NOTE 8 – SHARE BASED PAYMENTS

We measure the cost of employee service received in exchange for an award of equity instruments based on the grant-date fair value of the award. The compensation cost is amortized on a straight line basis over the period during which an employee is required to provide service in exchange for the award. The compensation cost related to performance awards that are contingent upon market-based criteria being met is recorded at the fair value of the award on the date of the grant and amortized over the performance period. As discussed in Note 1 forfeitures of share-based awards are expensed as they occur.

The Company established and our shareholders approved the Hersha Hospitality Trust 2012 Equity Incentive Plan, as amended, (the “2012 Plan”) for the purpose of attracting and retaining executive officers, employees, trustees and other persons and entities that provide services to the Company.

Executives & Employees

Annual Long Term Equity Incentive Programs

To further align the interests of the Company’s executives with those of shareholders, the Compensation Committee grants annual long term equity incentive awards that are both “performance based” and “time based.”

On March 10, 2017, the Compensation Committee approved the 2017 Annual Long Term Equity Incentive Program (“2017 Annual EIP”) for the executive officers, pursuant to which the executive officers are eligible to earn equity awards in the form of stock awards, LTIP Units, or performance share awards issuable pursuant to the 2012 Plan. These awards are earned under the 2017 Annual EIP based on achieving a threshold, target or maximum level of performance in the performance of RevPAR growth in certain defined areas. In addition, the Compensation Committee provided the option to the executive officers to elect shares in lieu of cash payment under the 2017 annual cash incentive program (“2017 ACIP”). The Company accounts for these grants as performance awards for which the Company assesses the probability of achievement of the performance conditions at the end of each period. As of June 30, 2017, no shares or LTIP Units have been issued in accordance with the 2012 Plan to the executive officers in settlement of 2017 Annual EIP awards.

NOTE 8 – SHARE BASED PAYMENTS (CONTINUED)

The following table is a summary of all unvested LTIP Units issued to executives:


				Units Vested		Unearned Compensation
Issuance Date	LTIP Units Issued	Vesting Period	Vesting Schedule	June 30, 2017	December 31, 2016		June 30, 2017		December 31, 2016
March 28, 2017
(2016 Annual EIP)	122,727	3 years	25%/year (1)	30,680	-	$	852	$	-
March 30, 2016
(2015 Annual EIP)	183,396	3 years	25%/year (1)	91,696	91,696		563		868
March 30, 2015
(2014 Annual EIP)	128,832	3 years	25%/year (1)	96,623	96,623		113		225
December 23, 2014	258,899	5 years	33% Year 3, 4, 5 (2)	258,899	172,599		-		457
	693,854			477,898	360,918	$	1,528	$	1,550

(1)

25% of the issued shares or LTIP Units vested immediately upon issuance. In general, the remaining shares or LTIP Units vest 25% on the first through third anniversaries of the end of the performance period, which is a calendar year-end (subject to continuous employment through the applicable vesting date).

(2)

On April 18, 2012, the Company entered into amended and restated employment agreements with the Company’s executive officers. To induce the executives to agree to the substantial reduction in benefits upon certain terminations following a change of control as described in the agreements, the Company awarded an aggregate of 258,899 restricted common shares to the executives pursuant to the 2012 Plan, which were subsequently forfeited and replaced with LTIP Units on December 23, 2014. One-third of each award of LTIP Units vested or will vest on each of the third, fourth and fifth anniversaries of the original date of issuance. Vesting will accelerate upon a change of control or if the relevant executive’s employment with the Company were to terminate for any reason other than for cause (as defined in the employment agreements).

Stock based compensation expense related to the Annual Long Term Equity Incentive Programs and 2017 ACIP of $1,537 and $952 and, $2,105 and $2,362 was incurred during the three and six months ended June 30, 2017 and 2016, respectively. Unearned compensation related to the Annual Long Term Equity Incentive Programs as of June 30, 2017 and December 31, 2016 was $1,528 and $1,550, respectively.

Unearned compensation related to the grants and amortization of LTIP Units is included in Noncontrolling Interests on the Company’s Consolidated Balance Sheets and Consolidated Statements of Equity.

Multi-Year Long Term Equity Incentive Programs

On March 10, 2017, the Compensation Committee approved the 2017 Multi-Year Long Term Equity Incentive Program (“2017 Multi-Year EIP”). This program has a three-year performance period which commenced on January 1, 2017 and ends December 31, 2019. As of June 30, 2017, no shares or LTIP Units have been issued to the executive officers in settlement of 2017 Multi-Year EIP awards.

NOTE 8 – SHARE BASED PAYMENTS (CONTINUED)

The following table is a summary of the approved Multi-Year Long Term Equity Incentive Programs:


				Units Vested		Unearned Compensation
Compensation Committee Approval Date	LTIP Units Issued	LTIP Issuance Date	Performance Period	June 30, 2017	December 31, 2016		June 30, 2017		December 31, 2016
March 10, 2017
(2017 Multi-Year EIP)	-	N/A	1/1/2017 to 12/31/2019	-	-	$	1,047	$	-
March 17, 2016
(2016 Multi-Year EIP)	-	N/A	1/1/2016 to 12/31/2018	-	-		740	$	888
March 18, 2015
(2015 Multi-Year EIP)	-	N/A	1/1/2015 to 12/31/2017	-	-		298		397
April 11, 2014
(2014 Multi-Year EIP)	61,057	3/28/2017	1/1/2014 to 12/31/2016	30,524	-		221		283
	61,057			30,524	-	$	2,306	$	1,568

The shares or LTIP Units issuable under the Multi-Year Long Term Incentive Programs, including the 2017 Multi-Year EIP, are based on the Company’s achievement of a certain level of (1) absolute total shareholder return (37.50% of the award), (2) relative total shareholder return as compared to the Company’s peer group (37.50% of the award), and (3) relative growth in revenue per available room (RevPar) compared to the Company’s peer group (25% of the award).

