NOTE 11 — COMPENSATION PROGRAMS

The compensation committee of Capstead's board of directors administers all compensation programs for employees including salaries and related programs, annual incentive compensation and long-term equity-based awards, as well as other benefit programs.

Performance-based Component of Base Salaries

In 2008 the compensation committee began implementing a performance-based cash compensation program designed to introduce a variable component to the base compensation for executive officers that provides for payments equal to the per share dividend declared on the Company's common stock multiplied by a notional amount of non-vesting or "phantom" common shares ("Dividend Equivalent Rights"). Dividend Equivalent Rights are not attached to any stock or option awards and only have 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. On August 10, 2011, the compensation committee granted an additional 72,000 Dividend Equivalent Rights that expire on July 1, 2014. In addition, the committee extended the expiration of previous grants by one year such that all grants expire on July 1, 2014.

Dividend Equivalent Rights issued and outstanding and related compensation costs were as follows at December 31, 2011:


*Month of*	*Total*		*Year Ended December 31,*
*Grant*	*Grant*		*2011*		*2010*		*2009*
July 2008		225,000	$	396,000	$	340,000	$	504,000
July 2009		225,000		396,000		340,000		248,000
July 2010		60,000		105,000		39,000		–
August 2011		72,000		63,000		–		–

			$	960,000	$	719,000	$	752,000

Annual Incentive Compensation

To provide employees with an appropriate performance-based annual incentive compensation opportunity, each year the compensation committee approves an incentive formula designed to create an incentive pool to serve as a guideline for the award of annual incentive compensation that is directly linked with the performance of the Company. The formula adopted accomplishes this by establishing an incentive pool equal to a percentage participation in the Company's earnings in excess of a pre-established performance threshold subject to a maximum amount, or cap, available to be paid in any one year. The committee has complete discretion with respect to the amount to be distributed from the pool, including its allocation between executive officers and other employees and the form of payment (e.g., cash or equity awards). Distributions are typically made subsequent to year-end.

The incentive pool is based on a 10.0% participation in "annual earnings," in excess of a benchmark amount established by multiplying "average long-term investment capital" by the greater of 10.0% for 2011 and 8.0% for 2010 and 2009, or the average 10-year U.S. Treasury rate plus 200 basis points subject to a cap of 50 basis points multiplied by "average long-term investment capital." Annual earnings for formula purposes equates to Net income excluding (i) Incentive compensation, (ii) any gains or losses from asset sales or writedowns, including impairment charges, and (iii) interest on Unsecured borrowings, net of equity in the earnings of related statutory trusts reflected in the balance sheet as Investments in unconsolidated affiliates. Average long-term investment capital for formula purposes equates to average Unsecured borrowings, net of related investments in statutory trusts, and average Stockholders' equity, excluding (i) Accumulated other comprehensive income, (ii) incentive compensation accruals, (iii) certain gains or losses from asset sales or writedowns, including impairment charges, and (iv) interest accruals on Unsecured borrowings.

During 2011, 2010 and 2009, the Company recognized Incentive compensation expense totaling $5.7 million, $5.1 million and $4.8 million, respectively, the accruals for which are included in Accounts payable and accrued expenses. The committee exercised its discretion regarding the form of payment of 2011 and 2010 incentive compensation awarded to certain executive officers determining it was appropriate to pay one-half of the amounts awarded in fully vested stock awards, which totaled 189,283 and 164,829 shares (before the surrender of shares for the payment of applicable taxes) valued at $12.60 and $12.71 per share when issued in early January 2012 and 2011, respectively.

Long-term Equity-based Awards

The Company sponsors equity-based award plans to provide for the issuance of stock awards, option awards and other long-term equity-based awards to directors and employees (collectively, the "Plans"). At December 31, 2011, the Plans had 1,047,951 common shares remaining available for future issuance.

The following table includes service-based stock awards issued to directors and employees with related vesting information (subject to certain restrictions, principally continuous service), at December 31, 2011:


	*Grant Date*		*Total*
*Year of*	*Fair Value*		*Original*		*Shares Scheduled to Vest During:*
*Grant*	*Per Share*		*Grants*		*2012*		*2013*		*2014*
2007	$	12.93		156,000		22,498		22,497		22,497
2008		12.87		6,000		–		–		–
2009		11.39		6,000		–		–		–
2010		11.64		12,000		–		–		–
2011		13.23		24,000		24,000		–		–

In 2008 the Company implemented a performance-based stock award program in lieu of its previous practice of issuing service-based awards to employees. As this program is currently configured, the first 50% of awards granted each year vest provided certain performance criteria pertaining to a three-year measurement period that starts at the beginning of the following calendar year are met. The remaining 50% vests provided performance criteria pertaining to a three-year measurement period beginning one year later are met. If the performance criteria are not met at the end of a three-year measurement period, vesting will be deferred and a new three-year measurement period will be established to include the subsequent year, up to and including the seventh calendar year after the year of grant. Any remaining unvested awards will expire if the performance criteria for the final three-year measurement period are not met. The performance criteria establishes an annualized threshold return on the Company's long-term investment capital, subject to certain adjustments, that must be exceeded for the awards to vest equal to the greater of 8.0% or the average 10-year U.S. Treasury rate plus 200 basis points. The following table includes performance-based stock awards issued to employees with related measurement period information at December 31, 2011:


