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.  During 2017, 2016, and 2013, amendments to the Plan were approved by our shareholders.  The Plan covers the Company’s eligible employees and consultants.  In addition to other cash and share-based compensation awards, the Plan has historically been designed to grant awards that qualified as performance-based compensation within the meaning of section 162(m) of the Internal Revenue Code (“IRC”).  Beginning in 2018, IRC section 162(m) will no longer contain deduction exemptions for performance-based compensation except for plans in place prior to November 2, 2017 that meet certain certifications.  The Plan grants the Compensation Committee of the Board of Directors administrative authority over all participants, and grants 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 vesting or performance criteria applicable to the award 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 (“RSUs”), 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.

The 2017 amendment increased the number of shares available in the Plan by 7,700,000 shares of common stock.  As of December 31, 2017, there were 13,363,792 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 2017, 2016 and 2015, performance awards under the Plan were granted in the form of RSUs to eligible employees.  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 2017, 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 2017 and (ii) Adjusted EBITDA as a percent of total revenue (“Adjusted EBITDA Margin”) for 2017.  Adjustments range from 0% to 100% based upon actual results compared against pre-defined performance levels.  For 2017, the Company achieved target for both Adjusted EBITDA and Adjusted EBITDA Margin.

During 2016 and 2015, RSUs granted were subject to adjustments based on achievement of a combination of performance criteria, which was comprised of: (i) Adjusted EBITDA and (ii) Adjusted EBITDA Margin for each respective year.  Adjustments range from 0% to 100% based upon actual results compared against pre-defined performance levels.  For both 2016 and 2015, the Company was below target for Adjusted EBITDA and achieved 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 2015 (after adjustment for performance) vested in December 2017 to eligible employees.  The Company has the option to settle RSUs in stock or cash at vesting.  Prior to 2017, only shares of common stock were used to settle vested RSUs.  During 2017, cash was used to settle vested RSUs related to the retirement of an executive officer and shares of common stock were used to settle all other vested RSUs.  The Company plans to settle RSUs that vest in the future using shares of common stock.  

During 2017, 2016 and 2015, 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 for all years presented 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, 2017 are eligible to vest in the year indicated in the table below:

 

RSUs fair value at grant date - During 2017, 2016 and 2015, the grant date fair value of RSUs granted was $5.9 million, $9.3 million and $9.4 million, respectively.

RSUs fair value at vested date - The fair value of the RSUs that vested during 2017, 2016 and 2015 was $5.5 million, $2.4 million and $2.1 million, respectively, based on the Company’s closing price on the vesting date.

Share-Based Awards:  Restricted Stock

Under the Directors Compensation Plan, shares of restricted stock (“Restricted Shares”) were issued in 2017, 2016 and 2015 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, 2017, there were 170,524 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, 2017 are expected to vest as follows:

Restricted stock fair value at grant date - The grant date fair value of restricted stock granted during 2017, 2016 and 2015 was $0.3 million each year for all years presented 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 2017, 2016 and 2015 was $0.1 million each year for all years presented 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, 2017, unrecognized share-based compensation expense related to our awards of RSUs and Restricted Shares was $6.2 million and $0.4 million, respectively.  Unrecognized compensation expense will be recognized through November 2019 for our RSUs and April 2020 for our 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 2017, 2016 and 2015.  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, these cash-based awards included an additional financial condition requiring Adjusted EBITDA less reported Interest Expense Incurred for any fiscal quarter plus the three preceding quarters to exceed defined levels measured over defined time periods for each cash-based award.  Expense is recognized over the service period once the business criteria, individual performance criteria and financial condition are met.

 

 

 

 

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):