NOTE 12 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 incentive compensation programs for key executives. These programs utilize multiple pre-established performance goals (referred to as “metrics”) and defined threshold, target and maximum award amounts determined by reference to established percentages of base salaries. Prior to granting awards, the Committee reviews the Company’s programs, implementing any desired changes in performance metrics and the composition of mortgage REIT industry peer groups used for relative performance metric measurement purposes, as well as establishing each executive’s targeted award opportunity.

Equity-based awards and other long-term incentive awards are made pursuant to the Company’s Amended and Restated 2014 Flexible Incentive Plan, approved by stockholders in May 2014. At December 31, 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 Capstead’s annual incentive compensation program, each participating executive has an overall target award opportunity equal to 125% of base salary. Awards are earned based on (a) relative and absolute economic return (change in book value per share of common stock plus common stock dividends divided by beginning book value per share), (b) relative operating cost efficiency (operating expenses divided by Unsecured borrowings and Stockholders’ equity), and (c) attainment of stated individual goals and objectives. Each performance metric is assigned a weighting and performance relative to each metric is calculated separately. No awards can be earned for performance below defined threshold return levels and awards are capped for performance above defined maximum return levels. Included in Accounts payable and accrued expenses at December 31, 2015 are annual incentive compensation accruals for participating executives, together with discretionary accruals for all other employees, totaling $3.4 million. Recognized in Short-term incentive compensation are $3.4 million, $1.2 million and $2.8 million related to annual incentive compensation for all employees during 2015, 2014 and 2013, 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 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 fourth quarter 2015 DERs distribution amounts totaling $170,000 that were paid in January 2016. Recognized in Short-term incentive compensation are $746,000, $889,000 and $811,000 related to 654,000 outstanding DERs during 2015, 2014 and 2013, respectively.

In February 2016 the Committee modified the relative weightings of the various metrics in the annual incentive compensation program for 2016 primarily to place more emphasis on absolute economic return at adjusted threshold, target and maximum return levels, while decreasing other relative weightings. Additionally, maximum payout percentages related to achieving or exceeding individual goals and objectives were increased and the term of outstanding DERs was extended to December 31, 2016.

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 threshold level of performance is met, to two shares per unit if the related maximum level of performance is met or exceeded, adjusted for the weighting assigned to the metric. If a metric’s threshold performance level 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 February 2016, January 2015 and December 2013 the Committee granted 269,354, 247,512 and 242,505 RSUs with three-year performance periods ending December 31, 2018, 2017 and 2016, respectively. Related initial grant date fair values of $8.03, $8.83 and $12.45 were assigned to each unit, respectively. Due to lowered expectations for attainment of certain nonmarket-based performance metrics, since issuance the three-year compensation cost estimate associated with the December 2013 grant has been reduced twice, once in 2015 and once in 2014, to $5.66 per unit. With the 2015 departure of a participating executive, 37,199 and 36,467 RSUs issued in 2015 and 2013, respectively, were forfeited. Recognized in Long-term incentive compensation is $818,000 and $582,000 in 2015 and 2014, respectively, related to these awards. Included in Common Stock dividends payable at December 31, 2015 and 2014 are estimated dividends payable pertaining to these awards of $289,000 and $213,000, respectively.

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 under this program for 125,221, 114,423 and 121,026 shares vested during 2015, 2014 and 2013, respectively. Average grant date fair values for these grants were $12.58, $13.31 and $12.01, respectively. Grants for another 118,784 shares with an average grant date fair value of $12.17 vested in January 2016 pertaining to initial measurement periods ending December 31, 2015. Remaining grants for 62,137 shares with average grant date fair values of $11.67 are scheduled to vest in February 2017, assuming performance criteria and service conditions are met.

In February 2016 the Committee granted service-based stock awards for 67,337 shares of common stock with a grant date fair value of $9.32 per share to key executives. These awards vest in February 2019 assuming service conditions are met. In January 2016 and December of 2014 and 2013, respectively, the Committee granted service-based stock awards for 61,272, 37,237 and 35,703 shares of common stock with grant date fair values of $7.87, $12.47 and $12.34 per share to employees not awarded RSUs. These awards vest in January of 2019, 2018 and 2017, respectively, assuming service conditions are met.

As a component of the Company’s director compensation program, directors are granted common stock awards annually upon election or re-election to the board of directors that vest approximately one year from issuance. In July 2015, director common stock awards for a total of 35,000 shares granted in July 2014 with a grant date fair value of $13.16 per share vested and new awards, also for a total of 35,000 shares, with a grant date fair value of $11.41 per share were granted that will vest on July 15, 2016.

Performance-based and service-based stock award activity for the year ended December 31, 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 December 31, 2015		288,861			11.98

During 2015, 2014 and 2013, the Company recognized in Long-term incentive compensation $878,000, $1.5 million and $1.8 million, respectively, related to amortization of the grant date fair value of employee performance-based and service-based stock awards. The amounts amortized for these periods assumed that absolute return 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 $436,000, $315,000 and $387,000 related to amortization of the grant date fair value of service-based director stock awards during 2015, 2014 and 2013, respectively. Unrecognized compensation expense for unvested stock awards totaled $953,000 as of December 31, 2015, to be expensed over a weighted average period of 1.3 years (assumes minimal employee and director attrition and, if applicable, absolute return performance metrics being met for related initial measurement periods).

Service-based stock awards issued to employees not awarded RSUs and to directors receive dividends on a current basis without risk of forfeiture if the related awards do not vest. Outstanding performance-based stock awards and stock awards issued to key executives defer the payment of dividends accruing between the grant dates and the end of related performance or service periods. If these awards do not vest, the related accrued dividends will be forfeited. Included in Common stock dividend payable at December 31, 2015 and 2014 are estimated dividends payable pertaining to these awards totaling $823,000 and $1.4 million, respectively.

Long-term Equity-based Awards – Option Awards

At December 31, 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 2.5 years. No option awards were exercised in 2015. The total intrinsic value of option awards exercised during 2014 and 2013 was $67,000 and $26,000, respectively. 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 2015, 2014 and 2013, the Company recognized in Salaries and benefits $391,000, $258,000 and $320,000 related to contributions to these plans, respectively.