NOTE S – STOCK BASED COMPENSATION

We grant stock-based compensation in the form of (1) unrestricted stock awards to our outside directors and (2) restricted stock units (“RSUs”) to key executive personnel. These awards are granted under the International Shipholding Corporation 2011 Stock Incentive Plan and are payable in shares of the Company’s common stock, $1.00 par value per share, up to a maximum of 400,000 shares authorized for issuance.

Unrestricted Stock Awards

Under our stock incentive plans, on January 15, 2015 and January 14, 2014, we granted our outside directors an aggregate of 8,100 and 4,470 unrestricted shares of common stock, respectively.

In 2015 and 2014, expense from our unrestricted stock awards was $120,000, which reduced both basic and diluted earnings by $0.02 per share.

Restricted Stock Units

Under our stock incentive plans, we also grant restricted stock units to key executive personnel. Vesting of these awards is based on continued service (“Time-Based RSUs”) or on a combination of continued service and certain performance metrics (“Performance-Based RSUs”). We discuss these two types of restricted stock units in greater detail below.

In 2015 and 2014, expense from our restricted stock units was $0.6 million and $1.4 million, respectively, which reduced both basic and diluted earnings by $0.08 and $0.19 per share, respectively.

Time-Based RSUs

Subject to certain exceptions, our Time-Based RSUs shall vest and pay out in an equal number of shares of common stock one-third per year over a three-year period beginning in May of the year following the year of grant.

We calculate the fair value of the Time-Based RSUs based on the closing market price of our stock as of the grant date multiplied by the number of RSUs issued with no forfeitures assumed. On February 24, 2015 and January 28, 2014, we granted 7,950 Time-Based RSUs. The closing market price of our stock on these dates was $14.26 and $25.95 per share, respectively.

Performance-Based RSUs

Each of our Performance-Based RSUs represents the right to receive a maximum of one-and-a-half shares of common stock, depending upon the Company’s performance as measured against certain performance metrics. We grant two types of Performance-Based RSUs, one of which is measured against an absolute metric (“Absolute Performance-Based RSUs”) and the second is measured against a relative metric (“Relative Performance-Based RSUs”).

Absolute Performance-Based RSUs

Our Absolute Performance-Based RSUs shall vest and pay out in a variable number of shares of common stock based upon the Company’s earnings before interest, taxes, depreciation, and amortization, adjusted to exclude any non-cash earnings or loss, as measured against a specified target during the year of grant, up to a maximum of one-and-a-half shares of common stock.

For our top four executives, such vesting and settlement shall occur in May of the year following the year of grant. For each other award recipient, such vesting and settlement shall occur one-third per year over a three-year period beginning in May of the year following the year of grant. Vesting is contingent upon continued employment for all Absolute Performance-Based RSU recipients.

In order to calculate the fair value of our Absolute Performance-Based RSUs, we multiply the closing market price of our stock as of the grant date by the number of RSUs issued and with no forfeitures assumed. In 2015 and 2014, we granted 17,351 Absolute Performance-Based RSUs at a closing market price on the days of the grants of $14.26 and $25.95 per share, respectively.

In 2015, the Compensation Committee of the Board of Directors resolved that with regard to our 2014 and 2015 grants, we did not meet our targeted threshold performance levels; therefore, all 2014 and 2015 Absolute Performance-Based RSUs were forfeited without any payout to the holders. In accordance with ASC 718, compensation cost should not be recognized for forfeited instruments measured against a performance metric; as such, we reversed the related compensation expense of approximately $0.5 million in 2015.

Relative Performance-Based RSUs

Our Relative Performance-Based RSUs shall vest and pay out in a variable number of shares of common stock based upon the Company’s total stockholder return (“TSR”) over the one-year period from January 1 to December 31 of the year of grant ranked in terms of a percentile in relation to the TSR of the companies in a specified peer group measured over the same period, up to a maximum of one-and-a-half shares of common stock.

