Stock-Based Compensation

In accordance with ASC 718, the Company recognizes compensation costs related to share-based payment transactions. Generally, compensation cost is measured based on the grant-date fair value of the equity instruments issued. Compensation cost is recognized over the requisite service period, generally as the awards vest.

The Rexnord Corporation Performance Incentive Plan, which was last approved by stockholders in fiscal 2017 (the "Plan"), is utilized to provide performance incentives to the Company's officers, employees, directors and certain others by permitting grants of equity awards (for common stock), as well as performance-based cash awards, to such persons, to encourage them to maximize Rexnord's performance and create value for Rexnord's stockholders. To date, stock options, Restricted Stock Units ("RSUs") and Performance Stock Units ("PSUs") have been issued under the Plan.

The options granted under the Plan have a maximum term of 10 years after the grant date. Options granted from the inception of the Plan through July 31, 2014 vest 50% three years after the grant date and the remaining 50% vest five years after the grant date. Options and RSUs granted from July 31, 2014 through May 21, 2015 vest ratably over four years. Options and RSUs granted subsequent to May 21, 2015 generally vest ratably over 3 years. RSUs granted to nonemployee directors vest immediately, but shares are not issued until six months after the Director's cessation of service. PSUs granted cliff vest after 3 years.

The Plan permits the grant of awards that may deliver up to an aggregate of 12,150,000 shares of common stock further subject to limits within the meaning of Section 162(m) of the Internal Revenue Code, to any individual in a single year. The Plan is administered by the Compensation Committee.

During fiscal 2019, 2018 and 2017, the Company recorded $22.6 million, $20.0 million and $13.1 million of stock-based compensation expense, respectively (the related tax benefit on these amounts was $5.2 million for fiscal 2019, $6.5 million for fiscal 2018, and $4.7 million for fiscal 2017). During fiscal 2019, 2018 and 2017, the Company also recorded $1.9 million, $1.3 million and $8.3 million, respectively, of an excess tax benefit related to stock options exercised during each fiscal year. As of March 31, 2019, there was $19.5 million of total unrecognized compensation cost related to non-vested stock options, RSUs and PSUs granted under the Plan. That cost is expected to be recognized over a weighted-average period of 1.73 years.

Stock Options

The fair value of each option granted under the Plan was estimated on the date of grant using the Black-Scholes valuation model that uses the following weighted-average assumptions:



	Years Ended
	March 31, 2019		March 31, 2018		March 31, 2017
Expected option term (in years)	6.5		6.5		6.5
Expected volatility factor	30	%	31	%	29	%
Weighted-average risk free interest rate	2.85	%	1.99	%	1.58	%
Expected dividend rate	0.0	%	0.0	%	0.0	%

Management’s estimate of the option term for options granted under the Plan is based on the midpoint between when the options vest and when they expire. The Company uses the simplified method to determine the expected term, as management does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The Company’s expected volatility assumption for options granted in fiscal 2019 and 2018 was based on the Company's own historical volatility, while the expected volatility assumption for options granted prior to fiscal 2018 was based on the expected volatilities of publicly-traded companies within the Company’s industry, due to the limited period of time its common stock shares had been publicly traded. The weighted average risk free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. Management also assumes expected dividends of zero. The weighted-average grant date fair value of options granted under the Plan during fiscal 2019, 2018 and 2017 was $10.59, $8.12 and $6.41, respectively. The total fair value of options vested during fiscal 2019, 2018 and 2017 was $12.3 million, $16.0 million and $5.8 million, respectively.

A summary of stock option activity during fiscal 2019, 2018 and 2017 is as follows:



	Years Ended
	March 31, 2019				March 31, 2018				March 31, 2017
	Shares		Weighted Avg. Exercise Price		Shares		Weighted Avg. Exercise Price		Shares		Weighted Avg. Exercise Price
Number of shares under options:
Outstanding at beginning of period	8,117,947		$	19.50	7,770,670		$	18.73	7,854,685		$	15.10
Granted	564,666		28.88		1,176,205		23.17		2,602,014		19.72
Exercised (1)	(642,953	)	14.21		(543,443	)	14.89		(2,116,571	)	5.18
Canceled/Forfeited	(195,749	)	23.95		(285,485	)	22.55		(569,458	)	23.34
Outstanding at end of period (2)	7,843,911		$	20.49	8,117,947		$	19.50	7,770,670		$	18.73
Exercisable at end of period (3)	5,833,565		$	19.42	4,810,737		$	17.93	3,221,622		$	15.25

______________________


(1)	The total intrinsic value of options exercised during fiscal 2019, 2018 and 2017 was $9.9 million, $6.4 million and $29.1 million, respectively.


