Employee compensation

The Company has a Long-Term Incentive Plan (the "LTIP"), which provides for the granting of incentive awards in the form of restricted stock awards, restricted stock option awards, performance share awards, performance unit awards and other awards. The LTIP provides for the issuance of 10.0 million shares.

The Company recognizes the fair value of stock-based compensation awards expected to vest over the requisite service period as a charge against earnings, net of amounts capitalized. The Company's stock-based compensation awards are accounted for as equity instruments and its performance unit awards are accounted for as liability awards. Stock-based compensation is included in "General and administrative" in the consolidated statements of operations. On January 1, 2014, the Company began capitalizing a portion of stock-based compensation for employees who are directly involved in the acquisition, exploration and development of oil and natural gas properties into the full cost pool. Capitalized stock-based compensation is included as an addition to "Oil and natural gas properties" in the consolidated balance sheets.

a. Restricted stock awards

All restricted stock awards are treated as issued and outstanding in the accompanying consolidated financial statements. Per the award agreement terms, if an employee terminates employment prior to the restriction lapse date, the awarded shares are forfeited and canceled and are no longer considered issued and outstanding. If the employee's termination of employment is by reason of death or disability, all of the holder's restricted stock will automatically vest. Restricted stock awards granted to officers and employees vest in a variety of vesting schedules including (i) 20% at the grant date and then 20% annually thereafter, (ii) 33%, 33% and 34% per year beginning on the first anniversary date of the grant, (iii) 50% in year two and 50% in year three, (iv) fully on the first anniversary date of the grant and (v) fully on the third anniversary date of the grant. Restricted stock awards granted to non-employee directors vest fully on the first anniversary date of the grant.

The following table reflects the outstanding restricted stock awards for the years ended December 31, 2014, 2013 and 2012:



(in thousands, except for weighted-average grant date fair values)	Restricted stock awards		Weighted-average grant date fair value (per award)
Outstanding at December 31, 2011	911		$	1.14
Granted	932		$	22.90
Forfeited	(251	)	$	15.61
Vested⁽¹⁾	(397	)	$	1.03
Outstanding at December 31, 2012	1,195		$	15.06
Granted	1,469		$	18.17
Forfeited	(229	)	$	18.47
Vested⁽²⁾	(636	)	$	18.69
Outstanding at December 31, 2013	1,799		$	19.17
Granted	1,234		$	25.68
Forfeited	(148	)	$	22.56
Vested⁽²⁾	(680	)	$	19.13
Outstanding at December 31, 2014	2,205		$	22.63

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(1)	Vestings in the year ended December 31, 2012 related to restricted stock awards converted in the Corporate Reorganization. Such shares have a tax basis of zero to the grantee and therefore result in no tax benefit to the Company.


(2)	The vesting of certain restricted stock awards could result in federal and state income tax expense or benefit related to the difference between the market price of the common stock at the date of vesting and the date of grant. See Note 6 for additional discussion regarding the tax impact of vested restricted stock awards.

For grants after the IPO, the Company utilizes the closing stock price on the date of grant to determine the fair value of service vesting restricted stock awards. As of December 31, 2014, unrecognized stock-based compensation expense related to restricted stock awards was $27.6 million. Such cost is expected to be recognized over a weighted-average period of 1.46 years.

b. Restricted stock option awards

Restricted stock options awards granted under the LTIP vest and are exercisable in four equal installments on each of the four anniversaries of the date of the grant. The following table reflects the stock option award activity for the years ended December 31, 2014, 2013 and 2012:



(in thousands, except for weighted-average exercise price and contractual term)	Restricted stock option awards		Weighted-average exercise price (per option)		Weighted-average remaining contractual term (years)
Outstanding at December 31, 2011	—		$	—	—
Granted	603		$	24.11	10
Forfeited	(144	)	$	24.11	10
Outstanding at December 31, 2012	459		$	24.11	10
Granted	1,019		$	17.34	9.13
Exercised⁽¹⁾	(104	)	$	20.79	8.75
Expired or canceled	(12	)	$	24.11	—
Forfeited	(133	)	$	19.88	—
Outstanding at December 31, 2013	1,229		$	19.32	8.82
Granted	336		$	25.60	9.16
Exercised⁽¹⁾	(95	)	$	19.93	7.73
Expired or canceled	(30	)	$	21.15	—
Forfeited	(73	)	$	19.68	—
Outstanding at December 31, 2014	1,367		$	20.76	8.17
Vested and exercisable at end of period⁽²⁾	324		$	20.29	7.68
Vested, exercisable, and expected to vest at end of period⁽³⁾	1,336		$	20.76	8.16

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(1)	The exercise of stock option awards could result in federal and state income tax expense or benefits related to the difference between the fair value of the stock option award at the date of grant and the intrinsic value of the stock option award when exercised. See Note 6 for additional discussion regarding the tax impact of exercised stock option awards.


