16.SHARE-BASED COMPENSATION

In accordance with the Employee Matters Agreement entered into between Versum and Air Products on September 29, 2016 in connection with the Separation, all share-based compensation awards previously granted to Versum employees under Air Products’ Long-Term Incentive Plan that were outstanding on October 1, 2016, other than restricted stock, were adjusted and converted into Versum equity with substantially the same terms and conditions as the original Air Products awards. The converted awards will continue to vest over the original vesting period defined at the grant date.

As a result of the conversion, we have the following outstanding share-based compensation awards: (a) stock options; (b) time-based restricted stock units; and (c) market-based restricted stock units.

For the years ended September 30, 2018, 2017, and 2016, share-based compensation expense of $10.1 million, $8.3 million, and $5.0 million, respectively, was included in the Annual Consolidated Financial Statements.

During the year ended September 30, 2017, under the Versum Long-Term Incentive Plan we made a one-time Founders grant of time-based restricted stock units. In addition, during the years ended September 30, 2018 and 2017, we granted annual awards of market-based restricted stock units, consisting of performance-based restricted stock units and performance-based market stock units. Under all programs, the terms of the awards are fixed at the grant date. We issue new shares upon the payout of restricted stock units and the exercise of stock options. As of September 30, 2018, there were 4.7 million shares available for future grant under the Versum Long-Term Incentive Plan.

Total after-tax share-based compensation awards cost recognized in the consolidated income statement is summarized below:



	Year Ended September 30, 2018		Year Ended September 30, 2017
(In millions)
Before-Tax Share-Based Compensation Award Cost	$	10.1	$	8.3
Income Tax Benefit	2.5		2.9
After-Tax Share-Based Compensation Award Cost	$	7.6	$	5.4

Before-tax share-based compensation award cost is primarily included in selling and administrative expense on our consolidated income statements.

Total before-tax share-based compensation award cost by type of program was as follows:



	Year Ended September 30, 2018		Year Ended September 30, 2017
(In millions)
Restricted stock units	$	9.5	$	7.5
Stock options	—		0.2
Director awards	0.6		0.6
Before-Tax Share-Based Compensation Cost	$	10.1	$	8.3

Restricted Stock Units

Converted share-based compensation awards. As a result of the conversion in connection with the Separation described above, Versum executive officers and employees have outstanding time-based restricted stock units and market-based restricted stock units. These converted restricted stock units entitle the recipient to shares of common stock and accumulated dividends upon vesting. The payout of the converted market-based restricted stock units is conditioned on continued employment during a three year deferral period subject to payout upon death, disability, or retirement. The converted time-based restricted stock units vest four years after the grant date subject to payout upon death, disability or retirement. Upon involuntary termination without cause, a pro rata portion of restricted stock units will vest. Dividend equivalents are paid in cash and equal the dividends that would have accrued on a share of stock from the grant date to the vesting date.

New share-based compensation awards

During the year ended September 30, 2018, under its Long-Term Incentive Plan, Versum granted 203,405 market-based restricted stock units, consisting of performance-based restricted stock units and performance-based market stock units. The performance-based restricted stock units are earned at the end of a performance period beginning October 1, 2017 and ending September 30, 2020, conditioned on the level of Versum’s total shareholder return in relation to a defined peer group over the three-year performance period. The performance-based market stock units are earned based on the percentage change in the price of Versum’s common stock over the performance period beginning October 1, 2017 and ending September 30, 2020.

During the year ended September 30, 2017, under the Versum Long-Term Incentive Plan, we made a one-time Founders grant of 424,247 time-based restricted stock units at a weighted-average grant-date fair value of $22.53 per unit. One third of these restricted stock units vest on October 1, 2018, one third vest on October 1, 2019, and one third vest on October 1, 2020, subject to the holder’s continued employment with the company.

In addition, during the year ended September 30, 2017, under its Long-Term Incentive Plan Versum granted 304,520 market-based restricted stock units, consisting of performance-based restricted stock units and performance-based market stock units. The performance-based restricted stock units are earned at the end of a performance period beginning October 1, 2016 and ending September 30, 2019, conditioned on the level of Versum’s total shareholder return in relation to a defined peer group over the three-year performance period. The performance-based market stock units are earned based on the percentage change in the price of Versum’s common stock over the performance period beginning October 1, 2016 and ending September 30, 2019.

Subject to the recipient’s continued employment, these market-based restricted stock units granted during the years ended September 30, 2018 and 2017, generally vest on the date that the Versum Compensation Committee certifies the payout determination under the performance goals, which date must be within 90 days after the end of the performance period. Vesting is subject to certain exceptions in the event of involuntary termination by Versum, death, disability or retirement. Under GAAP, both the performance-based restricted stock units and performance-based market stock units are considered market-based awards. Upon vesting, restricted stock units represent the right to receive shares of our common stock. Dividend equivalent rights accrue for these awards, but do not vest unless the underlying awards vest.

