15. Stock Incentive Plan

Commencing with grants in February 2016, employees receive 50% of their long-term incentive (LTI) grant value in the form of performance shares (PSs) and 50% in the form of restricted stock units (RSUs).

The grantee may earn 0%-200% of the target number of PSs based on the Company’s achievement of specified targets. The performance targets are for: 1) the Company’s compound annual growth rate (CAGR) for sales and 2) the Company’s CAGR in earnings per share relative to an established benchmark growth rate. Each performance target is weighted 50% and results are measured at the end of the three-year performance period. Each PS represents a promise to transfer a share of the Company’s common stock to the employee following completion of the performance period, provided that the performance goals mentioned above are met and provided, further, that the grantee remains employed through the performance period, subject to certain limited exceptions. The RSUs granted on February 15, 2016 and May 9, 2016 vest in three approximately equal annual installments beginning on the first anniversary of the grant date, and the RSUs granted on February 19, 2017 will vest in one installment on the third anniversary of the grant date, in each case subject to the grantee’s continued employment with the Company on each vesting date, subject to acceleration of vesting in certain circumstances. The RSUs and PSs granted in 2017 entitle the grantee to receive dividend equivalents in the form of additional RSUs and PSs subject to the same vesting conditions as the underlying RSUs and PSs, respectively.

The fair value of the RSUs and PSs granted under the LTI program are calculated as the grant date fair value of the shares expected to be issued. For the grants made during 2017, the fair value of a PS and a RSU is calculated by using the closing stock price at grant date. For the grants made during 2016 and earlier, the fair value of a RSU and a PS was estimated using the Black Scholes valuation model because of the difference in the value resulting from dividend rights. The grant date fair value for the RSUs at February 19, 2017 was $7.9 million. This cost will be amortized straight line over the vesting period. The grant date fair value of the PSs at February 19, 2017 was also $7.9 million. For PSs, the grant date fair value of the number of awards expected to vest is based on the Company’s best estimate of ultimate performance against the respective targets and is recognized as compensation cost on a straight-line basis over the requisite vesting period of the awards. The Company assesses the expected achievement levels at the end of each quarter. As of December 31, 2017, the Company believes it is probable that the performance conditions for the two grants will be met, although at a different level, and has accrued for the compensation expense accordingly. The cumulative effect of the change in estimate is recognized in the period of change as an adjustment to compensation expense.

The Company’s non-employee directors historically received grants of fully-vested shares of the Company’s common stock as payment of 50% of their annual base retainer, which shares were granted in arrears following a year of service. The Company’s non-employee directors received their last grant of fully-vested shares of the Company’s common stock pursuant to the prior program on the date of the 2017 annual general meeting of stockholders (AGM). The grant date fair value for the fully-vested shares of the Company’s common stock granted to the Company’s non-employee directors at May 9, 2017 was $1.2 million. Pursuant to the Company’s new director compensation policy, commencing May 2017, the Company’s non-employee directors receive RSUs as payment of 50% of their annual base retainer, which RSUs vest in one installment on the earlier of the date of the next AGM or the first anniversary of the grant date, in each case subject to the grantee’s continued service as a non-employee director on the vesting date. The RSUs granted to the Company’s non-employee directors entitle the grantee to receive dividend equivalents in the form of additional RSUs subject to the same vesting conditions as the underlying RSUs. The grant date fair value for the RSUs granted to the Company’s non-employee directors at May 9, 2017 was $1.0 million.

The source of the shares issued upon vesting of awards is generally from treasury shares. The Stock Incentive Plan provides for the issuance of up to 9,585,055 common shares for awards. At December 31, 2017, 6,438,452 of these shares have been issued for awards which includes 29,234 shares of common stock issued to non-executive directors in satisfaction of all or a portion of his or her annual base retainer for service on the Board. Included within the RSUs granted in 2017 are 9,297 RSUs issued to non-executive directors in satisfaction of all or a portion of his or her annual base retainer for service on the Board.

During 2015 and earlier, the awards were given in the form of stock options (SOs) and RSUs. All SOs were granted for 10-year terms, had an exercise price equal to the fair value of the share at the date of grant, and became exercisable after one year of continued employment following the grant date. The average grant date fair values of SOs were calculated using the Black-Scholes valuation model. The Company used historical exercise data for determining the expected life assumption. Expected volatility was based on historical and implied volatility. The table below includes the assumptions for all awards issued:

	2017		2016			2015
SOs
Risk-free interest rate		—		—			1.1	%
Dividend yield ¹⁾		—		—			2.3	%
Expected life in years		—		—			3.4
Expected volatility		—		—			24.0	%

PSs and RSUs
Dividend yield ²⁾		—		2.2	%		—

1)	The dividend yield assumption is used for both SOs and the RSUs granted in 2015.

