Equity and Cash Incentive Program

12 Months Ended

Dec. 31, 2020

Share-based Payment Arrangement, Noncash Expense [Abstract]

16. Equity and Cash Incentive Program

The Company's share-based awards are typically granted annually at its regularly scheduled first quarter Compensation Committee meeting. Additionally, in the second quarter of 2018, the Company granted equity awards to its new President and Chief Executive Officer. Awards were made pursuant to the terms of the Company's 2012 Equity and Cash Incentive Plan (the "2012 Plan"), which was approved by shareholders on May 3, 2012. This plan replaced the 2005 Equity and Cash Incentive Plan (the "2005 Plan"), which would have otherwise terminated according to its terms on January 31, 2015 and the 1996 Non-Employee Directors Stock Compensation Plan (the "Directors Plan"), which would have otherwise terminated according to its terms on December 31, 2012. Upon adoption of the 2012 Plan, no additional awards could be granted under the 2005 Plan. Officers and other key employees, as well as non-employee directors, are eligible to participate in the 2012 Plan, which has a ten-year term and will terminate on May 3, 2022. The 2012 Plan provides for stock options and SARs grants, restricted stock awards, restricted stock unit awards, performance share awards, cash performance awards, directors' shares and deferred stock units. Under the 2012 Plan, a total of 17,000,000 shares of common stock are reserved for issuance, subject to adjustments resulting from stock dividends, stock splits, recapitalizations, reorganizations and other similar changes.

In 2018, in connection with the separation of Apergy, the Company modified the outstanding equity awards for its employees. The awards were modified such that all individuals received an equivalent fair value both before and after the separation of Apergy. This modification resulted in the issuance of an additional 1,138,008 SARs, 26,316 performance shares, and 47,063 RSUs in 2018. The exercise price of these outstanding awards, where applicable, was adjusted to preserve the value of the awards immediately prior to the separation. As no incremental fair value was awarded as a result of the issuance of these additional shares, the modification did not result in additional compensation expense.

Stock-based compensation costs are reported within selling, general and administrative expenses in the Consolidated Statements of Earnings. The following table summarizes the Company’s compensation expense relating to all stock-based incentive plans:


	Years Ended December 31,
	2020		2019		2018
Pre-tax stock-based compensation expense (continuing)	$	25,026	$	29,702	$	23,698
Tax benefit	(2,731)		(2,490)		(2,722)
Total stock-based compensation expense, net of tax	$	22,295	$	27,212	$	20,976

Pre-tax stock-based compensation expense attributable to Apergy employees for the year ended December 31, 2018 was $744. These costs are reported within earnings from discontinued operations in the Consolidated Statement of Earnings.

SARs

The exercise price per share for SARs is equal to the closing price of the Company’s stock on the New York Stock Exchange on the date of grant. New common shares are issued when SARs are exercised. The period during which SARs are exercisable is fixed by the Company’s Compensation Committee at the time of grant. Generally, the SARs vest after three years of service and expire at the end of ten years.

In 2020, 2019 and 2018, the Company issued SARs covering 390,780, 615,089 and 757,603 shares, respectively. The fair value of each SAR grant was estimated on the date of grant using a Black-Scholes option-pricing model with the following assumptions:


	2020		2019		2018
Risk-free interest rate	1.44	%	2.51	%	2.58	%	—	2.87%
Dividend yield	1.65	%	2.13	%	1.99	%	—	2.43%
Expected life (years)	5.5		5.6		5.6		—	5.7
Volatility	22.76	%	22.35	%	20.95	%	—	21.20%
Grant price	$119.86		$91.20		$79.75		—	$82.09
Fair value at date of grant	$22.54		$17.55		$14.58		—	$15.41

Expected volatilities are based on Dover's stock price history, including implied volatilities from traded options on Dover stock. The Company uses historical data to estimate SAR exercise and employee termination patterns within the valuation model. The expected life of SARs granted is derived from the output of the option valuation model and represents the average period of time that SARs granted are expected to be outstanding. The interest rate for periods within the contractual life of the awards is based on the U.S. Treasury yield curve in effect at the time of grant.

A summary of activity relating to SARs granted under the 2012 Plan and the predecessor plans for the year ended December 31, 2020 is as follows:


	SARs
	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)
Outstanding at January 1, 2020	3,599,169	$	69.07
Granted	390,780	119.86


Forfeited / expired	(17,103)	91.98
Exercised	(992,913)	57.49
Outstanding at December 31, 2020	2,979,933	79.36		6.4

Exercisable at December 31, 2020	1,385,683	$	62.59	4.6

The following table summarizes information about outstanding SARs at December 31, 2020:


	SARs Outstanding						SARs Exercisable
Range of Exercise Prices	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Life in Years	Aggregate Intrinsic Value		Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Life in Years	Aggregate Intrinsic Value
$25.96 - $58.69	336,295	$	49.29	4.1	$	25,891	336,295	$	49.29	4.1	$	25,891
$61.79 - $84.94	1,716,140	$	72.54	5.8	92,163		1,049,388	$	66.95	4.8	62,230
$91.20 - $119.86	927,498	$	103.15	8.5	21,421		—	$	—	—	—
	2,979,933				$	139,475	1,385,683				$	88,121

Unrecognized compensation expense related to SARs not yet exercisable was $8,746 at December 31, 2020. This cost is expected to be recognized over a weighted average period of 1.6 years.

