13. Equity and Cash Incentive Program

The Company's share-based awards are typically granted annually at its regularly scheduled first quarter Compensation Committee meeting. In 2013, these awards were made pursuant to the terms of the Company's 2012 Equity and Cash Incentive Plan (the "2012 Plan"), which was approved by shareholders on May 3, 2012. This plan replaced the 2005 Equity and Cash Incentive Plan (the "2005 Plan"), which would have otherwise terminated according to its terms on January 31, 2015 and the 1996 Non-Employee Directors Stock Compensation Plan (the "Directors Plan"), which would have otherwise terminated according to its terms on December 31, 2012. Upon approval of the 2012 Plan, no additional awards may be granted under the 2005 Plan. Officers and other key employees, as well as non-employee directors, are eligible to participate in the 2012 Plan, which has a ten year term and will terminate on May 3, 2022. The 2012 Plan provides for stock options and SARs grants, restricted stock awards, restricted stock unit awards, performance share awards, cash performance awards, directors' shares, and deferred stock units. Under the 2012 Plan, a total of 17,000,000 shares of common stock are reserved for issuance, subject to adjustments resulting from stock dividends, stock splits, recapitalizations, reorganizations, and other similar changes.

The exercise price per share for stock options and SARs is equal to the closing price of the Company’s stock on the New York Stock Exchange on the date of grant. New common shares are issued when options or SARs are exercised. The period during which options and SARs are exercisable is fixed by the Company’s Compensation Committee at the time of grant. Generally, the stock options or SARs vest after three years of service and expire at the end of ten years.

Stock-based compensation costs are reported within selling and administrative expenses. The following table summarizes the Company’s compensation expense relating to all stock-based incentive plans:



	Years Ended December 31,
	2013			2012			2011
Pre-tax compensation expense	$	30,480		$	30,884		$	25,130
Tax benefit	(10,745		)	(10,904		)	(8,795		)
Total stock-based compensation expense, net of tax	$	19,735		$	19,980		$	16,335

SARs and Stock Options

In 2013, 2012, and 2011, the Company issued SARs covering 1,613,884, 1,719,943, and 1,524,329 shares, respectively. Since 2006, the Company has only issued SARs and does not anticipate issuing stock options in the future. The fair value of each SAR grant was estimated on the date of grant using a Black-Scholes option-pricing model with the following assumptions:



	2013			2012			2011
Risk-free interest rate	1.39		%	1.05		%	2.68		%
Dividend yield	2.06		%	2.03		%	1.70		%
Expected life (years)	7.1			5.7			5.8
Volatility	33.78		%	36.41		%	33.56		%
Grant price	$	71.86		$	65.38		$	66.59
Fair value at date of grant	$	20.62		$	18.51		$	20.13

Expected volatilities are based on Dover's stock price history, including implied volatilities from traded options on Dover stock. The Company uses historical data to estimate SAR exercise and employee termination patterns within the valuation model. The expected life of SARs granted is derived from the output of the option valuation model and represents the average period of time that SARs granted are expected to be outstanding. The interest rate for periods within the contractual life of the options is based on the U.S. Treasury yield curve in effect at the time of grant.

A summary of activity relating to SARs and stock options granted under the 2012 Plan and the predecessor plans for the year ended December 31, 2013 is as follows:



	SARs							Stock Options
	Number of Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Term (Years)	Number of Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Term (Years)
Outstanding at 1/1/2013	8,551,608		$	50.17				724,406		$	38.18
Granted	1,613,884		71.86					—		—
Forfeit / expired	(285,351	)	66.72					(22,438	)	30.50
Exercised	(2,359,381	)	42.28					(492,141	)	38.44
Outstanding at 12/31/2013	7,520,760		56.67		$	299,812	6.8	209,827		38.39		$	12,201	1.0

Exercisable at 12/31/2013	3,089,841		$	40.47	$	173,243	4.8	209,827		$	38.39	$	12,201	1.0

The following table summarizes information about SAR and option awards outstanding that are vested and exercisable at December 31, 2013:



	SARs Outstanding				SARs Exercisable
Range of Exercise Prices	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Life in Years	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Life in Years
$29.45 - $42.88	2,535,719	$	38.64	5.3	2,535,719	$	38.64	5.3
$46.00 - $50.60	552,000	48.80		2.6	552,000	48.80		2.6
$65.38 - $71.86	4,433,041	67.97		8.2	2,122	65.98		3.9



	Stock Options Outstanding				Stock Options Exercisable
Range of Exercise Prices	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Life in Years	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Life in Years
$38.00 - $38.50	184,241	$	38.00	1.1	184,241	$	38.00	1.1
$39.00 - $41.25	25,586	41.20		0.1	25,586	41.20		0.1

Unrecognized compensation expense related to SARs not yet exercisable was $30,018 at December 31, 2013. This cost is expected to be recognized over a weighted average period of 1.7 years.

