Carbon Natural Gas Company Annual Incentive Plan 2013

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.

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, 2013 to December 31, 2013.

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.

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 committee can, in its reasonable discretion, reduce 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 for the Plan will be:

 

Targets shall be adjusted for material changes made during the year to the business plan or scope thereof, including the capital expenditure budget.

 

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 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.

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, no bonus award will be paid.

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. All Awards to officers under the Plan are subject to approval of the Board.

Incentive compensation 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.