On May 22, 2007, our stockholders adopted a Long-Term Incentive Plan (“LTIP”) which provided an additional 5.0 million shares that could be granted in the form of stock options, stock appreciation rights, restricted stock awards, performance units and performance awards. Under the LTIP, the exercise price of shares granted could not be less than 100% of the fair market value at the date of the grant.

On May 24, 2016, our stockholders adopted the 2016 Long-Term Incentive Plan ("2016 Plan") which provides for approximately 13.4 million shares, comprised of 5.1 million new shares provided for under the 2016 Plan, approximately 0.6 million shares that were available for issuance under the previous LTIP that are now authorized for issuance under the 2016 Plan, approximately 3.9 million shares that were approved by the stockholders on May 15, 2018, and an additional 3.8 million shares that were approved by the stockholders on May 12, 2020.

Under the 2016 Plan, shares can be granted in the form of stock options, stock appreciation rights, restricted stock awards, performance awards, dividend equivalent rights, and other awards. Under the 2016 Plan, the exercise price of shares granted may not be less than 100% of the fair market value at the date of the grant. The 2016 Plan is administered by the Compensation Committee of the Board of Directors or such other committee of the Board of Directors as is designated by the Board of Directors (the “Committee”). Membership on the Committee is limited to independent directors. The Committee may delegate certain duties to one or more officers of the Company as provided in the 2016 Plan. The Committee determines the persons to whom awards are to be made, determines the type, size and terms of awards, interprets the 2016 Plan, establishes and revises rules and regulations relating to the 2016 Plan and makes any other determinations that it believes necessary for the administration of the 2016 Plan.

The following weighted average assumptions were used to determine the fair value of the stock options granted on the original grant date for expense recognition purposes for options granted during the nine months ended September 30, 2023 and 2022 using a Black Scholes-Merton Model:


	Nine months ended
	September 30, 2023	September 30, 2022
Directors and SLT1:
Expected (annual) dividend rate	$0.32	$0.25
Expected volatility	37.89%	36.00%
Risk-free interest rate	4.39%	2.21%
Expected life (in years)	4.0	4.0
Employees:
Expected (annual) dividend rate	$0.32	$0.25
Expected volatility	38.30%	37.38%
Risk-free interest rate	4.41%	2.20%
Expected life (in years)	3.0	3.0
1 SLT consists of officers and key members of management.

The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on historical volatility of our stock over time periods equal to the expected life at grant date.


Range of Exercise Prices					Number of Shares	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Intrinsic Value (in thousands)
$	13.95	-	$	27.58	1,528,983	4.52	$	24.70	$	49,191
$	28.28	-	$	37.16	534,293	6.72	30.91		13,870
$	37.63	-	$	69.62	210,415	7.44	48.06		1,857
			Total		2,273,691	5.31	$	28.32	$	64,918


Stock Options	Shares	Weighted Average Exercise Price
Outstanding at December 31, 2022	4,560,520	$	30.14
Granted	326,506	61.16
Exercised	(864,524)	29.19
Forfeited or Expired	(106,291)	33.90
Outstanding at September 30, 2023	3,916,211	$	32.83
Exercisable at September 30, 2023	2,273,691	$	28.32

The total pre-tax compensation cost related to unvested stock options not yet recognized as of September 30, 2023 is $10.7 million and is expected to be recognized over a weighted average period of approximately 1.3 years.

The total intrinsic value of options exercised during the nine months ended September 30, 2023 and 2022 was $27.6 million and $6.7 million, respectively. The cash received from options exercised during the nine months ended September 30, 2023 and 2022 was $25.3 million and $11.0 million, respectively. The impact of these cash receipts is included in financing activities in the accompanying consolidated statements of cash flows.

The fair value of restricted stock awards is based on the fair market value of AAON, Inc. common stock on the respective grant dates, reduced for the present value of dividends. At September 30, 2023, unrecognized compensation cost related to unvested restricted stock awards was approximately $5.7 million, which is expected to be recognized over a weighted average period of approximately 1.5 years.


	Shares	Weighted Average Grant Date Fair Value
Unvested at December 31, 2022	217,168	$	33.34
Granted	73,633	59.70
Vested	(92,977)	32.57
Forfeited	(4,846)	38.52
Unvested at September 30, 2023	192,978	$	43.64

We have awarded performance restricted stock units ("PSUs") to certain officers and employees under our 2016 Plan. Unlike our restricted stock awards, these PSUs are not considered legally outstanding and do not accrue dividends during the vesting period. These PSUs vest based on the level of achievement with respect to the Company's total shareholder return ("TSR") benchmarked against similar companies included in the capital goods sector of the S&P SmallCap 600 Index. The TSR measurement period is three years. At the end of the measurement period, each award will be converted into common stock at 0% to 200% of the PSUs held, depending on overall TSR as compared to the S&P SmallCap 600 Index benchmark companies.

