Compensation Plans

Long-Term Incentive Plan

In June 2016, shareholders approved the Clayton Williams Energy, Inc. Long-Term Incentive Plan (the “LTIP”), which was adopted by the Compensation Committee of the Board in April 2016. The LTIP was adopted in order to enable us to attract and retain highly qualified employees, directors and consultants and to provide equity-based compensation to those individuals that will align their interests with the interests of our shareholders. The LTIP provides for the granting of restricted stock awards, restricted stock units, stock options, stock appreciation rights, dividend-equivalent awards, other stock-based awards, cash awards, performance awards, and any combination of such awards. A total of 1,400,000 shares of our common stock have been reserved for issuance under the LTIP and are expected to consist of new shares of the Company. During the year ended December 31, 2016, grants of awards under the LTIP were made as disclosed in the tables below.

Stock Options

All outstanding nonqualified and incentive stock options under the LTIP expire seven years from the date of grant and vest ratably over a three-year period. The exercise price of stock options under the LTIP may not be less than the market value of the stock on the date of grant. The fair value of the stock options on the date of grant is expensed ratably over the applicable vesting period. We estimate the fair value of stock options granted using a Black-Scholes option valuation model, which requires us to make certain assumptions, as follows:


•	Expected volatility of the underlying common stock is based on our historical stock volatility;


•	Expected term of options granted is based on the mid-point between the final vesting date and the expiration date since our common stock does not have sufficient history to predict the expected term using historical data; and


•	Risk-free interest rate is based on the U.S. Treasury yield curve for the expected term of the options at the date of grant.

The following table summarizes the weighted average grant date fair values and related assumptions for grants made during the year ended December 31, 2016:



	December 31, 2016
Grant-date fair value	$	45.88
Expected volatility	76.3		%
Expected term (in years)	5
Risk-free rate	1.2		%

The following table sets forth certain information regarding our stock options as of December 31, 2016:



		Weighted Average
	Options	Exercise Price		Remaining Term	Aggregate Intrinsic Value
Outstanding at January 1, 2016	—	$	—
Granted	282,000	$	74.21
Exercised	—	$	—
Outstanding at December 31, 2016	282,000	$	74.21

Vested and expected to vest at December 31, 2016	282,000	$	74.21	6.7	$	12,705,250
Exercisable at December 31, 2016	—	$	—	—	$	—

As of December 31, 2016, the unrecognized compensation cost related to granted stock options was $11.8 million. Such cost is expected to be recognized over a weighted-average period of 2.7 years.

Restricted Stock Awards

Restricted stock awards granted under the LTIP as of December 31, 2016 vest over either a one-year or three-year period. The estimated fair value of restricted stock grants, computed based on the closing price of our common stock on the date of grant, is expensed ratably over the applicable vesting period.

The following table presents our restricted stock activity as of December 31, 2016:



	Restricted Stock Awards		Weighted-Average Grant Date Fair Value
Unvested at January 1, 2016	—		$	—
Granted	410,165		$	71.26
Vested	(25,000	)	$	63.11
Forfeited	—		$	—
Unvested at December 31, 2016	385,165		$	71.79

The aggregate fair value of restricted stock awards granted during the year ended December 31, 2016 was $29.2 million. As of December 31, 2016, our unrecognized compensation cost related to unvested restricted stock awards was $24.6 million. Such cost is expected to be recognized over a weighted-average period of 2.6 years.

Stock-based compensation expense related to stock options and restricted stock awards was $5.7 million for the year ended December 31, 2016 and none for the years ended December 31, 2015 and 2014.

