ANNUAL MANAGEMENT PERFORMANCE INCENTIVE PLAN

SAUER-DANFOSS INC.

ANNUAL MANAGEMENT PERFORMANCE INCENTIVE PLAN

Amended and Restated as of December 29, 2008

The Sauer-Danfoss Inc. Annual Management Performance Incentive Plan is designed to achieve the following objectives:

a)               Link variable pay to strategic business objectives and performance;

b)              Provide a means to recognize and reward outstanding individual performance;

c)               Facilitate the attraction, retention and motivation of talent; and

d)              Provide a competitive compensation opportunity.

ARTICLE I

DEFINITIONS

For the purposes of this Plan, the following words and phrases shall have the meaning indicated, unless a different meaning is clearly required by the context:

1.                    The “Plan” means this Sauer-Danfoss Inc. Annual Management Performance Incentive Plan with all amendments and supplements hereafter made.

2.                    The “Company” means Sauer-Danfoss Inc., a Delaware corporation, its successors, and the surviving companies or corporations resulting from any merger or consolidation of Sauer-Danfoss Inc. with any other corporation or partnership.

3.                    A “Subsidiary” means any corporation, partnership, limited liability company, joint venture, affiliate or other entity in which the Company, directly or indirectly, has a majority voting interest.

4.                    The “Executive Office” means the Executive Office of Sauer-Danfoss Inc., as the same shall from time to time exist.

5.                    An “Employee” shall mean any person employed by the Company or a Subsidiary.

6.                    A “Participant” shall mean any Employee who is eligible to participate in the Plan as provided in Article II.

7.                    The “Plan Year” means the fiscal year of the Company, which as of January 1, 2007 coincides with the calendar year.

8.                    An “Incentive Compensation Award” shall mean the incentive compensation amount determined for a Participant pursuant to the Plan with respect to any Plan Year, prior to

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any increase or reduction by the “Business Discretionary Adjustment” and/or the “Individual Performance Modifier” as provided by Article III, Paragraphs 6 and 7.

9.                    A “Beneficiary” shall mean the person or persons designated by a Participant in accordance with the Plan to receive payment of the Participant’s Incentive Compensation Award in the event of the death of the Participant prior to payment of the Participant’s Incentive Compensation Award.

10.              The “Target Incentive Opportunity” means an amount equal to a target percentage multiplied by the base salary paid to the Participant from the Participant’s effective date of participation through the end of the Plan Year.  Should a Participant have periods of illness or injury during the Plan Year, payments such as sick leave or disability pay, which are paid to the Participant in lieu of base salary during those periods, will be considered as base salary for the purpose of computing the Target Incentive Opportunity.

11.              “Achieved Performance” shall mean the actual EBIT Margin for the Company, Division or Business Unit per the Company’s yearend audited financial statements, measured on the same basis and with the same adjustments as the Participant’s original Performance Target and as otherwise adjusted pursuant to Article III, Paragraph 2.

12.              “Performance Target” shall mean the financial performance target for EBIT Margin for the Company, Division or Business Unit, as the case may be, as determined through the annual budgeting process for any Plan Year, as approved by the Executive Office and as further described in Article III, Paragraph 2.

13.              “EBIT Margin” (Earnings Before Interest and Taxes Margin) for the Company or for any Division or Business Unit, as the case may be, shall be defined as net income adjusted to remove any income tax expense or benefit and to remove any Net Interest Expense; divided by gross revenue for the Company or the corresponding Division or Business Unit, as the case may be.

14.              “Net Interest Expense” for Sauer-Danfoss Inc. or for any Division or Business Unit, as the case may be, shall be defined as interest expense, net of interest income, on interest bearing indebtedness plus minority interest expense, net of minority interest income.

15.              “Total Company Factor” shall mean a weighting factor, from 0% to 100%, assigned by the Executive Office to the Participant for the Plan Year and representing the relative importance that the total Company’s performance shall have on a Participant’s Incentive Compensation Award.  The sum of the Participant’s Company Factor plus the Participant’s Division / Business Unit factor shall equal 100%.

16.              “Division / Business Unit Factor” shall mean a weighting factor, from 0% to 100% assigned by the Executive Office to the Participant for the Plan Year and representing the relative importance that the Division / Business Unit shall have on a Participant’s

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Incentive Compensation Award.  The sum of the Participant’s Total Company Factor plus the Participant’s Division / Business Unit Factor shall equal 100%.

17.              “Permanent and Total Disability” shall have the meaning ascribed to such term in the Participant’s governing long-term disability plan.

18.              “Retirement” shall mean the normal retirement date on which a Participant qualifies for full retirement benefits under the Company’s qualified retirement plan, as identified by the Executive Office.

19.              “Business Discretionary Adjustment” shall mean an adjustment, solely at the discretion of the Executive Office, to increase or decrease the Incentive Compensation Awards for the Total Company and/or a specific Division and/or a specific Business Unit by up to 20 percentage points prior to payment.

20.              “Individual Performance Modifier” shall mean a percentage multiplier, from 0% to 125% that can be applied, at the discretion of the Executive Office, to increase or decrease an individual Participant’s Incentive Compensation Award, as adjusted by any Business Discretionary Adjustment, prior to payment.

ARTICLE II

ELIGIBILITY AND MEASUREMENT BASIS

The Executive Office shall, in its discretion, select the Employees who are to participate in the Plan and the selected Employees shall be notified of their selection in writing or electronically.  Notwithstanding the previous sentence, an Employee’s whose total compensation package is determined and administered by the Compensation Committee of the Sauer-Danfoss Inc. Board of Director’s shall be eligible to participate in this Plan only as dictated by the Compensation Committee.  Participation for each Employee shall be determined on an annual basis.  The Executive Office shall determine, for each Participant, the target percentage of base salary to be used in determining the Participant’s Target Incentive Opportunity.

The Executive Office shall also determine the business elements (Company and/or Division and/or Business Unit) that will be used to determine each Participant’s Incentive Compensation Award.  The Executive Office will also select t