Note 7 – Compensation Plans

Cash Bonus Plan

The Company has a cash bonus plan based on a performance measurement framework whereby selected eligible employee participants may be awarded an annual cash bonus. The plan document provides that no participant may receive an annual bonus under the plan of more than 200 percent of his or her base salary. As the plan is currently administered, any awards under the plan are based on Company and regional performance and are then further refined by individual performance. The Company accrues cash bonus expense based upon the Company’s current year performance. Included in general and administrative expense, lease operating expense, and exploration expense in the accompanying statements of operations are $41.8 million, $16.3 million, and $23.9 million of cash bonus expense related to the specific performance years ended December 31, 2013, 2012, and 2011, respectively.

Equity Plan

There are several components to the Company’s Equity Plan that are described in this section. Various types of equity awards have been granted by the Company in different periods.

As of December 31, 2013, 3.8 million shares of common stock remained available for grant under the Equity Plan. The issuance of a direct share benefit such as a share of common stock, a stock option, a restricted share, a RSU, or a PSU counts as one share against the number of shares available to be granted under the Equity Plan. Each PSU has the potential to count as two shares against the number of shares available to be granted under the Equity Plan based on the final performance multiplier. Stock options were issued out of the St. Mary Land & Exploration Company Stock Option Plan and the St. Mary Land & Exploration Company Incentive Stock Option Plan, both predecessors to the Equity Plan.

Performance Share Units Under the Equity Incentive Compensation Plan

The Company grants PSUs to eligible employees as a part of its equity compensation program. The PSU factor is based on the Company’s performance after completion of a three-year performance period. The performance criteria for the PSUs are based on a combination of the Company’s annualized Total Shareholder Return (“TSR”) for the performance period and the relative performance of the Company’s TSR compared with the annualized TSR of certain peer companies for the performance period. PSUs are recognized as general and administrative and exploration expense over the vesting period of the award.

The fair value of PSUs was measured at the grant date with a stochastic process method using the Geometric Brownian Motion Model (“GBM Model”). A stochastic process is a mathematically defined equation that can create a series of outcomes over time. These outcomes are not deterministic in nature, which means that by iterating the equations multiple times, different results will be obtained for those iterations. In the case of the Company’s PSUs, the Company cannot predict with certainty the path its stock price or the stock prices of its peers will take over the three-year performance period. By using a stochastic simulation, the Company can create multiple prospective stock pathways, statistically analyze these simulations, and ultimately make inferences regarding the most likely path the stock price will take. As such, because future stock prices are stochastic, or probabilistic with some direction in nature, the stochastic method, specifically the GBM Model, is deemed an appropriate method by which to determine the fair value of the PSUs. Significant assumptions used in this simulation include the Company’s expected volatility, dividend yield, and risk-free interest rate based on U.S. Treasury yield curve rates with maturities consistent with a three-year vesting period, as well as the volatilities and dividend yields for each of the Company’s peers.

Total expense recorded for PSUs was $16.8 million, $18.2 million, and $19.7 million for the years ended December 31, 2013, 2012, and 2011, respectively. As of December 31, 2013, there was $18.8 million of total unrecognized expense related to PSUs, which is being amortized through 2016.

A summary of the status and activity of non-vested PSUs is presented in the following table:



	For the Years Ended December 31,
	2013				2012				2011
	PSUs		Weighted-Average Grant-Date Fair Value		PSUs		Weighted-Average Grant-Date Fair Value		PSUs		Weighted-Average Grant-Date Fair Value
Non-vested at beginning of year⁽¹⁾	669,308		$	63.91	885,894		$	57.52	1,110,666		$	39.48
Granted⁽¹⁾	274,831		$	64.13	314,853		$	51.98	266,282		$	91.45
Vested⁽¹⁾	(345,005	)	$	60.06	(493,679	)	$	44.72	(364,172	)	$	35.74
Forfeited⁽¹⁾	(26,665	)	$	69.74	(37,760	)	$	65.35	(126,882	)	$	33.32
Non-vested at end of year⁽¹⁾	572,469		$	66.07	669,308		$	63.91	885,894		$	57.52


(1)	The number of awards assumes a one multiplier. The final number of shares of common stock issued may vary depending on the ending three-year performance multiplier, which ranges from zero to two.