The market-based restricted stock units awarded during the years ended September 30, 2018 and 2017 had an estimated grant-date fair value of $50.18 and $29.68, respectively, per unit for the performance-based restricted stock units and $45.71 and $28.37 for the performance-based market stock units. The fair value of market-based restricted stock units was estimated using a Monte Carlo simulation model as these equity awards are tied to a market condition. The model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the grant and calculates the fair value of the awards.

We generally expense the grant-date fair value of these awards on a straight-line basis over the vesting period; however, expense recognition is accelerated for retirement eligible individuals who meet the requirements for vesting upon retirement.

The calculation of the fair value of market-based restricted stock units during the years ended September 30, 2018 and 2017 used the following assumptions:



	Year Ended September 30,
	2018		2017
(In percentages)
Expected volatility	28.0	%	28.7	%
Risk-free interest rate	1.9	%	1.4	%
Expected dividend yield	0.5	%	—	%

The term is assumed to be the full vesting period for each grant.

A summary of restricted stock unit activity is presented below:



	Shares		Weighted Average Grant-Date Fair Value
(In millions, except weighted average)
Outstanding, September 30, 2017	1.1		$	25.30
Granted	0.2		47.23
Paid out	(0.2	)	29.65
Forfeited/adjustments	—		—
Outstanding, September 30, 2018	1.1		$	29.47



	Shares		Weighted Average Grant-Date Fair Value
(In millions, except weighted average)
Outstanding, September 30, 2016	—		$	—
Converted on October 1, 2016	0.5		22.85
Granted	0.7		25.30
Paid out	(0.1	)	15.55
Forfeited/adjustments	—		—
Outstanding, September 30, 2017	1.1		$	25.30

No cash payments were made for restricted stock units for the years ended September 30, 2018 and 2017. As of September 30, 2018 and 2017, there was $13.3 million and $13.9 million, respectively, of unrecognized compensation cost related to restricted stock units. The cost is expected to be recognized over a weighted average period of 1.9 and 2.5 years, respectively. The total fair value of restricted stock units paid out during the years ended September 30, 2018 and 2017, including shares vested in prior periods, was $5.0 million and $1.7 million, respectively.

Stock Options

We may grant awards of options to purchase common stock to executive officers and selected employees. All of our outstanding stock options are a result of the conversion in connection with the Separation as described above. The exercise price of stock options equals the market price of our stock on the date of the grant. Options generally vest incrementally over three years, and remain exercisable for ten years from the date of grant. During the years ended September 30, 2018 and 2017, no stock options were granted.

A summary of stock option activity is presented below:



	Shares	Weighted Average Exercise Price
(In millions, except weighted average)
Outstanding, September 30, 2017	0.5	$	18.55
Granted	—	—
Exercised	—	—
Outstanding, September 30, 2018	0.5	$	18.66



	Shares	Weighted Average Exercise Price
(In millions, except weighted average)
Outstanding, September 30, 2016	—	$	—
Converted on October 1, 2016	0.5	18.37
Granted	—	—
Exercised	—	—
Outstanding, September 30, 2017	0.5	$	18.55



	Weighted Average Remaining Contractual Terms (In years)	Aggregate Intrinsic Value
(In millions, except years)
Outstanding, September 30, 2018	4.7	$	7.9
Exercisable, September 30, 2018	4.7	7.9



	Weighted Average Remaining Contractual Terms (In years)	Aggregate Intrinsic Value
(In millions, except years)
Outstanding, September 30, 2017	5.6	$	9.6
Exercisable, September 30, 2017	5.6	9.3

The aggregate intrinsic value represents the amount by which our closing stock price of $36.01 and $38.82 as of September 30, 2018 and 2017, respectively, exceeds the exercise price multiplied by the number of in-the-money options outstanding or exercisable.

The total intrinsic value of stock options exercised during the year ended September 30, 2018 and 2017 was $0.4 million and $0.9 million, respectively.

Compensation cost is generally recognized over the stated vesting period consistent with the terms of the arrangement (i.e., either on a straight-line or graded-vesting basis). Expense recognition is accelerated for retirement-eligible individuals who would meet the requirements for vesting of awards upon their retirement. As of September 30, 2018, the stock options were fully expensed. As of September 30, 2017, there was $0.1 million of unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted average period of 0.3 years.

Director Awards

Non-employee directors were granted equity awards under the Versum Long-Term Incentive Plan, with a grant date fair value of $100,000 annually. In the second quarter of 2018 non-employee directors were granted restricted stock units for service on our Board of Directors through the 2019 annual meeting of stockholders. Subject to continued service on the Board of Directors, the restricted stock units vest on the earlier of February 8, 2019, and the date immediately prior to Versum's next annual meeting of stockholders, and will be settled in common stock upon vesting. The grant date fair value per share is equal to the closing sales price of our common stock as reported on the New York Stock Exchange on the date of grant.

During the years ended September 30, 2018 and 2017, $0.6 million in share-based compensation expense was recognized related to these awards.