STOCK-BASED COMPENSATION

In January 2017, our Board, upon the recommendation of its Compensation Committee, discontinued the 2008 Equity and Incentive Plan and approved the AutoNation, Inc. 2017 Employee Equity and Incentive Plan (the “2017 Plan”), in each case subject to stockholder approval of the 2017 Plan at our 2017 Annual Meeting of Stockholders. The 2017 Plan provides for the grant of time-based and performance-based RSUs and restricted stock, stock options, stock appreciation rights, and other stock-based and cash-based awards to employees. A maximum of 5.5 million shares may be issued under the 2017 Plan.

The AutoNation, Inc. 2014 Non-Employee Director Equity Plan (the “2014 Director Plan”) provides for the grant of stock options, restricted stock, RSUs, stock appreciation rights, and other stock-based awards to our non-employee directors. As of December 31, 2017, the total number of shares authorized for issuance under the 2014 Director Plan was 600,000. No director may be granted awards in any calendar year with an aggregate grant date fair market value (determined, with respect to options and stock appreciation rights, based on a Black-Scholes or other option valuation methodology approved by the Compensation Committee) in excess of $750,000 per director.

Restricted Stock Units

On January 3, 2017, each of our non-employee directors received a grant of 5,073 RSUs under the 2014 Director Plan. RSUs granted to our non-employee directors are fully vested on the grant date and are settled in shares of the Company’s common stock on the first trading day of February in the third year following the grant date, unless the non-employee director elects to defer delivery in accordance with the terms of the award and the 2014 Director Plan. Settlement of the RSUs will be accelerated in certain circumstances as provided in the terms of the award and the 2014 Director Plan, including in the event the non-employee director ceases to serve as a non-employee director of the Company. Compensation cost is recognized on the grant date and is based on the closing price of our common stock on the grant date.

In January 2017, our Board’s Compensation Committee approved the 2017 annual equity awards for eligible employees under the 2017 Plan, which awards were issued on March 1, 2017, subject to stockholder approval of the 2017 Plan. Our stockholders approved the 2017 Plan at the 2017 Annual Meeting held on April 19, 2017, and on that date, the 2017 annual equity awards were considered granted for accounting purposes. The 2017 annual equity awards include time-based and performance-based RSUs. Time-based RSUs vest in equal installments over four years. The performance-based RSUs are subject to a one-year earnings performance measure. Certain performance-based RSUs vest in equal installments over four years, and others cliff vest after three years subject to the achievement of certain additional performance goals measured over a three-year period. The additional performance goals are based on an additional measure of earnings, a measure of return on invested capital, and a measure of our performance relative to certain customer satisfaction indices.

The fair value of each RSU award grant is based on the closing price of our common stock on the date of grant. Compensation cost for time-based RSUs is recognized on a straight-line basis over the shorter of the stated vesting period or the period until employees become retirement-eligible, and for performance-based awards is recognized over the requisite service period based on the current expectation that performance goals will be achieved at the stated target level. The amount of compensation cost recognized on performance-based RSUs depends on the relative satisfaction of the performance condition based on performance to date. We account for forfeitures of stock-based awards as they occur.

The following table summarizes information about vested and unvested RSUs for 2017:



	RSUs
	Shares (in actual number of shares)		Weighted-Average Grant Date Fair Value
Nonvested at January 1	—		$	—
Granted ⁽¹⁾	632,255		$	43.66
Vested	(45,657	)	$	49.28
Forfeited	(66,989	)	$	43.30
Nonvested at December 31	519,609		$	43.22


⁽¹⁾	The RSUs granted during 2017 are primarily related to our employee annual equity award grant in April 2017 and non-employee director annual equity award grant in January 2017.

The weighted average grant-date fair value of RSUs and total fair value of RSUs vested are summarized in the following table:



	2017		2016		2015
Weighted average grant-date fair value of RSUs granted	$	43.66	$	58.69	$	60.04
Total fair value of RSUs vested (in millions)	$	2.2	$	2.3	$	2.7

Stock Options

Stock options granted under all plans are non-qualified. Upon exercise, shares of common stock are issued from our treasury stock. Employee stock options granted in 2016 have a term of 10 years from the date of grant and vest in equal installments over four years on the anniversary of the grant date. Employee stock options granted in 2015 were granted quarterly, have a term of 10 years from the first date of grant, and vest in equal installments over four years commencing on June 1 of the year following the grant date.

