NOTE 8 – SHARE-BASED COMPENSATION PLANS

Under the 2009 Rowan Companies, Inc. Incentive Plan (the Plan), the Compensation Committee of the Company's Board of Directors (the "Board") is authorized to grant employees and nonemployee directors incentive awards covering up to 4,500,000 of our ordinary shares. The Plan will terminate in May 2019, unless sooner terminated by the Board. The awards may be in the form of restricted share awards, restricted share units, options and share appreciation rights. In addition, the Compensation Committee may grant performance-based awards under the Plan, in which the amount earned is dependent on the achievement of certain long-term market or performance conditions over a specified period. As of December 31, 2012, there were 834,626 shares available for future grant under the Plan.

Restricted share awards, share appreciation rights and options granted generally have multiple vesting dates. The Company recognizes compensation cost for share-based awards on a straight-line basis over the requisite service period for the entire award. Compensation cost charged to expense under all share-based incentive awards is presented below (in thousands):

	2012		2011			2010

Restricted shares and restricted share units	$	18,557	$	15,912		$	13,379
Share appreciation rights		5,358		5,813			2,678
Share options		152		239			239
Performance-based awards		741		124			(718	)
Total compensation cost		24,808		22,088			15,578
Less: Discontinued operations		-		(1,003	)		(1,310	)
Continuing operations	$	24,808	$	21,085		$	14,268

As of December 31, 2012, unrecognized compensation cost related to nonvested share-based compensation arrangements totaled $29.0 million, which is expected to be recognized over a weighted-average period of 1.9 years.

Restricted Shares – A restricted share represents an ordinary share subject to a vesting period that restricts its sale or transfer until the vesting period ends. In general, the restricted shares vest and the restrictions lapse in one-third increments each year over a three-year service period, or in some cases, cliff vest at the end of a three-year service period. The Company measures compensation based on the market price of the shares on the date of grant. Restricted share activity for the year ended December 31, 2012, is summarized below:

	Number of Shares			Weighted-average grant-date fair value per share

Nonvested at January 1, 2012		878,489		$	31.49
Granted		678,829			35.32
Vested		(503,055	)		28.01
Forfeited		(22,229	)		27.26
Nonvested at December 31, 2012		1,032,034		$	35.80

The aggregate fair value of restricted shares that vested in 2012, 2011 and 2010 was $17.8 million, $17.5 million and $12.6 million, respectively, based on share prices on the vesting dates.

Employee Restricted Share Units – Restricted share units (RSUs) are rights to receive a specified number of ordinary shares or an equivalent value in cash. RSUs granted to employees typically vest in one-third increments over a three-year service period or in some cases cliff vest at the end of three years and are settled at the time of vesting. The Company measures compensation based on the market price of the underlying shares on the grant date. The Company intends to settle employee RSUs in shares and has therefore accounted for the awards as equity awards. Employee RSU activity for the year ended December 31, 2012, follows:

	Number of Shares			Weighted-average grant-date fair value per share

Nonvested at January 1, 2012		-		$	-
Granted		25,236			34.78
Vested		(1,092	)		35.47
Forfeited		-			-
Nonvested at December 31, 2012		24,144		$	34.74

The aggregate fair value of employee RSUs that vested in 2012 was not material.

Non-employee Director Restricted Share Units – RSUs granted to nonemployee directors generally cliff vest at the earlier of the first anniversary of the grant date or the next annual meeting of shareholders following the grant date and are settled in either cash or shares at the discretion of the Compensation Committee determined at the time the director terminates service to the Board. The Company accounts for RSUs granted to non-employee directors under the liability method of accounting. Compensation is recognized over the service period initially based on the market price of the underlying shares on the grant date and is adjusted for changes in market value through the settlement date. Non-employee director RSU activity for the year ended December 31, 2012, follows:

	Number of shares			Weighted-average grant-date fair value per share

Outstanding at January 1, 2012		207,971		$	34.59
Granted		53,217			33.82
Settled		(43,072	)		32.36
Outstanding at December 31, 2012		218,116		$	32.71

Vested at December 31, 2012		164,899		$	32.36

In 2012, the Company settled 43,072 non-employee director RSUs with a settlement date fair value of $1.4 million. No RSUs were settled in either 2011 or 2010.

Performance-based Awards – The Committee may grant awards in which payment is contingent upon the achievement of certain market or performance-based conditions over a period of time specified by the Committee. Payment of such awards may be in ordinary shares or in cash as determined by the Committee.

