(9) Stock-Based and Long-Term Compensation

The Company maintains various stock incentive plans that provide long-term incentives to the Company’s key employees, including officers, directors, consultants and advisors (Eligible Participants). Under the incentive plans, the Company may grant incentive stock options, non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights, other stock-based awards or any combination thereof to Eligible Participants. The Compensation Committee of the Company’s Board of Directors establishes the terms and conditions of any awards granted under the plans, provided that the exercise price of any stock options granted may not be less than the fair value of the common stock on the date of the grant.

Stock Options

The Company has granted non-qualified stock options under its stock incentive plans. The stock options generally vest in equal installments over three years and expire in ten years. Non-vested stock options are generally forfeitable upon termination of employment. During 2012, the Company granted 78,043 non-qualified stock options under these same terms and also assumed and converted 2,668,046 non-qualified stock options related to the merger with Complete.

In accordance with authoritative guidance related to stock-based compensation, the Company recognizes compensation expense for stock option grants based on the fair value at the date of grant using the Black-Scholes-Merton option pricing model. The Company uses historical data, among other factors, to estimate the expected price volatility, the expected life of the stock option and the expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected life of the stock option. The following table presents the fair value of stock option grants made during the years ended December 31, 2012, 2011 and 2010, as well as the options assumed and converted in the Complete acquisition, and the related assumptions used to calculate the fair value:



	Years Ended December 31,
	2012	2011	2010
	Actual	Actual	Actual

Weighted average fair value of grants	$ 21.76	$ 13.54	$ 10.56

Black-Scholes-Merton Assumptions:
Risk free interest rate	0.41%	0.85%	2.07%
Expected life (years)	2	5	4
Volatility	55.27%	56.31%	49.28%
Dividend yield	-	-	-

For 2012, the expected life of options assumed and converted in connection with the Complete acquisition was approximately two years, and the expected life of new option grants issued in 2012 was approximately five years, resulting in a weighted average life of approximately two years.

The Company’s compensation expense related to stock options for the years ended December 31, 2012, 2011 and 2010 was approximately $4.8 million, $3.3 million and $15.5 million, respectively, which is reflected in general and administrative expenses in the consolidated statements of income. During 2010, the Company modified 1,418,395 stock options, affecting three employees in connection with the management transition of certain executive officers. These stock options were accelerated to vest by December 31, 2010. The Company incurred incremental compensation cost of approximately $9.8 million during 2010 as a result of this modification.

The following table summarizes stock option activity for the years ended December 31, 2012, 2011 and 2010:



	Number of Options	Weighted Average Option Price	Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)

Outstanding as of December 31, 2009	3,538,545	$ 15.84

Granted	1,549,058	$ 25.04
Exercised	(87,150)	$ 10.62

Outstanding as of December 31, 2010	5,000,453	$ 18.78

Granted	207,183	$ 28.97
Exercised	(876,435)	$ 11.71

Outstanding as of December 31, 2011	4,331,201	$ 20.70

Granted	78,043	$ 28.57
Assumed and converted in connection
with acquisition of Complete Production
Services, Inc.	2,668,046	$ 10.56
Exercised	(1,962,248)	$ 7.53
Forfeited	(191,940)	$ 25.63

Outstanding as of December 31, 2012	4,923,102	$ 20.52	5.3	$ 16,334

Exercisable as of December 31, 2012	4,513,913	$ 19.87	5.1	$ 16,334

Options expected to vest	409,189	$ 27.66	8.4	$ -

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on December 31, 2012 and the stock option price, multiplied by the number of “in-the-money” stock options) that would have been received by the stock option holders if all the options had been exercised on December 31, 2012. The Company expects all of its remaining non-vested options to vest as they are primarily held by its officers and senior managers.

