Quarterly report pursuant to Section 13 or 15(d)

Share-Based Compensation and Cash-Based Incentive Compensation

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Share-Based Compensation and Cash-Based Incentive Compensation
3 Months Ended
Mar. 31, 2013
Share-Based Compensation and Cash-Based Incentive Compensation

8. Share-Based Compensation and Cash-Based Incentive Compensation

In 2010, the W&T Offshore, Inc. Amended and Restated Incentive Compensation Plan (the “Plan”) was approved by our shareholders. As allowed by the Plan, in 2012 and in 2011, the Company granted restricted stock units (“RSUs”) to certain of its employees. 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 achievement of certain predetermined criteria. The RSUs granted in 2012 (the “2012 RSUs”) were subject to performance criteria of earnings per share and total shareholder return (“TSR”), while the RSUs granted in 2011 (the “2011 RSUs”) were subject to only earnings per share performance measurement. In 2012 and in prior years, restricted stock was granted to the Company’s non-employee directors under the Director Compensation Plan. The restricted stock and RSUs each vest at the end of specified service periods. In addition to share-based compensation, the Company may grant to its employees cash-based incentive awards, which are a short-term component of the Plan and are based on the Company and the employee achieving certain predetermined performance criteria.

We recognize compensation cost for share-based payments to employees and non-employee directors over the period during which the recipient is required to provide service in exchange for the award, based on the fair value of the equity instrument on the date of grant. We are also required to estimate forfeitures, resulting in the recognition of compensation cost only for those awards that are expected to actually vest.

 

At March 31, 2013, there were 1,393,602 shares of common stock available for issuance in satisfaction of awards under the Plan and 546,829 shares of common stock available for issuance in satisfaction of awards under the Director Compensation Plan. The shares available for both plans are reduced when restricted stock is granted. RSUs will reduce the shares available in the Plan only if RSUs are settled in shares of common stock. 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. See Note 13 regarding shareholder approval received on May 7, 2013 to increase the shares available for issuance in the Plan by 4,000,000 shares and to make certain other amendments to the Plan.

Restricted Stock. As of March 31, 2013, the Company had 43,687 unvested restricted shares outstanding, all of which were issued to the non-employee directors. Restricted shares are subject to forfeiture until vested and cannot be sold, transferred or disposed of during the restricted 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. The fair value of restricted stock was estimated by using the Company’s closing price on the grant date.

Subject to the satisfaction of service conditions, the outstanding restricted shares issued to the non-employee directors as of March 31, 2013 are expected to vest as follows:

 

     Shares  

2013 (1)

     27,297   

2014

     10,295   

2015

     6,095   
  

 

 

 

Total

     43,687   
  

 

 

 

 

(1) Includes accelerated vesting of restricted shares held by one non-employee director who did not stand for re-election to the Board.

There were no grants, forfeitures or vesting of restricted shares during the three months ended March 31, 2013 and 2012.

Restricted Stock Units. As of March 31, 2013, the Company had outstanding RSUs issued to certain employees. A portion of the 2012 RSUs remains subject to the certain pre-defined performance measures of TSR for the defined periods in 2013 and 2014; therefore, this portion will be determined whether eligible for vesting at the end of the respective performance periods. TSR is determined based upon the change in the entity’s stock price and dividends for the performance period. The TSR targets are the ranking of the Company’s TSR compared to the TSR of 19 peer companies. The TSR components have an issuance scale from 0% to 150%. The portion of RSUs subject to TSR performance measurement is disclosed in the second table below.

The fair value 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 2012 RSUs component related to earnings per share targets was determined using the Company’s closing price on the grant date. The fair value for the 2012 RSUs 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 London Interbank Offered Rate (“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. The fair value of the 2011 RSUs was estimated by using the Company’s closing price on the grant date.

 

In addition to being subject to predetermined performance criteria, all RSUs are subject to service requirements prior to vesting. All RSUs awarded are subject to forfeiture until vested and cannot be sold, transferred or otherwise disposed of during the restricted period. Dividend equivalents are earned at the same rate as dividends paid on our common stock after achieving the specified performance requirement for that component of the RSUs.

A summary of activity related to RSUs is as follows:

 

     Restricted Stock Units  
     Units     Weighted Average
Grant Date Fair
Value Per Unit
 

Outstanding RSUs, December 31, 2012

     969,820      $ 22.70   

Granted (1)

     1,171        18.39   

Vested

     —          —     

Forfeited

     (11,293     19.26   
  

 

 

   

Outstanding RSUs, March 31, 2013

     959,698      $ 22.73   
  

 

 

   

 

(1) Adjustments to amounts granted in 2012.

Subject to the satisfaction of service conditions, the RSUs outstanding as of March 31, 2013 are eligible to vest in December of the year indicated in the table below:

 

     Shares  

2013

     474,812   

2014

     344,288   

2014 (2)

     140,598   
  

 

 

 

Total

     959,698   
  

 

 

 

 

(2) In addition to service requirements, these RSUs are also subject to certain performance requirements not yet measureable, with adjustments ranging from 0% to 150%.

During the three months ended March 31, 2012, there were no grants or vesting of RSUs.

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

 

     Three Months Ended
March 31,
 
     2013      2012  

Share-based compensation expense from:

     

Restricted stock

   $ 99       $ 106   

Restricted stock units

     2,156         2,553   
  

 

 

    

 

 

 

Total

   $ 2,255       $ 2,659   
  

 

 

    

 

 

 

Share-based compensation tax benefit:

     

Tax benefit computed at the statutory rate

   $ 789       $ 931   
  

 

 

    

 

 

 

Unrecognized Share-Based Compensation. As of March 31, 2013, unrecognized share-based compensation expense related to our outstanding restricted shares and RSUs was $0.4 million and $9.2 million, respectively. Unrecognized share-based compensation expense will be recognized through April 2015 for restricted shares and November 2014 for RSUs.

 

Cash-Based Incentive Compensation. As defined by the Plan, annual incentive awards may be granted to eligible employees payable in cash. These awards 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. Generally, the performance period is the calendar year and determination and payment is made in cash in the first quarter of the following year.

Share-Based Compensation and Cash-Based Incentive Compensation Expense. A summary of incentive compensation expense is as follows (in thousands):

 

     Three Months Ended
March 31,
 
     2013      2012  

Share-based compensation expense included in:

     

General and administrative

   $ 2,255       $ 2,659   
  

 

 

    

 

 

 

Total charged to operating income

     2,255         2,659   
  

 

 

    

 

 

 

Cash-based incentive compensation included in:

     

Lease operating expense

     1,393         1,900   

General and administrative

     3,530         1,878   
  

 

 

    

 

 

 

Total charged to operating income

     4,923         3,778   
  

 

 

    

 

 

 

Total incentive compensation charged to operating income

   $ 7,178       $ 6,437