Carbon Natural Gas Company 2014 Annual Incentive Plan
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Summary
This agreement outlines the 2014 Annual Incentive Plan for employees of Carbon Natural Gas Company. The plan provides cash incentive awards based on the company's financial and operational performance, with 60% of awards tied to specific performance measures and 40% at the Board's discretion. Key performance metrics include EBITDA growth, reserve increases, production growth, and cost controls. The plan is administered by company leadership, with awards determined by achievement levels and subject to Board approval. Participation and award amounts are set by the CEO and Board, and awards are paid based on results for the 2014 calendar year.
EX-10.5 2 f10q0314ex10v_carbon.htm ANNUAL INCENTIVE PLAN f10q0314ex10v_carbon.htm 
Exhibit 10.5
Carbon Natural Gas Company
Annual Incentive Plan
2014
Carbon Natural Gas Company
2014 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 Concept
The Plan provides Annual Incentive Awards which will be determined primarily on the basis of the Company’s results on financial and operating performance measures.
Sixty percent of the Incentive Award shall be based on financial and operating performance measures selected by the Board of Directors.
Forty percent of the Incentive Award will be based upon discretion of the Board of Directors.
The Plan period is from January 1, 2014 to December 31, 2014.
Performance Objective Measures and Weighting
The Board of Directors will establish the Performance Measures and Objectives, the Threshold, Target and Outstanding performance levels and the weighting for each Performance Measure.
| Measure | Weighting | Target | ||||
| EBITDA per Debt Adjusted Share Growth | 20.00 | % | 20% increase | |||
| Increase in Net Total Proved Reserves | 10.00 | % | 5% increase | |||
| Net Annual Production Growth | 20.00 | % | 10% increase | |||
| Lease Operating Expenses ($/unit) | 20.00 | % | $1.10/mcfe (6:1) | |||
| G&A per Unit of Production | 10.00 | % | $.80 per unit of production equivalent | |||
| F&D Cost per Unit of Reserves | 20.00 | % | $1.70 per unit of reserve equivalent | |||
| Total of Performance Measures | 100.00 | % | | |||
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Carbon Natural Gas Company
2014 Annual Incentive Plan
Plan Administration
The Plan will be administered by the 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 at his discretion.
The Board cannot increase payout amounts above the outstanding level under performance categories that 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 reasonable discretion, reduce or increase the payout amounts for these 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 | Minimum level at which Incentive Award payouts occur |
| ● | Target | Level at which the participant receives the Incentive Target Award percentage. |
| ● | Outstanding | Level at which the participant receives 200% of the Incentive Target Award percentage. |
Completion percentages between Threshold, Target and Outstanding will be determined by interpolation.
Targets can be adjusted for material changes made during the year to the business plan or scope thereof, including the capital expenditure budget.
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Carbon Natural Gas Company
2014 Annual Incentive Plan
Performance Levels
Performance levels will be set for each measure. Performance results below the Threshold will equate to a zero completion percentage.
A minimum 30% completion threshold is required for the total Plan in order for 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 and department objectives will be the sum of the weighted completion percentages for each individual measure.
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, bonus awards (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. Changes to Target Award percentages for Company officers are subject to the approval of the Board. 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
2014 Annual Incentive Plan
| Performance Measure | EBITDA per Debt Adjusted Share Growth |
| Objective | 20% increase in EBITDA per Debt Adjusted Share Growth. |
| Definition | The percentage increase in EBITDA per Debt Adjusted Share Growth from January 1, 2014 to December 31, 2014. |
| Awards Level | · | Threshold | 12.5% increase |
| · | Target | 20% increase | |
| · | Outstanding | 30% increase |
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Carbon Natural Gas Company
2014 Annual Incentive Plan
| Performance Measure | Increase in Net Total Proved Reserves |
| Objective | 5% increase in Net Total Proved Reserves. All reserve calculations are based on SEC reserve rules. |
| For purposes of the Plan, proved reserves shall be measured by calculating the natural gas equivalent value as determined by the ratio of the individual product annual average SEC prices at December 31, 2014. | |
| Definition | The percentage increase in the company’s Net Total Proved Reserves from January 1, 2014 to December 31, 2014. |
| Awards Level | · | Threshold | 1% Reserve Growth |
| · | Target | 5% Reserve Growth | |
| · | Outstanding | 15% Reserve Growth |
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Carbon Natural Gas Company
2014 Annual Incentive Plan
| Performance Measure | Growth in Net Annual Production |
| Objective | 10% increase in net annual production. |
| For purposes of the Plan, net equivalent production shall be measured by calculating the natural gas equivalent value as determined by the ratio of the individual product annual average SEC prices at December 31, 2014. | |
| Definition | The percentage increase in net production from January 1, 2014 to December 31, 2014. |
| Awards Level | · | Threshold | 7.5% Increase |
| · | Target | 10% Increase | |
| · | Outstanding | 15% Increase |
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Carbon Natural Gas Company
2014 Annual Incentive Plan
| Performance Measure | Lease Operating Cost $/unit of Net Production |
| Objective | Lease Operating Expenses of $1.10/mcfe (6:1) |
| Definition | Actual cash costs of the Company’s lease operating expenses. |
| Awards Level | · | Threshold | $1.21 per Unit |
| · | Target | $1.10 per Unit | |
| · | Outstanding | $ .90 per Unit |
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Carbon Natural Gas Company
2014 Annual Incentive Plan
| Performance Measure | G&A Cost $/unit of Net Production |
| Objective | General and Administrative Expense of $.80 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 the individual product annual average SEC prices at December 31, 2014. | |
| Definition | Actual cash costs of the company’s general and administrative expenses. |
| Awards Level | · | Threshold | $ .88 per Unit |
| · | Target | $ .80 per Unit | |
| · | Outstanding | $ .72 per Unit |
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Carbon Natural Gas Company
2014 Annual Incentive Plan
| Performance Measure | Finding and Development Cost $/unit of Net Equivalent Reserve Additions |
| Objective | Finding and Development Costs at $1.70 per unit of net equivalent reserve additions through drilling and completion activities. |
| For purposes of the Plan, net equivalent reserve additions shall be measured by calculating the natural gas equivalent value as determined by the ratio of the individual product annual average SEC prices at December 31, 2014. | |
| Definition | The quotient of capital expenditures divided by the change in proved reserves during 2014 after the addition of 2014 production. |
| Awards Level | · | Threshold | $1.96 per Unit |
| · | Target | $1.70 per Unit | |
| · | Outstanding | $1.40 per Unit |
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Exhibit A
| Target Bonus Award Levels | % | ||||
| Patrick R. McDonald | Chief Executive Officer | 100 | |||
| Kevin D. Struzeski | Chief Financial Officer | 60 | |||
| Mark D. Pierce | President | 60 | |||
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