The enclosed proxy is solicited by and on behalf of our board. We will bear the expense of soliciting proxies for our annual meeting, including the mailing cost. In addition to solicitation by mail, our officers or a company of our designation may solicit proxies from our stockholders by telephone, e-mail, facsimile or personal interview. Our officers receive no additional compensation for such services.

We intend to request persons holding shares of our common stock in their name or custody, or in the name of a nominee, to send a notice of internet availability of proxy materials to their principals and request authority for the execution of the proxies. We will reimburse such persons for their expense in doing so. We will also use the proxy solicitation services of Georgeson Inc. For such services, we will pay a fee that is not expected to exceed $6,500 plus out-of-pocket expenses.

Our common stock is our only equity security entitled to general voting rights. Each share of common stock entitles the holder to one vote. As of March 24, 2017, there were 96,062,865 shares of common stock outstanding and all are

entitled to vote for matters coming before our annual meeting. Only common stockholders of record at the close of business on March 24, 2017 are entitled to vote at the meeting or any adjournment of the meeting.

If you hold shares of our common stock in your own name as a holder of record, you may instruct the proxies to vote your shares through any of the following methods:

Our counsel has advised us these three voting methods are permitted under the corporate law of Maryland, the state in which we are incorporated.

The deadline for internet and telephone voting is 5:00 p.m., Eastern Time, on May 16, 2017. If you prefer, you may bring your proxy to our annual meeting to vote your shares in person.

If a broker, bank or other nominee holds shares of our common stock on your behalf, the voting instructions above do not apply to you. You will receive voting instructions from them.

A quorum will be present at our annual meeting if holders of a majority of our outstanding shares of common stock are present, in person or by proxy. If you have returned valid voting instructions or if you hold your shares in your own name as a holder of record and attend the meeting in person with your proxy, your shares will be counted for the purpose of determining whether there is a quorum. If a quorum is not present, the meeting may be postponed or adjourned until a quorum has been obtained.

We have hired Mediant Communications to count all votes cast at our annual meeting. The affirmative vote of a majority of all the votes cast at the annual meeting is required to elect each nominee to our board (proposal 1), approve on an advisory (non-binding) basis our 2016 executive compensation (proposal 2), approve on an advisory (non-binding) basis the frequency of stockholder votes on our executive compensation (proposal 3), and ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for 2017 (proposal 4). Unless otherwise required by Maryland or other applicable law, the affirmative vote of a majority of all votes cast is also required to approve any other matter brought to a vote at the meeting.

Brokers holding shares beneficially owned by their clients do not have the ability to cast votes with respect to any non-routine matter, including votes to elect our directors (proposal 1), or votes regarding executive compensation (proposals 2 and 3), unless the brokers have received instructions from the beneficial owners of the shares. It is therefore important that you provide instructions to your broker so that your shares will be counted in these matters.

Brokers may vote at their discretion on all routine matters (i.e. the ratification of the appointment of our independent registered public accounting firm). Broker non-votes occur when a broker, bank or other nominee holding shares on your behalf votes the shares on some matters but not others. We will treat broker non-votes as shares present and voting for quorum purposes and votes not cast in any non-routine matter, including proposals 1, 2 and 3.

Abstentions, broker non-votes and withheld votes will have no effect on the outcome of the votes on proposals 1, 2 and 3 assuming that a quorum is obtained.

If you sign and return your proxy card without giving specific voting instructions, your shares will be voted as recommended by our board.

You must meet the same deadline when revoking your proxy as when voting your proxy. See the “Voting” section of this proxy statement for more information. If you hold shares of our common stock in your own name as a holder of record, you may revoke your proxy instructions through any of the following methods:

If your shares are held on your behalf by a broker, bank or other nominee, you must contact them to receive information on revoking your proxy.

On or about April 12, 2017, we mailed our stockholders a notice with instructions on accessing these materials and voting online as permitted by the Securities and Exchange Commission (“SEC”). If you received a notice, you will not

receive a hard copy of the proxy materials unless you request them. If you would like to receive a hard copy of our proxy materials, follow the instructions on the notice.

SEC rules and Maryland corporate law allow for householding, which is the delivery of a single copy of an annual report and proxy statement, or notice of electronic availability, to any household at which two or more stockholders reside, if it is believed the stockholders are members of the same family. Duplicate mailings are eliminated by allowing stockholders to consent to such elimination or through implied consent if a stockholder does not request continuation of duplicate mailings. Depending upon the practices of your broker, bank or other nominee, you may be required to contact them directly to discontinue duplicate mailings to your household. If you wish to revoke your consent to householding, you must contact your broker,

bank or other nominee. If you hold shares of our common stock in your own name as a holder of record and would like to request householding, please contact our transfer agent, Wells Fargo, at (866) 870-3684.

Extra copies of our annual report and proxy statement may be obtained free of charge by sending a request to Capstead Mortgage Corporation, Attention: Stockholder Relations, 8401 North Central Expressway, Suite 800, Dallas, Texas, 75225-4404. You can also obtain copies on our website at www.capstead.com or by calling us toll-free at (800) 358-2323, extension 2339.

Voting results will be announced at our annual meeting and a detail of the voting results will be published in a Form 8-K filed with the SEC within four business days of the meeting.

One of the purposes of our annual meeting is to elect eight directors to hold office until the next annual meeting and until their successors have been elected and qualified. In order to understand each nominee’s qualifications to serve as a director, it is important to first review our investment strategy.

We operate as a self-managed mortgage REIT for federal income tax purposes and earn income from investing in a leveraged portfolio of residential mortgage pass-through securities consisting almost exclusively of relatively short-duration adjustable-rate mortgage (“ARM”) securities issued and guaranteed by Fannie Mae or Freddie Mac, or by an agency of the federal government, Ginnie Mae. Duration is a common measure of market price sensitivity to interest rate movements. A short duration generally indicates less interest rate risk.