						*Final*		*Remaining Shares with*
	*Grant Date*		*Total*			*Measurement*		*Initial Measurement Periods*
*Year of*	*Fair Value*		*Original*			*Period Ends*		*Ending December 31*
*Grant*	*Per Share*		*Grants*			*December 31*		*2012*		*2013*		*2014*		*2015*
2008	$	10.18		140,658	*		2015		67,595		–		–		–
2009		14.33		110,917			2016		55,043		55,035		–		–
2010		12.44		128,766			2017		–		64,087		64,077		–
2011		12.72		132,490			2018		–		–		66,247		66,243

*	The performance criteria for the first three-year measurement period ending December 31, 2011 was met resulting in the vesting of the first 50% of this grant.

Total service- and performance-based stock award activity for the year ended December 31, 2011 is summarized below:


	Number of Shares			Weighted Average Grant Date Fair Value
Unvested stock awards outstanding at beginning of year		521,100		$	11.96
Grants		156,490			12.80
Vestings		(77,164	)		10.15
Forfeitures		(3,008	)		12.27

Unvested stock awards outstanding at end of year		597,418			12.41

During 2011, 2010 and 2009, the Company recognized in Salaries and benefits $1.6 million, $1.4 million and $1.0 million, respectively, related to amortization of the grant date fair value of employee stock awards. The amounts amortized for these periods assumed that performance criteria, if applicable, would continue to be met for related initial measurement periods. In addition, the Company recognized in Other general and administrative expense $261,000, $119,000 and $98,000 related to amortization of the grant date fair value of service-based director stock awards in 2011, 2010 and 2009, respectively. All service-based stock awards and performance-based stock awards granted prior to 2010 are entitled to receive dividends on a current basis without risk of forfeiture if the related awards do not vest. The 2010 and 2011 performance-based awards defer the payment of dividends accruing during the vesting period until vesting and if the related awards do not vest these accrued dividends will be forfeited. At December 31, 2011 dividends accrued pertaining to these awards totaled $333,000 and are included in Common stock dividend payable. Unrecognized compensation expense for unvested stock awards totaled $4.8 million as of December 31, 2011, to be expensed over a weighted average period of 1.9 years, assuming related performance criteria are met for the initial measurement periods for performance-based stock awards.

Option awards currently outstanding have contractual terms and vesting requirements at the grant date of ten years and were issued with strike prices equal to the quoted market prices of the Company's common shares on the date of grant. The fair value of each option award was estimated on the date of grant using a Black-Scholes option pricing model. The Company estimated option exercises, expected holding periods and forfeitures based on past experience and expectations for option performance and employee or director attrition. Risk-free rates were based on market rates for the expected life of the options. Expected dividends were based on historical experience and expectations for future performance. Expected volatility factors were based on historical experience. No option awards were granted in 2011 or 2010. In 2009 option awards granted to directors totaled 30,000 common shares with strike prices and grant date fair values of $11.69 and $1.52 per share, respectively. Fair values were determined using average expected terms of four years, and volatility factors, dividend yields and risk-free rates of 51.0%, 14.0% and 1.7%, respectively. Option award activity for the year ended December 31, 2011 is summarized below:


	Number of Shares			Weighted Average Exercise Price
Option awards outstanding at beginning of year		288,125		$	10.48
Exercises		(31,875	)		8.68

Option awards outstanding at end of year		256,250			10.71

Exercisable option awards outstanding as of December 31, 2011 totaled 256,250 common shares with a weighted average remaining contractual term of 5.4 years, an average exercise price of $10.71 and an aggregate intrinsic value of $476,000. The total intrinsic value of option awards exercised was $129,000, $3,000 and $1.4 million in 2011, 2010 and 2009, respectively. During 2011, 2010 and 2009, the Company recognized in Salaries and benefits $3,000, $16,000 and $16,000 related to employee option awards, respectively. In addition, the Company recognized in Other general and administrative expense $15,000 and $44,000 related to director option awards in 2010 and 2009, respectively.

Other Benefit Programs

Capstead sponsors a qualified defined contribution retirement plan for all employees and a nonqualified deferred compensation plan for certain of its officers. In general the Company matches up to 50% of a participant's voluntary contribution up to a maximum of 6% of a participant's compensation and makes discretionary contributions of up to another 3% of compensation regardless of participation in the plans. Company contributions are subject to certain vesting requirements. During 2011, 2010 and 2009, the Company recognized in Salaries and benefits $514,000, $476,000 and $411,000 related to contributions to these plans, respectively.