(2)	The vested and exercisable options as of December 31, 2014 had no aggregate intrinsic value.


(3)	The vested, exercisable and expected to vest options as of December 31, 2014 had no aggregate intrinsic value.

The Company utilizes the Black-Scholes option pricing model to determine the fair value of restricted stock option awards and is recognizing the associated expense on a straight-line basis over the four-year requisite service period of the awards. Determining the fair value of equity-based awards requires judgment, including estimating the expected term that stock option awards will be outstanding prior to exercise and the associated volatility. As of December 31, 2014, unrecognized stock-based compensation related to restricted option awards was $8.2 million. Such cost is expected to be recognized over a weighted-average period of 2.32 years.

The assumptions used to estimate the fair value of restricted stock options granted are as follows:



	February 27, 2014			February 15, 2013			February 3, 2012
Risk-free interest rate⁽¹⁾	1.88		%	1.19		%	1.14		%
Expected option life⁽²⁾	6.25 years			6.25 years			6.25 years
Expected volatility⁽³⁾	53.21		%	58.89		%	59.98		%
Fair value per stock option	$	13.41		$	9.67		$	13.52

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(1)	U.S. Treasury yields as of the grant date were utilized for the risk-free interest rate assumption, matching the treasury yield terms to the expected life of the option.


(2)	As the Company had limited or no exercise history at the time of valuation relating to terminations and modifications, expected option life assumptions were developed using the simplified method in accordance with GAAP.


(3)	The Company utilized a peer historical look-back, which was weighted with the Company's own volatility, in order to develop the expected volatility.

In accordance with the LTIP and stock option agreement, the options granted will become exercisable in accordance with the following schedule based upon the number of full years of the optionee's continuous employment or service with the Company, following the date of grant:



Full years of continuous employment	Incremental percentage of option exercisable		Cumulative percentage of option exercisable
Less than one	—	%	—	%
One	25	%	25	%
Two	25	%	50	%
Three	25	%	75	%
Four	25	%	100	%

No shares of common stock may be purchased unless the optionee has remained in continuous employment with the Company for one year from the grant date. Unless terminated sooner, the option will expire if and to the extent it is not exercised within 10 years from the grant date. The unvested portion of a stock option award shall expire upon termination of employment, and the vested portion of a stock option award shall remain exercisable for (i) one year following termination of employment by reason of the holder's death or disability, but not later than the expiration of the option period, or (ii) 90 days following termination of employment for any reason other than the holder's death or disability, and other than the holder's termination of employment for cause. Both the unvested and the vested but unexercised portion of a stock option award shall expire upon the termination of the option holder's employment or service by the Company for cause.

c. Performance share awards

The performance share awards granted to management on February 27, 2014 ("Performance Share Awards") are subject to a combination of market and service vesting criteria. A Monte Carlo simulation prepared by an independent third party was utilized in order to determine the fair value of these awards at the date of grant. The Company has determined the Performance Share Awards are equity awards and is recognizing the associated expense on a straight-line basis over the three-year requisite service period of the awards. These awards will be settled in stock at the end of the requisite service period based on the achievement of certain performance criteria.

The Performance Share Awards have a performance period of January 1, 2014 to December 31, 2016 and any shares earned under such awards are expected to be issued in the first quarter of 2017 if the performance criteria are met. During the year ended December 31, 2014, 271,667 performance shares were awarded and all remain outstanding at December 31, 2014. As of December 31, 2014, unrecognized stock-based compensation related to the Performance Share Awards was $5.4 million. Such cost is expected to be recognized over a weighted-average period of 2.16 years.

The assumptions used to estimate the fair value of the Performance Share Awards are as follows:



Risk-free rate⁽¹⁾	0.63		%
Dividend yield	—		%
Expected volatility⁽²⁾	38.21		%
Laredo stock closing price as of February 27, 2014	$	25.60
Fair value per performance share	$	28.56

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(1)	The risk-free rate was derived using a zero-coupon yield derived from the Treasury Constant Maturities yield curve on the grant date.


(2)	The Company utilized a peer historical look-back, weighted with the Company's own volatility, to develop the expected volatility.

d. Stock-based compensation award expense

The following has been recorded to stock-based compensation expense for the periods presented:



	For the years ended December 31,
(in thousands)	2014			2013		2012
Restricted stock award compensation	$	21,982		$	17,084	$	8,496
Restricted stock option award compensation	3,639			4,349		1,560
Restricted performance share award compensation	2,108			—		—
Total stock-based compensation	27,729			21,433		10,056
Less amounts capitalized in oil and natural gas properties	(4,650		)	—		—
Net stock-based compensation expense	$	23,079		$	21,433	$	10,056

During the year ended December 31, 2013, two officers' and 20 employees' restricted stock awards and restricted option awards were modified to vest upon the officers' or the employees' retirement or in connection with the employees' termination of employment as a result of the Anadarko Basin Sale. The incremental compensation cost resulting from these modifications recognized during the year ended December 31, 2013 was $4.7 million.

