9.	Stock Based Compensation

The Company adopted the A. O. Smith Combined Incentive Compensation Plan (the “Plan”) effective January 1, 2007. The Plan was reapproved by stockholders on April 16, 2012. The Plan is a continuation of the A. O. Smith Combined Executive Incentive Compensation Plan which was originally approved by shareholders in 2002. The number of shares available for granting of options or share units at December 31, 2017, was 2,885,001. Upon stock option exercise or share unit vesting, shares are issued from treasury stock.

Total stock based compensation expense recognized in 2017, 2016 and 2015 was $9.9 million, $9.4 million and $8.8 million, respectively.

Stock options

The stock options granted in 2017, 2016 and 2015 have three year pro rata vesting from the dates of grant. Stock options are issued at exercise prices equal to the fair value of Common Stock on the date of grant. For active employees, all options granted in 2017, 2016 and 2015 expire ten years after date of grant. Stock option compensation expense recognized in 2017, 2016 and 2015 was $4.7 million, $4.5 million and $4.0 million, respectively. Included in the stock option expense recognized in 2017, 2016 and 2015 is expense associated with the accelerated vesting of stock option awards for certain employees who either are retirement eligible or become retirement eligible during the vesting period.

Changes in option shares, all of which are Common Stock, were as follows:


	Weighted-Avg. Per Share Exercise Price		Years Ended December 31									(dollars in millions) Aggregate Intrinsic Value
	Weighted-Avg. Per Share Exercise Price		2017			2016			2015			(dollars in millions) Aggregate Intrinsic Value
Outstanding at beginning of year	$	21.69		2,664,333			2,653,558			3,154,006
Granted
2017—$50.16 to $50.16 per share				358,150
2016—$31.49 to $46.93 per share							553,370
2015—$23.24 to $25.34 per share										484,990
Exercised
2017—$4.75 to $31.67 per share				(752,603	)							$	12.7
2016—$4.75 to $30.77 per share							(531,933	)					7.5
2015—$4.10 to $17.46 per share										(978,208	)		10.2
Forfeited
2017—$30.77 to $50.16 per share				(6,754	)
2016—$23.24 to $46.93 per share							(10,662	)
2015—$17.46 to $23.24 per share										(7,230	)

Outstanding at end of year
(2017—$4.75 to $50.16 per share)		27.73		2,263,126			2,664,333			2,653,558

Exercisable at end of year		20.48		1,387,259			1,602,651			1,544,186

The aggregate intrinsic value for the outstanding and exercisable options as of December 31, 2017 is $75.9 million and $56.6 million, respectively. The average remaining contractual life for outstanding and exercisable options is seven years and six years, respectively.

The following table summarizes weighted-average information by range of exercise prices for stock options outstanding and exercisable at December 31, 2017:


Range of Exercise Prices	Options Outstanding at December 31, 2017		Weighted- Average Exercise Price		Options Exercisable at December 31, 2017		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life
$4.75 to $11.50		414,134	$	9.56		414,134	$	9.56		4 years
$17.46 to $25.34		556,847		20.58		556,847		20.58		7 years
$26.47 to $50.16		1,292,145		36.63		416,278		31.20		8 years

		2,263,126				1,387,259

The weighted-average fair value per option at the date of grant during 2017, 2016 and 2015, using the Black-Scholes option-pricing model, was $13.04, $8.03 and $8.59, respectively. Assumptions were as follows:


	2017			2016			2015
Expected life (years)		5.7			5.8			5.9
Risk-free interest rate		2.4	%		1.7	%		2.0	%
Dividend yield		1.0	%		1.3	%		1.0	%
Expected volatility		26.5	%		27.7	%		29.3	%

The expected life of options for purposes of these models is based on historical exercise behaviors. The risk free interest rates for purposes of these models are based on the U.S. Treasury yield curve in effect on the date of grant for the respective expected lives of the option. The expected dividend yields for purposes of these models are based on the dividends paid in the preceding four quarters divided by the grant date market value of the Common Stock. The expected volatility for purposes of these models is based on the historical volatility of the Common Stock.

Stock Appreciations Rights (SARs)

Certain non-U.S.-based employees were granted SARs. Each SAR award grants the employee the right to receive cash equal to the excess of the share price of the Company’s Common Stock on the date that a participant exercises such right over the grant date value of the SAR. SARs granted have three year pro rata vesting from the date of grant. SARs were issued at exercise prices equal to the fair value of the Company’s Common Stock on the date of grant and expire ten years from the date of grant. The fair value and compensation expense for SARs are remeasured at each reporting period using the Black-Scholes option-pricing model, using assumptions similar to stock option awards. No SARs were granted in 2017 or 2016. As of December 31, 2017, there were 23,660 SARs outstanding and 15,774 were exercisable. In 2016, there were 24,940 SARs outstanding and 8,320 were exercisable. In 2015, the Company granted 26,230 SARs and no SARs were exercisable. Stock based compensation expense attributable to SARS was not material in 2017, 2016 and 2015.

Restricted stock and share units

Participants may also be awarded shares of restricted stock or share units under the Plan. The Company granted 107,853, 160,465 and 152,192 share units under the plan in 2017, 2016 and 2015, respectively.

The share units were valued at $5.4 million, $5.2 million and $4.7 million at the date of issuance in 2017, 2016 and 2015, respectively, and will be recognized as compensation expense ratably over the three-year vesting period; however, included in share based compensation is expense associated with the accelerated vesting of share unit awards for certain employees who either are retirement eligible or become retirement eligible during the vesting period. Compensation expense of $5.2 million, $4.9 million and $4.8 million was recognized in 2017, 2016 and 2015, respectively. Certain non-U.S.-based employees receive the cash value of vested shares at the vesting date in lieu of shares.

A summary of share unit activity under the plan is as follows:


	Number of Units			Weighted-Average Grant Date Value
Outstanding at January 1, 2017		544,055		$	27.35
Granted		107,853			50.17
Vested		(213,863	)		23.25
Forfeited/cancelled		(4,755	)		34.25

Outstanding at December 31, 2017		433,290			34.96

Total compensation expense for share units not yet recognized is $2.2 million at December 31, 2017. The weighted average period over which the expense is expected to be recognized is 11 months.