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 implemented 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 salaries. The Committee reviews the Company’s programs annually, establishing and implementing desired changes in performance metrics, composition of mortgage REIT industry peer groups used for relative performance metric measurement purposes, and each executive’s targeted award opportunity.

Equity-based awards and other long-term incentive awards that recognize the creation of value for stockholders and promote the Company’s long-term success are made pursuant to the Company’s Amended and Restated 2014 Flexible Incentive Plan, approved by stockholders in May 2014. At September 30, 2015, this plan had 4,397,739 shares of common stock remaining available for future issuances.

Short-term Incentive Compensation Programs

Under the provisions of the Capstead’s annual incentive compensation program, awards are made based on (a) economic return (change in book value per share of common stock plus common stock dividends divided by beginning book value per share) 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 executive’s attainment of stated goals and objectives. These key executives have targeted award opportunities equal to 125% of base salaries. 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 September 30, 2015 are annual incentive compensation accruals for key executives, together with discretionary accruals for remaining employees, totaling $2.4 million. Recognized in Short-term incentive compensation are $1.3 million and $2.4 million related to annual incentive compensation for all employees for the quarter and nine months ended September 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 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 third quarter 2015 DERs distribution amounts totaling $170,000 that were paid in October 2015. Recognized in Short-term incentive compensation are $170,000 and $576,000 related to the DERs program for the quarter and nine months ended September 30, 2015, respectively.

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

Capstead’s performance-based long-term incentive compensation program for key executives provides for the grant of performance-based RSUs that are convertible into shares of common stock 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 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 $280,000 and $751,000 related to the RSUs for the quarter and nine months ended September 30, 2015, respectively (net of a $137,000 second quarter 2015 adjustment related to forfeitures).

Long-term Equity-based Awards – Stock Awards

Under a performance-based stock award program last utilized in 2012, 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 each award’s 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 2015, director stock awards for a total of 35,000 shares granted in July 2014 with a grant date fair value of $13.16 vested and new awards, also for a total of 35,000 shares, with a grant date fair value of $11.41 were granted that will vest on July 15, 2016.

Performance-based and service-based stock award activity for the nine months ended September 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
Grants		35,000			11.41
Forfeitures		(22,499	)		12.00
Vestings		(160,221	)		12.71
Unvested stock awards outstanding at September 30, 2015		288,861			11.98

During the quarter and nine months ended September 30, 2015, the Company recognized in Long-term incentive compensation $256,000 and $620,000, respectively, related to amortization of the grant date fair value of employee performance-based and service-based stock awards (net of a $172,000 second quarter 2015 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 $105,000 and $336,000 related to amortization of the grant date fair value of service-based director stock awards during the quarter and nine months ended September 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

At September 30, 2015 option awards for 40,000 shares of common stock were outstanding with a weighted average strike price of $11.86. These awards are currently exercisable, have no aggregate intrinsic value and have a weighted average remaining contractual term of 2.7 years. All outstanding option awards were granted prior to 2010, have ten-year contractual terms and were issued with strike prices equal to the closing market price of Capstead’s common stock on the dates of grant. The fair value of these awards was estimated at that time 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. The Company also 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 nine months ended September 30, 2015, the Company recognized in Salaries and benefits $123,000 and $285,000 related to contributions to these plans, respectively.