Note 17. Stock-Based Compensation Plans

Stock option plans

The Company has five active stock option plans, two of which provide for the grant of stock options to employees, one provides for the grant of stock options to non-employee directors, and another provides for the grant of stock options to key executives on a matching basis provided they use a proportion of their annual bonus to purchase common stock in the Company on the open market or from the Company. The fifth plan is a savings plan which provides for the grant of stock options to all Company employees provided they commit to make regular savings over a pre-defined period which can then be used to purchase common stock upon vesting of the options. The stock options have vesting periods ranging from 24 months to 6 years and in all cases stock options granted expire within 10 years of the date of grant. All grants are at the sole discretion of the Compensation Committee of the Board of Directors. Grants may be priced at market value or at a premium or discount. The aggregate number of shares of common stock reserved for issuance which can be granted under the plans is 2,640,000.

The fair value of stock options is measured on the grant date using either the Black-Scholes model, or in cases where performance criteria are dependent upon external factors such as the Company’s stock price, using a Monte Carlo model. The following weighted average assumptions were used to determine the grant-date fair value of options:


	2014			2013			2012
Dividend yield		1.34	%		0.11	%		0.00	%
Expected life		5 years			5 years			5 years
Volatility		30.7	%		41.1	%		60.1	%
Risk free interest rate		0.97	%		0.46	%		0.43	%

The following table summarizes the transactions of the Company’s stock option plans for the year ended December 31, 2014:


	Number of Options			Weighted Average Exercise Price		Weighted Average Grant-Date Fair Value
Outstanding at December 31, 2013		447,390		$	7.33
Granted – at discount		376,925		$	27.69	$	14.26
– at market value		21,959		$	46.03	$	14.18
Exercised		(103,282	)	$	4.47
Forfeited		(14,352	)	$	5.84

Outstanding at December 31, 2014		728,640		$	19.55

At December 31, 2014, there were 134,921 stock options that were exercisable, 51,001 had performance conditions attached.

The Company’s policy is to issue shares from treasury stock to holders of stock options who exercise those options, but if sufficient treasury stock is not available, the Company will issue previously unissued shares of stock to holders of stock options who exercise options.

The stock option compensation cost for 2014, 2013 and 2012 was $2.6 million, $2.5 million and $3.1 million, respectively. The total intrinsic value of options exercised in 2014, 2013 and 2012 was $0.9 million, $4.7 million and $1.5 million, respectively.

The total compensation cost related to non-vested stock options not yet recognized at December 31, 2014 was $4.7 million and this cost is expected to be recognized over the weighted-average period of 2.30 years.

The cash tax benefit realized from stock option exercises totaled $0.9 million, $5.7 million and $2.7 million in 2014, 2013 and 2012, respectively. The excess tax benefit classified in financing activities was $0.4 million, $3.8 million and $2.2 million in 2014, 2013 and 2012, respectively.

No stock options awards were modified in 2014, 2013 or 2012.

Stock equivalent units

The Company awards Stock Equivalent Units (“SEUs”) from time to time as a long-term performance incentive. SEUs are cash settled equity instruments conditional on certain performance criteria and linked to the Innospec Inc. share price. SEUs have vesting periods ranging from 11 months to 4 years and in all cases SEUs granted expire within 10 years of the date of grant. Grants may be priced at market value or at a premium or discount. There is no limit to the number of SEUs that can be granted. As at December 31, 2014 the liability for SEUs of $7.2 million is located in accrued liabilities in the consolidated balance sheets until they are cash settled.

The fair value of SEUs is measured at the balance sheet date using either the Black-Scholes model, or in cases where performance criteria are dependent upon external factors such as the Company’s stock price, using a Monte Carlo model. The following assumptions were used to determine the fair value of SEUs at the balance sheet dates:


	2014			2013			2012
Dividend yield		1.29	%		1.08	%		0.00	%
Volatility		26.0	%		37.6	%		43.8	%
Risk free interest rate		1.10	%		0.78	%		0.36	%

The following table summarizes the transactions of the Company’s SEUs for the year ended December 31, 2014:


	Number of SEUs			Weighted Average Exercise Price		Weighted Average Grant-Date Fair Value
Outstanding at December 31, 2013		403,262		$	3.64
Granted – at discount		54,713		$	0.00	$	33.84
– at market value		7,147		$	46.03	$	14.18
Exercised		(170,317	)	$	4.70
Forfeited		(8,242	)	$	5.49

Outstanding at December 31, 2014		286,563		$	3.41

At December 31, 2014, there were 91,226 SEUs that were exercisable, 79,868 had performance conditions attached.

The charges for SEUs are spread over the life of the award subject to a revaluation to fair value each quarter. The revaluation may result in a charge or a credit to the income statement in the quarter dependent upon our share price and other performance criteria.

The SEU compensation cost for 2014, 2013 and 2012 was $2.0 million, $7.1 million and $6.8 million, respectively. The total intrinsic value of SEUs exercised in 2014, 2013 and 2012 was $3.7 million, $2.2 million and $1.3 million, respectively.

The weighted-average remaining vesting period of non-vested SEUs is 1.17 years.

Additional exceptional long-term incentive plan

In the first quarter of 2014, Innospec implemented an additional exceptional long-term incentive plan to reward selected executives with a cash bonus for delivering exceptional performance. One of the elements of the plan is payable only if the Innospec share performance matches or out-performs that of competitors, as measured by the Russell 2000 Index, over the performance period January 1, 2014 to December 31, 2016. The maximum cash bonus payable under this element of the plan is $3 million and is accounted for as share-based compensation. As such, the fair value of these liability cash-settled long-term incentives is calculated on a quarterly basis. The fair value is calculated using a Monte Carlo model and is summarized as follows:


(in millions)	2014
Balance at January 1	$	0.0
Compensation charge for the period		0.1

Balance at December 31	$	0.1

The following assumptions were used in the Monte Carlo model at December 31, 2014:


	2014
Dividend yield		1.29	%
Volatility of Innospec’s share price		26.0	%
Risk free interest rate		1.10	%