10. Incentive Compensation Plan and Directors Compensation Plan

Incentive Compensation Plan

In 2010, the W&T Offshore, Inc. Amended and Restated Incentive Compensation Plan (the “Plan”) was approved by our shareholders and amendments to the Plan were approved by our shareholders in 2013.  The Plan covers the Company’s eligible employees and consultants.  In addition to other cash and share-based compensation awards, the Plan is designed to grant awards that qualify as performance-based compensation within the meaning of section 162(m) of the IRC.  The Plan grants the Compensation Committee of the Board of Directors administrative authority over all participants, and grants the President and Chief Executive Officer with authority over the administration of awards granted to participants that are not subject to section 16 of the Exchange Act (as applicable, the “Committee”).

Pursuant to the terms of the Plan, the Committee establishes the performance criteria and may use a single measure or combination of business measures as described in the Plan.  Also, individual goals may be established by the Committee.  Performance awards may be granted in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, bonus stock, dividend equivalents, or other awards related to stock, and awards may be paid in cash, stock, or any combination of cash and stock, as determined by the Committee.  The performance awards granted under the Plan can be measured over a performance period of up to 10 years and annual incentive awards (a type of performance award) will be paid within 90 days following the applicable year end.

Share-based Awards: Restricted Stock Units

For 2014, 2013 and 2012, performance awards under the Plan were granted in the form of restricted stock units (“RSUs”).  As defined by the Plan, RSUs are rights to receive stock, cash or a combination thereof at the end of a specified vesting period, subject to certain terms and conditions as determined by the Committee.  RSUs are a long-term compensation component of the Plan, which are granted to only certain employees, and are subject to adjustments at the end of the applicable performance period using a predefined scale based on the Company achieving certain predetermined performance criteria.   Vesting occurs upon completion of the specified vesting period applicable to each grant.  Subsequent to the determination of the performance achievement and prior to vesting, the RSUs earn dividend equivalents at the same rate as dividends paid on our common stock.  RSUs are subject to forfeiture until vested and cannot be sold, transferred or disposed of during the restricted period.  

During 2014, RSUs granted were subject to adjustments based on achievement of a combination of performance criteria, which is comprised of: (i) net income before income tax expense, net interest expense, depreciation, depletion, amortization, accretion and certain other items (“Adjusted EBITDA”) for 2014 and (ii) Adjusted EBITDA as a percent of total revenue (“Adjusted EBITDA Margin”) for 2014.  Adjustments range from 0% to 100% dependent upon actual results compared against pre-defined performance levels.  For 2014, the Company was above target for Adjusted EBITDA and was slightly below target for Adjusted EBITDA Margin.

During 2013, RSUs granted were subject to a combination of performance criteria, which was comprised of: (i) Adjusted EBITDA for 2013; (ii) Adjusted EBITDA Margin for 2013; and (iii) the Company’s total shareholder return (“TSR”) ranking against peer companies’ TSR for 2013, 2014 and January 1, 2015 to October 31, 2015.  TSR is determined based upon the change in the entity’s stock price plus dividends for the applicable performance period.  Adjustments range from 0% to 150% for portions subject to Adjusted EBITDA and Adjusted EBITDA Margin measurements and adjustments range from 0% to 200% for the portion subject to TSR measurement.  For 2013, the Company exceeded the target for Adjusted EBITDA and was approximately at target for 2013 Adjusted EBITDA Margin.  For 2014 and 2013, the Company was below target for the TSR rankings for each period.  In addition, RSUs were granted during 2013 which were not subject to performance criteria and were less than 3% of total grants.

During 2012, RSUs granted were subject to a combination of performance criteria, which was comprised of: (i) earnings per share (“EPS”) for 2012; and (ii) the Company’s TSR ranking against peer companies’ TSR for 2012, 2013 and January 1, 2014 to October 31, 2014.  Adjustments range from 0% to 100% for the portion subject to EPS measurement and adjustments range from 0% to 150% for the portion subject to TSR measurement.  Pursuant to the Plan, discretionary authority was exercised for certain non-executive employees, which reduced the forfeitures that would have occurred through application of the pre-defined performance measurement.

All RSUs granted to date are subject to employment-based criteria in addition to performance criteria.  Vesting occurs in December of the third year after the grant.  For example, the RSUs granted during 2012 (after adjustment for performance) vested in December 2014 to eligible employees.

Cash-based Awards

For 2014, 2013 and 2012, cash-based awards were granted under the Plan to substantially all eligible employees.  The cash-based awards, which are a short-term component of the Plan, were determined based on multiple performance measures, such as Adjusted EBITDA, reserve and production growth, cost containment and individual performance measures.  With respect to the 2014 cash-based awards, some of the performance criteria targets were achieved and were combined with estimates of personal performance measurements to record potential payments.  With respect to the 2013 cash-based awards, most of the performance criteria targets were achieved and were combined with the individual’s performance to determine the cash-based award.  With respect to the 2012 cash-based awards, some of the performance criteria targets were achieved and were combined with the individual’s performance to determine the cash-based award.  In addition, pursuant to the Plan, discretionary authority was exercised for certain non-executive employees, which increased cash-based award amounts in 2012.  Eligible employees are paid their cash-based awards within 75 days following year end.

Share-based Awards: Common Stock

The 2014 annual incentive plan award for the Chief Executive Officer (“CEO”) was settled in shares of common stock based on a pre-determined price of $14.66 per share, subject to pre-defined performance measures and approval of the Compensation Committee.  As the number of shares could not be determined until the full-year 2014 results were determined and approved by the Committee, the CEO’s 2014 award was accounted for as a liability award during 2014 and adjusted to fair value using the Company’s closing price at the end of each reporting period.  The grant was made in the first quarter of 2015 once the number of shares could be determined and approved by the Committee.  The 2013 annual incentive plan award for the CEO was settled in shares of common stock based using the price of the stock immediately preceding the day the award was settled and the grant was made in the first quarter of 2014.  Adjustments were made to both grants to satisfy withholding tax requirements.  The performance measures for the CEO’s awards were the same as the cash-based-awards performance measures established for the other eligible Company employees for 2014 and 2013, respectively.

Directors Compensation Plan Share-Based Awards

Under the Directors Compensation Plan, shares of restricted stock (“Restricted Shares”) were issued in 2014, 2013 and 2012 to the Company’s non-employee directors as a component of their compensation arrangement.  Vesting occurs upon completion of the specified vesting period and one-third of each grant vests each year over a three-year period.  The holders of Restricted Shares generally have the same rights as a shareholder of the Company with respect to such shares, including the right to vote and receive dividends or other distributions paid with respect to the shares.  Restricted Shares are subject to forfeiture until vested and cannot be sold, transferred or otherwise disposed of during the restriction period.  

For additional information concerning share-based awards and cash-based awards, including expense recognition, see Note 11.