Set forth below for each director nominee is the name, age, principal occupation, the date elected or appointed to our board, board committee memberships held, the number of shares of common stock beneficially held, directorships held with other public companies and certain other biographical information necessary to provide you with a more complete understanding of the experiences, qualifications, attributes or skills of the nominees.

Also provided below is a brief discussion of our considerations for recommending each of the nominees for director. For discussion of beneficial ownership, see the “Security Ownership of Management and Certain Beneficial Owners” section of this proxy statement. If any nominee becomes unable to stand for election as a director, an event we do not presently expect, the proxy will be voted for a replacement nominee if our board designates one.

The board recommends a vote FOR all nominees.

Our business and affairs are managed under the direction of our board. Members of our board are kept informed of our business through discussions with our chairman, CEO and other executive officers, by reviewing materials provided to them, and by participating in meetings of our board and its committees.

Our board held five regular meetings and four special meetings during the year ended December 31, 2016. In

accordance with our Board of Directors’ Guidelines, directors are expected to attend all meetings of our board and meetings of committees on which they serve. Each director standing for election attended more than 75 percent of the meetings of our board and committees on which he or she served that were held during the period for which such person was a director.

In keeping with our Board of Directors’ Guidelines, directors are expected to attend our annual meeting in person. Should a director be unable to attend an annual meeting in person but is able to do so by telephonic or electronic conferencing, we will arrange for the director’s participation by means

where the director can hear, and be heard, by those present at the meeting. All but two of our sitting directors were in attendance at our 2016 annual meeting held on May 25, 2016.

Section 303A.02 “Independence Tests” of the NYSE Listed Company Manual outlines the requirements for a director to be deemed independent by the NYSE, including the mandate that our board affirmatively determines that each of our directors has no material relationship with us that would impair independence. To assist in ascertaining the independence of our directors, each director completed a qualification questionnaire in December 2016. They were also asked to affirm compliance with all of the independence standards set forth in the NYSE Listed Company Manual and our Board of Directors’ Guidelines. Further, directors were asked to verify their interest in serving on our board in 2017 and their availability and capability to serve, as well as confirm they meet additional qualifications required for continued service as outlined in our Board of Directors’ Guidelines.

After receipt of all completed qualification questionnaires, our governance & nomination committee members were given a copy of each questionnaire, along with information regarding each director’s ownership in our equity securities. The

committee briefed our board on the results of their review, noting that the son of one of our directors currently works for our independent accounting firm in a non-partner position, and in a different city with no involvement with our audit. At the conclusion of this process, our board affirmatively determined no director, with the exception of Mr. Reinsch who is our CEO, has a material relationship with us that would impair his or her independence, and each director meets all of the independence requirements set forth in the NYSE Listed Company Manual and our Board of Directors’ Guidelines. Therefore, our board is comprised of a majority of independent directors, as required in Section 303A.01 “Independent Directors” of the NYSE Listed Company Manual.

Our Board of Directors’ Guidelines are found on our website at www.capstead.com by clicking “Investor Relations” and “Governance Documents.” Any reference to an independent director herein infers compliance with the NYSE independence tests and our Board of Directors’ Guidelines.

At no time during the preceding three years have we made a contribution to a charitable organization where one of our independent directors served as an executive officer.

The board modified its independent director compensation program in 2016. Independent directors currently receive base compensation for their representation on our board of $60,000 and an annual stock award with a value equal to approximately $60,000.  The chairman of the board and each of the chairs of our committees receive an additional annual amount for serving in such capacity. The chairman of the board receives $40,000, while each of the chairs of the audit, compensation and governance & nomination committees receives $15,000, $15,000 and $10,000, respectively.  All committee members receive $1,000 per committee meeting attended. All of our directors receive reimbursement for travel costs and expenses. Employee directors do not receive compensation for serving on our board.

The board believes a meaningful portion of our independent directors’ total compensation should be paid in the form of equity awards in order to better align these directors’ financial interests to those of our stockholders. Equity awards granted may include (i) stock awards, (ii) option awards or (iii) other incentive-based awards as defined in our Amended and Restated 2014 Flexible Incentive Plan. Our compensation committee routinely reviews our director compensation structure with the committee’s compensation consultant and makes director compensation-related recommendations to our board for approval.

Stock awards granted to our independent directors provide for vesting over a requisite service period established by our board, typically one year. Directors are considered owners of the shares and entitled to vote and receive all dividends and any other distributions declared on the shares prior to vesting. Dividends or other distributions on these shares shall not exceed those available to our common stockholders. Unvested shares cannot be sold, transferred or otherwise disposed of for any purpose other than to us. Unvested shares will revert to us in the event a director leaves us for any reason, including termination of directorship by reason of voluntary or involuntary discharge, disability or retirement, except in the event of a change in control, dissolution or liquidation of Capstead, or death of the grantee, in which case outstanding unvested shares will automatically vest in full.

Option awards granted to our independent directors in previous years provided for vesting over one year service periods established by our board, and expire at the earliest of (i) ten years after date of grant, (ii) six months, or the remaining term of the option if earlier, after the optionee’s termination of directorship by reason of death, resignation, retirement or disability or (iii) on the date of the optionee’s termination of directorship for cause. Outstanding option awards do not receive dividends prior to exercise and are non-voting.

Our board currently separates the roles of chairman and CEO, with the chairmanship held by an independent director. Our board believes the separation of roles, while not required, enhances the board’s oversight of and independence from management, as well as the ability of our board to carry out its roles and responsibilities on behalf of stockholders. This leadership structure also allows our CEO to focus more of his time and energy on operations while providing him more of an opportunity to learn from the experience and perspectives of our chairman and other independent directors.

Our chairman, together with our CEO and with input from our other directors, oversees the development of board and board committee calendars and meeting agendas. He also leads the discussion at board meetings, and acts as the primary liaison between our CEO and board. Our chairman is available to speak on behalf of our board under certain circumstances and performs other functions and responsibilities as required under our Board of Directors’ Guidelines or as directed by the board from time to time.

