11. Equity‑based Compensation

Restricted Stock Awards and Restricted Stock Units

Prior to our corporate reorganization, Kosmos Energy Holdings issued common units designated as profit units with a threshold value ranging from $0.85 to $90 to employees, management and directors. Profit units were equity awards that were measured on the grant date and expensed over a vesting period of four years. Founding management and directors vested 20% as of the date of issuance and an additional 20% on the anniversary date for each of the next four years. Profit units issued to employees vested 50% on the second and fourth anniversaries of the issuance date.

As part of the corporate reorganization in May 2011, vested profit units were exchanged for 31.7 million common shares of Kosmos Energy Ltd., unvested profit units were exchanged for 10.0 million restricted stock awards and the $90 profit units were cancelled. These restricted stock awards ultimately vested during 2015. Based on the terms and conditions of the corporate reorganization, the exchange of profit units for common shares of Kosmos Energy Ltd. resulted in no incremental compensation costs.

In April 2011, the Board of Directors approved the LTIP, which provides for the granting of incentive awards in the form of stock options, stock appreciation rights, restricted stock awards, restricted stock units, among other award types. In January 2015, the board of directors approved an amendment to the plan to add 15.0 million shares to the plan which was approved at the Annual General Meeting in June 2015. The LTIP provides for the issuance of 39.5 million shares pursuant to awards under the plan, in addition to the 10.0 million restricted stock awards exchanged for unvested profit units. As of December 31, 2016, the Company had approximately 8.3 million shares that remain available for issuance under the LTIP.

The Company adopted ASU 2016-09, “Improvements to Employee Share-based Payment Accounting” during the second quarter of 2016 using an effective date of January 1, 2016. Prior period compensation expense disclosed below includes estimated forfeitures and has not been adjusted.

We record equity-based compensation expense equal to the fair value of share‑based payments over the vesting periods of the LTIP awards. We recorded compensation expense from awards granted under our LTIP of $40.1 million, $75.1 million and $74.5 million during the years ended December 31, 2016, 2015 and 2014, respectively. During the year ended December 31, 2014, an additional $5.0 million of equity-based compensation was recorded as restructuring charges. The total tax benefit for the years ended December 31, 2016, 2015 and 2014 was $13.0 million, $25.7 million and $25.7 million, respectively. Additionally, we expensed a tax shortfall related to equity‑based compensation of $5.5 million, $18.6 million and $6.5 million for the years ended December 31, 2016, 2015 and 2014, respectively. The fair value of awards vested during 2016, 2015 and 2014 was approximately $14.4 million, $52.2 million, and $37.0 million, respectively. The Company granted both restricted stock awards and restricted stock units with service vesting criteria and granted both restricted stock awards and restricted stock units with a combination of market and service vesting criteria under the LTIP. Substantially, all of these awards vest over three or four year periods. Restricted stock awards are issued and included in the number of outstanding shares upon the date of grant and, if such awards are forfeited, they become treasury stock. Upon vesting, restricted stock units become issued and outstanding stock.

The following table reflects the outstanding restricted stock awards as of December 31, 2016:


		Weighted-		Market / Service	Weighted-
	Service Vesting	Average		Vesting	Average
	Restricted Stock	Grant-Date		Restricted Stock	Grant-Date
	Awards	Fair Value		Awards	Fair Value
	(In thousands)			(In thousands)
Outstanding at December 31, 2013	6,384	$	16.48	3,438	$	12.95
Granted	—		—	—		—
Forfeited	(122)		15.20	(77)		10.74
Vested	(3,022)		16.02	—		—
Outstanding at December 31, 2014	3,240		16.95	3,361		13.00
Granted	660		8.64	—		—
Forfeited	(2)		12.84	(1,554)		13.29
Vested	(3,088)		17.21	(1,546)		13.30
Outstanding at December 31, 2015	810		9.20	261		9.44
Granted	—		—	—		—
Forfeited	—		—	(162)		9.44
Vested	(322)		9.77	(99)		9.44
Outstanding at December 31, 2016	488		8.83	—		—

The following table reflects the outstanding restricted stock units as of December 31, 2016:


		Weighted-		Market / Service	Weighted-
	Service Vesting	Average		Vesting	Average
	Restricted Stock	Grant-Date		Restricted Stock	Grant-Date
	Units	Fair Value		Units	Fair Value
	(In thousands)			(In thousands)
Outstanding at December 31, 2013	2,238	$	10.74	1,858	$	15.59
Granted	2,113		10.80	1,572		15.71
Forfeited	(412)		10.90	(184)		15.48
Vested	(572)		10.74	—		—
Outstanding at December 31, 2014	3,367		10.76	3,246		15.66
Granted	1,539		8.37	3,544		12.96
Forfeited	(254)		10.14	(212)		14.48
Vested	(1,060)		10.71	—		—
Outstanding at December 31, 2015	3,592	$	9.79	6,578	$	14.24
Granted	2,158		4.05	1,379		4.88
Forfeited	(134)		8.87	(70)		14.49
Vested	(1,456)		9.61	(693)		15.81
Outstanding at December 31, 2016	4,160		6.91	7,194		12.29

As of December 31, 2016, total equity‑based compensation to be recognized on unvested restricted stock awards and restricted stock units is $31.6 million over a weighted average period of 1.3 years.

For restricted stock awards and restricted stock units with a combination of market and service vesting criteria, the number of common shares to be issued is determined by comparing the Company’s total shareholder return with the total shareholder return of a predetermined group of peer companies over the performance period and can vest in up to 100% of the awards granted for restricted stock awards and up to 200% of the awards granted for restricted stock units. The grant date fair value of these awards ranged from $6.70 to $13.57 per award for restricted stock awards and $4.83 to $15.81 per award for restricted stock units. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. The expected volatility utilized in the model was estimated using our historical volatility and the historical volatilities of our peer companies and ranged from 41.3% to 56.7% for restricted stock awards and 44.0% to 54.0% for restricted stock units. The risk‑free interest rate was based on the U.S. treasury rate for a term commensurate with the expected life of the grant and ranged from 0.5% to 1.1% for restricted stock awards and 0.5% to 1.2% for restricted stock units.

For profit units that were exchanged for restricted stock awards, the significant assumptions used to calculate the fair values of the profit units granted as calculated using a binomial tree, were as follows: no dividend yield, expected volatility ranging from approximately 25% to 66%; risk‑free interest rate ranging from 1.3% to 5.1%; expected life ranging from 1.2 to 8.1 years; and projected turnover rates ranging from 7.0% to 27.0% for employees and none for management. For profit units granted immediately prior to our initial public offering, we utilized the midpoint of the range of the estimated offering price, or $17.00 per share.

In January 2017, we granted 1.8 million service vesting restricted stock units and 2.1 million market and service vesting restricted stock units to our employees under our long-term incentive plan. We expect to recognize approximately $34.1 million of non-cash compensation expense related to these grants over the next three years.