12. Equity and Cash Incentive Program

The Company's share-based awards are typically granted annually at its regularly scheduled first quarter Compensation Committee meeting. Beginning 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.

In connection with the separation of Knowles on February 28, 2014, the Company modified the outstanding equity awards for its employees. The awards were modified such that all individuals received an equivalent fair value both before and after the separation of Knowles. This modification resulted in the issuance of an additional 933,845 SARs, 20,523 stock options, 11,480 performance shares and 5,389 restricted stock units. The exercise price of these outstanding awards, where applicable, was adjusted to preserve the value of the awards immediately prior to the separation. As no incremental fair value was awarded as a result of the issuance of these additional shares, the modification did not result in additional compensation expense.

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,
	2015			2014			2013
Pre-tax compensation expense	$	30,697		$	31,628		$	30,480
Tax benefit	(10,877		)	(11,201		)	(10,745		)
Total stock-based compensation expense, net of tax	$	19,820		$	20,427		$	19,735

SARs and Stock Options

In 2015, 2014, and 2013, the Company issued SARs covering 1,144,529, 1,043,734, and 1,613,884 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:



	2015			2014				2013
Risk-free interest rate	1.51		%	1.70		%		1.39		%
Dividend yield	2.24		%	1.98		%		2.06		%
Expected life (years)	5.1			5.3				7.1
Volatility	27.19		%	30.81		%		33.78		%
Grant price	$	73.28		$	82.51			$	63.33
Fair value at date of grant	$	14.55		$	19.84		⁽¹⁾	$	18.17		⁽¹⁾


(1)	Updated to reflect the modification of grants issued prior to 2014 and 2013 in connection with the separation of Knowles.

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, 2015 is as follows:



	SARs					Stock Options
	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)
Outstanding at 1/1/2015	7,640,742		$	54.69		52,907		$	33.50
Granted	1,144,529		73.28			—		—
Forfeited / expired	(299,349	)	70.91			(9,081	)	33.49
Exercised	(675,329	)	48.61			(43,826	)	33.50
Outstanding at 12/31/2015	7,810,593		57.32		5.9	—		—		na

Exercisable at 12/31/2015	4,482,264		$	46.67	4.4	—		$	—	na

The following table summarizes information about outstanding SARs at December 31, 2015:



	SARs Outstanding						SARs Exercisable
Range of Exercise Prices	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Life in Years	Aggregate Intrinsic Value		Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Life in Years	Aggregate Intrinsic Value
$25.96 - $37.79	1,969,791	$	33.94	3.5	$	53,922	1,969,791	$	33.94	3.5	$	53,922
$40.54 - $58.69	2,502,838	$	56.59	5.1	$	11,810	2,502,838	$	56.59	5.1	$	11,810
$63.33 - $82.51	3,337,964	$	71.67	8.0	$	—	9,635	$	70.57	7.5	$	—
	7,810,593				$	65,732	4,482,264				$	65,732

Unrecognized compensation expense related to SARs not yet exercisable was $13,178 at December 31, 2015. This cost is expected to be recognized over a weighted average period of 1.6 years.

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



	2015		2014		2013
SARs
Fair value of SARs that became exercisable	$	25,380	$	26,796	$	23,605
Aggregate intrinsic value of SARs exercised	$	14,560	$	51,813	$	83,944

Stock Options
Cash received by Dover for exercise of stock options	$	1,468	$	5,227	$	14,830
Aggregate intrinsic value of options exercised	$	1,649	$	8,614	$	19,937

The Company recognized net tax benefits of $661, $15,110, and $25,661 during 2015, 2014, and 2013, 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 2015, 2014, and 2013, the Company issued performance shares covering 61,611, 58,206, and 47,032 shares, respectively. The performance share awards granted in 2014 and 2015 are considered performance condition awards as attainment is based on Dover's performance relative to established internal metrics. The fair value of these awards was determined using Dover's closing stock price on the date of grant. The expected attainment of the internal metrics for these awards is analyzed each reporting period, and the related expense is adjusted up or down based on expected attainment, if that attainment differs from previous estimates. The cumulative effect on current and prior periods of a change in attainment is recognized in compensation cost in the period of change.

The fair value and average attainment used in determining compensation cost of the performance shares issued in 2014 and 2015 is as follows for the year ended December 31, 2015:



	Performance shares
	2015			2014
Fair value per share at date of grant	$	73.28		$	82.51
Average attainment rate reflected in expense	11.98		%	34.33		%

The performance share awards granted in 2013 are market condition awards as attainment is based on Dover's three-year performance relative to its peer group for the relevant performance period. These awards were valued on the date of grant using a Monte Carlo simulation model (a binomial lattice-based valuation model) with the following assumptions, and are generally recognized ratably over the vesting period:



	2013
Risk-free interest rate	0.40		%
Dividend yield	2.06		%
Expected life (years)	2.9
Volatility	30.36		%
Fair value of performance award ⁽¹⁾	$	70.92


(1)	Updated to reflect the modification of grants issued prior to 2014 in connection with the separation of Knowles.

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, 2015 is as follows:



	Number of Shares		Weighted-Average Grant-Date Fair Value
Unvested at January 1, 2015	101,723		$	77.33
Granted	61,611		73.28
Forfeited	(4,690	)	75.49
Vested ⁽¹⁾	(42,584	)	70.92
Unvested at December 31, 2015	116,060		$	77.61

(1)

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. The awards that vested in 2015, as shown above, will result in 73.0% of payout of Dover common shares as a result of the three-year performance from 2013 - 2015 relative to its peer group.

Unrecognized compensation expense related to unvested performance shares as of December 31, 2015 was $924, which will be recognized over a weighted average period of 1.4 years.

Restricted Stock Awards

The Company also has restricted stock authorized for grant (as part of the 2005 and 2012 Plans). Under these Plans 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 145,545 and 131,719 of restricted stock awards in 2015 and 2014, respectively. No restricted stock awards were issued in 2013.

A summary of activity for restricted stock awards for the year ended December 31, 2015 is as follows:



	Number of Shares		Weighted-Average Grant-Date Fair Value
Unvested at January 1, 2015	166,000		$	76.00
Granted	145,545		73.28
Forfeited	(17,597	)	77.67
Vested	(39,376	)	82.15
Unvested at December 31, 2015	254,572		$	75.07

Unrecognized compensation expense relating to unvested restricted stock as of December 31, 2015 was $7,722, which will be recognized over a weighted average period of 1.3 years.

Directors' Shares

The Company issued the following shares to its non-employee directors under the 2012 Plan as partial compensation for serving as directors of the Company:



	Years ended December 31,
	2015		2014		2013
Aggregate shares granted	21,205		17,331		14,271
Shares deferred	(11,196	)	(8,904	)	(6,929	)
Shares withheld to satisfy tax obligations	—		(210	)	(354	)
Net shares issued	10,009		8,217		6,988