(2)	The weighted average remaining contractual life of options outstanding was 5.5 years at March 31, 2019, 6.1 years at March 31, 2018 and 6.6 years at March 31, 2017. The aggregate intrinsic value of options outstanding at March 31, 2019 was $41.2 million.


(3)	The weighted average remaining contractual life of options exercisable was 4.6 years at March 31, 2019, 4.7 years at March 31, 2018 and 4.6 years at March 31, 2017. The aggregate intrinsic value of options exercisable at March 31, 2019 was $36.0 million.



	Shares		Weighted Avg. Exercise Price
Nonvested options at beginning of period	3,307,210		$	21.77
Granted	564,666		28.88
Vested	(1,706,123	)	21.78
Canceled/Forfeited	(155,407	)	23.71
Nonvested options at end of period	2,010,346		$	23.61

Restricted Stock Units

During fiscal 2019, 2018 and 2017 the Company granted restricted stock units ("RSUs") to certain of its officers, directors, and employees. The fair value of each award is determined based on the Company's closing stock price on the date of grant. A summary of RSU activity during fiscal 2019, 2018, and 2017 is as follows:



	Years Ended
	March 31, 2019				March 31, 2018				March 31, 2017
	Units		Weighted Avg. Grant Date Fair Value		Units		Weighted Avg. Grant Date Fair Value		Units		Weighted Avg. Grant Date Fair Value
Nonvested RSUs at beginning of period	368,182		$	21.55	322,142		$	20.59	125,307		$	24.67
Granted	300,119		28.87		250,013		23.19		279,445		19.53
Vested	(149,531	)	24.30		(150,784	)	21.92		(48,207	)	24.01
Canceled/Forfeited	(101,423	)	21.10		(53,189	)	22.41		(34,403	)	22.00
Nonvested RSUs at end of period	417,347		$	25.94	368,182		$	21.55	322,142		$	20.59

Performance Stock Units

During fiscal 2019, 2018, and 2017, the Company granted performance stock units ("PSUs") to certain of its officers and employees. Those PSUs have a three-year performance period, and are earned and vest, subject to continued employment, based in part on performance relative to metrics determined by the Compensation Committee. The number of performance share awards earned, which can range between 0% and 200% of the target awards granted depending on the Company's actual performance during the three-year performance period, will be satisfied with Rexnord common stock. A summary of PSU activity during fiscal 2019, 2018, and 2017 is as follows:



	Years Ended
	March 31, 2019				March 31, 2018			March 31, 2017
	Units		Weighted Avg. Grant Date Fair Value		Units	Weighted Avg. Grant Date Fair Value		Units		Weighted Avg. Grant Date Fair Value
Nonvested PSUs at beginning of period	453,001		$	25.53	259,930	$	24.74	49,136		$	28.57
Granted	183,069		28.91		193,071	26.58		219,266		23.95
Vested	(217,319	)	23.89		—	—		—		—
Canceled/Forfeited	(67,647	)	28.37		—	—		(8,472	)	25.90
Nonvested PSUs at end of period	351,104		$	27.76	453,001	$	25.53	259,930		$	24.74

In fiscal 2019, PSUs were granted with vesting based on goals related to free cash flow conversion and return on invested capital. In fiscal 2018 and 2017, PSUs were granted with vesting based on goals related to free cash flow conversion and relative total shareholder return. The fair value of the portion of PSUs with vesting based on free cash flow conversion and return on invested capital is determined based on the Company's closing stock price on the date of grant. The fair value of PSUs with vesting based on relative total shareholder return is determined utilizing the Monte Carlo simulation model. The following weighted-average assumptions were used in the Monte Carlo simulation model, which were based on historical data and standard industry valuation practices and methodology:



	Years Ended
	March 31, 2018		March 31, 2017
Expected volatility factor	31	%	30	%
Weighted-average risk-free interest rate	1.45	%	0.86	%
Expected dividend rate	0.0	%	0.0	%
PSU fair value per share	$31.25		$27.67