We use the Black-Scholes valuation model to determine compensation expense and amortize compensation expense on a straight-line basis over the requisite service period of the grants. We account for forfeitures of stock-based awards as they occur. Certain of our equity-based compensation plans contain provisions that provide for vesting of awards upon retirement. Accordingly, compensation cost is recognized over the shorter of the stated vesting period or the period until employees become retirement-eligible.

The following table summarizes the assumptions used related to the valuation of our stock options granted during 2016 and 2015:



	2016	2015
Risk-free interest rate	1.16% - 1.55%	0.76% - 1.86%
Expected dividend yield	—	—
Expected term	4 - 7 years	2 - 7 years
Expected volatility	29% - 31%	24% - 34%

The risk-free interest rate is based on the U.S. Treasury yield curve at the time of the grant with a remaining term equal to the expected term used for stock options granted. The expected term of stock options granted is derived from historical data and represents the period of time that stock options are expected to be outstanding. The expected volatility is based on historical volatility, implied volatility, and other factors.

The following table summarizes stock option activity during 2017:



	Stock Options
	Shares (in millions)		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Options outstanding at January 1	5.2		$	46.99
Granted	—		$	—
Exercised	(1.0	)	$	37.85
Forfeited	(0.2	)	$	56.35
Expired	(0.3	)	$	54.91
Options outstanding as of December 31	3.7		$	48.49	5.82	$	23.4
Options exercisable at December 31	2.7		$	45.65	5.19	$	23.5
Options exercisable at December 31 and expected to vest thereafter	3.7		$	48.52	5.76	$	23.5
Options available for future grants at December 31	5.4

The weighted average grant-date fair value of stock options granted and total intrinsic value of stock options exercised are summarized in the following table:



	2017		2016		2015
Weighted average grant-date fair value of stock options granted	$	—	$	17.96	$	19.38
Total intrinsic value of stock options exercised (in millions)	$	11.9	$	5.3	$	51.9

Restricted Stock

Restricted stock awards are considered nonvested share awards as defined under U.S. generally accepted accounting principles and are issued from our treasury stock. Restricted stock awards granted in 2016 vest in equal installments over four years on the anniversary date of the grant. Restricted stock awards granted in 2015 vest in equal installments over four years commencing on June 1 of the year following the grant date. Compensation cost for restricted stock awards is based on the closing price of our common stock on the date of grant and is recognized on a straight-line basis over the shorter of the stated vesting period or the period until employees become retirement-eligible. We account for forfeitures of stock-based awards as they occur.

The following table summarizes information about vested and unvested restricted stock for 2017:



	Restricted Stock
	Shares (in actual number of shares)		Weighted-Average Grant Date Fair Value
Nonvested at January 1	266,906		$	54.23
Granted	—		$	—
Vested	(100,341	)	$	51.99
Forfeited	(18,634	)	$	55.10
Nonvested at December 31	147,931		$	55.65

The weighted average grant-date fair value of restricted stock awards granted and total fair value of restricted stock awards vested are summarized in the following table:



	2017		2016		2015
Weighted average grant-date fair value of restricted stock awards granted	$	—	$	52.23	$	62.54
Total fair value of restricted stock awards vested (in millions)	$	4.2	$	6.4	$	8.8

Compensation Expense

The following table summarizes the total stock-based compensation expense recognized in Selling, General, and Administrative Expenses in the Consolidated Statements of Income and the total recognized tax benefit related thereto:



	2017		2016		2015
RSUs	$	14.2	$	2.3	$	2.7
Stock options	3.1		16.2		14.8
Restricted stock	3.3		6.6		6.5
Total stock-based compensation expense	$	20.6	$	25.1	$	24.0

Tax benefit related to stock-based compensation expense	$	7.8	$	9.6	$	9.2

As of December 31, 2017, there was $17.7 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements, of which $10.5 million relates to RSUs, $3.0 million relates to stock options, and $4.2 million relates to restricted stock. These amounts are expected to be recognized over a weighted average period of 1.64 years.

Tax benefits related to stock options exercised and vesting of restricted stock were $6.2 million in 2017, $4.8 million in 2016, and $23.3 million in 2015.