7.  COMPENSATION

Stock options

Stock options are granted under our long-term incentive plan and have an exercise price that may not be less than the fair market value of the underlying shares on the date of grant. Stock options granted to participants will become exercisable over a period determined by the Compensation Committee of our Board of Directors, which in the past has been a five year life, with the options vesting over a service period of up to five years. In addition, stock options will become exercisable upon a change in control, unless provided otherwise by the Compensation Committee of our Board of Directors. A portion of the stock options granted in the three months ended March 31, 2016 and 2015 were vested immediately with the remainder vesting over a two year period.

Stock option activity for the three months ended March 31, 2016 is provided below:

Restricted shares

Shares of restricted stock may be granted under our long-term incentive plan and related compensation expense is recorded using the fair market value of the underlying shares on the date of grant. Restricted stock granted to employees will vest over a period determined by the Compensation Committee which is generally a three year period, vesting in three equal parts on the first three anniversaries of the date of the grant.



In the three months ended March 31, 2016, 31,808 shares were added to treasury due to tax withholding on vesting restricted shares.

Stock appreciation rights (“SARs”)

Stock appreciation rights (“SARs”) are granted under the “VAALCO Energy, Inc. 2016 Stock Appreciation Rights Plan”. A SAR is the right to receive a cash amount equal to the (“Spread”) with respect to a share of common stock upon the exercise of the SAR.  The Spread is the difference between the SAR price per share specified in a SAR award on the date of grant (which may not be less than the fair market value of our common stock on the date of grant) and the fair market value per share on the date of exercise of the SAR. SARs granted to participants will become exercisable over a period determined by the Compensation Committee of our Board of Directors. In addition, SARs will become exercisable upon a change in control, unless provided otherwise by the Compensation Committee of our Board of Directors. The 815,355 SARs granted in the three months ended March 31, 2016 vest over a three year period with a life of 5 years and have a maximum Spread of 300% of the $1.04 SAR price per share specified in a SAR award on the date of grant.

Compensation expense

We record non-cash compensation expense related to stock-based incentive compensation as general and administrative expense. For the three months ended March 31, 2016 and 2015, non-cash compensation expense was $0.9 million and $1.7 million, related to stock options, common stock, restricted stock and SARs. Because we do not pay significant United States federal income taxes, no amounts were recorded for tax benefits.