The fair value of the PSUs granted in 2013, 2012, and 2011 was $17.6 million, $16.4 million, and $24.3 million for the 2013, 2012, and 2011 grants, respectively. The PSUs granted in 2013 will remain unvested until the third anniversary date of their issuance, at which time they will fully vest. The PSUs granted in 2012 will vest 1/3 on each of the first three anniversary dates of their issuance. PSUs granted prior to 2012 vest 1/7^th, 2/7^ths, and 4/7^ths, respectively, on the first three anniversary dates of their issuances.

The total fair value of PSUs that vested during the years ended December 31, 2013, 2012, and 2011 was $20.7 million, $22.1 million, and $13.0 million, respectively.

During the year ended December 31, 2013, the Company settled PSUs that were granted in 2010, and which had earned a 1.725-times multiplier, by issuing a net 387,461 shares of the Company’s common stock in accordance with the terms of the PSU awards. The Company and the majority of grant participants mutually agreed to net share settle the awards to cover income and payroll tax withholdings as provided for in the plan document and award agreements. As a result, 200,050 shares were withheld to satisfy income and payroll tax withholding obligations that occurred upon delivery of the shares underlying those PSUs for 2013.

During the year ended December 31, 2012, the Company settled PSUs that were granted in 2009, which earned a 2.0-times multiplier, by issuing a net 812,562 shares of the Company’s common stock in accordance with the terms of the PSU awards. The Company and the majority of grant participants mutually agreed to net share settle the awards to cover income and payroll tax withholdings as provided for in the plan document and award agreements. As a result, 406,866 shares were withheld to satisfy income and payroll tax withholding obligations that occurred upon delivery of the shares underlying those PSUs for 2012.

During the year ended December 31, 2011, the Company settled PSUs that were granted in 2008, and which had earned a 0.8-times multiplier, by issuing a net 206,468 shares of the Company’s common stock in accordance with the terms of the PSU awards. The Company and the majority of grant participants mutually agreed to net share settle the awards to cover income and payroll tax withholdings as provided for in the plan document and award agreements. As a result, 98,955 shares were withheld to satisfy income and payroll tax withholding obligations that occurred upon delivery of the shares underlying those PSUs for 2011.

Restricted Stock Units Under the Equity Incentive Compensation Plan

The Company grants RSUs to eligible employees as a part of its equity incentive compensation program. Restrictions and vesting periods for the awards are determined by the Compensation Committee of the Board of Directors and are set forth in the award agreements. Each RSU represents a right for one share of the Company’s common stock to be delivered upon settlement of the award at the end of a specified period. RSUs are recognized as general and administrative and exploration expense over the vesting period of the award.

The total expense associated with RSUs for the years ended December 31, 2013, 2012, and 2011, was $13.1 million, $9.8 million, and $5.3 million, respectively. As of December 31, 2013, there was $19.3 million of total unrecognized expense related to unvested RSU awards, which is being amortized through 2016. The Company records compensation expense associated with the issuance of RSUs based on the fair value of the awards as of the date of grant. The fair value of an RSU is equal to the closing price of the Company’s common stock on the day of grant.

A summary of the status and activity of non-vested RSUs is presented below:



	For the Years Ended December 31,
	2013				2012				2011
	RSUs		Weighted- Average Grant-Date Fair Value		RSUs		Weighted- Average Grant-Date Fair Value		RSUs		Weighted- Average Grant-Date Fair Value
Non-vested at beginning of year	496,244		$	51.81	308,877		$	44.33	333,359		$	31.16
Granted	329,939		$	60.01	379,332		$	49.47	98,952		$	72.69
Vested	(207,376	)	$	49.73	(166,672	)	$	32.72	(105,820	)	$	30.61
Forfeited	(38,376	)	$	54.37	(25,293	)	$	51.06	(17,614	)	$	36.80
Non-vested at end of year	580,431		$	57.05	496,244		$	51.81	308,877		$	44.33

The fair value of RSUs granted in 2013, 2012, and 2011 was $19.8 million, $18.8 million, and $7.2 million, respectively. The RSUs granted in 2013 and 2012 will vest 1/3 on each of the first three anniversary dates of the awards. RSUs granted prior to 2012 vest 1/7^th, 2/7^ths, and 4/7^ths, respectively, on the first three anniversary dates of their issuances.

The total fair value of RSUs that vested during the years ended December 31, 2013, 2012, and 2011, was $10.3 million, $5.4 million, and $3.2 million, respectively.