Our board recognizes how critical effective risk oversight is in our success and believes that its current leadership structure and operating style, with a board composed of primarily independent directors, its chairmanship separated from our CEO, and experienced executive officers who participate regularly in board and committee meetings, enhances risk oversight. Enterprise risks are identified and prioritized by our management and reported to our full board on a quarterly basis or as otherwise appropriate, while compliance and

financial risks are overseen by our audit committee. Our compensation committee considers enterprise risks within the design of our compensation programs to ensure these programs do not encourage excessive risk taking. Our chairman and other independent directors, themselves all experienced business professionals, are experienced in identifying enterprise risk issues for board consideration and challenging our management to address their concerns and understand their perspective on these issues.

We maintain guidelines for ownership of our common stock by our directors and named executive officers for purposes of improving the alignment of interests of these individuals and those of our stockholders. Each of our directors is expected to own shares of our common stock equal to three times their annual cash retainer and each of our executive officers is

expected to own shares ranging from three to five times their annual base salary.

In 2017, our board adopted a pledging policy which prohibits directors and executive officers from pledging our common stock.

In 2010 our board adopted a policy which prohibits our employees and directors from entering into transactions to

hedge or offset any change in the market value of our common stock.

The current standing committees of our board are listed in the table below. Each of these committees has a written charter approved by our board. A copy of the charters can be found on our website at www.capstead.com by clicking

“Investor Relations” and “Committee Charters.” The members of these committees and the number of meetings held during 2016 are identified in the table below, and a description of the principal responsibilities of each committee follows.

Our audit committee is comprised of three independent directors. This committee is responsible for the appointment, compensation, retention and oversight of our independent registered public accounting firm; and it provides assistance to our board in fulfilling their oversight responsibilities to our stockholders, potential stockholders and the investment community relating to:

Our board has determined that Messrs. Keiser and O’Neil are “audit committee financial experts” as defined in the applicable rules and regulations of the Securities Exchange Act of 1934, as amended. All members of our audit committee meet our Board of Directors’ Guidelines and the NYSE Listed Company Manual Guidelines for independence of audit committee members, have financial management experience and are financially literate as required by the NYSE Listed Company Manual. Our audit committee charter limits the number of audit committees on which committee members may serve to no more than two other public companies, unless our board determines such simultaneous service would not impair the ability of such member to effectively serve.

Our compensation committee is comprised of four independent directors that our board has determined are independent in accordance with NYSE listing standards and

Item 407(a) of the SEC Regulation S-K. In addition to routinely reviewing our director compensation structure with the committee’s compensation consultant and making director compensation-related recommendations to our board, all of our executive compensation programs are administered under the direction of this committee. This committee is responsible for overseeing our compensation programs including:

Our executive committee is comprised of four directors. During intervals between meetings of our board, this committee has all of the powers and authority of our board in managing our business and affairs, except those powers that by law cannot be delegated by our board.

Our governance & nomination committee is comprised of three independent directors. This committee is responsible for:

No member of our compensation committee was at any time during 2016 or at any other time an officer or employee of ours, and no member had any relationship with us requiring disclosure in the “Related Person Transactions” section of this proxy statement. None of our executive officers has

served on the board or compensation committee of any other entity that has or had one or more executive officers who served as a member of our board or compensation committee during 2016.

Periodically non-management directors meet without management in connection with our quarterly board meetings. Accordingly, such directors met five times in 2016. At these meetings, the non-management directors reviewed strategic issues for consideration by our board, including future agendas, the flow of information to directors, management progression and succession, and our corporate governance guidelines. The non-management directors have determined that our chairman will preside at such meetings. The chairman is generally responsible for advising our CEO of decisions reached and suggestions made at these sessions. If non-management directors include a director who

is not an independent director, our Board of Directors’ Guidelines requires that at least one of the scheduled executive sessions include only independent directors. Presently, all of our non-management directors are independent.

Stockholders and interested parties may communicate with the chairman or non-management directors as a group by utilizing the communication process identified in the “Interested Party and Stockholder Communication with our Board” section of this proxy statement.

Our policies and practices reflect corporate governance initiatives that are compliant with the NYSE listing standards and the corporate governance requirements of the Sarbanes-Oxley Act of 2002. We maintain a corporate governance section on our website which includes key information about our corporate governance initiatives including our Board of Directors’ Guidelines, charters for our board committees, our Code of Business Conduct and Ethics (applicable to all of our employees, officers and directors) and our Financial Code of Professional Conduct. The corporate governance section can be found on our website at www.capstead.com by clicking “Investor Relations” and “Governance Documents.”

Each of our directors should, to the best of his or her ability, perform in good faith the duties of director and committee member in a manner he or she believes to be in our best interests with the care an ordinarily prudent person in a like position would use under similar circumstances. This duty of care includes the obligation to make, or cause to be made, an inquiry when the circumstances would alert a reasonable director to the need thereof. Our directors are expected to attend, in person or by telephone, all meetings of our board and committees on which they serve, as well as attend in person or by telephone our annual meeting of stockholders.

Our governance & nomination committee considers and makes recommendations to our board concerning candidates for election and the appropriate size of our board. In considering incumbent directors, the committee reviews the directors’ overall service during their terms, including the number of meetings attended, level of participation and quality of performance. Other considerations include the directors’ level of ownership of our equity securities and, when applicable, the nature of and time involved in the directors’ service on other boards. The committee reviews the completed qualification questionnaires submitted by incumbent directors (as previously described in the “Board Member Independence” section of this proxy statement) prior to making its recommendation to our board regarding the slate of directors for election at the following year’s annual meeting of stockholders. Additionally, in 2017 the board concluded that all current directors continue to possess the talent, knowledge and experience relevant to our business deemed necessary to stand for re-election to our board.

