SHARE-BASED COMPENSATION PLANS

12 Months Ended

Dec. 31, 2019

Share-based Payment Arrangement, Noncash Expense [Abstract]

Our employee share-based compensation plans consist of our employee stock purchase plan and our long-term incentive plan. Effective May 2, 2017, our shareholders approved the Deluxe Corporation 2017 Long-Term Incentive Plan, simultaneously terminating our previous plan. Under this plan, 5.0 million shares of common stock plus any shares released as a result of the

forfeiture or termination of awards issued under our prior plan are reserved for issuance, with 4.1 million shares remaining available for issuance as of December 31, 2019. Full value awards such as restricted stock, restricted stock units and performance share awards reduce the number of shares available for issuance by a factor of 2.23, or if such an award were forfeited or terminated without delivery of the shares, the number of shares that again become eligible for issuance would be multiplied by a factor of 2.23. Under our current and previous plans, we have granted non-qualified stock options, restricted stock units, restricted shares and performance share awards. Our current plan also allows for the issuance of stock appreciation rights, which we have not granted as of December 31, 2019. Our policy regarding the recognition of compensation expense for employee share-based awards can be found in Note 1.

The following amounts were recognized in our consolidated statements of (loss) income for share-based compensation awards for the years ended December 31:



(in thousands)	2019			2018			2017
Restricted shares and restricted stock units	$	13,411		$	5,232		$	6,533
Performance share awards	2,907			4,502			4,782
Stock options	2,954			3,143			3,270
Employee stock purchase plan	430			501			524
Total share-based compensation expense	$	19,702		$	13,378		$	15,109
Income tax benefit	$	(5,350	)	$	(3,946	)	$	(5,152	)

As of December 31, 2019, the total compensation expense for unvested awards not yet recognized in our consolidated statements of (loss) income was $28,891, net of the effect of estimated forfeitures. This amount is expected to be recognized over a weighted-average period of 2.2 years.

Non-qualified stock options – All options allow for the purchase of shares of common stock at prices equal to the stock's market value at the date of grant. Options become exercisable beginning 1 year after the grant date, and beginning in 2019, one-fourth vest each year over 4 years. Awards granted prior to 2019 vest one-third each year over 3 years. Beginning in 2019, options may be exercised up to 10 years following the grant date. Awards granted prior to 2019 have a 7 year life. Beginning 1 year after the grant date, in the case of qualified retirement, death or disability, options vest immediately and the period over which the options can be exercised is shortened. Beginning 1 year after the grant date, in the case of involuntary termination without cause, a pro-rata portion of the options vest immediately and the period over which the options can be exercised is shortened. Employees forfeit unvested options when they voluntarily terminate their employment with the company, and they have up to 3 months to exercise vested options before they are canceled. In the case of involuntary termination with cause, the entire unexercised portion of the award is canceled. All options may vest immediately upon a change of control, as defined in the award agreement. The following weighted-average assumptions were used in the Black-Scholes option pricing model to determine the fair value of stock options granted:



	2019		2018		2017
Risk-free interest rate	2.3	%	2.7	%	1.6	%
Dividend yield	2.7	%	2.0	%	1.6	%
Expected volatility	24.5	%	23.0	%	23.7	%
Weighted-average option life (in years)	5.3		3.9		3.7

The risk-free interest rate for periods within the expected option life is based on the U.S. Treasury yield curve in effect at the grant date. The dividend yield is estimated over the expected life of the option based on historical dividends paid. Expected volatility is based on the historical volatility of our stock over the most recent historical period equivalent to the expected life of the option. The expected option life is the average length of time over which we expect the employee groups will exercise their options, based on historical experience with similar grants.

Each option is convertible into 1 share of common stock upon exercise. Information regarding options issued under the current and all previous plans was as follows:



	Number of options (in thousands)		Weighted-average exercise price per option		Aggregate intrinsic value (in thousands)		Weighted-average remaining contractual term (in years)
Outstanding, December 31, 2016	1,251		$	47.68
Granted	270		75.30
Exercised	(347	)	38.72
Forfeited or expired	(35	)	62.19
Outstanding, December 31, 2017	1,139		56.51
Granted	519		62.12
Exercised	(339	)	42.55
Forfeited or expired	(74	)	66.85
Outstanding, December 31, 2018	1,245		62.04
Granted	644		44.72
Exercised	(21	)	32.42
Forfeited or expired	(521	)	62.75
Outstanding, December 31, 2019	1,347		53.92		$	3,311	6.1

Exercisable at December 31, 2017	555		$	47.42
Exercisable at December 31, 2018	472		59.90
Exercisable at December 31, 2019	485		61.44		$	292	2.7

The weighted-average grant-date fair value of options granted was $8.30 per option for 2019, $10.98 per option for 2018 and $12.81 per option for 2017. The intrinsic value of a stock award is the amount by which the fair value of the underlying stock exceeds the exercise price of the award. The total intrinsic value of options exercised was $292 for 2019, $10,007 for 2018 and $11,699 for 2017.

Restricted stock units – During 2019, we increased our use of restricted stock unit awards. We granted awards to all North American employees, we paid a portion of employee bonuses previously settled in cash in the form of restricted stock units and we granted certain other awards under our long-term incentive plan. These awards generally vest over 3 years. Additionally, certain management employees have the option to receive a portion of their bonus payment in the form of restricted stock units. When employees elect this payment method, we provide an additional matching amount of restricted stock units equal to 100% of the restricted stock units earned under the bonus plan. These awards vest 2 years from the date of grant. In the case of qualified retirement, death, disability or change of control, the awards vest immediately. In the case of involuntary termination without cause or voluntary termination, employees receive a cash payment for the units earned under the bonus plan, but forfeit the company-provided matching amount.