Non-Equity Award Plans

The Compensation Committee of the Board has adopted an after-payout (“APO”) incentive plan (the “APO Incentive Plan”) for officers, key employees and consultants who promote our drilling and acquisition programs. The Compensation Committee’s objective in adopting this plan is to further align the interests of the participants with ours by granting the participants an APO interest in the production developed, directly or indirectly, through the efforts of the participants. The plan generally provides for the creation of a series of partnerships or participation arrangements, which are treated as partnerships for tax purposes (the “APO Partnerships”), between us and the participants, to which we contribute a portion of our economic interest in wells drilled or acquired within certain areas. Generally, we pay all costs to acquire, drill and produce applicable wells and receive all revenues until we have recovered all of our costs, plus interest (“payout”). At payout, the participants receive 99% to 100% of all subsequent revenues and pay 99% to 100% of all subsequent expenses attributable to the economic interests that are subject to the APO Partnerships. Between 5% and 7.5% of our economic interests in specified wells drilled or acquired by us subsequent to October 2002 are subject to the APO Incentive Plan. We record our allocable share of the assets, liabilities, revenues, expenses and oil and gas reserves of these APO Partnerships in our consolidated financial statements. Participants in the APO Incentive Plan are immediately vested in all future amounts payable under the plan.

The Compensation Committee has also adopted an APO reward plan (the “APO Reward Plan”) which offers eligible officers, key employees and consultants the opportunity to receive bonus payments that are based on certain profits derived from a portion of our working interest in specified areas where we are conducting drilling and production enhancement operations. The wells subject to an APO Reward Plan are not included in the APO Incentive Plan. Likewise, wells included in the APO Incentive Plan are not included in the APO Reward Plan. Although conceptually similar to the APO Incentive Plan, the APO Reward Plan is a compensatory bonus plan through which we pay participants a bonus equal to a portion of the APO cash flows received by us from our working interest in wells in a specified area. Unlike the APO Incentive Plan, however, participants in the APO Reward Plan are not immediately vested in all future amounts payable under the plan. To date, we have granted awards under the APO Reward Plan in eight specified areas, each of which established a quarterly bonus amount equal to 7% or 10% of the APO cash flow from wells drilled or recompleted in the respective areas after the effective date set forth in each plan, which dates range from January 1, 2007 to June 11, 2014. As of June 23, 2016, all eight awards were fully vested. On May 4, 2016, the Compensation Committee amended the definition of a well in each plan to end the inclusion of new wells in all plans. A well is a well drilled by the employer in the area described provided that the well has a spud date between the effective date and May 4, 2016. All other terms of the plan remain unchanged. Future payments to participants in the plan will be based on the performance of only those wells that meet the revised definition of a well. The Compensation Committee expects to utilize the LTIP in lieu of future grants under the APO Reward Plan.

In January 2007, we granted awards under the Southwest Royalties Reward Plan (the “SWR Reward Plan”), a one-time incentive plan which established a quarterly bonus amount for participants equal to the APO cash flow from a 22.5% working interest in one well. The plan is fully vested and 100% of subsequent quarterly bonus amounts are payable to participants.

To continue as a participant in the APO Reward Plan or the SWR Reward Plan, participants must remain in the employment or service of the Company through the full vesting date established for each award. The full vesting date may be accelerated in the event of a change of control or sale transaction, as defined in the plan documents.

We recognize compensation expense related to the APO Partnerships based on the estimated value of economic interests conveyed to the participants. Estimated compensation expense applicable to the APO Reward Plan and the SWR Reward Plan is recognized over the applicable vesting periods, which range from two years to five years. Compensation expense related to non-equity award plans was $(7.9) million in 2016, $(0.03) million in 2015 and $4.6 million in 2014. Credits to expense resulted from the reversal of previously accrued compensation expense attributable to changes in estimates of future compensation expense.

Accrued compensation under non-equity award plans is reflected in the accompanying consolidated balance sheets as detailed in the following schedule:



	2016		2015
	(In thousands)
Current liabilities:
Accrued liabilities and other	$	1,087	$	1,251
Non-current liabilities:
Accrued compensation under non-equity award plans	4,655		16,254
Total accrued compensation under non-equity award plans	$	5,742	$	17,505