The total pre-tax compensation cost related to unvested PSUs not yet recognized as of September 30, 2023 is $5.0 million and is expected to be recognized over a weighted average period of approximately 1.7 years.

The following weighted average assumptions were used to determine the fair value of the PSUs granted on the original grant date for expense recognition purposes for PSUs granted during the nine months ended September 30, 2023 and 2022 using a Monte Carlo Model:


	Nine months ended
	September 30, 2023	September 30, 2022

Expected (annual) dividend rate	$0.32	$0.25
Expected volatility	32.71%	37.60%
Risk-free interest rate	4.66%	2.00%
Expected life (in years)	2.8	2.8

The expected term of the PSUs is based on their remaining performance period. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on historical volatility of our stock over time periods equal to the expected life at grant date.


	Shares	Weighted Average Grant Date Fair Value
Unvested at December 31, 2022	93,982	$	36.62
Granted	58,130	84.42
Vested	—	—
Forfeited	—	—
Unvested at September 30, 20231	152,112	$	54.88
1Consists of 22,222 PSUs cliff vesting December 31, 2023, 71,760 PSUs cliff vesting December 31, 2024, and 58,130 PSUs cliff vesting December 31, 2025.

As part of the December 2021 acquisition of BASX, the Company granted awards to key employees of BASX ("Key Employee Awards"). Unlike our restricted stock awards under the 2016 Plan, the Key Employee Awards are not considered legally outstanding and do not accrue dividends during the vesting period. The potential future issuance of the Key Employee Awards is contingent upon BASX meeting certain post-closing earn-out milestones during each of the years ending 2021, 2022 and 2023 as defined by the BASX acquisition membership interest purchase agreement ("MIPA Agreement") and continued employment with the Company. At the end of the earn-out period, ending December 31, 2023, each eligible Key Employee Award will vest and be converted into common stock. The fair value of Key Employee Awards is based on the fair market value of AAON common stock on the grant date.

The total pre-tax compensation cost related to unvested Key Employee Awards not yet recognized as of September 30, 2023 is $0.3 million and is expected to be recognized over a weighted average period of approximately 0.3 years.


	Three Months Ended				Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Grant date fair value of awards during the period:	(in thousands)
Options	$	106	$	480	$	5,224	$	5,979
PSUs	—		109		4,907		2,190
Restricted stock	246		164		4,396		3,319

Total	$	352	$	753	$	14,527	$	11,488

Share-based compensation expense:
Options	$	2,228	$	2,104	$	6,604	$	6,483
PSUs	737		188		1,820		665
Restricted stock	1,053		768		2,903		2,290
Key employee awards	261		261		775		791
Total	$	4,279	$	3,321	$	12,102	$	10,229

Income tax benefit related to share-based compensation:
Options	$	478	$	531	$	5,639	$	1,022
Restricted stock	16		3		680		231
Total	$	494	$	534	$	6,319	$	1,253

Share-based compensation expense is recognized on a straight-line basis over the service period of the related share-based compensation award. Historically, stock options and restricted stock awards, granted to employees, vested at a rate of 20% per year. Restricted stock awards granted to directors historically vested one-third each year or, if granted on or after May 2019, vest over the shorter of directors' remaining elected term or one-third each year. As of March 2021, all new grants of stock options and restricted stock awards, granted to employees, vest at a rate of 33.3% per year. Forfeitures are accounted for as they occur.

Historically, if the employee or director is retirement eligible (as defined by the applicable LTIP or 2016 Plan) or becomes retirement eligible during the service period of the related share-based compensation award, the service period (and compensation expense recognition) is the lesser of 1) the grant date, if retirement eligible on grant date, or 2) the period between grant date and retirement eligible date. All stock options and restricted stock awards granted on or after March 1, 2020 to retirement eligible employees or directors contain a one-year employment requirement (minimum service period) or the entire award is forfeited. Forfeitures are accounted for as they occur.

The PSUs cliff vest on December 31, at the end of the third year from the date of grant. Share-based compensation expense is recognized on a straight-line basis over the service period of PSUs. The PSUs are subject to several service and market conditions, as defined by the PSU agreement, which allows the holder to retain a pro-rata amount of awards as a result of certain termination conditions, retirement, change in common control, or death. Forfeitures are accounted for as they occur.