In March 2012 the Company granted to certain members of management performance units (P-Units) that have a target value of $100 per unit. The amount ultimately earned with respect to the P-Units will depend on the Company's total shareholder return (TSR) ranking compared to a group of peer companies over a three-year period ending December 31, 2014, and could range from zero to $200 per unit depending on performance. Twenty-five percent of the P-Units' value is determined by the Company's relative TSR ranking for each one-year period ended December 31, 2012, 2013, and 2014, respectively, and 25% of the P-Units' value is determined by the relative TSR ranking for the three-year period ended December 31, 2014. Vesting of awards and any payment with respect to the P-Units would not occur until the third anniversary following the grant date. Any employee who terminates employment with the Company prior to the third anniversary will not receive any payment with respect to P-Units unless approved by the Compensation Committee. The Compensation Committee has determined that any amount earned with respect to P-Units granted in 2012 would be settled in cash.

The Company uses liability accounting to account for the P-Units due to the variable nature of the awards. The Company has estimated the fair value of the P-Units using a Monte Carlo simulation model, which considers the probabilities of the Company's TSR ranking at the end of each performance period, and the amount of the payout at each rank to determine the probability-weighted expected payout. Compensation is recognized on a straight-line basis over three years from the grant date and is adjusted for changes in fair value through the vesting date. In the event there is no payout of the P-Units for any 25% tranche as a result of not meeting the performance thresholds, any previously recognized expense relating to that tranche would be reversed at the end of the tranche's performance period. The estimated fair value of the P-Units at December 31, 2012, was $2.3 million, of which $0.7 million was recognized in long-term liabilities.

No performance-based awards vested in 2012. The aggregate fair value of performance-based share awards granted in prior years that vested in 2011 and 2010 was $2.3 million and $0.6 million, respectively.

Share Appreciation Rights – Share appreciation rights (SARs) give the holder the right to receive ordinary shares at no cost to the employee, or cash at the discretion of the Committee, equal in value to the excess of the market price of a share on the date of exercise over the exercise price. All SARs granted have exercise prices equal to the market price of the underlying shares on the date of grant. SARs become exercisable in one-third annual increments over a three-year service period and expire ten years following the grant date. The Company intends to settle the SAR awards in shares and has therefore accounted for the awards as equity awards.

Fair values of SARs granted were determined using the Black-Scholes option pricing model with the following weighted-average assumptions:

	2012			2011			2010

Expected life in years		6.0			5.7			6.0
Risk-free interest rate		1.108	%		2.269	%		2.725	%
Expected volatility		44.30	%		49.16	%		50.16	%
Weighted-average grant-date per-share fair value	$	15.28		$	19.76		$	14.00

SARs activity for the year ended December 31, 2012, is summarized below:

	Number of shares under SARs			Weighted-average exercise price		Weighted-average remaining contractual term (in years)		Aggregate intrinsic value (in thousands)

Outstanding at January 1, 2012		1,188,435		$	27.43
Granted		260,052			35.44
Exercised		(26,151	)		20.02
Forfeited		(5,367	)		35.47
Outstanding at December 31, 2012		1,416,969		$	29.01		6.5	$	7,174

Exercisable at December 31, 2012		876,442		$	24.67		5.8	$	6,933

The aggregate intrinsic value of SARs exercised in 2012 was $0.4 million. No SARs were exercised in 2011 or 2010.

Share Options – Share options granted to employees generally became exercisable in one-third or one-quarter annual increments over a three or four-year service period at a price generally equal to the market price of the Company's common shares on the date of grant. The Company has not granted any share options since 2008. Unexercised options expire ten years after the grant date.

Share option activity for the year ended December 31, 2012, is summarized below:

	Number of shares under option			Weighted-average exercise price		Weighted-average remaining contractual term (in years)		Aggregate intrinsic value (in thousands)

Outstanding at January 1, 2012		559,205		$	23.26
Exercised		(27,908	)		21.07
Forfeited or expired		(251	)		23.18
Outstanding at December 31, 2012		531,046		$	23.37		2.3	$	4,331

Exercisable at December 31, 2012		531,046		$	23.37		2.3	$	4,331

The aggregate intrinsic value of options exercised was $0.3 million in 2012, $15.9 million in 2011 and $3.6 million in 2010.

Award modifications – In 2012 the Company accelerated the vesting of share-based awards and P-Units and extended the exercise period for vested options held by a retiring employee whose awards would otherwise have been forfeited upon retirement. As a result of the modification, the Company recognized additional compensation expense in 2012 in the amount of $2.3 million, which is classified within material charges and other operating expenses in the Consolidated Statements of Income. The Company valued the modified options assuming they are to be outstanding near or until such time as they expire.

In 2011 the Company adjusted the vesting period of outstanding share-based compensation awards to an employee effective on the date of his separation. As a result of the modification, the Company recognized additional compensation expense totaling $2.0 million.