Note 9 Share-Based Compensation

Total share-based compensation expense, which includes both stock options and restricted stock, totaled $53.3 million, $18.3 million and $21.2 million for 2013, 2012 and 2011, respectively. Compensation expense related to awards of restricted stock totaled $51.1 million, $14.1 million and $13.4 million for 2013, 2012 and 2011, respectively, and is included in direct costs and general and administrative expenses in our consolidated statements of income (loss). Share-based compensation expense has been allocated to our various operating segments. See Note 23—Segment Information.

Our restricted stock share-based awards also includes two types of performance share awards: the first, based on our performance measured against pre-determined performance metrics and the second based on market conditions measured against a predetermined peer group. The performance period for the awards granted in 2013 commenced on January 1, 2013 and ended December 31, 2013.

Stock Option Plans

As of December 31, 2013, we had several stock plans under which options to purchase our common shares could be granted to key officers, directors and managerial employees of Nabors and its subsidiaries. Options granted under the plans generally are at prices equal to the fair market value of the shares on the date of the grant. Options granted under the plans generally are exercisable in varying cumulative periodic installments after one year. In the case of certain key executives, options granted may vest immediately on the grant date. Options granted under the plans cannot be exercised more than ten years from the date of grant. Options to purchase 7.8 million and 14.3 million Nabors common shares remained available for grant as of December 31, 2013 and 2012, respectively. Of the common shares available for grant as of December 31, 2013, approximately 6.8 million of these shares are also available for issuance in the form of restricted shares.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model which uses assumptions for the risk-free interest rate, volatility, dividend yield and the expected term of the options. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equal to the expected term of the option. Expected volatilities are based on implied volatilities from traded options on Nabors' common shares, historical volatility of Nabors' common shares, and other factors. We use historical data to estimate the expected term of the options and employee terminations within the option-pricing model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of the options represents the period of time that the options granted are expected to be outstanding.

We also consider an estimated forfeiture rate for these option awards, and we recognize compensation cost only for those shares that are expected to vest, on a straight-line basis over the requisite service period of the award, which is generally the vesting term of three to five years. The forfeiture rate is based on historical experience. Estimated forfeitures have been adjusted to reflect actual forfeitures during 2013.

Stock option transactions under our various stock-based employee compensation plans are presented below:

Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value

	(In thousands, except exercise price)
Options outstanding as of December 31, 2012		22,464		$	20.53
Granted		63			16.06
Exercised		(577	)		9.34
Surrendered(1)		—			9.18
Forfeited		(3,564	)		19.36


Options outstanding as of December 31, 2013		18,386		$	21.10	3.22 years	$	51,136


Options exercisable as of December 31, 2013		17,837		$	21.10	3.06 years	$	50,818

(1): Represents unexercised vested stock options that were surrendered by employees, to satisfy the option exercise price and related income taxes. See related discussion at Note 15—Common Shares.

Of the options outstanding, 17.8 million, 20.8 million and 24.9 million were exercisable at weighted-average exercise prices of $21.10, $20.99 and $19.83, as of December 31, 2013, 2012 and 2011, respectively.

During 2013, 2012 and 2011, respectively, we awarded options vesting over periods up to four years to purchase 63,368, 658,061 and 930,753 of our common shares to our employees, executive officers and directors.

The fair value of stock options granted during 2013, 2012 and 2011 was calculated using the Black-Scholes option pricing model and the following weighted-average assumptions:

	Year Ended December 31,

	2013	2012	2011
Weighted average fair value of options granted	$6.05	$9.40	$6.24
Weighted average risk free interest rate	0.79%	0.63%	0.65%
Dividend yield	0.84%	0%	0%
Volatility(1)	51.01%	55.74%	51.09%
Expected life	4.0 years	4.0 years	4.0 years

(1): Expected volatilities are based on implied volatilities from publicly traded options to purchase Nabors' common shares, historical volatility of Nabors' common shares and other factors.

A summary of our unvested stock options as of December 31, 2013, and the changes during the year then ended is presented below:

Unvested Stock Options	Outstanding			Weighted-Average Grant-Date Fair Value

	(In thousands, except fair value)
Unvested as of December 31, 2012		1,626		$	5.62
Granted		63			6.05
Vested		(1,075	)		3.97
Forfeited		(65	)		5.47


Unvested as of December 31, 2013		549		$	8.88

The total intrinsic value of options exercised during 2013, 2012 and 2011 was $4.1 million, $23.7 million and $18.3 million, respectively. The total fair value of options that vested during the years ended December 31, 2013, 2012 and 2011 was $4.3 million, $7.9 million and $5.2 million, respectively.

As of December 31, 2013, there was $3.8 million of total future compensation cost related to unvested options that are expected to vest. That cost is expected to be recognized over a weighted-average period of approximately one year.

Restricted Stock

Our stock plans allow grants of restricted stock. Restricted stock is issued on the grant date, but cannot be sold or transferred. Restricted stock vests in varying periodic installments ranging up to five years.

A summary of our restricted stock as of December 31, 2013, and the changes during the year then ended, is presented below:

Restricted stock	Outstanding			Weighted-Average Grant-Date Fair Value

	(In thousands, except fair value)
Unvested as of December 31, 2012		1,781		$	23.42
Granted		4,493			16.43
Vested		(2,262	)		18.48
Forfeited		(248	)		20.07


Unvested as of December 31, 2013		3,764		$	18.26

During 2013 and 2012, we awarded 4,493,443 and 944,015 shares of restricted stock, respectively, to our employees and directors. These awards had an aggregate value at their date of grant of $73.8 million and $19.5 million, respectively, and were scheduled to vest over a period of up to four years. The fair value of restricted stock that vested during 2013, 2012 and 2011 was $37.5 million, $9.7 million and $21.4 million, respectively.

As of December 31, 2013, there was $48.8 million of total future compensation cost related to unvested restricted stock awards that are expected to vest. That cost is expected to be recognized over a weighted-average period of approximately one year.

Restricted Stock Based on Performance Conditions

During the first quarter of 2014, we granted 362,311 restricted stock performance-based awards for fiscal year 2013 to some of our executives. These awards vest over a period up to three years. The performance awards granted are based upon achievement of specific financial or operational objectives. The number of shares granted was determined by the number of performance goals achieved. Our performance shares based on performance conditions are liability-classified awards, of which our accrued liabilities included $1.8 million at December 31, 2013. The fair value of these awards was estimated at each reporting period during 2013, based on internal metrics and marked to market at December 31, 2013.

Restricted Stock Based on Market Conditions

During 2013, we began granting restricted stock awards based on market conditions to some of our executives. We granted 353,933 such awards with an aggregate fair value of $3.7 million. These shares were granted based on the comparative performance of our Total Shareholder Return ("TSR") relative to a peer group over a three-year period.

The grant date fair value of these awards was based on a Monte Carlo model, using the following assumptions during 2013:


Risk free interest rate		0.41	%
Expected volatility		46.00	%
Closing stock price	$	16.53
Expected term (in years)		2.82

The following table sets forth information regarding outstanding restricted stock based on market conditions as of December 31, 2013:

Market based restricted stock	Outstanding		Weighted-Average Grant-Date Fair Value

	(In thousands, except fair value)
Outstanding as of December 31, 2012		—	$	—
Granted		354		10.42
Vested		—		—
Forfeited		—		—


Outstanding as of December 31, 2013		354	$	10.42