Note 12. Share-Based Employee Compensation

As of September 30, 2017, the Company had two shareholder approved stock plans under which shares were available for equity-based awards: the Callaway Golf Company Amended and Restated 2004 Incentive Plan (the "2004 Incentive Plan") and the 2013 Non-Employee Directors Stock Incentive Plan (the "2013 Directors Plan"). From time to time, the Company grants stock options, restricted stock units, performance share units, phantom stock units, stock appreciation rights and other awards under these plans.

The table below summarizes the amounts recognized in the financial statements for the three and nine months ended September 30, 2017 and 2016 for share-based compensation, including expense for stock options, restricted stock units, performance share units and cash settled stock appreciation rights. The increase in stock compensation expense was primarily due performance share units, which were adjusted to reflect the Company's anticipated performance level for these awards.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
	(In thousands)
Cost of sales	$	287	$	198	$	650	$	520
Operating expenses	3,894		2,067		8,901		6,280
Total cost of share-based compensation included in income, before income tax	$	4,181	$	2,265	$	9,551	$	6,800

Stock Options

Stock options granted under the 2004 Incentive Plan are valued using the Black-Scholes option-pricing model on the date of grant. The model uses various assumptions, including a risk-free interest rate, the estimated term of the options and the estimated stock price volatility and dividend yield. Compensation expense for stock options is recognized over the vesting period and is reduced by an estimate for forfeitures, which is based on the Company’s historical forfeitures of unvested options and awards.

There were no stock options granted during the first nine months of 2017 or 2016. Total compensation expense recognized for stock options during the three months ended September 30, 2017 and 2016 was $9,000 and $8,000, respectively. Total compensation expense recognized for stock options during the nine months ended September 30, 2017 and 2016 was $25,000 and $137,000, respectively. At September 30, 2017, the total amount of unamortized expense related to stock options was $23,000, which will be recognized over a weighted-average period of 0.7 years.

Restricted Stock Units

Restricted stock units awarded under the 2004 Incentive Plan and the 2013 Directors Plan are valued at the Company’s closing stock price on the date of grant. Restricted stock units generally vest over a one- to three-year period. Compensation expense for restricted stock units is recognized on a straight-line basis over the vesting period and is reduced by an estimate for forfeitures. During the three months ended September 30, 2017 and 2016, the Company granted 155,000 and 126,000 shares underlying restricted stock units, respectively, at a weighted average grant-date fair value of $12.93 and $11.49, respectively. During the nine months ended September 30, 2017 and 2016, the Company granted 680,000 and 665,000 shares underlying restricted stock units, respectively, at a weighted average grant-date fair value of $10.94 and $9.20, respectively.

Total compensation expense, net of estimated forfeitures, recognized for restricted stock units during the three months ended September 30, 2017 and 2016 was $1,430,000 and $1,055,000, respectively, and $4,090,000 and $3,157,000, for the nine months ended September 30, 2017 and 2016, respectively. At September 30, 2017, the Company had $10,067,000 of total unamortized compensation expense related to non-vested restricted stock units. That cost is expected to be recognized over a weighted-average period of 2.6 years.

Performance Share Units

Performance share units granted under the 2004 Incentive Plan are stock-based awards in which the number of shares ultimately received depends on the Company's performance against specified metrics over a one- to three-year performance period from the date of grant. These performance metrics are established by the Company at the beginning of the performance period. At the end of the performance period, the number of shares of stock that could be issued is fixed based upon the degree of achievement of the performance goals. The number of shares that could be issued can range from 0% to 200% of the participant's target award. Performance share units are initially valued at the Company's closing stock price on the date of grant. Stock compensation expense, net of estimated forfeitures, is recognized on a straight-line basis over the vesting period. The expense recognized over the vesting period is adjusted up or down based on the anticipated performance level during the performance period. If the performance metrics are not probable of achievement during the performance period, compensation expense would be reversed. The awards are forfeited if the threshold performance metrics are not achieved as of the end of the performance period. The performance share units cliff-vest in full three years from the date of grant.

The Company granted 462,000 and 420,000 shares underlying performance share units during the nine months ended September 30, 2017 and 2016, respectively, at a weighted average grant-date fair value of $10.68 and $8.61 per share, respectively. During the three months ended September 30, 2017, the Company granted 92,450 shares underlying performance share units at a weighted average grant-date fair value of $12.98. There were no shares underlying performance share units granted during the three months ended September 30, 2016. The awards granted in 2017 and 2016 are subject to a three-year performance period provided that (i) if certain first year performance goals are achieved, the participant could earn up to 50% of the three-year target award shares, subject to continued service through the vesting date, and (ii) if certain cumulative first- and second-year performance goals are achieved, the participant could earn up to an aggregate of 80% of the three-year target award shares (which includes any shares earned during the first year), subject to continued service through the vesting date. Based on the Company’s performance in 2016, participants earned a minimum of 50% of the target award shares granted in 2016, subject to continued service through the vesting date.

During the three months ended September 30, 2017 and 2016, the Company recognized total compensation expense, net of estimated forfeitures, for performance share units of $2,742,000 and $1,073,000, respectively, and $5,468,000 and $3,170,000 for the nine months ended September 30, 2017 and 2016, respectively. At September 30, 2017, unamortized compensation expense related to these awards was $10,750,000, which is expected to be recognized over a weighted-average period of 1.4 years.

Stock Appreciation Rights

Cash settled stock appreciation rights ("SARs") granted under the 2004 Incentive Plan are valued using the Black-Scholes option-pricing model on the date of grant. SARs are subsequently remeasured at each interim reporting period based on a revised Black-Scholes value until they are exercised. SARs generally vest over a three-year period. There were no outstanding SARs as of September 30, 2017. There were no SARs granted during the first nine months of 2017 or 2016, and there were no outstanding SARs as of September 30, 2017.

The Company recognized $129,000 of compensation expense related to previously granted SARs during the three months ended September 30, 2016. There were no outstanding SARs during the three months ended September 30, 2017. The Company reversed $32,000 and recognized $336,000 of compensation expense related to previously granted SARs during the nine months ended September 30, 2017 and 2016, respectively. Accrued compensation expense for these awards was $224,000 at December 31, 2016, which was recorded in accrued employee compensation and benefits in the accompanying consolidated condensed balance sheet. There were no outstanding amounts accrued as of September 30, 2017.