In considering candidates to fill new positions created by expansion and/or vacancies that occur because of resignation, retirement or any other reason, the committee uses its and our management’s network of contacts to compile a list of potential candidates. The committee may also engage, if it deems appropriate, a professional search firm. Candidates are selected on the basis of talent, knowledge and experience relevant to our business without

regard to race, religion, gender or national origin as described in our Board of Directors’ Guidelines. Accordingly, our board does not consider diversity in identifying nominees for director in the sense that it is agnostic as to a potential nominee’s characteristics in this regard and does not have any diversity goals or guidelines relative to the overall make-up of our board. Candidates should possess fundamental qualities of intelligence, honesty, perceptiveness, good judgment, maturity, high ethics and standards, integrity, fairness and responsibility. Each candidate should also have a genuine interest in Capstead, recognize that he or she is accountable to our stockholders and have a background that demonstrates an understanding of business and financial affairs, the complexities of a large business organization and the related capital markets in which the Company operates.

No person shall be eligible to serve as a director who has been convicted of a felony criminal offense or any criminal offense involving moral turpitude, dishonesty or a breach of trust. The committee will consider candidates recommended by stockholders provided stockholders follow the procedures set forth in the “Stockholder Procedures for Director Candidate Recommendations” section of this proxy statement. The committee evaluates a candidate using the criteria set forth above regardless of who nominated the candidate.

Our Board of Directors’ Guidelines prohibit our directors from serving on more than four boards of other public companies and recommends its audit committee members serve on audit committees of no more than two other public companies. In addition, our CEO’s service is limited to two

other public company boards. With the exception of Ms. Goolsby who serves on one other public company board, none of our directors presently serve on other public company boards.

A nominee for director in an uncontested election shall be elected to our board if the votes cast for such nominee’s election exceed the votes cast against such nominee’s election. In the case of a contested election, directors shall be elected by a plurality of the votes.

Concurrent with adoption of the majority vote standard in uncontested elections, our board modified our Board of Directors’ Guidelines to require an incumbent director who does not receive a majority of the votes cast and therefore is not re-elected to promptly submit a letter of resignation to our

governance & nomination committee. The committee will consider the resignation and make its recommendation to our board on whether to accept or reject the resignation. Our board, excluding the resigning director, will make a decision regarding the resignation within 90 days after the date on which the certification of the stockholder vote on the election of directors is made, and our board will publicly disclose its decision and related rationale. If a decision is made to accept the resignation, the director’s resignation shall be effective immediately.

Our Board of Directors’ Guidelines require a director to promptly submit a letter of resignation to our governance & nomination committee if the director (i) changes substantially his or her principal occupation or business association for any reason other than retirement or retirement planning, (ii) declares or is otherwise involved in a personal bankruptcy or the bankruptcy of a business in which he or she is a principal, (iii) fails to receive a majority of the votes cast in an uncontested election or (iv) is named as a party in a material legal proceeding, becomes the target of a material state or federal investigation, or receives a request of a material nature for the production of records or testimony from any state or federal agency. The committee will in turn consider

the resignation and make its recommendation to our board on whether to accept or reject the resignation. Our board, in its sole judgment, shall then decide whether such event requires the board to accept such resignation in the best interests of the company and its stockholders.

A director who has been convicted of a felony criminal offense or any criminal offense involving moral turpitude, dishonesty or a breach of trust shall resign effective immediately. An employee director must resign from our board, unless a majority of our board determines otherwise, once he or she ceases to be employed by us whether due to retirement or otherwise.

Our governance & nomination committee will consider written director candidate recommendations made by stockholders to our secretary at 8401 North Central Expressway, Suite 800, Dallas, Texas 75225-4404. Electronic or facsimile submissions will not be accepted.

For the committee to consider a candidate, submissions must include sufficient information concerning the recommended individual including biographical data such as age; employment history; a description of all businesses that employ or employed the candidate, including the name and phone number of the businesses; a list of board memberships the candidate holds, if any; and additional information that would provide a more complete understanding of the experiences, qualifications, attributes or skills of each director nominee in light of Capstead’s business and structure. In addition, the candidate should affirm he or she can read and understand basic financial statements and consent to stand for election, if nominated by our board, and serve, if elected by our stockholders.

Once a fully complete recommendation is received by the committee and if deemed appropriate by the committee chair, the candidate will be sent a questionnaire that requests additional information regarding independence, qualifications and other information to assist the committee in evaluating him or her, as well as certain information that must be disclosed about the candidate in our proxy statement, if nominated. Further, the questionnaire provides that the individual must grant consent to us to conduct a confidential background search of the individual to the extent allowable under federal, state and local legislation. The recommended candidate must return the questionnaire within the time frame outlined below to be considered for nomination by the committee. Recommendations for which we have received completed questionnaires by December 8, 2017 will be considered for candidacy for the 2018 annual meeting of stockholders. Completed questionnaires received after December 8, 2017 will be considered for candidacy for the 2019 annual meeting, if not earlier withdrawn.

Interested parties and stockholders who wish to contact any of our directors either individually or as a group may do so by calling toll-free (800) 358-2323, by writing to them care of Capstead Mortgage Corporation, 8401 North Central Expressway, Suite 800, Dallas, Texas 75225-4404 or via e-mail at directors@capstead.com. Interested party and

stockholder calls, letters and e-mails are screened by our employees based on criteria established and maintained by our governance & nomination committee, which includes filtering out improper or irrelevant communications such as solicitations, advertisements, spam, surveys, junk mail, mass mailings, resumes and other forms of job inquiries.

Our board and named executive officers conduct a comprehensive orientation through a review of background material and meetings with our executive officers to familiarize new directors with our vision, strategic direction, core values, ethics, financial matters, corporate governance practices and other key policies and practices. Our board recognizes the importance of continuing education for our directors and is committed to providing such education to

improve the performance of our board and its committees. Our executive officers assist in identifying and advising our directors about opportunities for continuing education including conferences provided by independent third parties. Mr. Keiser attended the National Association of Corporate Directors’ Advanced Director Professionalism course in June 2016.