Other information regarding the exercise of SARs is listed below:


	2020		2019		2018
SARs
Fair value of SARs that became exercisable	$	8,585	$	8,611	$	12,832
Aggregate intrinsic value of SARs exercised	$	55,031	$	89,473	$	101,365

Performance Share Awards

Performance share awards granted are expensed over the three-year requisite performance and service period. Awards become vested if (1) the Company achieves certain market conditions or specified internal metrics and (2) the employee remains continuously employed by the Company during the performance period. Partial vesting may occur after separation from service in the case of certain terminations not for cause and for retirements.

In 2020, 2019 and 2018, the Company issued performance shares covering 49,056, 35,172 and 122,459 shares, respectively.

The performance share awards granted in 2020 are market condition awards as attainment is based on Dover's performance relative to its peer group (companies listed under the S&P 500 Industrials sector) for the relevant performance period. The performance period and vesting period for these awards is approximately three years. These awards were valued on the date of grant using the Monte Carlo simulation model (a binomial lattice-based valuation model), and are generally recognized ratably over the vesting period, and the fair value is not subject to change based on future market conditions. The assumptions used in determining the fair value of the performance shares granted in 2020 were as follows:


	Performance Shares
	2020
Risk-free interest rate	1.40	%
Dividend yield	1.65	%
Expected life (years)	2.9
Volatility	23.30	%

Grant price	$119.86
Fair value per share at date of grant	$165.71

The performance share awards granted in 2019 and 2018 are considered performance condition awards as attainment is based on Dover's performance relative to established internal metrics. The fair value of these awards was determined using Dover's closing stock price on the date of grant. The expected attainment of the internal metrics for these awards is analyzed each reporting period, and the related expense is adjusted up or down based on expected attainment, if that attainment differs from previous estimates. The cumulative effect on current and prior periods of a change in attainment is recognized in selling, general and administrative expenses in the Consolidated Statements of Earnings in the period of change.

The fair value and average attainment used in determining compensation cost of the performance shares issued in 2019 and 2018 are as follows for the year ended December 31, 2020:



	2019		2018
Fair value per share at date of grant	$91.20		$79.75	-	$82.09
Average attainment rate reflected in expense	191.2	%	186.1%

A summary of activity for performance share awards for the year ended December 31, 2020 is as follows:


	Number of Shares	Weighted Average Grant-Date Fair Value
Unvested at January 1, 2020	137,809	$	82.45
Granted	49,056	165.71



Vested	(108,886)	80.08
Unvested at December 31, 2020	77,979	$	138.14

Unrecognized compensation expense related to unvested performance shares as of December 31, 2020 was $7,402, which will be recognized over a weighted average period of 1.8 years.

Restricted Stock Units

The Company also has restricted stock authorized for grant (as part of the 2012 Plan). Under this Plan, common stock of the Company may be granted at no cost to certain officers and key employees. In general, restrictions limit the sale or transfer of these shares during a three-year period, and restrictions lapse proportionately over the three-year period. The Company granted 83,512, 124,929 and 284,721 of restricted stock units in 2020, 2019 and 2018, respectively. The fair value of these awards was determined using Dover's closing stock price on the date of grant, which were $119.86, $91.20, and $79.75-$82.09 in 2020, 2019 and 2018, respectively.

A summary of activity for restricted stock units for the year ended December 31, 2020 is as follows:


	Number of Shares	Weighted Average Grant-Date Fair Value
Unvested at January 1, 2020	324,553	$	81.45
Granted	83,512	119.86


Forfeited	(11,140)	96.26
Vested	(144,018)	81.16
Unvested at December 31, 2020	252,907	$	93.43

Unrecognized compensation expense relating to unvested restricted stock units as of December 31, 2020 was $14,943, which will be recognized over a weighted average period of 1.3 years.

Directors' Shares

The Company issued the following shares to its non-employee directors under the 2012 Plan as partial compensation for serving as directors of the Company:


	Years ended December 31,
	2020	2019	2018
Aggregate shares granted	9,854	10,838	15,802
Deferred stock units	(6,278)	(6,168)	(9,917)

Net shares issued	3,576	4,670	5,885