During the years ended December 31, 2013, 2012, and 2011, the Company settled 207,378, 166,670, and 105,820 RSUs, respectively. The Company and the majority of grant participants mutually agreed to net share settle the awards to cover income and payroll tax withholdings as provided for in the plan document and award agreements. As a result, the Company issued net shares of common stock of 139,391, 116,813, and 72,305 for 2013, 2012, and 2011, respectively. The remaining 67,987, 49,857, and 33,515 shares were withheld to satisfy income and payroll tax withholding obligations that occurred upon the delivery of the shares underlying those RSUs for 2013, 2012, and 2011, respectively.

Stock Option Grants Under the Equity Incentive Compensation Plan

The Company has previously granted stock options under the St. Mary Land & Exploration Company Stock Option Plan and the St. Mary Land & Exploration Company Incentive Stock Option Plan. The last issuance of stock options occurred on December 31, 2004. Stock options to purchase shares of the Company’s common stock had been granted to eligible employees and members of the Board of Directors. All options granted under the option plans were granted at exercise prices equal to the respective closing market price of the Company’s underlying common stock on the grant dates. All stock options granted under the option plans are exercisable for a period of up to ten years from the date of grant. As of December 31, 2013, there was no unrecognized compensation expense related to stock option awards.

A summary of activity associated with the Company’s Stock Option Plans during the last three years is presented in the following table:



			Weighted -
			Average		Aggregate
			Exercise		Intrinsic
	Shares		Price		Value
For the year ended December 31, 2011
Outstanding, start of year	920,765		$	13.11
Exercised	(412,551	)	$	12.19	$	24,359,240
Forfeited	—		$	—
Outstanding, end of year	508,214		$	13.86	$	30,109,110
Vested and exercisable at end of year	508,214		$	13.86	$	30,109,110
For the year ended December 31, 2012
Outstanding, start of year	508,214		$	13.86
Exercised	(240,368	)	$	12.65	$	11,842,575
Forfeited	—		$	—
Outstanding, end of year	267,846		$	14.95	$	9,983,177
Vested and exercisable at end of year	267,846		$	14.95	$	9,983,177
For the year ended December 31, 2013
Outstanding, start of year	267,846		$	14.95
Exercised	(228,758	)	$	13.92	$	12,326,994
Forfeited	—		$	—
Outstanding, end of year	39,088		$	20.87	$	2,432,837
Vested and exercisable at end of year	39,088		$	20.87	$	2,432,837

A summary of additional information related to options outstanding as of December 31, 2013, follows:



		Options Outstanding and Exercisable
		Number	Weighted-
		Of Options	Average
		Outstanding	Remaining
Exercise		and	Contractual
Price⁽¹⁾		Exercisable	Life (in years)
$	20.87	39,088	1
Total		39,088

(1) Exercise price is equal to the weighted average exercise price.

The fair value of options was measured at the date of grant using the Black-Scholes-Merton option-pricing model.

Cash flows resulting from excess tax benefits are classified as part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions for vested RSUs, settled PSUs, and exercised options in excess of the deferred tax asset attributable to stock compensation costs for such equity awards. The Company recorded no excess tax benefits for the years ended December 31, 2013, 2012, and 2011. Cash received from exercises under all share-based payment arrangements for the years ended December 31, 2013, 2012, and 2011, was $3.2 million, $3.0 million, and $5.0 million, respectively.

Director Shares

In 2013, 2012, and 2011, the Company issued 28,169, 30,486, and 21,568 shares, respectively, of the Company’s common stock held as treasury shares to its non-employee directors pursuant to the Company’s Equity Plan. The Company recorded compensation expense related to these issuances of $1.4 million, $1.3 million, and $1.2 million for the years ended December 31, 2013, 2012, and 2011, respectively.

Employee Stock Purchase Plan

Under the Company’s Employee Stock Purchase Plan (“ESPP”), eligible employees may purchase shares of the Company’s common stock through payroll deductions of up to 15 percent of eligible compensation, without accruing in excess of $25,000 in fair market value from purchases for each calendar year. The purchase price of the stock is 85 percent of the lower of the fair market value of the stock on the first or last day of the purchase period. All shares issued under the ESPP on or after December 31, 2011, have no minimum restriction period. The ESPP is intended to qualify under Section 423 of the IRC. The Company has 1.2 million shares available under the ESPP for issuance as of December 31, 2013. Shares issued under the ESPP totaled 77,427 in 2013, 66,485 in 2012, and 41,358 in 2011. Total proceeds to the Company for the issuance of these shares were $3.7 million in 2013, $2.8 million in 2012, and $2.3 million in 2011.