The total intrinsic value of stock options exercised during the year ended December 31, 2012 (the difference between the stock price upon exercise and the stock option price) was approximately $40.4 million. The Company received approximately $14.8 million, $10.3 million and $0.9 million during the years ended December 31, 2012, 2011 and 2010, respectively, from employee stock option exercises. In accordance with authoritative guidance related to stock-based compensation, the Company has reported the tax benefits of approximately $0.6 million, $7.4 million, $0.6 million from the exercise of stock options for the years ended December 31, 2012, 2011 and 2010, respectively, as financing cash flows in the consolidated statement of cash flows.

A summary of information regarding stock options outstanding as of December 31, 2012 is as follows:



	Options Outstanding			Options Exercisable
Range of		Weighted Average	Weighted		Weighted
Exercise		Remaining	Average		Average
Prices	Shares	Contractual Life	Price	Shares	Price

$4.00 - $9.72	108,453	2.7 years	$ 6.56	108,453	$ 6.56
$10.36 - $10.90	988,771	2.8 years	$ 10.61	988,771	$ 10.61
$12.45 - $16.56	379,204	5.6 years	$ 13.53	379,204	$ 13.53
$17.46 - $23.00	1,696,936	5.6 years	$ 20.29	1,624,210	$ 20.22
$24.00 - $30.00	1,283,259	7.1 years	$ 26.25	994,111	$ 25.76
$34.40 - $37.64	458,066	5.7 years	$ 35.38	410,751	$ 35.45
$40.00 - $40.69	8,413	5.2 years	$ 40.69	8,413	$ 40.69

The following table summarizes non-vested stock option activity for the year ended December 31, 2012:



	Number of Options	Weighted Average Grant Date Fair Value

Non-vested as of December 31, 2011	683,456	$ 11.59
Granted	78,043	$ 13.19
Assumed and converted with acquisition
of Complete Production Services, Inc.	177,867	$ 12.41
Vested	(384,180)	$ 11.51
Forfeited	(145,997)	$ 10.77

Non-vested as of December 31, 2012	409,189	$ 12.71

As of December 31, 2012, there was approximately $4.0 million of unrecognized compensation expense related to non-vested stock options outstanding. The Company expects to recognize approximately $2.4 million and $1.6 million of compensation expense during the years 2013 and 2014, respectively, for these outstanding non-vested stock options.

Restricted Stock

During the year ended December 31, 2012, the Company granted 362,904 shares of restricted stock to its employees. Shares of restricted stock generally vest in equal annual installments over three years. On February 7, 2012 the Company also assumed and converted 609,743 shares of restricted stock related to the Complete acquisition. Non-vested shares are generally forfeited upon termination of employment. With the exception of the non-vested shares of restricted stock assumed and converted as a result of the Complete acquisition, holders of shares of restricted stock are entitled to all rights of a stockholder of the Company with respect to the restricted stock, including the right to vote the shares and receive any dividends or other distributions. Compensation expense associated with restricted stock is measured based on the grant date fair value of our common stock outstanding for the years ended December 31, 2012, 2011 and 2010. The Company’s compensation expense related to restricted stock for years ended December 31, 2012, 2011 and 2010 was approximately $17.0 million, $6.0 million and $11.4 million, respectively, which is reflected in general and administrative expenses in the consolidated statements of income. During 2010, the Company modified 282,781 shares of restricted stock affecting three employees in connection with the management transition of certain executive officers. These shares of restricted stock were accelerated to vest by December 31, 2010. The Company incurred incremental compensation cost of approximately $4.3 million during the year as a result of this modification.

A summary of the status of restricted stock for the year ended December 31, 2012 is presented in the table below:



	Number of Shares	Weighted Average Grant Date Fair Value


Non-vested as of December 31, 2011	1,039,717	$ 27.07
Granted	362,904	$ 22.87
Assumed and converted with acquisition
of Complete Production Services, Inc.	609,743	$ 30.90
Vested	(520,575)	$ 25.03
Forfeited	(194,896)	$ 29.98

Non-vested as of December 31, 2012	1,296,893	$ 27.89

As of December 31, 2012, there was approximately $26.1 million of unrecognized compensation expense related to non-vested restricted stock. The Company expects to recognize approximately $14.0 million, $10.2 million, $2.0 million during the years 2013, 2014 and 2015, respectively, for non-vested restricted stock. In accordance with authoritative guidance related to stock-based compensation, the Company has reported tax benefits of approximately $1.0 million from the vesting of restricted stock for the year ended December 31, 2012 as financing cash flows in the consolidated statements of cash flows.