Section 303A.09 “Corporate Governance Guidelines” of the NYSE Listed Company Manual requires listed company boards to conduct a self-evaluation at least annually to determine whether it and its committees are functioning effectively. On an annual basis, we provide each of our directors a self-evaluation questionnaire regarding the performance of our board and one for each of our committees on which he or she serves. The completed

committee questionnaires are given to the respective committee chair to review and discuss during the next scheduled committee meeting. The director who presides at our non-management director meetings leads a review of the board self-evaluation questionnaires with directors at our annual board meeting.

The following table shows the names and ages of our executive officers and the positions held by each individual.

A description of the business experience of each for at least the past five years follows the table.

For a description of Mr. Reinsch’s business experience, see the “Election of Directors” section of this proxy statement.

Mr. Spears has served as our executive vice president and chief investment officer (“CIO”) since July 2006.  Prior thereto, Mr. Spears served in a similar capacity as a senior vice president since 1999 and has served in various other executive positions with us since 1994.  Mr. Spears was employed by NationsBanc Mortgage Corporation from 1990 to 1994, last serving as vice president – secondary marketing manager.

Mr. Kim has served as our senior vice president since April 2015 and was appointed our treasurer in 2016.  From 2014 to 2015 Mr. Kim was portfolio manager at Regan Capital, a registered investment advisor in Dallas, Texas, focusing on distressed non-agency residential mortgage backed securities.  Mr. Kim pursued personal investments from 2013 to 2014.  From 2004 to 2012 Mr. Kim was executive director at J.P. Morgan Securities in New York, New York where he was head of agency ARM residential mortgage-backed securities trading and from 1995 to 2004 Mr. Kim was employed by Bank of America in Charlotte, North Carolina, last serving as senior vice president and trading team leader.

The following Compensation Discussion and Analysis provides information regarding the 2016 compensation of our executive officers identified in the Summary Compensation Table, whom we refer to as our named executive officers or NEOs. The following discussion also contains statements regarding individual and

company performance targets and goals. These targets and goals are disclosed in the limited context of our compensation programs and are not statements of management’s expectations or estimates of future results or other guidance. We caution investors not to apply these statements in other contexts.

Our Compensation Philosophy. The compensation committee of our board is responsible for establishing, implementing, and monitoring our compensation programs and practices. Our compensation philosophy is to provide competitive, largely performance-based compensation programs to attract, motivate, and retain employees vital to our long-term financial success and the creation of stockholder value.  At our 2016 annual meeting of stockholders, 97% of the votes cast voted to approve the compensation paid or awarded our executive officers in 2015. We considered that support when making executive compensation decisions in 2016.

Recent Company Performance. We operate as a self-managed REIT and earn income from investing in a leveraged portfolio of short-duration residential adjustable-rate mortgage “ARM” securities issued and guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, referred to as Agency mortgage securities. We believe our strategy of investing primarily in short-duration Agency ARM securities differentiates us from our peers by reducing our interest rate risk, making us one of the most defensively-positioned mortgage REITs. Duration is a common measure of market price sensitivity to interest rate movements. A shorter duration indicates less interest rate risk.

Highlights of our performance in 2016 include:

Our Change in Leadership. Effective July 14, 2016, Andrew F. Jacobs resigned from his positions as President and CEO, and from our board. Upon his resignation, the board appointed Phillip A. Reinsch, our executive vice president and CFO, to serve as President and CEO. Mr. Reinsch was subsequently appointed to our board. Our board believed that it was in the best interests of stockholders to engage Mr. Jacobs’ in a consulting capacity in order to facilitate an orderly transition of the CEO position. Details of his separation agreement can be found under “Change in Leadership” on page 30.

2016 Compensation. We believe a key measure of our financial performance is the economic return we deliver to our stockholders over both short- and long-term time horizons. Economic return is also a common measure of performance used by the broader mortgage REIT investment community.  Accordingly, we emphasize economic return in our compensation programs, in addition to other performance metrics.

The primary elements of our compensation programs are base salaries, short-term incentives and long-term equity-based incentives. Over 57% of our 2016 executive compensation awarded our NEOs (other than our former CEO) was performance-based:

Executive Compensation Practices. The following highlights certain of our executive compensation and governance practices which we utilize to drive performance and serve our stockholders’ long-term interests:

Our Pay Practices Include

Our Pay Practices Do Not Include

Previous Say-on-Pay Votes

At our 2016 annual meeting of stockholders 97% of the votes cast supported the compensation paid or awarded to our NEOs in 2015. This level of support was in line with our expectations and was reflective of the important changes made to our compensation programs in prior years.  

In order to remain proactive in managing our executive compensation programs and practices, during 2016 the chair and other members of the committee continued outreach efforts begun in prior years by again reaching out to some of our largest stockholders. While most stockholders contacted did not offer any suggestions as to our compensation programs, the committee did receive input that the metrics used in the programs created a fair alignment between stockholder interest and our executive’s compensation.

What We Pay and Why

In this section we review the various factors influencing the design of our compensation programs and decisions affecting 2016 compensation of our NEOs, including:

Our Philosophy

Our compensation philosophy is to provide competitive performance-based compensation programs to attract, motivate and retain employees vital to our long-term financial success and creation of stockholder value. The committee (assisted by its compensation consultant) has designed and administered compensation programs it believes support this philosophy. In implementing its philosophy, the committee:

The Role of the Committee, Its Consultant, the CEO and Management in Making Compensation Decisions

Committee

The committee has responsibility for determining and approving, on an annual basis, the compensation of our CEO and other NEOs.  The committee’s review of individual executive officer compensation includes, but is not limited to, a review of company and individual performance and the total value of past compensation, including long-term equity awards.

Members of the committee participate in the board’s annual CEO performance review and setting of annual performance goals. The committee establishes compensation levels for our CEO in consultation with its independent compensation consultant. Our CEO neither recommends nor is involved in any discussions regarding his own compensation.

