10.  Share-Based Awards and Cash-Based Awards

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 2016.  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 the Chief Executive Officer (“CEO”) 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 generally be paid within 90 days following the applicable year end.

On May 4, 2016, after receiving shareholder approval, 3,300,000 shares of common stock were added to the amount available for issuance under the Plan.  As of December 31, 2016, there were 6,933,337 shares of common stock available for issuance in satisfaction of awards under the Plan.  RSUs reduce the shares available in the Plan when settled in shares of common stock, net of withholding tax.  

Share-based Awards: Restricted Stock Units

For 2016, 2015 and 2014, performance awards under the Plan were granted in the form of 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 2016, RSUs granted were subject to adjustments based on achievement of a combination of performance criteria, which was comprised of: (i) net income before income tax expense, net interest expense, depreciation, depletion, amortization, accretion and certain other items (“Adjusted EBITDA”) for 2016 and (ii) Adjusted EBITDA as a percent of total revenue (“Adjusted EBITDA Margin”) for 2016.  Adjustments range from 0% to 100% based upon actual results compared against pre-defined performance levels.  For 2016, the Company was below target for Adjusted EBITDA and achieved target for Adjusted EBITDA Margin.

  During 2015, RSUs granted were subject to adjustments based on achievement of a combination of performance criteria, which was comprised of: (i) Adjusted EBITDA for 2015 and (ii)  Adjusted EBITDA Margin for 2015.  Adjustments range from 0% to 100% based upon actual results compared against pre-defined performance levels.  For 2015, the Company was below target for Adjusted EBITDA and achieved target for Adjusted EBITDA Margin.

During 2014, RSUs granted were subject to adjustments based on achievement of a combination of performance criteria, which was comprised of: (i) Adjusted EBITDA for 2014 and (ii) Adjusted EBITDA Margin for 2014.  Adjustments range from 0% to 100% based upon actual results compared against pre-defined performance levels.  For 2014, the Company achieved target for Adjusted EBITDA and was slightly below target for Adjusted EBITDA Margin.

All RSUs granted to date are subject to employment-based criteria in addition to performance criteria.  Vesting occurs in December of the second calendar year following the date of grant.  For example, the RSUs granted during 2014 (after adjustment for performance) vested in December 2016 to eligible employees.  Although the Company has the option to settle RSUs in stock or cash at vesting, only common stock has been used to settle vested RSUs to date.

During 2016, 2015 and 2014, the Company granted RSUs to certain employees, with nearly all grants being contingent upon meeting specified performance requirements described above.  The fair value of the RSUs granted in 2016, 2015 and 2014 was determined using the Company’s closing price on the grant dates.  

A summary of activity related to RSUs is as follows:

 

Subject to the satisfaction of service conditions, the RSUs outstanding as of December 31, 2016 are eligible to vest in the year indicated in the table below:

 

RSUs fair value at grant date: During 2016, 2015 and 2014, the grant date fair value of RSUs granted was $9.3 million, $9.4 million and $20.1 million, respectively.

RSUs fair value at vested date: The fair value of the RSUs that vested during 2016, 2015 and 2014 was $2.4 million, $2.1 million and $2.0 million, respectively, based on the Company’s closing price on the vesting date.

Share-based Awards: Common Stock

The 2014 annual incentive plan award for the CEO was settled in shares of common stock based on a pre-determined price of $14.66 per share, pursuant to the terms of his award.  As the number of shares could not be determined until the full-year 2014 results were determined and approved by the Compensation Committee, the CEO’s 2014 award was accounted for as a liability award and adjusted to fair value using the Company’s closing price at the end of each reporting period.  The CEO award for 2014 was 100% performance based and was subject to pre-defined performance measures and employment-based criteria, which were the same pre-defined performance measures and employment-based criteria established for the other eligible employees, and were subject to approval of the Compensation Committee.  An issuance of 37,316 shares of common stock was made in March 2015 to the CEO for his 2014 annual incentive compensation award.  The number of shares was determined after deductions for withholding and payroll taxes and the shares were valued at the Company’s closing price as of the date of issuance.  

Share-Based Awards:  Restricted Stock

Under the Directors Compensation Plan, shares of restricted stock (“Restricted Shares”) were issued in 2016, 2015 and 2014 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.  

As of December 31, 2016, there were 317,896 shares of common stock available for issuance in satisfaction of awards under the Directors Compensation Plan.  Reductions in shares available are made when Restricted Shares are granted.  

A summary of activity related to Restricted Shares is as follows:

 

Subject to the satisfaction of service conditions, the Restricted Shares outstanding as of December 31, 2016 are expected to vest as follows:

Restricted stock fair value at grant date:  The grant date fair value of restricted stock granted during 2016, 2015 and 2014 was $0.3 million for all periods based on the Company’s closing price on the date of grant.

Restricted stock fair value at vested date: The fair value of the restricted stock that vested during 2016, 2015 and 2014 was $0.1 million, $0.1 million and $0.3 million, respectively, based on the Company’s closing price on the date of vesting.

Share-Based Compensation

A summary of compensation expense under share-based payment arrangements and the related tax benefit is as follows (in thousands):

As of December 31, 2016, unrecognized share-based compensation expense related to our awards of RSUs and Restricted Shares was $9.7 million and $0.4 million, respectively.  Unrecognized compensation expense will be recognized through November 2018 for RSUs and April 2019 for Restricted Shares.

Cash-based Awards

In addition to share-based compensation, cash-based awards were granted under the Plan to substantially all eligible employees in 2016, 2015 and 2014.  The cash-based awards, which are a short-term component of the Plan, are performance-based awards consisting of one or more business criteria or individual performance criteria and a targeted level or levels of performance with respect to each of such criteria.  In addition, for the 2016 and 2015 cash-based awards, which includes the 2016/2015 incentive plan for the CEO, the Company designed the awards with an additional financial condition that must be achieved on or before December 31, 2018 for the 2016 awards, and on or before December 31, 2017 for the 2015 awards:  Adjusted EBITDA less Interest Expense Incurred, as reporting by the Company in its announced Earning Release with respect to the end of any fiscal quarter plus three preceding quarters, exceeds $300.0 million.  As this additional financial condition was not achieved as of December 31, 2016, no amounts were accrued or subsequently paid.  If this additional financial condition is achieved, payment is to be made within 30 days following the achievement of the financial condition, but subject to all the terms of the 2016 and 2015 Annual Incentive Award Agreement (the 2016 and 2015 cash-based awards).  

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.  Eligible employees were paid their cash-based awards within 75 days following year end 2014.

Share-Based Awards and Cash-Based Awards Compensation Expense

A summary of compensation expense related to share-based awards and cash-based awards is as follows (in thousands):