Note 12. Stock Based Compensation

We grant stock-based compensation in the form of (1) unrestricted stock awards to our independent Board of Directors and (2) restricted stock units (“RSUs”) to key executive personnel. These awards are granted under the International Shipholding Corporation 2011 Stock Incentive Plan (the “Plan”), which was approved by our stockholders in 2011.

Unrestricted Stock Awards

On January 15, 2013, we granted our independent directors an aggregate of 6,708 unrestricted shares of common stock from the Plan. On January 14, 2014, we granted our independent directors an aggregate of 4,470 unrestricted shares of common stock from the Plan. For the three months ended March 31, 2014 and 2013, our net income reflected approximately $30,000 of stock-based compensation expense charges related to these issuances, which had no effect on either basic or diluted earnings per share.

A summary of the activity for stock awards during the three months ended March 31, 2014, is as follows:



	2014
	Shares	Weighted Average Fair Value Per Share
Non-vested - December 31, 2013	-	-
Unrestricted Shares Granted	4,470	$ 26.80
Shares Vested	(4,470)	$ 26.80
Non-vested - March 31, 2014	-	-

Restricted Stock Units

General Terms

We grant restricted stock units to key executive personnel under the Plan. Each year, we have granted awards that vest based on continued service (“Time-Based RSUs”) as well as awards that vest based on a combination of performance metrics and continued service (“Performance-Based RSUs”). Our Time-Based RSUs generally vest one-third per year over a three-year period. Each of our Performance-Based RSUs represents the right to receive a maximum of one-and-a-half shares of common stock, depending upon performance. We grant two types of Performance-Based RSUs – one for which vesting is contingent upon an absolute metric, earnings per share (our “Absolute Performance-Based RSUs”) and another for which vesting is contingent upon the Company’s performance as measured against a relative metric, relative total shareholder return (our “Relative Performance-Based RSUs”)

For our top four executives, their Absolute Performance-Based RSUs vest and pay out in the year following the grant. For each other recipient, the Absolute Performance-Based RSUs vest and pay out one-third per year over the three years following grant, based on the achievement of the metric in the first year. With respect to the Relative Performance-Based RSUs, vesting is contingent upon the Company’s total stockholder return for a given period as compared to the companies comprising the Russell 2000 index for the same period. For our top four executives, the performance of their Relative Performance-Based RSUs are measured over a one-year period (the calendar year of the grant), while for each other recipient, the performance of their Relative Performance-Based RSUs are measured over a three-year period (through December 31 of the third year following the grant). For all RSUs, vesting is contingent upon continued employment with the Company except in certain limited circumstances.

For the three months ended March 31, 2014 and 2013, our net income reflected $416,000 and $243,000, respectively, of RSU stock-based compensation expense charges.

2012 Grants

In 2012, we achieved maximum performance on our Absolute Performance-Based RSUs, and 21,564 shares of common stock vested and were paid out in 2013. The remaining 3,000 RSUs will vest and pay out ratably in May 2014 and 2015. With respect to our Absolute Performance-Based RSUs, for our top four executives, whose awards were measured over a one-year performance period, our Company’s relative rank was in the 27th percentile, and therefore those awards paid out at 53% of grant (21,564 shares of common stock) in 2013. Vesting of the remainder of Absolute Performance-Based RSUs granted in 2012 is based on the Company’s relative TSR rank over a three-year measurement period, and therefore those 3,000 RSUs will vest and be paid out in 2015 based on the Company’s relative performance as determined following the end of the performance period (December 31, 2014).

2013 Grants

In 2013, we achieved maximum performance on our Absolute Performance-Based RSUs, and 8,450 shares of common stock will vest and be paid out on May 7, 2014. The remaining 3,525 RSUs will vest and pay out ratably in May 2015 and 2016. With respect to our Absolute Performance-Based RSUs, for our top four executives, whose awards were measured over a one-year performance period, our Company’s relative rank was in the 79th percentile, and therefore those awards will pay out at 150% of grant (20,064 shares of common stock) on May 7, 2014. The remainder of Absolute Performance-Based RSUs granted in 2013 will vest based on the Company’s relative TSR rank over a three-year measurement period, and therefore those 3,525 RSUs will be vest and be paid out in 2016 based on the Company’s relative performance as determined following the end of the performance period (December 31, 2015).