Independent Compensation Consultant

The committee has the sole authority to select, retain, and terminate compensation consultants. Pay Governance LLC (“Pay Governance”) has been engaged by our committee since 2010 to serve as its consultant on executive and director compensation matters, including recommendations with respect to both overall guidelines and specific compensation elements.  More specifically, Pay Governance provides advice and analysis to the committee on the design, structure and level of executive and director compensation, and, when requested by the committee, attends meetings of the committee and participates in executive sessions without members of management present. Pay Governance reports directly to the committee, and the committee reviews, on an annual basis, Pay Governance’s performance and provides Pay Governance with direct feedback.

The committee recognizes that it is essential to receive objective advice from its compensation advisors. To that end, the committee has assessed the independence of Pay Governance pursuant to SEC rules and concluded that Pay Governance’s work for the committee does not raise any conflicts of interest.

CEO and Management

The committee is responsible for establishing, implementing, and monitoring the Company’s compensation program and practices.  While the committee has responsibility for the Company’s compensation program and practices, management provides information requested by the committee and Pay Governance on our performance and that of our mortgage REIT peers. Our CEO assists the committee by providing a self-assessment of his own performance, but neither recommends, nor is involved in any discussions regarding his own compensation.   Our CEO also provides performance assessments for our other NEOs including recommendations regarding adjustments to their base salaries. These recommendations are considered by the committee when making compensation decisions.  

Our Use and the Role of Peer Companies

Our investment strategy entails investing in a leveraged portfolio of Agency ARM securities with the goal of producing reasonable risk-adjusted economic returns over both short- and long-term time horizons. The investment community generally evaluates us in this context and monitors our performance relative to other mortgage REITs that minimize mortgage credit risk by investing primarily in Agency mortgage securities (“Agency REIT” peers).  In 2016, the committee included three additional Agency REIT peers after a thorough review of the individual company’s business model and key metrics. We view our Agency REIT peers as our primary competitors for both capital and executive talent. As such, a significant portion of our NEOs’ short- and long-term incentives measure our economic returns against the economic returns of our Agency REIT peers.

Many of our investors and independent security analysts also evaluate our performance relative to a broader group of mortgage REITs. This broader group includes mortgage REITs with significant investments in both Agency and non-Agency mortgage securities and also includes select other mortgage REITs that invest in assets other than Agency mortgage securities. We consider these mortgage REITs to also be competitors for both capital and executive talent. As such, we also measure our economic returns against the economic returns of this broader REIT peer group (“Broader REIT” peers). Additionally, we measure our operating cost efficiency against this broader peer group.

Based on the foregoing, the committee established the following companies as our 2016 peers for purposes of evaluating our relative performance and determining earned compensation (Agency REIT peers are in bold and in blue):

When available, the committee considers information regarding our peers’ pay levels and practices to establish a point of reference when making compensation decisions. While we seek to establish pay levels that are consistent with market medians, we do not “benchmark” NEO compensation so that it must equal a specified level relative to other companies. Rather, the committee makes decisions regarding pay opportunities it considers appropriate in light of its philosophy and based on information available principally from our internally-managed peers.  The committee believes pay opportunities consistent with market medians are often appropriate; however, the committee may choose to pay above or below market medians when it believes doing so would be appropriate to account for scope of position responsibilities, experience, skills and contribution.

Like Capstead, seven of our peers are internally-managed.  The executive officers of those internally-managed peers are employees of their companies.  As a result, detailed compensation information is fully disclosed in these companies’ annual proxy statements, making compensation-related comparisons between the executive officers of Capstead and these internally-managed companies relatively straightforward.  

The remaining 14 peers are externally-managed by third-parties in exchange for management fees.  An external manager uses a portion of management fees earned to compensate its employees that manage the REIT.  Externally-managed REITs are not required to disclose salaries and incentive compensation paid to REIT executive officers who are also employees of the management company (other than any equity awards granted directly to these individuals).  Consequently, complete compensation data for the executive officers of our externally-managed peers is generally unavailable and the committee is unable to make meaningful direct comparisons for executive compensation purposes.

Given that direct comparisons for executive compensation purposes cannot be made with externally-managed peers, the committee also compares our overall operating costs, including compensation, to the operating costs of our Broader REIT peers. Given our focus on operating cost efficiency, the committee incorporated a relative operating cost efficiency metric in our annual incentive compensation program.  This metric is a ratio of aggregate management fees and other operating costs (collectively “total operating costs”) to average long-term investment capital (stockholders’ equity plus long-term unsecured borrowings).  We believe this is a transparent and consistent way to evaluate our efficiency and the relative reasonableness of our costs, including the costs of our overall compensation programs.

Objectives of Our Program

Our stockholders and the broader investment community evaluate our performance with particular emphasis on changes in our book value per common share (a capital preservation performance measure) and dividend returns to investors (a return on capital performance measure). Together, these two measures comprise the economic return we deliver to our stockholders. In addition, we seek to maintain an efficient operating platform as part of our business strategy. Finally, we believe performance in achieving specific individual goals and objectives to be an important factor to consider in awarding annual incentive compensation.  

Our compensation arrangements are designed to prominently feature each of these aspects of our performance:

We believe the structure of our compensation arrangements appropriately incorporates measures of company performance that are of importance to our stockholders and the broader investment community, helping to ensure proper alignment of management’s interests with those of our stockholders.

Review of 2016 Total Direct Compensation

The committee seeks to provide competitive, performance-based compensation opportunities necessary to attract, motivate, and retain employees vital to our long-term financial success and creation of stockholder value. The committee believes this is best achieved through a combination of pay elements it refers to as total direct compensation, comprised of base salary, short-term incentives and long-term equity-based incentives.

Base Salary

The committee increased the base salaries for Messrs. Reinsch and Spears in August 2016 reflecting increased responsibilities associated with our July 2016 change in leadership. Mr. Reinsch received a 39% increase in base salary following his appointment as President and CEO, while Mr. Spears received a 6% increase. Annualized base salaries in effect for our NEOs in 2016 were as follows:  

Short-Term Incentives

The committee believes short-term incentives are an important tool in motivating and rewarding management for delivering strong operational performance and achieving our strategic objectives.  We provide short-term incentive opportunities through two programs:

Annual Incentive Compensation Program. The 2016 annual incentive compensation program adopted by the committee was similar to the 2015 annual incentive compensation program. Adjustments were made to the relative weightings of the various performance metrics to place more emphasis on absolute return at adjusted minimum, target and maximum thresholds, while decreasing other relative weightings.  Additionally, maximum payout opportunities related to achieving individual goals and objectives were increased.