Restricted Stock Units

Each non-employee director is issued annually a number of Restricted Stock Units (RSUs) having an aggregate dollar value determined by the Company’s Board of Directors. The exact number of RSUs granted is determined by dividing the aggregate dollar value determined by the Company’s Board of Directors by the fair market value of the Company’s common stock on the day of the annual stockholders’ meeting. If the director’s election occurs at a time other than at the annual meeting, the director will receive a pro rata number of RSUs based on the number of months between his election date and the anniversary of the last annual stockholder meeting. An RSU represents the right to receive from the Company, within 30 days of the date the director ceases to serve on the Board, one share of the Company’s common stock. As of December 31, 2012, there were 257,215 RSUs outstanding. The Company’s expense related to RSUs for the years ended December 31, 2012, 2011 and 2010 was approximately $2.4 million, $1.2 million and $1.2 million, respectively, which is reflected in general and administrative expenses in the consolidated statements of income.

A summary of the activity of restricted stock units for the year ended December 31, 2012 is presented in the table below:



	Number of Restricted Stock Units	Weighted Average Grant Date Fair Value

Outstanding as of December 31, 2011	170,457	$ 28.64
Granted	86,758	$ 21.48

Outstanding as of December 31, 2012	257,215	$ 26.23

Performance Share Units

The Company has issued performance share units (PSUs) to its employees as part of the Company’s long-term incentive program. There is a three-year performance period associated with each PSU grant. The two performance measures applicable to all participants are the Company’s return on invested capital and total stockholder return relative to those of the Company’s pre-defined “peer group.” If the participant has met specified continued service requirements, the PSUs will settle in cash or a combination of cash and up to 50% of equivalent value in the Company’s common stock, at the discretion of the Compensation Committee. As of December 31, 2012, there were 295,965 PSUs outstanding (94,562, 74,024 and 127,379 related to performance periods ending December 31, 2013, 2014 and 2015, respectively). The Company’s compensation expense related to all outstanding PSUs for the years ended December 31, 2012, 2011 and 2010 was approximately $11.9 million, $3.2 million and $5.2 million, respectively, which is reflected in general and administrative expenses in the consolidated statements of income. The Company has recorded both current and long-term liabilities for this liability-based compensation award. During the year ended December 31, 2012, the Company issued approximately 43,300 shares of its common stock and paid approximately $2.7 million in cash to its employees to settle PSUs for the three year performance period ended December 31, 2011. During the year ended December 31, 2011, the Company issued approximately 67,300 shares of its common stock and paid approximately $2.8 million in cash to its employees to settle PSUs for the three year performance period ended December 31, 2010. During the year ended December 31, 2010, the Company paid approximately $6.4 million in cash to settle PSUs for the performance period ended December 31, 2009.

Employee Stock Purchase Plan

The Company has an employee stock purchase plan under which an aggregate of 1,000,000 shares of common stock were reserved for issuance. Under this stock purchase plan, eligible employees can purchase shares of the Company’s common stock at a discount. The Company received approximately $2.9 million, $2.2 million and $1.9 million related to shares issued under this plan for years ended December 31, 2012, 2011 and 2010, respectively. For the years ended December 31, 2012, 2011 and 2010, the Company recorded compensation expense of approximately $0.5 million, $0.4 million and $0.3 million, respectively, which is reflected in general and administrative expenses in the consolidated statements of income. Additionally, the Company issued approximately 147,000 shares, 75,700 shares and 94,200 shares in the years ended December 31, 2012, 2011 and 2010, respectively, related to this stock purchase plan.