The fair value of ESPP shares was measured at the date of grant using the Black-Scholes-Merton option-pricing model. Expected volatility was calculated based on the Company’s historical daily common stock price, and the risk-free interest rate is based on U.S. Treasury yield curve rates with maturities consistent with a six month vesting period.

The fair value of ESPP shares issued during the periods reported were estimated using the following weighted-average assumptions:



	For the Years Ended December 31,
	2013		2012		2011
Risk free interest rate	0.1	%	0.1	%	0.2	%
Dividend yield	0.2	%	0.2	%	0.2	%
Volatility factor of the expected market
price of the Company’s common stock	41.1	%	47.8	%	36.3	%
Expected life (in years)	0.5		0.5		0.5

The Company expensed $1.1 million, $948,000, and $682,000 for the years ended December 31, 2013, 2012, and 2011, respectively, based on the estimated fair value of grants.

401(k) Plan

The Company has a defined contribution pension plan (the “401(k) Plan”) that is subject to the Employee Retirement Income Security Act of 1974. The 401(k) Plan allows eligible employees to contribute a maximum of 60 percent of their base salaries up to the contribution limits established under the IRC. The Company matches each employee’s contribution up to six percent of the employee’s base salary and may make additional contributions at its discretion. Beginning in 2014, the Company will also match employee contributions up to six percent of the employee's bonus paid pursuant to the Company's cash bonus plan. The Company’s matching contributions to the 401(k) Plan were $4.2 million, $3.5 million, and $2.9 million for the years ended December 31, 2013, 2012, and 2011, respectively. No discretionary contributions were made by the Company to the 401(k) Plan for any of these years.

Net Profits Plan

Under the Company’s Net Profits Plan, all oil and gas wells that were completed or acquired during each year were designated within a specific pool. Key employees recommended by senior management and designated as participants by the Compensation Committee of the Company’s Board of Directors and employed by the Company on the last day of that year became entitled to payments under the Net Profits Plan after the Company has received net cash flows returning 100 percent of all costs associated with that pool. Thereafter, 10 percent of future net cash flows generated by the pool are allocated among the participants and distributed at least annually. The portion of net cash flows from the pool to be allocated among the participants increases to 20 percent after the Company has recovered 200 percent of the total costs for the pool, including payments made under the Net Profits Plan at the 10 percent level. In December 2007, the Board of Directors discontinued the creation of new pools under the Net Profits Plan. As a result, the 2007 pool was the last Net Profits Plan pool established by the Company.

Cash payments made or accrued under the Net Profits Plan that have been recorded as either general and administrative expense or exploration expense are detailed in the table below:



	For the Years Ended December 31,
	2013		2012		2011
	(in thousands)
General and administrative expense	$	13,734	$	15,565	$	19,326
Exploration expense	1,310		1,751		2,091
Total	$	15,044	$	17,316	$	21,417

Additionally, the Company made or accrued cash payments under the Net Profits Plan of $10.3 million, $2.3 million, and $6.3 million for the years ended December 31, 2013, 2012, and 2011, respectively, as a result of divestiture proceeds. The cash payments are accounted for as a reduction in the gain (loss) on divestiture activity line item in the accompanying statements of operations.

The Company records changes in the present value of estimated future payments under the Net Profits Plan as a separate line item in the accompanying statements of operations. The change in the estimated liability is recorded as a non-cash expense or benefit in the current period. The amount recorded as an expense or benefit associated with the change in the estimated liability is not allocated to general and administrative expense or exploration expense because it is associated with the future net cash flows from oil and gas properties in the respective pools rather than results being realized through current period production. If the Company allocated the change in liability to these specific functional line items, based on the current allocation of actual distributions made by the Company, such expenses or benefits would predominately be allocated to general and administrative expense. The amount that would be allocated to exploration expense is minimal in comparison. Over time, less of the amount distributed relates to prospective exploration efforts as more of the amount distributed is paid to employees that have terminated employment and do not provide ongoing exploration support to the Company.