Note 5—Stock‑Based Compensation

Stock‑based compensation cost is recognized over the requisite service period, which generally equals the stated vesting period, unless the stated vesting period exceeds the date upon which an employee reaches retirement eligibility. Pre‑tax stock‑based compensation expense in continuing operations was $16.5 million, $17.4 million and $15.7 million for the years ended December 31, 2016, 2015, and 2014, respectively and is included in selling and administrative expenses in the Consolidated Statements of Earnings.

Incentive Compensation Program

The Company maintains an Incentive Compensation Program (the “Program”) for executives, certain other employees of the Company and its operating segments and subsidiaries, and the Company’s non-employee directors. Members of the Board of Directors that receive stock-based compensation are treated as employees for accounting purposes. The Program was approved by shareholders on May 6, 2015. The Program allows for awards to eligible employees of stock options, restricted stock, stock appreciation rights, performance shares and units or other awards based on Company common stock. At December 31, 2016, 3,950,953 shares were available for grant under this plan, of which 1,437,278 shares were available for the issuance of stock awards.

During the year ended December 31, 2016, the Company awarded 371,623 stock options, 69,583 restricted stock awards, 61,127 performance share awards and 14,359 restricted stock units with an aggregate grant-date fair value of approximately $22.0 million to be expensed over the requisite service period for each award.

Stock Option Awards

Options issued under the Program generally vest on a straight-line basis over a three year period on the anniversary date of the grant. All options have a maximum term life of 10 years. Shares issued to cover options under the Program may be issued from shares held in treasury, from new issuances of shares, or a combination of the two.

For 2016, 2015 and 2014 share‑based compensation expense related to stock options was as follows:


	Years Ended December 31,
(in millions)	2016		2015		2014
Pre-tax compensation expense	$	6.1	$	5.1	$	4.5

Unrecognized compensation cost related to stock options of $4.3 million at December 31, 2016, is to be recognized over a weighted-average period of 1.83 years.

Excess income tax benefits related to share‑based compensation expense that must be recognized directly in equity are considered financing cash flows. The amount of financing cash flows for these benefits was $18.8 million, $15.9 million, and $13.2 million for the years ended December 31, 2016, 2015, and 2014, respectively and is included in proceeds from issuance of stock options in the Consolidated Statement of Cash Flows.

The Company utilizes the Black‑Scholes-Merton (“BSM”) option pricing model to determine the fair value of its stock option awards. The BSM relies on certain assumptions to estimate an option’s fair value. The weighted average assumptions used in the determination of fair value for stock option awards in 2016, 2015, and 2014 were as follows:


	Years Ended December 31,
	2016			2015			2014
Expected dividend yield		1.4	%		1.1	%		1.2	%
Expected life in years		5.61			5.71			5.74
Expected volatility		27.5	%		27.3	%		29.3	%
Risk-free interest rate		1.4	%		1.4	%		1.7	%
Weighted-average fair value	$	19.30		$	21.19		$	19.15

The expected life of options is based on the assumption that all outstanding options will be exercised at the midpoint of the valuation date (if vested) or the vesting dates (if unvested) and the options’ expiration date. The expected volatility is based on historical volatility as well as implied volatility of the Company’s options. The risk-free interest rate is based on rates of U.S. Treasury issues with a remaining life equal to the expected life of the option. The expected dividend yield is based on the projected annual dividend payment per share, divided by the stock price at the date of grant.

Stock option activity under the Company’s stock option awards for 2016, 2015, and 2014 was as follows:


		Weighted-Average
	Number of	Exercise
	Shares	Price
Outstanding at January 1, 2014	2,993,007	$	38.76
Options granted	259,035		73.08
Options exercised	(925,520)		38.63
Options forfeited / expired	(49,885)		56.89
Outstanding at December 31, 2014	2,276,637	$	42.32
Options granted	316,345		92.84
Options exercised	(748,270)		38.44
Options forfeited / expired	(34,632)		81.68
Outstanding at December 31, 2015	1,810,080	$	52.00
Options granted	371,623		83.85
Options exercised	(888,166)		37.25
Options forfeited / expired	(29,872)		85.07
Outstanding at December 31, 2016	1,263,665	$	70.95

The weighted‑average grant‑date fair value of options granted during the years ended December 31, 2016, 2015, and 2014 was $7.2 million, $6.7 million, and $5.0 million, respectively. The total intrinsic value of options exercised during the years ended December 31, 2016, 2015, and 2014 was $56.4 million, $42.7 million, and $41.7 million, respectively.

At December 31, 2016, 2015, and 2014 there were 634,719, 1,281,126, and 1,666,647 options exercisable with a weighted average exercise price of $56.15, $39.09, and $34.24, respectively. The weighted-average contractual term of options exercisable at December 31, 2016, 2015, and 2014 was 5.14, 4.43 and 4.72 years, respectively.

The aggregate intrinsic value of options outstanding and exercisable at December 31, 2016, 2015, and 2014 was $34.4 million, $63.5 million and $91.8 million, respectively. The weighted-average contractual term of options outstanding at December 31, 2016, 2015, and 2014 was 6.85, 5.63, and 5.71 years, respectively. The total grant date fair value of options vested during the year ended December 31, 2016, 2015, and 2014 was $4.7 million, $4.6 million, and $4.0 million, respectively.

