Stock Based Compensation
|12 Months Ended|
Dec. 31, 2014
|Share-based Compensation [Abstract]|
|Stock Based Compensation||
NOTE 7: STOCK BASED COMPENSATION
Washington REIT maintains short-term and long-term incentive plans that allow for stock-based awards to officers and non-officer employees. Stock based awards are provided to officers and non-officer employees, as well as trustees, under the Washington Real Estate Investment Trust 2007 Omnibus Long-Term Incentive Plan which allows for awards in the form of restricted shares, restricted share units, options, and other awards up to an aggregate of 2,000,000 shares over the ten year period in which the plan will be in effect. Restricted share units are converted into shares of our stock upon full vesting through the issuance of new shares. There were no options outstanding as of December 31, 2014. During 2014, the Board of Trustees adopted a new short-term incentive plan ("STIP") and new long-term incentive plan ("LTIP") for executive officers.
Regarding the new STIP, the changes from the prior STIP primarily removed the 15% service-only component of the award and the 20% performance condition based on strategic acquisition and disposition goal criteria, maintaining an award payable 50% in cash and 50% in stock. The new LTIP was modified to be based entirely on total shareholder return during a defined three-year period. The LTIP was also converted from a single three-year plan structure to a “rolling” structure in which a new three-year plan is commenced each year. The vesting at the end of the performance period was modified to be 75% at the end of the performance period and 25% one year thereafter. In addition, during the transition period to the new LTIP, the Board of Trustees awarded similar transition awards with defined performance periods of one and two years and modified vesting to account for the transition.
Short-Term Incentive Plan
Under the STIP, executive officers earn awards, payable 50% in cash and 50% in restricted shares, based on a percentage of salary and an achievement rating subject to the discretion of the Compensation Committee of the Board of Trustees in consideration of various performance conditions and other subjective factors during a one-year performance period. With respect to the 50% of the STIP award payable in restricted shares, the restricted shares will vest over a three-year period commencing on the January 1 following the end of the one-year performance period.
The grant date for the 50% of the STIP award payable in restricted shares is the date on which the Compensation Committee approves the STIP awards. We recognize compensation expense on this 50% when the grant date occurs at the end of the one-year period through the three-year vesting period.
Short-term incentive plans for other officers and non-officers are payable 100% in cash.
Long-Term Incentive Plan
Under the LTIP, officers earn awards payable, 75% in unrestricted shares and 25% in restricted shares, based on a percentage of salary and the achievement of certain market conditions. LTIP performance is evaluated based on 50% on absolute total shareholder return (“TSR”) and 50% on relative TSR over a three-year evaluation period with a new three-year period initiating under the existing plan each year. The officers' total award opportunity under the LTIP stated as a percentage of base salary ranges from 80% to 150% at target level. The unrestricted shares vest immediately at the end of the three-year performance period, and the restricted shares vest over a one-year period commencing on the January 1 following the end of the three-year performance period. In addition, during the transition period to the new LTIP, the Board of Trustees awarded similar transition awards with defined performance periods of one and two years and modified vesting to account for the transition.
We recognize compensation expense ratably (over three years for the 75% unrestricted shares and over four years for the 25% restricted shares) based on the grant date fair value, as determined using a Monte Carlo simulation, and regardless of whether the market conditions are achieved and the awards ultimately vest.
We use a binomial model which employs the Monte Carlo method as of the grant date to determine the fair value of the officer LTIP awards. The market condition performance measurement is based on total shareholder return on both an absolute basis (50% weighting) and relative to a defined population of 15 peer companies (50% weighting). The model evaluates the awards for changing total shareholder return over the term of the vesting, on an absolute basis and relative to the peer companies, and uses random simulations that are based on past stock characteristics as well as dividend growth and other factors for Washington REIT and each of the peer companies. The assumptions used to value the officer LTIP awards were an expected volatility of 23.2%, a risk-free interest rate of 0.8% and an expected life of 3 and 4 years. We based the expected volatility upon the historical volatility of our daily closing share price. The price at the grant date, April 23, 2014, was $24.08. We based the risk-free interest rate used on U.S. treasury constant maturity bonds on the measurement date with a maturity equal to the market condition performance period. We based the expected term on the market condition performance period. The calculated grant date fair value as a percentage of base salary for the officers for the new three-year performance period that commenced in 2014 ranged from approximately 35% to 67% for the 50% of the LTIP based on relative TSR and from 20% to 38% for the 50% of the LTIP based on absolute TSR. For the one-year transition awards, the calculated grant date fair value as a percentage of base salary for the officers for the one-year performance period that commenced in 2014 ranged from approximately 11% to 20% for the 50% of the LTIP based on relative TSR and from 10% to 20% for the 50% of the LTIP based on absolute TSR. For the two-year transition awards, the calculated grant date fair value as a percentage of base salary for the officers for the two-year performance period that commenced in 2014 ranged from approximately 23% to 43% for the 50% of the LTIP based on relative TSR and from 16% to 30% for the 50% of the LTIP based on absolute TSR.
Non-officer employees earn restricted share unit awards under the LTIP based upon various percentages of their salaries and annual performance calculations. The restricted share unit awards vest ratably over three years from December 15 preceding the grant date based upon continued employment. We initially measure compensation expense for awards with performance conditions at fair value at the service inception date based on probability of payout, and we remeasure compensation expense at subsequent reporting dates until all of the award's key terms and conditions are known and the grant date is established. We recognize compensation expense for these awards according to a graded vesting schedule over the four-year requisite service period.
We award share based compensation to our trustees on an annual basis in the form of restricted shares which vest immediately and are restricted from sale for the period of the trustees' service. The value of share-based compensation for each trustee was $55,000 for each of the years ended December 31, 2014, 2013 and 2012.
Total Compensation Expense
Total compensation expense recognized in the consolidated financial statements for the three years ended December 31, 2014 for all share based awards, was as follows (in thousands):
Washington REIT's prior chief executive officer ("Prior CEO") retired as of December 31, 2013. Under the terms of his separation agreement, all of the Prior CEO's unvested restricted shares and restricted share units under the prior STIP, prior LTIP and deferred compensation plans vested on December 31, 2013. The impact of this modification of the Prior CEO's awards was $1.0 million for the year ended December 31, 2013.
Restricted Share Awards
The activity for the three years ended December 31, 2014 related to our restricted share awards, excluding those subject to market conditions, was as follows:
The total fair value of share grants vested for the years ended December 31, 2014, 2013 and 2012 was $6.1 million, $3.8 million and $5.6 million, respectively.
As of December 31, 2014, the total compensation cost related to non-vested share awards not yet recognized was $1.2 million, which we expect to recognize over a weighted average period of 17 months.
Restricted and Unrestricted Shares with Market Conditions
Stock based awards with market conditions under the LTIP were granted in February 2014 with fair market values, as determined using a Monte Carlo simulation, as follows (in thousands):
The unamortized value of these awards with market conditions as of December 31, 2014 was as follows (in thousands):
The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.
Reference 1: http://www.xbrl.org/2003/role/presentationRef