NOTE 10 ¾ COMPENSATION PROGRAMS

The compensation committee of Capstead’s board of directors (the “Committee”) is responsible for establishing, implementing, and monitoring the Company’s compensation program and practices. In 2013 the Committee replaced an absolute return-based, discretionary bonus program and an absolute return-based stock award program with largely nondiscretionary and formulaic, target-based annual and long-term incentive compensation programs for key executives with multiple, pre-established performance goals and defined threshold, target and maximum awards as a percentage of base salary.

Equity-based awards as well as other incentive awards that recognize the creation of value for stockholders and promote the Company’s long-term growth and success are made pursuant to the Company’s Amended and Restated 2014 Flexible Incentive Plan, approved by stockholders in May 2014. At June 30, 2015, this plan had 4,432,739 shares of common stock remaining available for future issuances.

Short-term Incentive Compensation Programs

The Committee periodically reviews Capstead’s annual incentive compensation program, establishing and implementing desired changes in performance metrics, composition of the mortgage REIT industry peer group used for measurement purposes and each participating officer’s targeted award opportunity. Under the provisions of the program in effect for 2015 and 2014, awards are made based on (a) economic return (change in book value plus dividends) measured on a relative basis, and, to a lesser extent, on an absolute return basis, (b) relative operating cost efficiency (operating expenses divided by Unsecured borrowings and Stockholders’ equity), and (c) each participating officer’s attainment of stated goals and objectives. Each participating officer has a targeted award opportunity equal to 125% of his base salary. Under the terms of the program, each performance metric is assigned a weighting and the Company’s performance relative to each metric is calculated separately. No awards can be earned for performance below the defined threshold returns and awards are capped for performance above the defined maximum return levels. Included in Accounts payable and accrued expenses at June 30, 2015 are annual incentive compensation accruals for all employees totaling $1.1 million. Recognized in Short-term incentive compensation are $627,000 and $1.1 million related to annual incentive compensation for all employees for the quarter and six months ended June 30, 2015, respectively.

The Committee administers an additional performance-based short-term incentive compensation program for key executives that provides for quarterly cash payments equal to per share dividends declared on Capstead’s common stock multiplied by a notional amount of non-vesting shares of common stock (“Dividend Equivalent Rights” or “DERs”). DERs only represent the right to receive the same cash distributions that the Company’s common stockholders are entitled to receive during the term of the grants, subject to certain conditions, including continuous service. In December 2014 the Committee extended the term of the 654,000 outstanding DERs to December 31, 2015. In April 2015 the Compensation Committee issued 90,000 DERs to a new executive and 90,000 DERs were forfeited by a departing executive.. Included in Accounts payable and accrued expenses are second quarter 2015 DERs distribution amounts totaling $203,000 that were paid in July 2015. Recognized in Short-term incentive compensation are $203,000 and $405,000 related to the DERs program for the quarter and six months ended June 30, 2015, respectively.

Long-term Equity-based Awards – Performance-based RSUs

The Committee adopted a new performance-based long-term incentive compensation program for key executives in December 2013. The program provides for the grant of performance-based RSUs that are convertible into common shares following three-year performance periods, contingent upon whether, and to what extent, defined performance levels established for certain relative and absolute return performance metrics are met or exceeded. The relative return metrics measure the Company’s performance against its peers in the mortgage REIT industry on the basis of relative economic return and relative total stockholder return (change in stock price plus reinvested dividends). The absolute economic return metric measures performance against defined return levels. For conversion purposes, each performance metric is assigned a weighting and the Company’s performance relative to each metric is calculated separately. The actual number of shares of common stock the units can convert into for each of the metrics, if any, can range from one-half of a share per unit if that metric’s minimum threshold of performance is met, to two shares per unit if the related maximum performance threshold is met or exceeded, adjusted for the weighting assigned to the metric. If a metric’s minimum performance threshold is not met, no shares are issuable under that metric. Dividends accrue from the date of grant and will be paid in cash when the units convert into shares of common stock based on the number of shares ultimately issued, if any.

