Annual Incentive Plan

It is Donaldson’s philosophy to provide a total compensation package that attracts, retains and motivates key employees. The FY__ Annual Incentive Plan (“Plan”) emphasizes pay-for-performance by linking eligible employees’ compensation to key financial performance and provides the participants the opportunity to share in Donaldson’s financial success.

    

The Plan Year coincides with Donaldson’s fiscal year of August 1^st through July 31^st.

Regular full-time and part-time employees in specific job grades/levels are eligible. Temporary staff and contractors are excluded.

Target incentive opportunity varies by job grade and position and is expressed as a percentage of the participant’s base salary effective as of the last working day in July or last working day in an eligible position.

“Performance Goal” shall mean one or more of the following performance goals, either individually, alternatively or in any combination, applied on a corporate, subsidiary, division, business unit or line of business basis: earnings per share; return on investment; revenues, including net sales growth; earnings, including net operating profit after taxes; return on equity; profit margins; cost reductions; inventory levels; delivery performance; safety performance; quality performance; core operating earnings; total stockholder return; cash flow, including operating cash flows, free cash flow, discounted cash flow return on investment, and cash flow in excess of cost of capital; economic value added; stockholder value added; market share; price to earnings ratio; expense ratios; workforce

goals; total expenditures; completion of key projects and any other financial, operational or strategic measure.

Refer to your applicable fiscal year’s individual goal sheet for the target incentive opportunity for your position. Your goal sheet will specify the performance objectives and target incentive opportunities based on your Performance Goal(s) for the Plan Year, specify in terms of a formula or standard the method for calculating the amount payable to a participant if the Performance Goal(s) are achieved, and determine the degree to which the grant, vesting, exercisability, lapse of restrictions and/or settlement of such award has been earned, including the degree to which applicable Performance Goal(s) have been achieved.

Each such Performance Goal may be based (i) solely by reference to absolute results of individual performance or organizational performance at various levels or (ii) upon organizational performance relative to the comparable performance of other companies. The Performance Goal may also exclude charges related to an event or occurrence, including (X) restructurings, acquisitions, divestitures, discontinued operations, extraordinary items, and other unusual or non-recurring charges, (Y) an event either not directly related to the operations of Donaldson or not within the reasonable control of Donaldson’s management, or (Z) the cumulative effects of tax or accounting changes in accordance with U.S. generally accepted accounting principles, as set forth on your individual goal sheet.

Goals are financial and are weighted based on importance and relevance. Appropriate goals and goal weightings for each participant will vary based on the organizational goals and position responsibilities.

In order to be eligible for an incentive payout, a participant must:

If a participant has one of the following employment status changes during the Plan Year, the incentive payout will be prorated based on the number of days in an incentive eligible position during the Plan Year:

If a participant terminates on or after the last working day of the Plan Year, the Plan Year incentive will be earned, and payout will be based on the participant’s goal achievement.

    

Incentive payouts will be calculated by applying a payout multiplier to the target incentive opportunity. The payout multiplier is based upon the Plan Year-end financial results. Any proration calculations due to employee status changes will also be applied.

Incentive payouts will be paid no later than October 15^th following the end of the Plan Year. Payouts are subject to all applicable taxes and will be paid net of any required withholdings

Donaldson reserves the right to modify, amend or cancel the Plan at any time in response to changing business conditions or unforeseen circumstances. They also retain the right to make adjustments for any unusual item that has an unplanned impact on the incentive payout. Adjustments, if any, may have either a negative or positive effect on the incentive payout earned by a participant.

Nothing contained in the Plan shall be construed to confer upon any participant the right to continued employment or alter the company’s right to terminate his/her employment at any time.