Compensation Plans

Cash Bonus Plan

During the first quarters of 2011 and 2010, the Company paid $21.6 million and $7.7 million for cash bonuses earned in the 2010 and 2009 performance years, respectively. Within the general and administrative expense and exploration expense line items in the accompanying statements of operations was $3.8 million and $3.1 million of accrued cash bonus plan expense related to the specific performance year for the three-month periods ended September 30, 2011, and 2010, respectively, and $11.3 million and $9.2 million for the nine-month periods ended September 30, 2011, and 2010, respectively.

Performance Stock Units Under the Equity Incentive Compensation Plan

PSUs are the primary form of long-term equity incentive compensation for the Company. The PSU multiplier is based on the Company’s performance after completion of a three-year performance period. The performance criteria for PSUs is based on a combination of the Company’s annualized total shareholder return (“TSR”) for the performance period and the relative measure of the Company’s TSR compared with the annualized TSR of an index comprised of certain peer companies for the performance period. In addition, there are separate employment service vesting provisions. PSUs are recognized as general and administrative and exploration expense over the vesting period of the award.

Total stock-based compensation expense related to PSUs for the three-month periods ended September 30, 2011, and 2010, was $5.9 million and $5.6 million, respectively, and $14.3 million and $13.0 million for the nine-month periods ended September 30, 2011, and 2010, respectively. As of September 30, 2011, there was $31.9 million of total unrecognized compensation expense related to unvested PSUs that is being amortized through 2014.

A summary of the status and activity concerning PSUs for the nine-month period ended September 30, 2011, is presented in the following table:



	PSUs		Weighted-Average Grant-Date Fair Value
Non-vested, at January 1, 2011	1,110,666		$	39.48
Granted	266,282		$	91.45
Vested ⁽¹⁾	(359,671	)	$	35.53
Forfeited	(125,849	)	$	32.89
Non-vested, at September 30, 2011	891,428		$	58.77

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⁽¹⁾	The number of awards vested assumes a multiplier of one. The final number of shares vested may vary depending on the ending three-year multiplier, which ranges from zero to two.

During the third quarter of 2011, the Company granted a total of 266,282 PSUs as part of its regular annual long-term equity compensation process with a fair value of $24.3 million. These PSUs will vest 1/7^th on July 1, 2012, 2/7^ths on July 1, 2013, and 4/7^ths on July 1, 2014. During the third quarter of 2011, the Company settled 305,423 PSUs that related to awards granted in 2008 through the issuance of shares of the Company's common stock in accordance with the terms of the PSU awards. As a result, the Company issued a net of 206,468 shares of common stock associated with these grants. The remaining 98,955 shares were withheld to satisfy income and payroll tax withholding obligations that arose upon delivery of the shares underlying those PSUs.

Restricted Stock Units Under the Equity Incentive Compensation Plan

The Company grants RSUs for a portion of its annual long-term equity compensation. An RSU represents a right to receive one share of the Company’s common stock to be delivered upon settlement of the RSU when it vests. Total RSU compensation expense for the three-month periods ended September 30, 2011, and 2010, was $1.6 million and $2.1 million, respectively, and $3.6 million and $5.7 million for the nine-month periods ended September 30, 2011, and 2010, respectively. As of September 30, 2011, there was $9.2 million of total unrecognized compensation expense related to unvested RSU awards that is being amortized through 2014.

A summary of the status and activity concerning RSUs for the nine-month period ended September 30, 2011, is presented in the following table:



	RSUs		Weighted-Average Grant-Date Fair Value
Non-vested, at January 1, 2011	333,359		$	31.16
Granted	98,952		$	72.69
Vested	(105,554	)	$	30.63
Forfeited	(17,270	)	$	36.06
Non-vested, at September 30, 2011	309,487		$	44.34

During the third quarter of 2011, the Company granted a total of 90,665 RSUs as part of its regular annual long-term equity compensation process with a fair value of $6.7 million. These RSUs will vest 1/7^th on July 1, 2012, 2/7^ths on July 1, 2013, and 4/7^ths on July 1, 2014. During the first nine months of 2011, the Company settled 105,554 RSUs that related to awards granted in 2008, 2009 and 2010 through the issuance of shares of the Company’s common stock in accordance with the terms of the RSU awards. As a result, the Company issued a net of 72,127 shares of common stock associated with these grants. The remaining 33,427 shares were withheld to satisfy income and payroll tax withholding obligations that arose upon delivery of the shares underlying those RSUs.

