockholder approval of such amendment is required by applicable law, rule or regulation.

The Plan shall not constitute or be evidence of any agreement or understanding, express or implied, that the Company will retain any person as a Director or employee for any period of time.

A Participant may designate in writing delivered to the Committee, one or more beneficiaries (which may include a trust) to receive any distributions under the Plan after the death of the Participant. If a Participant fails to designate a beneficiary, or no designated beneficiary survives the Participant, any payments to be made with respect to the Participant after death shall be made to the personal representative of the Participant’s estate.

All notices and other communications required or permitted to be given under this Plan shall be in writing and shall be deemed to have been duly given if delivered personally or mailed first class, postage prepaid, as follows: (i) if to the Company—at its principal business address to the attention of the Chairman of the Committee; (ii) if to any Participant—at the last address of the Participant known to the sender at the time the notice or other communication is sent.

The Plan shall be construed and enforced according to the laws of the State of New York, unless federal law applies. All transactions under this Plan shall also be subject to compliance with applicable securities laws. Reference to one gender includes the other, and references to the singular and plural include each other.

A Participant who, as of the Effective Date, is a participant in the Alliance Financial Corporation Amended and Restated Directors Compensation Deferral Plan (the “prior plan”) (including a former Director who as of the Effective Date has not received a distribution of all benefits due under the prior plan) may elect not later than 30 days after the Effective Date to effect a one-time transfer to this Plan of all or any portion of the amounts accrued by the Company as of March 11, 2008 with respect to the Participant’s benefits under such plan. All transferred amounts shall be treated in the same manner as any other compensation deferred under this Plan and shall, for all purposes, be subject to the provisions of this Plan. A Participant who elects to make a transfer from the prior plan shall acknowledge in writing at the time of election that the Participant’s participation in the prior plan shall cease effective with such transfer. Notwithstanding anything in this Plan or the prior plan to the contrary, a Participant who was formerly a Director and who (i) is in pay status under the prior plan and (ii) elects to transfer the remaining balance of his account to this Plan shall continue to receive installment payments in accordance with his election under the prior plan and based on the value of such payments when made under the prior plan.