10. Incentive Compensation Plan

In 2010, the W&T Offshore, Inc. Amended and Restated Incentive Compensation Plan (the “Plan”) was approved by our shareholders and covers the Company’s eligible employees and consultants. The Plan amended and restated the Company’s previous Long-term Incentive Compensation Plan (the “Previous Plan”). In addition to other cash and equity-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.

For 2012, performance awards under the Plan were granted in the form of restricted stock units (“RSUs”) and cash awards. 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 based on the Company achieving certain predetermined performance criteria. For 2012, 70% of the RSUs award was conditioned on achieving earnings per share targets for 2012, 10% of the RSUs award was conditioned on achieving total shareholder return (“TSR”) targets for 2012, 10% of the RSUs award was conditioned on achieving TSR targets for 2013 and 10% of the RSUs award was conditioned on achieving TSR targets for the period January 1, 2014 to October 31, 2014 (collectively, the “2012 RSUs”). TSR is determined based upon the change in the entity’s stock price plus dividends for the applicable performance period. The TSR targets are the ranking of the Company’s TSR compared to the TSR of 19 peer companies. The 2012 RSUs related to the earnings per share targets have an issuance scale from 0% to 100%. The 2012 RSUs related to TSR targets have an issuance scale from 0% to 150%. Vesting for the 2012 RSUs occurs on December 15, 2014.

The fair value at the date of grant for the 2012 RSUs was determined separately for the component related to the earnings per share targets and the component related to TSR targets. The fair value of the component related to earnings per share targets was determined using the Company’s closing price on the grant date. The fair value for the component related to TSR targets was determined by using a Monte Carlo simulation probabilistic model. The inputs used in the probabilistic model for the Company and the peer companies were: average closing stock prices during January 2012; risk-free interest rates using the LIBOR ranging from 0.15% to 0.72% over the service period; expected volatilities ranging from 33% to 74%; expected dividend yields ranging from 0.0% to 2.5%; and correlation factors ranging from (67%) to 94%. The expected volatilities, expected dividends and correlation factors were developed using historical data.

For 2012, some of the RSUs that were granted to employees were forfeited as the Company did not meet certain predefined performance measures including earnings per share and TSR targets. 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 predefined performance measurement. Vesting eligibility for the TSR component of RSUs for the 2013 and 2014 periods will be determined at the end of the respective performance periods. With the exception of the 2012 RSU components that relate to TSR for the 2013 and 2014 performance periods, the remaining 2012 RSUs not forfeited will be eligible for vesting in December 2014, subject to meeting certain employment criteria. The cash-based awards, which are a short-term component of the Plan, were determined based on multiple performance measures, such as earnings per share, reserve and production growth, cost containment and individual performance measures. With respect to the 2012 cash-based awards, some of the performance criteria targets were achieved and were combined with estimates of personal performance measurements to determine potential payments. In addition, pursuant to the Plan, discretionary authority was exercised for certain non-executive employees, which increased cash-based award amounts. Employees will be paid their cash-based awards within 75 days following year end 2012.

For 2011, performance awards under the Plan were granted in the form of RSUs and cash awards. The sole business performance criteria established for the 2011 RSU awards (the “2011 RSUs”) was an earnings per share target. The Company exceeded the top-tier target; therefore 100% of the 2011 RSUs awards will be eligible for vesting on December 15, 2013. The fair value of the 2011 RSUs was estimated by using the Company’s closing price on the grant date. The cash-based awards, which are a short-term component of the Plan, were determined based on multiple performance measures, such as earnings per share, reserve and production growth, cost containment and individual performance measures. With respect to the 2011 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 paid.

For 2010, performance awards under the Plan were granted in the form of RSUs and cash awards. The sole business performance criteria established for the 2010 RSU awards (the “2010 RSUs”) was an earnings per share target. The Company exceeded the top-tier target; therefore 100% of the 2010 RSUs awards were eligible for vesting on December 15, 2012. The fair value of the 2010 RSUs was estimated by using the Company’s closing price on the grant date. The cash based awards were determined based on multiple performance measures. With respect to the 2010 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 paid.

For information concerning grants awarded and amounts recognized in lease operating expense and G&A, see Note 11.