Share-Based and Long-Term Compensation Plans

The Company grants share-based awards under the Parkway Properties, Inc. and Parkway Properties LP 2013 Omnibus Equity Incentive Plan (the “2013 Equity Plan”). The Company's Board of Directors (the “Board”) adopted the 2013 Equity Plan on December 19, 2012, and the Company's stockholders approved the 2013 Equity Plan on May 16, 2013. The 2013 Equity Plan replaced the Parkway Properties, Inc. 2010 Omnibus Equity Incentive Plan, as amended (the “2010 Equity Plan”), upon stockholder approval of the 2013 Equity Plan, although outstanding awards granted under the 2010 Equity Plan continue to be governed by the 2010 Equity Plan.

Except with respect to awards granted to non-employee directors, the Compensation Committee of the Board (the “Committee”) administers the 2013 Equity Plan. The 2013 Equity Plan authorizes the Committee or the Board, where applicable, to grant stock options (including incentive stock options and nonstatutory stock options), stock appreciation rights, restricted shares, restricted share units (“RSUs”), dividend equivalent rights, profits interest units (“LTIP units”) and other share-based awards. The Company's employees, non-employee directors and consultants or advisors are eligible to receive awards under the 2013 Equity Plan. The aggregate number of shares of the Company's common stock available for awards pursuant to the Plan is 3,250,000, including a maximum of 2,000,000 shares that may be granted pursuant to stock options or stock appreciation rights and a maximum of 1,250,000 shares that may be granted pursuant to other awards.

Through June 30, 2013, the Company has granted stock options, LTIP units and RSUs (including time-vesting RSUs and performance-vesting RSUs) under the 2013 Equity Plan. As of June 30, 2013, the Company has restricted shares and deferred incentive share units outstanding under the 2010 Equity Plan. The Company has also previously awarded long-term equity incentive awards and long-term cash incentives.

Compensation expense, net of estimated forfeitures, for service-based awards is recognized over the expected vesting period. The total compensation expense for the long-term equity incentive awards is based upon the fair value of the shares on the grant date, adjusted for estimated forfeitures. Time-vesting restricted shares, RSUs and deferred incentive share units are valued based on the New York Stock Exchange closing market price of Parkway's common shares (NYSE: PKY) as of the date of grant. The grant date fair value for awards that are subject to performance-based vesting and market conditions, including LTIP units, performance-vesting RSUs, and long-term equity incentive awards, is determined using a simulation pricing model developed to specifically accommodate the unique features of the awards. The total compensation expense for stock options is estimated based on the fair value of the options as of the date of grant using the Black-Scholes-Merton model.

Long-Term Equity Incentives

At June 30, 2013, a total of 1,850,000 shares underlying stock options had been granted to officers of the Company and remain outstanding under the 2013 Equity Plan. The stock options are valued at $7.7 million, which equates to an average price per share of $4.17. At June 30, 2013, a total of 115,350 time-vesting RSUs had been granted to officers of the Company and remain outstanding. The time-vesting RSUs are valued at $2.2 million, which equates to an average price per share of $19.25. Each stock option and time-vesting RSU award will vest in increments of 25% per year on each of the first, second, third and fourth anniversaries of the grant date, subject to the grantee's continued service.

At June 30, 2013, a total of 114,443 LTIP units had been granted to officers of the Company and remain outstanding under the 2013 Equity Plan. The LTIP units are valued at $1.2 million, which equates to an average price per share of $10.60. At June 30, 2013, a total of 58,597 performance-vesting RSUs had been granted to officers of the Company and remain outstanding under the 2013 Equity Plan. The performance-vesting RSUs are valued at $615,000, which equates to an average price per share of $10.50. Each LTIP unit and performance-vesting RSU will vest based on the attainment of total stockholder return targets during the performance period running from March 2, 2013 to March 1, 2016, subject to the grantee's continued service.