401(k)/Profit Sharing Plan

The Company maintains a defined contribution profit sharing plan for employees who have satisfied minimum service requirements. Employees may contribute up to 75% of their eligible earnings to the plan subject to the contribution limitations imposed by the Internal Revenue Service. In 2012, the Company adopted a “safe harbor” match for its 401(k) plan which includes a nondiscretionary match of 100% of an employee’s contributions to the plan, up to 4% of the employee’s salary. In 2011 and 2010, the Company provided a discretionary match, not to exceed 5% of an employee’s salary. The Company made contributions of approximately $8.4 million, $7.4 million and $3.3 million in the years ended December 31, 2012, 2011 and 2010, respectively.

Non-Qualified Deferred Compensation Plans

The Company has a non-qualified deferred compensation plan which allows certain highly compensated employees to defer up to 75% of their base salary, up to 100% of their bonus, and up to 100% of the cash portion of their PSU compensation to the plan. The Company also has a non-qualified deferred compensation plan for its non-employee directors which allows each director to defer up to 100% of their cash compensation paid by the Company to the plan. Additionally, participating directors may defer up to 100% of the shares of common stock they are entitled to receive in connection with the payout of RSUs. Payments are made to participants based on their annual enrollment elections and plan balances. Participants earn a return on their deferred compensation that is based on hypothetical investments in certain mutual funds. Changes in market value of these hypothetical participant investments are reflected as an adjustment to the deferred compensation liability of the Company with an offset to compensation expense (see note 14). As of December 31, 2012 and 2011, the liability of the Company to the participants was approximately $13.5 million and $13.0 million, respectively, which reflects the accumulated participant deferrals and earnings (losses) as of that date. These amounts are recorded in other long-term liabilities. Additionally as of December 31, 2012 and 2011, the Company had approximately $0.1 million and $2.8 million in accounts payable in anticipation of pending payments. For the years ended December 31, 2012, 2011 and 2010, the Company recorded compensation income (expense) of approximately $1.6 million, $0.1 million and ($1.8) million, respectively, related to the earnings and losses of the deferred compensation plan liability. The Company makes contributions that approximate the participant deferrals into various investments, principally life insurance that is invested in mutual funds similar to the participants’ hypothetical investment elections. Changes in market value of the investments and life insurance are reflected as adjustments to the deferred compensation plan asset with an offset to other income (expense). As of December 31, 2012 and 2011, the deferred compensation plan asset was approximately $11.3 million and $10.6 million, respectively, and is recorded in intangible and other long-term assets, net. For the years ended December 31, 2012, 2011 and 2010, the Company recorded other income (expense) of ($0.7) million, ($0.2) million, $0.8 million, respectively, related to the earnings and losses of the deferred compensation plan assets.

Supplemental Executive Retirement Plan

The Company has a supplemental executive retirement plan (SERP). The SERP provides retirement benefits to the Company’s executive officers and certain other designated key employees. The SERP is an unfunded, non-qualified defined contribution retirement plan, and all contributions under the plan are unfunded credits to a notional account maintained for each participant. Under the SERP, the Company will generally make annual contributions to a retirement account based on age and years of service. During 2012, 2011 and 2010, the participants in the plan received contributions ranging from 5% to 35% of salary and annual cash bonus, which totaled approximately $1.8 million, $1.0 million and $5.5 million, respectively. The Company may also make discretionary contributions to a participant’s account. In 2010, the Company made a discretionary contribution to the account of its former chief operating officer in the amount of $4.7 million as part of its executive management transition. The Company recorded compensation expense of approximately $2.4 million, $1.8 million and $5.6 million in general and administrative expenses for the years ended December 31, 2012, 2011 and 2010, respectively, inclusive of discretionary contributions. During the years ended December 31, 2012 and 2011, the Company paid approximately $6.7 million and $5.5 million, respectively, to select participants of the plan. There were no payments to participants of this plan in 2010.