e. Performance unit awards

The performance unit awards issued to management on February 15, 2013 ("2013 Performance Unit Awards") and on February 3, 2012 ("2012 Performance Unit Awards") are subject to a combination of market and service vesting criteria. A Monte Carlo simulation prepared by an independent third party was utilized in order to determine the fair values of these awards at the date of grant and to re-measure the fair values at the end of each reporting period until settlement in accordance with GAAP. The volatility criteria utilized in the Monte Carlo simulation is based on the volatility of the Company's stock price and the stock price volatilities of a group of peer companies that have been determined to be most representative of the Company's expected volatility. These awards are accounted for as liability awards as they will be settled in cash at the end of the requisite service period based on the achievement of certain performance criteria. The liability and related compensation expense of these awards for each period is recognized by dividing the fair value of the total liability by the requisite service period and recording the pro rata share for the period for which service has already been provided. As there are inherent uncertainties related to these factors and the Company's judgment in applying them to the fair value determinations, there is risk that the recorded performance unit compensation may not accurately reflect the amount ultimately earned by the members of management.

The 2013 Performance Unit Awards have a performance period of January 1, 2013 to December 31, 2015 and are expected to be paid in the first quarter of 2016 if the performance criteria are met. The 2012 Performance Unit Awards had a performance period of January 1, 2012 to December 31, 2014 and were paid at $100 per unit in the first quarter of 2015. There were no performance unit awards issued or outstanding during the year ended December 31, 2011.

The following table reflects the outstanding performance unit awards for the periods presented:



(in thousands)	2013 Performance Unit Awards		2012 Performance Unit Awards ⁽²⁾
Outstanding at December 31, 2011	—		—
Granted	—		49
Forfeited	—		(2	)
Outstanding at December 31, 2012	—		47
Granted	58		—
Forfeited	(4	)	(9	)
Vested⁽¹⁾	(10	)	(11	)
Outstanding at December 31, 2013	44		27
Vested	—		(27	)
Outstanding at December 31, 2014	44		—

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(1)	During the year ended December 31, 2013, certain officers' performance unit awards were modified to vest upon the officers' retirement in 2013. The cash payments for these performance unit awards were paid at $100.00 per unit.


(2)	The 2012 Performance Unit Awards' performance period ended December 31, 2014. Their market and service criteria were met and accordingly they were paid at $100.00 per unit in the first quarter of 2015.

The assumptions used to estimate the fair value of the 2013 Performance Unit Awards as of December 31, 2014 are as follows:



Risk-free rate⁽¹⁾	0.25		%
Dividend yield	—		%
Expected volatility⁽²⁾	64.76		%
Laredo closing price as of December 31, 2014	$	10.35

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(1)	The risk-free rate uses the one-year zero-coupon yield derived from the Treasury Constant Maturities yield curve.


(2)	The expected volatility is calculated using daily stock returns based on the one year historical volatility for LPI.

The fair value of the 2013 Performance Unit Awards as of December 31, 2014 was $3.5 million. The liability related to the 2012 Performance Unit Awards as of December 31, 2014 was $2.7 million and represents the cash payment made in the first quarter of 2015. The fair values of the 2013 Performance Unit Awards and 2012 Performance Unit Awards as of December 31, 2013 were $5.7 million and $3.8 million, respectively. The fair value of the 2012 Performance Unit Awards as of December 31, 2012 was $5.4 million.

The following has been recorded to performance unit award compensation expense for the periods presented:



	For the years ended December 31,
(in thousands)	2014		2013		2012
2013 Performance Unit Award compensation expense	$	409	$	2,863	$	—
2012 Performance Unit Award compensation expense	192		1,870		1,797
Total performance unit award compensation expense	$	601	$	4,733	$	1,797

Compensation expense for the 2012 Performance Unit Awards and the 2013 Performance Unit Awards is recognized in "General and administrative" in the Company's consolidated statements of operations, and the corresponding liabilities are included in "Other current liabilities" and "Other noncurrent liabilities" in the consolidated balance sheets. As there are inherent uncertainties related to the factors and the Company's judgment in applying them to the fair value determination of the 2013 Performance Unit Awards, there is risk that the recorded performance unit compensation may not accurately reflect the amount ultimately earned by the members of management.

f. Defined contribution plan

The Company sponsors a 401(k) defined contribution plan for the benefit of substantially all employees at the date of hire. The plan allows eligible employees to make pre-tax and after-tax contributions up to 100% of their annual compensation, not to exceed annual limits established by the federal government. The Company makes matching contributions of up to 6% of an employee's compensation and may make additional discretionary contributions for eligible employees. Employees are 100% vested in the employer contributions upon receipt.

The following table presents the cost recognized for the Company's defined contribution plan for the periods presented:



	For the years ended December 31,
(in thousands)	2014		2013		2012
Contributions	$	2,202	$	1,886	$	1,293