Under the 2016 annual incentive compensation program and as illustrated in the table on the following page:

Total payout under the 2016 annual incentive compensation program was as follows:

Dividend Equivalent Rights (DERs). DERs awarded by the committee provide our NEOs compensation directly in proportion to the common dividends paid during the year to our stockholders, which is a key component of our economic returns and vary depending upon our earnings. DERs represent notional rights entitling the holder to cash payments equal to the per share dividend amount declared on our common stock multiplied by the number of DERs awarded. DERs provide another component of our NEOs’ short-term incentive compensation that is directly linked to our current year performance.

The table below provides information on the total number of DERs held by each of our NEOs and the total amount of dividend equivalents earned in 2016.  

The value of dividend equivalents earned by our NEOs during 2016 was 17% lower than the value earned during 2015, which was directly attributable to a 17% decline in common stock dividends declared in 2016.  

Long-Term Incentives

The committee believes our NEOs should have an ongoing stake in the long-term success of our business and should have a meaningful portion of their total compensation delivered in the form of service- and performance-based equity awards with performance measured over a period of years.

On January 3, 2017, the committee granted 2016 incentive compensation awards in two forms consisting of (a) restricted common stock and (b) performance units. The aggregate opportunity was based on 150% of each executive’s 2017 base salary divided by the closing common stock price on the date of grant, allocated one-third to restricted stock and two-thirds to performance units.

The restricted common stock awards will vest three years from the date of grant or January 3, 2020. Upon vesting, such restricted shares will be entitled to receive dividends and any other distributions declared from the date of grant through the vesting date. The number of shares issued and the grant date fair value were as follows:

The performance units may convert into shares of common stock if and only to the extent certain performance metrics are satisfied after a three-year performance period ending December 31, 2019, calculated independently for each metric.  Such metrics include relative economic return, absolute economic return and relative total stockholder return.  The performance metrics used for the January 3,

2017 performance unit awards are substantially similar to the performance metrics used in the prior year, except that the absolute economic return levels required for payouts at the threshold and target performance levels were reduced to reflect current market conditions. The committee set the target for relative economic return performance against both Agency REIT peers and our Broader REIT peer group, as well as relative total stockholder return against our Broader REIT peer group, at the 60^th percentile thus insuring that the target payout will be awarded only for above average performance.  

The performance units contain “double trigger” vesting provisions that provide for accelerated vesting only if (i) a change in control occurs and (ii) an involuntary termination without cause or a voluntary resignation for good reason occurs within 24 months following the change in control. At the end of the performance period, each NEO will be entitled to receive dividends and any other distributions declared from the grant date through the end of the performance period with respect to the number of shares earned, if any. The number of units issued and the grant date fair value were as follows:

The number of shares ultimately accruing to our NEOs pursuant to these awards is dependent upon Capstead’s performance calculated separately under each of the indicated performance metrics over the three-year period ending December 31, 2019 as illustrated below:

Our NEOs participate in our other benefit programs including basic life insurance, accidental death and dismemberment insurance, long-term disability insurance, long-term care insurance, a charitable gift matching program, and a qualified defined contribution retirement plan, or 401(k) plan, each on the same terms offered to other employees.

In addition, we have a nonqualified deferred compensation plan for our NEOs and any other employees earning more than the maximum amount of eligible earnings considered for purposes of determining contributions to our 401(k) plan ($265,000 in 2016). Our nonqualified deferred compensation plan is designed to allow employees, regardless of pay, the opportunity to achieve the same retirement income as a percentage of their base salaries and incentive compensation as is available to all employees.  The plan extends the general matching provisions of the 401(k) plan to base salary and annual incentive compensation amounts in excess of $265,000. The aggregate cost to us of this benefit for Messrs. Reinsch, Spears and Kim was $105,735 for 2016.

Participants in the plan may elect to defer up to 60% of base salary and 100% of annual incentive compensation into a deferral account. We contribute into each participant’s deferral account a matching amount equal to 50% of the participant’s voluntary contribution up to a maximum of 6% of the participant’s eligible compensation that exceeds the 401(k) maximum amount, as discussed above. We may, but are not required, to credit to deferral accounts a supplemental matching contribution of 3% of the participant’s eligible compensation, but only up to the same 6%. Vesting in the amounts contributed by us into the deferral account is determined on the same service-based vesting schedule used in our 401(k) plan, which provides for annual vesting ratably over a participant’s initial five years of service. Messrs. Reinsch and Spears are 100% vested. Participant deferral accounts are considered a part of our general assets and participants are considered unsecured creditors.

And finally, we have agreements with Messrs. Reinsch, Spears, Kim and certain other employees that provide for severance payments in the event they are terminated for any reason, including death or disability, other than those reasons

described in the “Potential Payments Upon Termination or Change-in-Control” table on page 33 of this proxy statement. These agreements were entered into in December 1999 with each person employed by us at that time. In May 2016, we entered into an agreement with Mr. Kim with terms that mirrored past agreements. Any payment under any of these agreements will be limited as follows: two times base salary for Messrs. Reinsch and Spears, and one and one-half times base salary for Mr. Kim. Severance payments are not entitled to tax gross-ups.

Payments were made as part of Mr. Jacobs’ separation agreement. Details of his separation agreement can be found under “Change in Leadership” on page 30.