Restricted Stock Awards

Restricted stock awarded under the Program is generally released to the recipient after a period of approximately three years. Compensation expense related to restricted stock awards of $4.5 million $5.9 million and $5.1 million was recognized for the years ended December 31, 2016, 2015, and 2014, respectively. Unrecognized compensation cost related to restricted stock awards of $5.5 million at December 31, 2016 is to be recognized over a weighted-average period of 2.4 years.

The following represents activity related to restricted stock for the years ended December 31, 2016, 2015, and 2014:


		Weighted-Average
	Number of	Grant Date
	Shares	Fair Value
Outstanding at January 1, 2014	240,990	$	49.66
Shares granted	104,773		76.70
Shares vested	(94,590)		38.57
Shares forfeited	(4,185)		63.73
Outstanding at December 31, 2014	246,988	$	65.14
Shares granted	58,040		90.54
Shares vested	(75,740)		49.56
Shares forfeited	(2,881)		81.32
Outstanding at December 31, 2015	226,407	$	76.66
Shares granted	69,583		84.73
Shares vested	(67,570)		64.80
Shares forfeited	(3,155)		84.93
Outstanding at December 31, 2016	225,265	$	82.59

Performance Share Awards

Performance shares vest based on the employee rendering three years of service to the Company, and the attainment of a market condition over the performance period, which is based on the Company’s relative total shareholder return versus the S&P Midcap 400 Index® over a pre-determined time period as determined by the Compensation Committee of the Board of Directors. The grant date fair value of the 2016, 2015, and 2014 performance shares of $119.08, $112.39 and $95.72, respectively, was estimated using a Monte‑Carlo simulation approach based on a three year measurement period. Such approach entails the use of assumptions regarding the future performance of the Company’s stock and those of the S&P Midcap 400 Index®. Those assumptions include expected volatility, risk‑free interest rates, correlation coefficients and dividend reinvestment. Dividends accrue on the performance shares during the performance period and are to be paid in cash based upon the number of awards ultimately earned.

The Company expenses the compensation cost associated with the performance awards on a straight‑line basis over the vesting period of approximately three years. In the years ended December 31, 2016, 2015, and 2014, the Company recognized $4.7 million, $6.3 million, and $6.0 million, respectively, of compensation cost related to the performance share awards. Unrecognized compensation cost related to performance share awards of $6.0 million at December 31, 2016 is to be recognized over a weighted-average period of 1.81 years. For purposes of determining diluted earnings per share, the performance share awards are considered contingently issuable shares and are included in diluted earnings per share based upon the number of shares that would have been awarded had the conditions at the end of the reporting period continued until the end of the performance period. See Note 7 for further information regarding earnings per share computations.

The following represents activity related to performance shares for the years ended December 31, 2016, 2015, and 2014:


	Number of
	Performance	2016	2015	2014	2013	2012	2011
	Units	Awards	Awards	Awards	Awards	Awards	Awards
Outstanding at January 1, 2014	328,990	-	-	-	70,175	77,595	181,220
Units granted (1)	137,890	-	-	67,970	-	69,920	-
Units vested and issued	(135,008)	-	-	-	-	-	(135,008)
Units vested and deferred	(46,212)	-	-	-	-	-	(46,212)
Units forfeited	(4,185)	-	-	(1,465)	(1,630)	(1,090)	-
Outstanding at December 31, 2014	281,475	-	-	66,505	68,545	146,425	-
Units granted (1)	95,536	-	58,040	-	37,496	-	-
Units vested and issued	(112,814)	-	-	-	-	(112,814)	-
Units vested and deferred	(33,611)	-	-	-	-	(33,611)	-
Units forfeited	(2,340)	-	(1,220)	(750)	(370)	-	-
Outstanding at December 31, 2015	228,246	-	56,820	65,755	105,671	-	-
Units granted (1)	100,139	61,127	-	39,012	-	-	-
Units vested and issued	(81,604)	-	-	-	(81,604)	-	-
Units vested and deferred	(24,067)	-	-	-	(24,067)	-	-
Units forfeited	(3,155)	(1,040)	(1,380)	(735)	-	-	-
Outstanding at December 31, 2016	219,559	60,087	55,440	104,032	-	-	-

⁽¹⁾

The Company's relative total shareholder return versus companies in the S&P Midcap 400 Index® over the period covered by the 2014 awards, 2013 awards, and 2012 awards resulted in participants being awarded an additional 39,012 shares, 37,496 shares, and 69,920 shares, respectively, under the plan. The awarding of these additional shares had no impact on stock-based compensation expense as the likelihood of their issuance was included in the determination of grant date fair value using a Monte Carlo simulation approach.

Restricted Stock Units

The restricted stock units awarded to eligible directors are fully vested and will be paid in shares of Company common stock after the director ceases to serve as a member of the Board, or if earlier, upon a change in control of the Company. The $83.31 grant date fair value of the 2016 restricted stock units was based on the closing market price of the stock on February 4, 2016, the date of the grant.

Deferred Compensation - Equity

Certain employees are eligible to participate in the Company’s Non-qualified Deferred Compensation Plan (the “Deferred Compensation Plan”). Participants may elect to defer all or part of their restricted and performance shares. Participants have elected to defer 294,574 shares of Company common stock as of December 31, 2016 and 253,520 shares as of December 31, 2015. Company stock held for future issuance of vested awards is classified as deferred compensation equity in the Consolidated Balance Sheets and is recorded at grant date fair value.