Other information regarding the exercise of SARs and stock options is listed below:



	2013		2012		2011
SARs
Fair value of SARs that became exercisable	$	23,605	$	16,484	$	21,202
Aggregate intrinsic value of SARs exercised	$	83,944	$	61,531	$	24,322

Stock Options
Cash received by Dover for exercise of stock options	$	14,830	$	38,029	$	26,519
Aggregate intrinsic value of options exercised	$	19,937	$	29,866	$	24,726

The company recognized tax benefits of $25,661, $22,771, and $8,752 during 2013, 2012, and 2011, respectively, for the exercise of SARs and stock options. These benefits have been recorded as an increase to additional paid-in capital and are reflected as financing cash inflows in the Consolidated Statements of Cash Flows.

Performance Share Awards

Performance share awards granted are expensed over the three-year requisite performance and service period. Awards shall become vested if (1) the Company achieves certain specified stock performance targets compared to a defined group of peer companies and (2) the employee remains continuously employed by the company during the performance period. Partial vesting may occur after separation from service in the case of certain terminations not for cause and for retirements.

In 2013, 2012, and 2011, the Company issued performance shares covering 47,032, 50,416, and 44,751 shares, respectively. The performance share awards are market condition awards and have been fair valued on the date of grant using the Monte Carlo simulation model (a binomial lattice-based valuation model) with the following assumptions:



	2013			2012			2011
Risk-free interest rate	0.40		%	0.37		%	1.34		%
Dividend yield	2.06		%	2.03		%	1.61		%
Expected life (years)	2.9			2.9			2.9
Volatility	30.36		%	34.10		%	40.48		%
Fair value of performance award	$	80.47		$	71.98		$	91.41

Expected volatilities are based on historical volatilities of each of the defined peer companies. The interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.

A summary of activity for performance share awards for the year ended December 31, 2013 is as follows:



	Number of Shares		Weighted-Average Grant-Date Fair Value
Unvested at December 31, 2012	95,167		$	81.12
Granted	47,032		80.47
Vested *	(42,498	)	91.41
Forfeited	(7,156	)	81.19
Unvested at December 31, 2013	92,545		$	76.05
* Under the terms of the performance share award, the actual number of shares awarded can range from zero to 200% of the original target grant, depending on Dover's three-year performance relative to the peer group for the relevant performance period. Awards vesting at the end of 2013, as shown above, are expected to be paid out at approximately 136.8% of their original target.

Unrecognized compensation expense related to unvested performance shares as of December 31, 2013 was $3,524, which will be recognized over a weighted average period of 1.6 years.

Restricted Stock Awards

The Company also has restricted stock authorized for grant (as part of the 2005 Plan), under which common stock of the Company may be granted at no cost to certain officers and key employees. In general, restrictions limit the sale or transfer of these shares during a two or three year period, and restrictions lapse proportionately over the two or three year period. The Company granted 55,200 restricted shares in 2011. No restricted shares were granted in 2013 or 2012. The number of outstanding restricted shares at December 31, 2013 totaled 40,000 with a weighted-average grant-date fair value of $66.59. Unrecognized compensation expense relating to unvested restricted stock as of December 31, 2013 was $1,125, which will be recognized over a weighted average period of 2.1 years.

Directors' Shares

The Company issued the following shares to its non-employee directors during 2013 and 2012 under the 2012 Plan and during 2011 under the Directors' Plan as partial compensation for serving as directors of the Company:



	Years ended December 31,
	2013		2012		2011
Aggregate shares granted	14,271		20,344		20,929
Shares deferred	(6,929	)	—		—
Shares withheld to satisfy tax obligations	(354	)	(544	)	(562	)
Net shares issued	6,988		19,800		20,367