The compensation committee of Capstead's board of directors administers all compensation programs for employees including salaries and related programs, annual incentive compensation and long-term equity-based awards, as well as other benefit programs.

In 2008 the compensation committee began implementing a performance-based cash compensation program designed to introduce a variable component to the base compensation for executive officers that provides for payments equal to the per share dividend declared on the Company's common stock multiplied by a notional amount of non-vesting or "phantom" common shares ("Dividend Equivalent Rights"). Dividend Equivalent Rights are not attached to any stock or option awards and only have the right to receive the same cash distributions that the Company's common stockholders are entitled to receive during the term of the grants, subject to certain conditions, including continuous service. On August 10, 2011, the compensation committee granted an additional 72,000 Dividend Equivalent Rights with a July 1, 2014 expiration. In addition, the committee extended the expiration of previous grants by one year such that at September 30, 2011 all grants expire on July 1, 2014. Dividend Equivalent Rights issued and outstanding and related compensation costs were as follows at September 30, 2011:

To provide employees with an appropriate performance-based annual incentive compensation opportunity, each year the compensation committee approves an incentive formula to create an incentive pool equal to a percentage participation in the Company's earnings in excess of a pre-established performance threshold. This formula is intended to serve as a guideline for the creation of an annual incentive pool. The committee has complete discretion with respect to the amount to be distributed from the pool, including its allocation between executive officers and other employees and the form of payment (e.g., cash or equity awards). Distributions are typically made subsequent to year-end.

The formula approved for 2011 and 2010 includes a minimum performance threshold based on return on average long-term investment capital and a maximum amount, or cap, available to be paid in any one year of 50 basis points multiplied by "average long-term investment capital," as defined below. The incentive pool equals a 10% participation in "annual earnings," as defined below, in excess of a benchmark amount based on "average long-term investment capital," as defined below, multiplied by the greater of 10.00% and 8.00% for 2011 and 2010, respectively, or the average 10-year U.S. Treasury rate plus 200 basis points. Annual earnings for formula purposes equates to Net income excluding (i) Incentive compensation, (ii) any gain or loss from asset sales or writedowns, including impairment charges, and (iii) interest on Unsecured borrowings, net of equity in the earnings of related statutory trusts reflected in the balance sheet as Investments in unconsolidated affiliates. Average long-term investment capital for formula purposes equates to average Unsecured borrowings, net of related investments in statutory trusts, and average Stockholders' equity, excluding (i) Accumulated other comprehensive income, (ii) incentive compensation accruals, (iii) any gain or loss from asset sales or writedowns, including impairment charges, and (iv) interest accruals on Unsecured borrowings.

During the quarter and nine months ended September 30, 2011 the Company recognized Incentive compensation totaling $1.4 million and $4.1 million, respectively, the accruals for which are included in Accounts payable and accrued expenses.

The Company sponsors equity-based award plans to provide for the issuance of stock awards, option awards and other long-term equity-based awards to directors and employees (collectively, the "Plans"). At September 30, 2011, the Plans had 1,180,441 common shares remaining available for future issuance.

The following table includes service-based stock awards issued to directors and employees with related vesting information (subject to certain restrictions, principally continuous service), at September 30, 2011:


	*Grant Date*		*Total*
*Year of*	*Fair Value*		*Original*		*Shares Scheduled to Vest During:*
*Grant*	*Per Share*		*Grants*		2011*		*2012*		*2013*		*2014*
2006	$	8.06		218,957		42,499		—		—		—
2007		12.93		156,000		22,665		22,498		22,497		22,497
2008		12.87		6,000		—		—		—		—
2009		11.39		6,000		—		—		—		—
2010		11.64		12,000		12,000		—		—		—
2011		13.23		24,000		—		24,000		—		—

*	All service-based stock awards scheduled to vest during 2011 were vested as of September 30, 2011.

In 2008 the Company implemented a performance-based stock award program in lieu of its previous practice of issuing service-based awards to employees. As this program is currently configured, the first 50% of awards granted each year vest provided certain performance criteria pertaining to a three-year measurement period that starts at the beginning of the following calendar year are met. The remaining 50% vests provided performance criteria pertaining to a three-year measurement period beginning one year later are met. If the performance criteria are not met at the end of a three-year measurement period, vesting will be deferred and a new three-year measurement period will be established to include the subsequent year, up to and including the seventh calendar year after the year of grant. Any remaining unvested awards will expire if the performance criteria for the final three-year measurement period are not met. The performance criteria establishes an annualized threshold return on the Company's long-term investment capital, subject to certain adjustments, that must be exceeded for the awards to vest equal to the greater of 8.0% or the average 10-year U.S. Treasury rate plus 200 basis points.

The following table includes performance-based stock awards issued to employees with related measurement period information at September 30, 2011:

Total stock award activity for the nine months ended September 30, 2011 is summarized below:

During the quarter and nine months ended September 30, 2011, the Company recognized in Salaries and benefits $469,000 and $1,349,000, respectively, related to amortization of the grant date fair value of stock awards assuming performance criteria, if applicable, continue to be met for related initial measurement periods. All service-based stock awards and performance-based stock awards granted prior to 2010 are entitled to receive dividends on a current basis without risk of forfeiture if the related awards do not vest. The 2010 performance-based awards defer the payment of dividends accruing during the vesting period until vesting and if the related awards do not vest these accrued dividends will be forfeited. At September 30, 2011 dividends accrued pertaining to these awards totaled $220,000 and are included in Common stock dividend payable. Unrecognized compensation expense for unvested stock awards totaled $3.5 million as of September 30, 2011, to be expensed over a weighted average period of 1.6 years, assuming related performance criteria are met for the initial measurement periods for performance-based stock awards.

Option awards currently outstanding have contractual terms and vesting requirements at the grant date of ten years and were issued with strike prices equal to the quoted market prices of the Company's common shares on the date of grant. The fair value of each option award was estimated on the date of grant using a Black-Scholes option pricing model. The Company estimated option exercises, expected holding periods and forfeitures based on past experience and expectations for option performance and employee or director attrition. Risk-free rates were based on market rates for the expected life of the options. Expected dividends were based on historical experience and expectations for future performance. Expected volatility factors were based on historical experience. No option awards were granted in 2011 or 2010. In 2009 option awards granted to directors totaled 30,000 common shares with strike prices and grant date fair values of $11.69 and $1.52 per share, respectively. Fair values were determined using average expected terms of four years, and volatility factors, dividend yields and risk-free rates of 51%, 14% and 1.70%, respectively.

Option award activity for the nine months ended September 30, 2011 is summarized below:

Exercisable option awards outstanding as of September 30, 2011 totaled 256,250 shares with a weighted average remaining contractual term of 5.68 years, an average exercise price of $10.71 and an aggregate intrinsic value of $286,000. The total intrinsic value of option awards exercised during the quarter and nine months ended September 30, 2011 was $104,000 and $129,000, respectively. During the nine months ended September 30, 2011, the Company recognized $3,000 in Salaries and benefits related to option awards.

Capstead sponsors a qualified defined contribution retirement plan for all employees and a nonqualified deferred compensation plan for certain of its officers. In general the Company matches up to 50% of a participant's voluntary contribution up to a maximum of 6% of a participant's compensation and makes discretionary contributions of up to another 3% of compensation regardless of participation in the plans. Company contributions are subject to certain vesting requirements. During the quarter and nine months ended September 30, 2011, the Company recognized in Salaries and benefits $124,000 and $367,000 related to contributions to these plans, respectively.