Pursuant to this program, in January 2015 and December 2013 the Committee granted 247,512 and 242,505 RSUs with three-year performance periods ending December 31, 2017 and 2016, respectively. With the April 2015 departure of a participating executive, 37,199 and 36,467 RSUs issued in 2015 and 2013, respectively, were forfeited. Initial grant date fair values of $8.83 and $12.45 were assigned to each unit of the January 2015 and December 2013 grants, respectively. In the fourth quarter of 2014 the three-year compensation cost estimate for the December 2013 grant was reduced to $7.21 per unit. Recognized in Long-term incentive compensation are $143,000 and $471,000 related to the RSUs for the quarter and six months ended June 30, 2015, respectively (net of a $137,000 adjustment related to forfeitures).

Long-term Equity-based Awards – Stock Awards

Under an absolute return performance-based stock award program terminated in 2013, the Committee granted common stock awards to all employees with staggered three-year vesting periods. These awards vest if annualized returns in excess of established return levels are generated during three-year measurement periods. Vesting can be deferred and a new three-year measurement period established to include the subsequent year, up to and including the seventh calendar year after the year of grant. Any remaining unvested awards issued under this program will expire if the required returns are not generated for the final three-year measurement period. Grants made under this program totaling 125,221 shares with an average grant date fair value of $12.58 vested in February 2015 pertaining to initial measurement periods ending December 31, 2014. Remaining grants under this program totaling 118,784 and 62,137 shares with average grant date fair values of $12.17 and $11.67 are scheduled to vest in February 2016 and 2017, respectively, assuming performance criteria and service conditions are met.

In December 2014 and 2013 respectively, the Committee granted service-based stock awards for 37,237 and 35,703 shares of common stock with grant date fair values of $12.47 and $12.34 to employees not awarded RSUs. These awards vest January 2, 2018 and January 2, 2017, respectively, assuming service conditions are met. As a component of the Company’s director compensation program, directors are granted stock awards annually upon election or re-election to the board of directors that vest approximately one year from issuance. In July 2014, director stock awards for 35,000 shares with a grant date fair value of $13.16 were granted that vested on July 15, 2015.

Performance-based and service-based stock award activity for the six months ended June 30, 2015 is summarized below:

	Number of Shares			Weighted Average Grant Date Fair Value
Unvested stock awards outstanding at December 31, 2014		436,581			12.29
Forfeitures		(22,499	)		12.00
Vestings		(125,221	)		12.58
Unvested stock awards outstanding at June 30, 2015		288,861			12.19

During the quarter and six months ended June 30, 2015, the Company recognized in Long-term incentive compensation $84,000 and $364,000, respectively, related to amortization of the grant date fair value of employee performance-based and service-based stock awards (net of a $172,000 adjustment related to forfeitures). The amounts amortized for these periods assumed that performance metrics, if applicable, would continue to be met for related initial measurement periods. In addition, the Company recognized in Other general and administrative expense $116,000 and $231,000 related to amortization of the grant date fair value of service-based director stock awards during the quarter and six months ended June 30, 2015, respectively.

All service-based stock awards receive dividends on a current basis without risk of forfeiture if the related awards do not vest. Outstanding performance-based stock awards defer the payment of dividends accruing between the grant dates and the end of related performance periods. If these awards do not vest, the related accrued dividends will be forfeited.

Long-term Equity-based Awards – Option Awards

Option awards currently outstanding have ten-year contractual terms from the grant date and were issued with strike prices equal to the quoted market prices of Capstead’s common shares on the dates of grant, all of which were prior to 2010. No option award activity occurred during 2015. All outstanding option awards are exercisable at June 30, 2015. These awards totaled 40,000 shares with a weighted average remaining contractual term of 3.0 years and an aggregate intrinsic value of $5,000. The fair value of these awards was estimated on the dates of grant using a Black-Scholes option pricing model and was expensed over the related vesting periods.

Other Benefit Programs

Capstead sponsors a qualified defined contribution retirement plan for all employees and a nonqualified deferred compensation plan for certain of its executives. In general the Company matches up to 50% of a participant’s voluntary contribution up to a maximum of 6% of a participant’s base salary and annual incentive compensation payments and makes discretionary contributions of up to another 3% of such compensation regardless of participation in the plans. Company contributions are subject to certain vesting requirements that have been met by nearly all of Capstead’s current employees. During the quarter and six months ended June 30, 2015, the Company recognized in Salaries and benefits $87,000 and $162,000 related to contributions to these plans, respectively.