The Company accounts for the total shareholder return components of these grants as market based awards where the Company estimates unearned compensation at the grant date fair value which is then amortized into compensation cost over the vesting period of each individual plan. The Company accounts for the RevPAR component of the grants as performance-based awards for which the Company assesses the probable achievement of the performance conditions at the end of the reporting period.

Stock based compensation expense of $309 and $343 and, $980 and $1,184 was recorded for the three and six months ended June 30, 2017 and 2016, respectively, for the Multi-Year Long Term Equity Incentive Programs. Unearned compensation related to the multi-year program as of June 30, 2017 and December 31, 2016, respectively, was 2,306, and $1,568.

Restricted Share Awards

In addition to share based compensation expense related to awards to executives under the Multi-Year and Annual Long Term Equity Incentive Programs, share based compensation expense related to restricted common shares issued to employees of the Company of $154 and $135 and, $286 and $256 was incurred during the three and six months ended June 30, 2017 and 2016, respectively. Unearned compensation related to the restricted share awards as of June 30, 2017 and December 31, 2016 was $416 and $505, respectively. The following table is a summary of all unvested share awards issued to employees under the 2012 Plan and prior equity incentive plans:


						Shares Vested			Unearned Compensation
Original Year of Issuance Date	Shares Issued	Range of Share Price on Date of Grant		Vesting Period	Vesting Schedule	June 30, 2017	December 31, 2016		June 30, 2017		December 31, 2016
2017	10,809	$	18.51-18.53	2 years	50% /year	885	-	$	156	$	-
2016	30,070		18.02-21.11	2 years	50% /year	18,160	497		194		348
2015	23,281		21.76-28.09	2-4 years	25-50% /year	20,815	13,733		66		157
Total	64,160					39,860	14,230	$	416	$	505

NOTE 8 – SHARE BASED PAYMENTS (CONTINUED)

Trustees

Annual Retainer

The Compensation Committee approved a program that allows the Company’s trustees to make a voluntary election to receive any portion of the annual cash retainer in the form of common equity valued at a 25% premium to the cash that would have been received. On December 30, 2016, we issued 4,395 shares which do not fully vest until December 31, 2017. Compensation expense incurred for the three and six months ended June 30, 2017 and 2016 was $23 and $37 and, $47 and $37, respectively. The following table is a summary of all unvested share awards issued to trustees in lieu of an annual cash retainer:



						Unearned Compensation
Original Issuance Date	Shares Issued	Share Price on Date of Grant		Vesting Period	Vesting Schedule		June 30, 2017		December 31, 2016
December 30, 2016	4,395	$	21.50	12 months	100%	$	47	$	94

Multi-Year Long-Term Equity Incentives

Compensation expense for the Multi-Year Long Term Incentive Programs for the Company’s trustees incurred for the three and six months ended June 30, 2017 and 2016 was $20 and $15 and, $39 and $30, respectively. Unearned compensation related to the Multi-Year Long Term Equity Incentive Programs was $128 and $167 as of June 30, 2017 and December 31, 2016, respectively.

The following table is a summary of all unvested share awards issued to trustees under the 2012 Plan and prior equity incentive plans:


				Shares Vested		Unearned Compensation
Original Issuance Date	Shares Issued	Vesting Period	Vesting Schedule	June 30, 2017	December 31, 2016		June 30, 2017		December 31, 2016
December 30, 2016	5,000	3 years	33% /year	-	-	$	90	$	108
March 30, 2016	2,500	3 years	33% /year	835	835		26		35
December 30, 2014	2,500	3 years	33% /year	1,670	1,670		12		24
				2,505	2,505	$	128	$	167

Share Awards

Compensation expense related to share awards issued to the Company’s trustees of $322 and $319 was incurred during the three and six months ended June 30, 2017 and 2016, respectively, and is recorded in general and administrative expense on the statement of operations. Share grants issued to the Company’s trustees are immediately vested. On June 6, 2017, an aggregate of 17,074 shares were issued to the Company’s trustees at a price per share on the date of grant of $18.86.

NOTE 8 – SHARE BASED PAYMENTS (CONTINUED)

Non-employees

The Company issues share based awards as compensation to non-employees for services provided to the Company consisting primarily of restricted common shares. The Company recorded stock based compensation expense of $162 and $72 and, $177 and $91 for the three and six months ended June 30, 2017 and 2016, respectively. Unearned compensation related to the restricted share awards as of June 30, 2017 and December 31, 2016 was $137 and $79, respectively. The following table is a summary of all unvested share awards issued to non-employees under the 2012 Plan:



						Shares Vested			Unearned Compensation
Original Issuance Date	Shares Issued	Share Price on Date of Grant		Vesting Period	Vesting Schedule	June 30, 2017	December 31, 2016		June 30, 2017		December 31, 2016
March 28, 2017	15,000	$	18.53	2 years	50% /year	7,625	-	$	137	$	-
March 30, 2016	7,350	$	21.11	2 years	50% /year	7,350	3,750		-		79
Total	22,350					14,975	3,750	$	137	$	79