Decisions Affecting Compensation for 2017

Stock Ownership Guidelines. To assist with aligning interests of our NEOs and our stockholders, we have adopted stock ownership guidelines requiring that our NEOs maintain a minimum ownership interest in Capstead, as a percentage of base salaries. The stock ownership requirements and effective ownership as of March 24, 2017 were as follows:

Effective ownership of common stock considered for purposes of measuring an executive officer’s minimum equity investment, or threshold, adopted by the board differs from the amount reported for an executive officer on SEC Form 4 because the threshold calculation adopted by the board includes only owned shares and 60% of the executive officer’s unvested service-based stock awards, while excluding all of an executive officer’s unvested performance-based units. Our executive officers are required to reach the minimum ownership threshold within five years from the date he or she first becomes subject to the guidelines.  Any NEO not meeting the minimum ownership threshold is required to retain all shares received in the future through our compensation programs until the threshold is met, except that the NEO may surrender shares to satisfy tax withholding requirements or the share equivalent for the aggregate strike price for an option exercise.

Prohibition on Pledging of Owned Shares. We prohibit our NEOs and directors from pledging their owned shares.

Derivatives Trading and Hedging. All of our employees and directors are restricted from entering into transactions to hedge or offset any change in the market value of our common stock.

Clawback Policy. If we are required to prepare and file accounting restatements of certain financial documents, our NEOs are required to reimburse us for any short- and long-term incentive compensation received in the 12-month period following the first public issuance or filing with the SEC of any financial document subject to restatement if:

Tax Considerations. Internal Revenue Code Section 162(m) generally precludes a publicly-held corporation from a federal income tax deduction for annual compensation in excess of $1 million paid individually to the principal executive officer or any of the three other most highly compensated executive officers. Exceptions are made for, among other things, qualified performance-based compensation. Qualified performance-based compensation means compensation paid solely upon attaining objective performance goals for each individual, provided that (i) performance goals are determined by a committee consisting solely of two or more outside directors, (ii) material terms of the performance-based compensation programs and performance goals are disclosed to and approved by stockholders at least every five years (proposal 3), and (iii) the committee certifies that the performance goals were attained and other material terms were satisfied prior to any payment. While the committee designs certain components of executive compensation to preserve income tax deductibility, it believes that it is not in the stockholders’ interest to restrict the committee’s discretion and flexibility in developing appropriate compensation programs and establishing compensation levels. Consequently, the committee may approve compensation that is not fully deductible. The majority of the 2016 payout under the annual incentive compensation program was performance–based and not subject to the above noted income tax deduction limitation.

The compensation committee has reviewed and discussed the Compensation Discussion and Analysis contained in this proxy with our management. Based on this review and

discussion, the compensation committee recommends to our board that the above Compensation Discussion and Analysis be included in this proxy statement.

The Summary Compensation Table below shows certain compensation information for our three executive officers, referred to as our NEOs, for services rendered during the

three years ended December 31, 2016, as appropriate. As of the date of this proxy, we had no other executive officers.

Change in Leadership.  Effective July 14, 2016, Mr. Jacobs resigned from our board and from his positions as President and CEO.  In connection with his resignation, we entered into an agreement with him pursuant to which he continued as our employee through year-end providing consulting services for the principal purpose of assisting in the orderly transition of his previous roles and responsibilities to Mr. Reinsch, our new CEO. The agreement provided for aggregate consulting fees equal to three times his current annual base salary, less any legally required withholdings and deductions.  In addition, Mr. Jacobs received certain retirement- and insurance-related benefits and remained eligible to receive incentive awards, including short-term incentives, dividend equivalent rights, restricted stock and performance units under our existing incentive programs through year-end.  The Summary Compensation Table includes Mr. Jacobs’ salary, dividend equivalent right payments and other compensation amounts associated with his service through his resignation date. Also included as a component of All Other Compensation are amounts paid to or on behalf of Mr. Jacobs subsequent to his resignation pursuant his consulting agreement.  These amounts are detailed in the Potential Payments Upon Termination or Change-in-Control table on page 33.

Short-term Incentive Compensation. Short-term incentive compensation amounts in 2016 included (i) an annual incentive compensation program based on our economic returns, measured on a relative and absolute basis, relative operating cost efficiency as well as achievement of individual goals and objectives, and (ii) dividends paid on outstanding DERs.  As such, 100% of short-term incentive compensation is considered performance-based. Under the 2016 annual incentive compensation program each NEO had a target opportunity equal to 125% of his 2016 base salary.  Based on the results of our 2016 performance, Messrs. Reinsch, Spears and Kim were awarded 82% of their base salaries (65% of target opportunity).  Including dividends paid on DERs, short-term incentive compensation accounted for 28% of these NEOs’ total 2016 executive compensation, as measured for proxy compensation purposes.  

On January 3, 2017 the compensation committee adopted an annual incentive compensation program for 2017 that is substantially similar to the 2016 annual incentive program, except that the absolute economic return levels required for payouts at the threshold and target performance levels were reduced to reflect current market conditions.

Long-term Incentive Compensation. Consistent with the belief that our NEOs should have an ongoing stake in the long-term success of our business, long-term incentive compensation amounts for 2016 consisted of performance units and restricted stock awarded on January 3, 2017. Under this long-term incentive compensation program the aggregate number of performance units and restricted stock awarded each NEO was based on 150% of each executive’s 2017 base salary divided by the closing common stock price on the date of grant of $10.41, allocated two-thirds to performance units and one-third to restricted stock.

The performance units are convertible into shares of our common stock based on our economic returns measured on both a relative and absolute basis, as well as our relative total stockholder returns, following a three-year performance period ending December 31, 2019. The performance units awarded for 2016 are substantially similar to the performance units awarded for 2015, except the absolute economic return levels required for payouts at the threshold and target performance levels were reduced to reflect current market conditions.

The restricted stock will vest three years from the date of grant or January 3, 2020 and on such date will be entitled to receive dividends and any other distributions from the date of grant through the vesting date.

In total, long-term incentive compensation accounted for approximately 43% of our 2016 executive compensation for Messrs. Reinsch, Spears and Kim, as measured for proxy compensation purposes.  Combining our short-term incentive compensation with performance units issued for 2016, over 57% of our total 2016 executive compensation for these NEOs was performance-based.