2)	Dividend equivalent rights applied to LTI program starting 2017.

The total stock (RSUs, PSs and SOs) compensation cost recognized in the Consolidated Statements of Net Income for 2017, 2016 and 2015 was $8.5 million, $11.1 million and $8.2 million, respectively. The total compensation cost related to non-vested awards not yet recognized is $14.8 million for RSUs and PSs and the weighted average period over which this cost is expected to be recognized is approximately 1.9 years. There are no remaining unrecognized compensation costs associated with stock options.

Information on the number of RSUs, PSs and SOs related to the Stock Incentive Plan during the period of 2015 to 2017 is as follows.

RSUs	2017			2016			2015
Weighted average fair value at grant date	$	105.64		$	100.77		$	105.87

Outstanding at beginning of year		188,494			204,552			198,285
Granted		84,771			71,870			74,908
Shares issued		(70,795	)		(66,651	)		(58,186	)
Cancelled/Forfeited/Expired		(14,060	)		(21,277	)		(10,455	)
Outstanding at end of year		188,410			188,494			204,552

The grant date fair values for RSUs granted in 2014, 2013 and 2012 (vested in 2017, 2016 and 2015) were $5.7 million, $5.9 million and $4.5 million, respectively. The aggregate intrinsic value for RSUs outstanding at December 31, 2017 was $23.9 million.

PSs	2017			2016			2015
Weighted average fair value at grant date	$	105.87		$	98.57		N/A

Outstanding at beginning of year		138,548			—		N/A
Change in performance conditions		(69,274	)		—		N/A
Granted		75,379			143,740		N/A
Shares issued		—			—		N/A
Cancelled/Forfeited/Expired		(4,762	)		(5,192	)	N/A
Outstanding at end of year		139,891			138,548		N/A

The PSs granted include assumptions regarding the ultimate number of shares that will be issued based on the probability of achievement of the performance conditions. Changes in those assumptions result in changes in the estimated shares to be issued which is reflected in the “Change in performance conditions” line above. The aggregate intrinsic value for PSs outstanding at December 31, 2017 was $16.7 million.

SOs	Number of options			Weighted average exercise price
Outstanding at Dec 31, 2014		538,825		$	70.38
Granted		187,996			113.51
Exercised		(244,182	)		68.82
Cancelled/Forfeited/Expired		(9,588	)		92.70
Outstanding at Dec 31, 2015		473,051		$	87.88
Granted		—			—
Exercised		(51,084	)		88.10
Cancelled/Forfeited/Expired		(10,858	)		102.31
Outstanding at Dec 31, 2016		411,109		$	87.47
Granted		—			—
Exercised		(100,184	)		79.58
Cancelled/Forfeited/Expired		(10,976	)		112.20
Outstanding at Dec 31, 2017		299,949		$	89.20

OPTIONS EXERCISABLE
At December 31, 2015		290,487		$	71.76
At December 31, 2016		254,842		$	71.48
At December 31, 2017		299,949		$	89.20

The following summarizes information about SOs outstanding and exercisable at December 31, 2017:

RANGE OF EXERCISE PRICES	Number outstanding		Remaining contract life (in years)		Weighted average exercise price
$16.31 – $19.96		13,744		1.14	$	16.31
$44.70 – $49.60		17,125		2.14	$	44.70
$51.67 – $59.01		6,875		0.14	$	51.67
$67.00 – $69.18		51,450		4.76	$	68.35
$72.95 – $94.87		87,474		5.55	$	90.52
$113.36 – $126.46		123,281		7.13	$	113.36
		299,949		5.54	$	89.20

RANGE OF EXERCISE PRICES	Number exercisable		Remaining contract life (in years)		Weighted average exercise price
$16.31 – $19.96		13,744		1.14	$	16.31
$44.70 – $49.60		17,125		2.14	$	44.70
$51.67 – $59.01		6,875		0.14	$	51.67
$67.00 – $69.18		51,450		4.76	$	68.35
$72.95 – $94.87		87,474		5.55	$	90.52
$113.36 – $126.46		123,281		7.13	$	113.36
		299,949		5.54	$	89.20

The total aggregate intrinsic value, which is the difference between the exercise price and $127.08 (closing price per share at December 31, 2017), for all “in the money” SOs, both outstanding and exercisable as of December 31, 2017, was $11.3 million. The average grant date fair value of SOs granted during 2015 was estimated at $16.72 per share.