Stock Option Grants Under Prior Stock Option Plans

The following table summarizes stock option activity for the nine months ended September 30, 2011:



	Options		Weighted- Average Exercise Price		Aggregate Intrinsic Value

Outstanding, January 1, 2011	920,765		$	13.11	$	42,192,057
Exercised	(366,117	)	$	12.22
Forfeited	—		$	—
Outstanding, September 30, 2011	554,648		$	13.69	$	26,043,950
Vested and exercisable, September 30, 2011	554,648		$	13.69	$	26,043,950

As of September 30, 2011, there was no unrecognized compensation expense related to stock option awards.

Director Shares

During the nine months ended September 30, 2011, and 2010, the Company issued 21,568 and 24,258 shares, respectively, of the Company’s common stock held as treasury shares to the Company’s non-employee directors. The shares were issued pursuant to the Company’s Equity Incentive Compensation Plan. There was no compensation expense recorded for the three months ended September 30, 2011. The Company recorded $33,000 of related compensation expense for the three months ended September 30, 2010, and $1.0 million and $748,000 of related compensation expense for the nine months ended September 30, 2011, and 2010, respectively.

Employee Stock Purchase Plan

Under the Company’s Employee Stock Purchase Plan (the “ESPP”), eligible employees may purchase shares of the Company’s common stock through payroll deductions of up to 15 percent of eligible compensation without accruing in excess of $25,000 in fair market value from such purchases for each calendar year. The purchase price of the stock is 85 percent of the lower of the fair market value of the stock on the first or last day of the purchase period. The ESPP is intended to qualify under Section 423 of the Internal Revenue Code. The Company has set aside 2,000,000 shares of its common stock to be available for issuance under the ESPP, of which 1,392,954 shares were available for issuance as of September 30, 2011. There were 22,373 and 27,456 shares issued under the ESPP during the first nine months of 2011 and 2010, respectively, with a six month minimum holding period. Shares issued under the ESPP on or after July 1, 2011, have no minimum holding period. The fair value of ESPP grants is measured at the date of grant using the Black-Scholes option-pricing model.

Net Profits Plan

Under the Company’s Net Profits Plan, all of the Company's oil and gas wells that were completed or acquired during a year were designated within a specific pool. Key employees recommended by senior management and designated as participants by the Compensation Committee of the Company’s Board of Directors (“Board”) and employed by the Company on the last day of that year became entitled to payments under the Net Profits Plan after the Company had received net cash flows returning 100 percent of all costs associated with that pool. Thereafter, ten percent of future net cash flows generated by the pool are allocated among the participants and distributed at least annually. The portion of net cash flows from a pool to be allocated among the participants increases to 20 percent after the Company has recovered 200 percent of the total costs for the pool, including payments made under the Net Profits Plan at the ten percent level. In December 2007, the Board discontinued the creation of new pools under the Net Profits Plan. As a result, the 2007 Net Profits Plan pool was the last pool established by the Company.

Cash payments made or accrued under the Net Profits Plan that have been recorded as either general and administrative expense or exploration expense are detailed in the table below:



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2011		2010		2011		2010
	(in thousands)
General and administrative expense	$	4,229	$	3,918	$	14,820	$	16,233
Exploration expense	507		638		1,569		1,896
Total	$	4,736	$	4,556	$	16,389	$	18,129

Additionally, the Company accrued or made cash payments under the Net Profits Plan of $686,000, relating to divestiture proceeds for the three months ended September 30, 2010, and $6.3 million and $20.8 million for the nine months ended September 30, 2011, and 2010, respectively. There were no cash payments made or accrued for relating to divestiture proceeds for the three months ended September 30, 2011. The cash payments are accounted for as a reduction of the gain on divestiture activity in the accompanying statements of operations.

The Company records changes in the present value of estimated future payments under the Net Profits Plan as a separate line item in the accompanying statements of operations. The change in the estimated liability is recorded as a non-cash expense or benefit in the current period. The amount recorded as an expense or benefit associated with the change in the estimated liability is not allocated to general and administrative expense or exploration expense because it is associated with the future net cash flows from oil and gas properties in the respective pools rather than results being realized through current period production. If the Company allocated the change in liability to these specific functional line items, based on the current allocation of actual distributions made by the Company, such expenses or benefits would predominately be allocated to general and administrative expense. The amount that would be allocated to exploration expense is minimal in comparison. Over time, less of the amount distributed relates to prospective exploration efforts as more of the amount distributed is to employees that have terminated employment and do not provide ongoing exploration support to the Company.