NOTE 11 — COMPENSATION PROGRAMS

Capstead’s annual and long-term incentive compensation programs for key executives are largely nondiscretionary, formulaic and target-based, utilizing 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. Metrics used include (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), (c) relative total stockholder return (change in stock price plus reinvested dividends, and (d) attainment of 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. Awards are made pursuant to the Company’s Amended and Restated 2014 Flexible Incentive Plan that was approved by stockholders in May 2014. At December 31, 2017, this plan had 3,684,662 shares of common stock remaining available for future issuances.

Short-Term Incentive Compensation Programs

Under the provisions of Capstead’s annual incentive compensation program, participating executives have overall target award opportunities ranging from 75% to 125% of base salary. Recognized in Compensation-related expense during 2017 and included in Accounts payable and accrued expenses at December 31, 2017 are 2017 annual incentive compensation accruals for participating executives, together with discretionary accruals for all other employees, totaling $894,000. An adjustment to the annual incentive compensation accrual related to finalizing 2016 program results reduced 2017 Compensation-related expense by $938,000. Amounts totaling $3.6 million and $3.4 million were recognized in Compensation-related expense related to annual incentive compensation for all employees during 2016 and 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. Included in Accounts payable and accrued expenses are fourth quarter 2017 DERs distribution amounts totaling $114,000 that were paid in January 2018 and recognized in Compensation-related expense are $434,000, $621,000 and $746,000 related to the DERs program during 2017, 2016 and 2015, respectively.

Long-term Equity-based Awards – Performance-based Restricted Stock Units (“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, performance metrics are met or exceeded. 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. Dividends accrue from the date of grant and will be paid in cash to the extent the units convert into shares of common stock following completion of related performance periods.

Pursuant to this program, in January 2018, January 2017, February 2016 and January 2015 the Committee granted 183,137, 148,894, 269,354 and 247,512 RSUs with three-year performance periods ending December 31, 2020, 2019, 2018, and 2017, respectively. Initial grant date fair values developed for compensation cost purposes of $8.71, $10.52, $8.03 and $8.83 were assigned to the units of each grant, respectively. Amounts actually expensed are largely predicated on estimated performance metric attainment. The January 2015 RSUs did not meet the criteria for conversion into shares of common stock pursuant to the applicable performance criteria and, accordingly, outstanding RSUs awarded under these grants totaling 117,255 were forfeited subsequent to year-end. Recognized in Compensation-related expense are $149,000, $204,000 and $818,000 related to this program during 2017, 2016 and 2015, respectively. Included in Common stock dividends payable at December 31, 2017 and 2016 are estimated dividends payable pertaining to these awards of $193,000 and $235,000, respectively.

RSU activity for the year ended December 31, 2017 is summarized below:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Unvested RSU awards outstanding at December 31, 2016		685,705		$	9.60
Grants		148,894			10.52
Forfeitures		(398,623	)		10.50
Unvested RSU awards outstanding at December 31, 2017		435,976			9.10

Long-term Equity-based Awards – Stock Awards

In January 2018, January 2017 and February 2016, respectively, the Committee granted service-based stock awards for 126,451, 74,446 and 67,337 shares of common stock with grant date fair values of $8.60, $10.41 and $9.32 per share to executives awarded RSUs. Outstanding awards under this program and related deferred dividends are scheduled to vest in January 2021, January 2020 and February 2019, respectively, assuming service conditions are met. In January of 2018, 2017 and 2016 and December of 2014, respectively, the Committee granted service-based stock awards for 57,283, 49,416, 61,272 and 37,237 shares of common stock with grant date fair values of $8.60, $10.41, $7.87 and $12.47 per share to employees not awarded RSUs. These awards vest in January of 2021, 2020, 2019, and 2018 respectively, assuming service conditions are met.

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 with vesting subject to the Company generating returns in excess of established return levels. Grants under this program for 62,137, 118,784, 125,221 and 114,423 shares vested during 2017, 2016, 2015 and 2014, respectively. Average grant date fair values for these grants were $11.67, $12.17, $12.58 and $13.31, respectively.

As a component of the Company’s director compensation program, directors are granted service-based stock awards annually upon election or re-election to the Board of Directors that vest approximately one year from issuance. In July 2017, director stock awards for a total of 41,881 shares of common stock granted in July 2016 with a grant date fair value of $10.03 per share vested. Also in July 2017, new awards for a total of 41,797 shares with a grant date fair value of $10.05 per share were granted that will vest in July 2018.

Stock award activity for the year ended December 31, 2017 is summarized below:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Unvested stock awards outstanding at December 31, 2016		305,567		$	10.29
Grants		165,659			10.32
Forfeitures		(34,565	)		9.48
Vestings		(139,721	)		11.35
Unvested stock awards outstanding at December 31, 2017		296,940			9.90

During 2017, 2016 and 2015, the Company recognized in Compensation-related expense $834,000, $828,000 and $878,000, respectively, related to amortization of the grant date fair value of employee stock awards. Included in Common stock dividend payable at December 31, 2017 and 2016 are estimated dividends payable pertaining to these awards totaling $134,000 and $350,000, respectively. In addition, the Company recognized in Other general and administrative expense $421,000, $409,000 and $436,000 related to amortization of the grant date fair value of director stock awards during 2017, 2016 and 2015, respectively. Unrecognized compensation expense for unvested stock awards for all employees and directors totaled $1.4 million as of December 31, 2017, to be expensed over a weighted average period of 1.4 years (assumes minimal employee and director attrition and any applicable performance metrics would continue to be met for related initial measurement periods).

Service-based stock awards issued to directors and to employees not awarded RSUs receive dividends on a current basis without risk of forfeiture if the related awards do not vest. Stock awards issued to executives awarded RSUs 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.

Long-term Equity-based Awards – Option Awards

At December 31, 2017 option awards for 30,000 shares of common stock were outstanding with a weighted average strike price of $12.28. These awards are currently exercisable, have no aggregate intrinsic value and have a weighted average remaining contractual term of 1.1 years. During 2017, 10,000 options with strike price of $10.58 expired. There was no other option activity in 2017. 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. 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. During 2017, 2016 and 2015, the Company recognized in Compensation-related expense $180,000, $385,000 and $391,000 related to contributions to these plans, respectively. Included in Accounts payable and accrued expenses at December 31, 2017 are $7.4 million in nonqualified deferred compensation plan accruals.