The Company began expensing the grants of stock options, LTIP units and time-vesting and performance-vesting RSUs upon stockholder approval of the 2013 Equity Plan on May 16, 2013.

At June 30, 2013, a total of 32,581 restricted shares had been granted to officers of the Company and remain outstanding under the 2010 Equity Plan. The restricted shares vest ratably over four years from the date of grant. The restricted shares are valued at $482,000, which equates to an average price per share of $14.78. At June 30, 2013, a total of 17,235 deferred incentive share units had been granted to officers of the Company and remain outstanding under the 2010 Equity Plan. The deferred incentive share units are valued at $356,000, which equates to an average price per share of $20.66. The deferred incentive share units vest ratably overfour years from the date of grant.

Total compensation expense related to stock options, LTIP units, RSUs, restricted shares and deferred incentive units of $1.3 million and $204,000 was recognized during the six months ended June 30, 2013 and 2012, respectively. Total compensation expense related to non-vested awards not yet recognized was $11.3 million at June 30, 2013. The weighted average period over which this expense is expected to be recognized is approximately two years.

A summary of the Company's stock options, LTIP units, RSUs, restricted shares and deferred incentive share unit activity for the six months ended June 30, 2013 is as follows:



	Restricted Shares				Deferred Incentive Share Units				Stock Options			Restricted Stock Units			LTIP Units
	# of Shares		Weighted Average Grant-Date Fair Value		# of Share Units		Weighted Average Grant-Date Fair Value		# of Options	Weighted Average Grant-Date Fair Value		# of Stock Units	Weighted Average Grant-Date Fair Value		# of LTIP Units	Weighted Average Grant-Date Fair Value
Balance at 12/31/12	281,233		$	8.34	17,760		$	25.61	—	$	—	—	$	—	—	$	—
Granted	—		—		—		—		1,850,000	4.17		173,947	16.30		114,443	10.60
Vested	(11,786	)	15.14		—		—		—	—		—	—		—	—
Forfeited	(236,866	)	7.11		(525	)	N/M*		—	—		—	—		—	—
Balance at 06/30/13	32,581		$	14.78	17,235		$	20.66	1,850,000	$	4.17	173,947	$	16.30	114,443	$	10.60
*N/M-Not meaningful

On July 8, 2013, the Board of Directors approved the grant of 100,000 LTIP units and 100,000 time-vesting RSUs to Mr. Heistand, the Company's President and Chief Executive Officer. Each time-vesting RSU will vest in increments of 33% per year on each of the first, second and third anniversaries of the grant date, subject to the officer's continued service. Each LTIP unit will vest based on the attainment of total stockholder return targets during the performance period running from July 8, 2013 to July 7, 2016, subject to the Mr. Heistand's continued service.

The Committee previously approved long-term equity incentive awards to executive officers of the Company consisting of, in part, performance-based awards subject to both an absolute and relative total return goal. The performance-based awards vested contingent on the Company meeting goals for compounded annual total return to stockholders (“TRTS”) set by the Committee over the three-year performance period beginning July 1, 2010. The performance goals were based upon the Company's (i) absolute compounded annual TRTS and (ii) absolute compounded annual TRTS relative to the compounded annual return of the MSCI US REIT (“RMS”) Index calculated on a gross basis. As of June 30, 2013, which was the end of the performance period, the Company did not achieve the performance goals and the performance-based awards did not vest.

Long-Term Cash Incentive Plan

The Company previously adopted a long-term cash incentive plan that was designed to reward officers of the Company based on significant outperformance over the three-year performance period beginning July 1, 2010. The performance goals were based upon the Company's (i) absolute compounded annual TRTS and (ii) absolute compounded annual TRTS relative to the compounded annual return of the RMS Index calculated on a gross basis. As of June 30, 2013, the Company did not achieve the performance goals of the long-term cash incentive plan and no cash payments were made to officers of the Company under the long-term cash incentive plan.