2014 Grants

On January 28, 2014, we granted 7,950 Time-Based RSUs, 17,351 Absolute Performance-Based RSUs, and 17,349 Relative Performance-Based RSUs. The fair value of the service based awards was calculated based on the closing market price of our stock as of the grant date times the number of RSUs issued with no forfeitures assumed. For our 2014, 2013, and 2012 awards, we used the closing market price of our stock on January 28, 2014, April 23, 2013, and May 7, 2012 which was $25.95, $17.66, and $19.35 per share, respectively. The performance based RSUs are subject to vesting upon two different performance metrics: an absolute performance metric based on targeted earnings per share and a relative performance metric based on our total stockholder return over a given period as measured against that of the other companies in the Russell 2000 index. In order to calculate the fair value of our absolute performance RSUs, we multiplied the closing market price of our stock as of the grant date times the number of RSU’s issued with no forfeitures assumed. For our 2014, 2013, and 2012 awards, we used the closing market price of our stock on January 28, 2014, April 23, 2013, and May 7, 2012 which was $25.95, $17.66, and $19.35 per share, respectively. We measured our related performance RSUs based on market conditions and were accounted for and measured differently from an award that has a performance or service feature. The effect of a market condition is reflected in the award’s fair value on the grant date. In order to derive the fair value of these awards, a Monte-Carlo simulation statistical technique was used to simulate our future stock prices and the components of the Russell 2000 Index. The stock prices were based upon the risk-free rate of return, the volatility of each entity, and the correlation of each entity with the Russell 2000 Index. We multiplied our ending simulated stock price by the payout percentage to determine a projected payout at the end of the performance period. The ending payout was then discounted, using the risk-free rate of return, to the grant date to determine the grant date fair value. Since 2014, 2013, and 2012 all provide for one year vesting (top four named executive officers) and three year vesting (all other award recipients), a fair value was calculated separately for the one and three year awards for each year.

The following assumptions were used:



		2014 Awards						2013 Awards						2012 Awards
		1 Year Vest			3 Year Vest			1 Year Vest			3 Year Vest			1 Year Vest			3 Year Vest

Stock Price	$	25.95		$	25.95		$	17.66		$	17.66		$	19.35		$	19.35
Expected Volatilities		44.3	%		40.02	%		33.5	%		37.03	%		44.31	%		40.50	%
Correlation Coefficients		0.3735			0.5541			0.4729			0.6254			0.719			0.6938
Risk Free Rate		0.10	%		0.72	%		0.10	%		0.31	%		0.16	%		0.34	%
Dividend Yield		3.85	%		3.85	%		5.70	%		5.70	%		5.17	%		5.17	%
Simulated Fair Value	$	23.03		$	25.46		$	15.33		$	16.57		$	17.73		$	18.88
Fair Value as a % of Grant		88.74	%		98.10	%		86.81	%		93.83	%		91.63	%		97.57	%

Our operating results, net income (loss) and net income (loss) before taxes for the periods set forth below include (i) the following amounts of compensation expense associated with the stock grants and RSUs and (ii) the related reductions in earnings per share:



	Three Months ended March 31,
		2014		2013
Stock-Based Compensation
Expense:
Stock Grants to Directors & Officers	$	30,000	$	30,000
RSUs Awards to Officers	$	416,000	$	243,000
Related Reduction in
Earnings Per Share 1	$	(0.04)	$	(0.03)

1 Same for basic and diluted earnings per share

In all cases, vesting is contingent upon continued employment with the company. A summary of the activity for the restricted stock awards during the three months ended March 31, 2014 is as follows:



	Number of RSU's	Weighted Average Grant Date Fair Value
Non-vested - December 31, 2013	131,100	$ 18.77
Additional Awards Granted	-	-
Awards Granted	42,650	24.99
Awards Exercised	-	-
Awards Cancelled	-	-
Non-vested - March 31, 2014	173,750	$ 20.72