NOTE 10 — 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 common share plus common stock dividends divided by beginning book value per common 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 September 30, 2018, this plan had 3,312,051 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. Included in Accounts payable and accrued expenses at September 30, 2018 are annual incentive compensation accruals for participating executives, together with discretionary accruals for all other employees, totaling $1.1 million. Recognized in Compensation-related expense are $332,000 and $1.1 million related to annual incentive compensation for all employees for the quarter and nine months ended September 30, 2018, respectively.

The Company 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 third quarter 2018 DERs distribution amounts totaling $66,000 that were paid in October 2018. Recognized in Compensation-related expense are $66,000 and $246,000 related to the DERs program for the quarter and nine months ended September 30, 2018, 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, 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 and 2017, as well as February 2016, respectively, the Company granted 183,137, 148,894 and 269,354 RSUs with three-year performance periods ending December 31, 2020, 2019 and 2018. Initial grant date fair values developed for compensation cost purposes of $8.71, $10.52 and $8.03 were assigned to the units of each grant, respectively. Amounts actually expensed are largely predicated on estimated performance metric attainment. Recognized in Compensation-related expense are $211,000 and $228,000 related to this program during the quarter and nine months ended September 30, 2018, respectively.

RSU activity for the nine months ended September 30, 2018 is summarized below:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Unvested RSU awards outstanding at December 31, 2017		435,976		$	9.10
January 2018 grants		183,137			8.71
Forfeiture of remaining 2015 grants		(117,255	)		8.83
Unvested RSU awards outstanding at September 30, 2018		501,858			9.02

Long-term Equity-based Awards – Stock Awards

In January 2018 and 2017, as well as February 2016, respectively, the Company 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, respectively, the Company granted service-based stock awards for 57,283, 49,416 and 61,272 shares of common stock with grant date fair values of $8.60, $10.41 and $7.87 per share to employees not awarded RSUs. These awards vest in January of 2021, 2020 and 2019, respectively, assuming service conditions are met.

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 common stock awards for a total of 41,797 shares with a grant date fair value of $10.05 per share were granted that vested in July 2018. In July 2018 director common stock awards for a total of 57,113 shares with a grant date fair value of $8.58 per share were granted that will vest in July 2019.

Performance-based and service-based stock award activity for the nine months ended September 30, 2018 is summarized below:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Unvested stock awards outstanding at December 31, 2017		296,940		$	9.90
Grants		240,847			8.60
Vestings		(76,696	)		11.15
Unvested stock awards outstanding at September 30, 2018		461,091			9.01

During the quarter and nine months ended September 30, 2018, the Company recognized in Compensation-related expense $307,000 and $922,000, respectively, related to amortization of the grant date fair value of employee stock awards. In addition, the Company recognized in Other general and administrative expense $117,000 and $327,000 related to amortization of the grant date fair value of director stock awards during the quarter and nine months ended September 30, 2018, respectively. Unrecognized compensation expense for unvested stock awards for employees and directors totaled $2.2 million as of September 30, 2018, to be expensed over a weighted average period of 1.3 years.

Service-based stock awards issued to non-executive employees and to directors receive dividends on a current basis without risk of forfeiture if the related awards do not vest. Stock awards issued to executives defer the payment of dividends accruing between the grant dates and the end of related service periods. If these awards do not vest, the related accrued dividends will be forfeited.