Note 20. Stock-Based Compensation

ARRIS grants stock awards under its 2016 Stock Incentive Plan (“SIP”). Upon approval of the 2016 SIP, all shares available for grant under the Company’s other existing stock incentive plans were no longer available. The Board of Directors approved the SIP and the prior plans to facilitate the retention and continued motivation of key employees, consultants and directors, and to align more closely their interests with those of the Company and its stockholders.

Awards under the SIP may be in the form of stock options, stock grants, stock units, restricted stock, stock appreciation rights, performance shares and units, and dividend equivalent rights. A total of 31,215,000 shares of the Company’s shares may be issued pursuant to the SIP. The SIP has been designed to allow for flexibility in the form of awards; however, awards denominated in ordinary shares other than stock options and stock appreciation rights will be counted against the SIP limit as 1.87 shares for every one share covered by such an award. The vesting requirements for issuance under the SIP may vary; however, awards generally are required to have a minimum three-year vesting period or term.

Restricted Stock (Non-Performance) Units

ARRIS grants restricted stock units to certain employees and its non-employee directors. The Company records a fixed compensation expense equal to the fair market value of the underlying shares of restricted stock unit granted on a straight-line basis over the requisite services period for the restricted shares. The Company applies an estimated forfeiture rate based upon historical rates. The fair value is the market price of the underlying ordinary shares on the date of grant.

In connection with the Pace combination, ARRIS accelerated the vesting of the time-based restricted shares that otherwise were scheduled to vest in 2016 for all of its executive officers and additional acceleration of time-based restricted shares for two executives that reached retirement age eligibility that otherwise would vest in 2017, 2018 and 2019.

The following table summarizes ARRIS’s unvested restricted stock unit (excluding performance-related) transactions during the year ending December 31, 2018:

	Ordinary Shares			Weighted Average Grant Date Fair Value
Unvested at December 31, 2017		7,360,344		$	26.18
Granted		3,930,880			26.50
Vested		(2,730,727	)		26.38
Forfeited		(854,110	)		26.79
Unvested at December 31, 2018		7,706,387			26.20

Restricted Shares Units — Subject to Comparative Market Performance

ARRIS grants to certain employees restricted shares units, in which the number of shares to be issued is dependent upon the Company’s total shareholder return as compared to the shareholder return of the NASDAQ composite over a three-year period. The number of shares which could potentially be issued ranges from zero to 200% of the target award. For the awards granted in 2016, the three-year measurement period ended on December 31, 2018. The Company’s total shareholder return underperformed the NASDAQ composite over the three-year period. This resulted in zero achievement of the target award, subject to separate treatment under terms of the Acquisition Agreement with CommScope. The remaining grants outstanding that are subject to market performance are 532,385 shares at target; at 200% performance 1,064,770 would be issued. Compensation expense is recognized on a straight-line basis over the three-year measurement period and is based upon the fair market value of the shares expected to vest. The fair value of the restricted share units is estimated on the date of grant using a Monte Carlo Simulation model.

	Market Performance Shares			Weighted Average Grant Date Fair Value
Unvested at December 31, 2017		1,345,060		$	22.73
Granted		596,540			27.29
Vested		—			—
Performance adjustment		(820,920	)		22.14
Unvested at December 31, 2018		1,120,680			25.58

The total fair value of restricted share units, including both non-performance and performance-related shares, that vested during 2018, 2017 and 2016 was $73.8 million, $76.1 million and $52.3 million, respectively.

Employee Stock Purchase Plan (“ESPP”)

ARRIS offers an ESPP to certain employees. The plan complies with Section 423 of the U.S. Internal Revenue Code, which provides that employees will not be immediately taxed on the difference between the market price of the stock and a discounted purchase price if it meets certain requirements. Participants can request that up to 10% of their base compensation be applied toward the purchase of ARRIS ordinary shares under ARRIS’s ESPP. Purchases by any one participant are limited to $25,000 (based upon the fair market value) in any one year. The exercise price is the lower of 85% of the fair market value of the ARRIS ordinary shares on either the first day of the purchase period or the last day of the purchase period. A plan provision which allows for the more favorable of two exercise prices is commonly referred to as a “look-back” feature. Any discount offered in excess of five percent generally will be considered compensatory and appropriately is recognized as compensation expense. Additionally, any ESPP offering a look-back feature is considered compensatory. ARRIS uses the Black-Scholes option valuation model to value shares issued under the ESPP. The valuation is comprised of two components; the 15% discount of a share of ordinary shares and 85% of a six-month option held (related to the look-back feature). The weighted average assumptions used to estimate the fair value of purchase rights granted under the ESPP for 2018, 2017 and 2016, were as follows: risk-free interest rates of 2.3%, 1.2% and 0.5%, respectively; a dividend yield of 0%; volatility factor of the expected market price of ARRIS’s stock of 0.27, 0.28, and 0.37, respectively; and a weighted average expected life of 0.5 year for each. The Company recorded stock compensation expense related to the ESPP of approximately $5.7 million, $4.8 million and $4.6 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Unrecognized Compensation Cost

As of December 31, 2018, there was approximately $161.9 million of total unrecognized compensation cost related to unvested share-based awards granted under the Company’s incentive plans. This compensation cost is expected to be recognized over a weighted-average period of 2.8 years.