In addition to awards granted to employees, non-employee members of our board of directors can elect to receive all or a portion of their fees in the form of restricted stock units. Directors are issued shares in exchange for the units upon the earlier of the tenth anniversary of February 1^st of the year following the year in which the non-employee director ceases to serve on the board or such other objectively determinable date pre-elected by the director.

Each restricted stock unit is convertible into 1 share of common stock upon completion of the vesting period. Information regarding our restricted stock units was as follows:



	Number of units (in thousands)		Weighted-average grant date fair value per unit		Weighted-average remaining contractual term (in years)
Outstanding at December 31, 2016	139		$	37.99
Granted	16		73.27
Vested	(43	)	43.18
Forfeited	(3	)	57.18
Outstanding at December 31, 2017	109		38.31
Granted	110		52.32
Vested	(22	)	48.14
Forfeited	(2	)	74.96
Outstanding at December 31, 2018	195		45.41
Granted	611		44.73
Vested	(93	)	49.31
Forfeited	(49	)	45.40
Outstanding at December 31, 2019	664		44.35		2.3

Of the awards outstanding as of December 31, 2019, 15 thousand restricted stock units with a value of $710 were included in accrued liabilities and other non-current liabilities on the consolidated balance sheet. As of December 31, 2019, these units had a fair value of $47.00 per unit and a weighted-average remaining contractual term of 9 months.

The total fair value of restricted stock units that vested was $4,374 for 2019, $1,619 for 2018 and $3,161 for 2017. We made cash payments of $263 during 2019, $78 during 2018 and $421 during 2017 to settle share-based liabilities.

Restricted shares – For restricted share awards granted to employees under our current long-term incentive plan, in most cases one-fourth of the shares vest each year over 4 years. Such awards granted under our previous plan vest in their entirety at the end of the 3 year vesting period. The restrictions lapse immediately in the case of qualified retirement, death or disability, or in the event of a change in control where replacement securities are not awarded. In the case of involuntary termination without cause, restrictions on a pro-rata portion of the shares lapse based on how much of the vesting period has passed. In the case of voluntary termination of employment or termination with cause, the unvested restricted shares are forfeited.

Information regarding unvested restricted shares was as follows:



	Number of shares (in thousands)		Weighted-average grant date fair value per share		Weighted-average remaining contractual term (in years)
Unvested at December 31, 2016	220		$	56.43
Granted	68		74.84
Vested	(99	)	52.41
Forfeited	(8	)	61.37
Unvested at December 31, 2017	181		65.33
Granted	77		71.29
Vested	(76	)	69.73
Forfeited	(14	)	66.24
Unvested at December 31, 2018	168		66.02
Vested	(117	)	63.15
Forfeited	(25	)	73.62
Unvested at December 31, 2019	26		71.61		1.0

The total fair value of restricted shares that vested was $5,608 for 2019, $5,375 for 2018 and $7,452 for 2017.

Performance share awards – Our performance share awards have a 3-year vesting period. Shares will be issued at the end of the vesting period if performance targets relating to revenue and total shareholder return are achieved. If employment is terminated for any reason prior to the 1-year anniversary of the commencement of the performance period, the award is forfeited. On or after the 1-year anniversary of the commencement of the performance period, a pro-rata portion of the shares awarded at the end of the performance period is issued in the case of qualified retirement, death, disability, involuntary termination without cause or resignation for good reason, as defined in the agreement. The following weighted-average assumptions were used in the Monte Carlo simulation model in determining the fair value of market-based performance shares granted:



	2019		2018		2017
Risk-free interest rate	2.3	%	2.4	%	1.4	%
Dividend yield	3.1	%	1.6	%	1.7	%
Expected volatility	26.8	%	21.6	%	21.9	%

The risk-free interest rate for periods within the expected award life is based on the U.S. Treasury yield curve in effect at the grant date. The dividend yield is estimated over the expected life of the award based on historical dividends paid. Expected volatility is based on the historical volatility of our stock.

Information regarding unvested performance shares was as follows:



	Performance shares (in thousands)		Weighted-average grant date fair value per share		Weighted-average remaining contractual term (in years)
Unvested at December 31, 2016	236		$	55.15
Granted⁽¹⁾	83		75.31
Forfeited	(9	)	64.85
Vested	(60	)	50.17
Adjustment for performance results achieved⁽²⁾	5		50.34
Unvested at December 31, 2017	255		63.42
Granted⁽¹⁾	91		74.49
Forfeited	(48	)	59.32
Vested	(45	)	67.10
Adjustment for performance results achieved⁽²⁾	(3	)	67.11
Unvested at December 31, 2018	250		67.54
Granted⁽¹⁾	151		41.79
Forfeited	(38	)	54.42
Vested	(118	)	59.67
Adjustment for performance results achieved⁽²⁾	7		54.42
Unvested at December 31, 2019	252		57.64		1.5

⁽¹⁾ Reflects awards granted assuming achievement of performance goals at target.

⁽²⁾ Reflects the difference between the awards earned at the end of the performance period and the target number of shares.

Employee stock purchase plan – During 2019, 65 thousand shares were issued under this plan at prices of $39.92 and $37.93. During 2018, 53 thousand shares were issued under this plan at prices of $63.13 and $50.09. During 2017, 46 thousand shares were issued under this plan at prices of $61.92 and $61.37.