In order to calculate the fair value of our Relative Performance-Based RSUs, we utilize the Monte Carlo simulation model, which is a generally accepted statistical technique that simulates a range of possible future stock prices for the Company and each member of our peer group over the performance period. The purpose of this model is to use a probabilistic approach for estimating the fair value that takes into account the following inputs: the stock price at the end of the period, the stock price at the beginning of the period, the corresponding risk-free interest rate, the expected dividend yield, an annualized standard deviation of stock price returns, the length of the period, and a standard normal random variable.

In 2015 and 2014, we granted 17,349 Relative Performance-Based RSUs at a simulated present value payout of $12.27 and $23.03 (one year performance period) and $25.46 (three year performance period) per share, respectively. In the table below, we present a description of the significant assumptions used during the year to estimate the grant date fair value of our Relative Performance-Based RSUs granted in 2015 and 2014 as measured over the stated performance period:



	2015			2014
Performance Period *	1 Year			1 Year			3 Year
Stock Price	$	14.26		$	25.95		$	25.95
Expected Volatilities		40.55	%		44.30	%		40.02	%
Correlation Coefficients		0.259			0.374			0.554
Risk Free Rate		0.18	%		0.10	%		0.72	%
Dividend Yield		1.75	%		3.85	%		3.85	%
Simulated Fair Value	$	12.27		$	23.03		$	25.46
Fair Value as a % of Grant		86.03	%		88.74	%		98.10	%

* In 2015, the Compensation Committee of the Board of Directors modified the performance period for the 2014 grant. The terms presented in the table above are prior to the modification. See the discussion below for the terms subsequent to the modification and the related effect on compensation expense.

In 2015, the Compensation Committee of the Board of Directors modified certain terms related to the Relative Performance-Based RSUs granted in 2013 and 2014. Awards granted on April 23, 2013 and January 28, 2014 with a three-year performance period were modified to a one-year performance period. Because the one-year performance periods have ended, the final payouts for these awards were already known and were 150% for the 2013 grant and 0% for the 2014 grant.

Under ASC 718, this type of change is considered a “modification” and any incremental expense before and after the modification is considered the fair value of the modification and should be included in compensation expense. Because the post-modification payout related to the 2014 awards was 0%, no incremental expense was generated. Using the Monte Carlo simulation model described above, we calculated the incremental expense related to the 2013 awards. As a result, we recorded approximately $37,000 of incremental expense in 2015 related to this modification.

We did not meet our targeted threshold TSR levels in 2015; therefore, all 2015 Relative Performance-Based RSUs were forfeited without any payout to the holders.

A summary of the activity for the restricted stock unit awards during the year ended December 31, 2015 is as follows:



	Number of RSUs		Weighted Average Grant Date Fair Value
Non-vested - December 31, 2014	114,400	$	22.07
Granted	44,413		13.51
Vested	(37,013)		18.41
Forfeited	(76,450)		18.93
Non-vested - December 31, 2015	45,350	$	21.97

During 2015, we had additional forfeitures of 4,350 restricted stock units; accordingly, we reversed expense of approximately $51,000 related to these forfeited units.

During 2015 and 2014, we retired a combined total of 13,363 and 25,639 shares of common stock, respectively, in order to meet the minimum tax liabilities associated with the vesting of equity awards held by our executive officers.

As of December 31, 2015, there was approximately $453,000 of unrecognized compensation expense related to non-vested restricted stock unit awards. The Company expects to recognize approximately $370,000, $70,000, and $13,000 during the years 2016, 2017, and 2018, respectively, related to these awards.

In 2015, the stockholders of the Company approved the International Shipholding Corporation 2015 Stock Incentive Plan. The Compensation Committee of the Board of Directors will generally administer the plan and has the authority to grant awards, including setting the terms of the awards. Incentives may be granted in any one or a combination of the following forms: incentive stock options, non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights, other stock-based awards, and cash-based performance awards. A total of 400,000 shares of common stock are authorized to be issued under this plan. In January of 2016, the Company issued 60,000 shares to independent directors under this plan reducing the availability to 340,000.