Stock-Based Compensation

12 Months Ended

Dec. 31, 2020

14. Stock-based Compensation

On May 3, 2018, our shareholders approved the 2018 Omnibus Incentive Plan (the “Plan”), which was adopted by the Board of Directors on February 22, 2018. The Plan’s purpose is to promote the Company’s long-term financial interests and growth by attracting, retaining and motivating high-quality key employees and directors, motivating such employees and directors to achieve the Company’s short- and long-range performance goals and objectives, and thereby align their interests with those of the Company’s shareholders. The Plan reserves 4,500,000 shares of common stock to be issued for grants of several different types of long-term incentives including stock options, stock appreciation rights, restricted awards, performance awards, other common stock-based awards, and dividend equivalent rights.

The 2013 Omnibus Incentive Plan (the “Previous Plan”), was replaced by the Plan, and no future grants may be made under the Previous Plan. However, any outstanding awards or grants made under the Previous Plan will continue until the end of their specified terms.

Stock options, performance share units, deferred stock units and restricted stock units were the only grant types outstanding at December 31, 2020. Stock options, performance share units, and restricted stock units are discussed below. Activities in other grant types were not significant.

Stock Options

General Information

Stock options outstanding at December 31, 2020, have a term of 10 years, vest evenly over three years on the anniversary of the grant date, and have an exercise price equal to the per share fair market value of our common stock on the grant date. Accelerated vesting is used for options held by employees who meet both the age and years of service requirements to retire prior to the end of the vesting period. In the case of death or retirement, the stock options become 100% vested and exercisable.

Stock Option Valuation Model and Method Information

We estimate the fair value of each stock option on the date of grant using the Black-Scholes option pricing model. We use judgment in selecting assumptions for the model, which may significantly impact the timing and amount of compensation expense, and we base our judgments primarily on historical data. When appropriate, we adjust the historical data for circumstances that are not likely to occur in the future.

The following table details the determination of the assumptions used to estimate the fair value of stock options:


Assumption		Estimation Method
Expected life, in years		Historical stock option exercise experience
Risk-free interest rate		Yield of U.S. Treasury Bonds with remaining maturity equal to expected life of the stock option
Expected volatility		Historical daily price observations of the Company’s common stock over a period equal to the expected life of the stock option
Expected dividend yield		Historical dividend rate at the date of grant

The following table details the weighted-average grant-date fair values and the assumptions used for estimating the fair values of stock options granted in the respective years:



	2020			2019			2018
Weighted-average grant-date fair value	$	5.28		$	6.47		$	8.91
Expected life, in years		5.2			5.6			5.4
Risk-free interest rate		1.4	%		2.5	%		2.7	%
Expected volatility		35.1	%		33.9	%		39.7	%
Expected dividend yield		—	%		—	%		—	%

Stock Option Activity Information

A summary of stock option activity follows:



					Weighted-
					Average
			Weighted-		Remaining		Aggregate
	Number of		Average		Contractual		Intrinsic
	Options		Exercise Price		Term		Value
Outstanding at December 31, 2019		1,728,999	$	12.49
Granted		345,100		14.64
Exercised		(115,033)		6.57
Forfeited or expired		(25,167)		14.65
Outstanding at December 31, 2020		1,933,899	$	13.20		5.4	$	4,959
Exercisable at December 31, 2020		1,381,365	$	11.96		4.1	$	4,916
Vested or expected to vest at December 31, 2020		1,933,899	$	13.20		5.4	$	4,959

We calculated the aggregate intrinsic value in the table above by taking the total pretax difference between our common stock’s closing market value per share on the last trading day of the year and the stock option exercise price for each grant and multiplying that result by the number of shares that would have been received by the option holders had they exercised all their in-the-money stock options.

Information related to stock options exercised follows:



(Dollars in thousands)	2020		2019		2018
Proceeds from the exercise of stock options	$	756	$	1,052	$	727
Intrinsic value of stock options exercised		867		750		1,590
Income tax benefit related to stock options exercised		182		158		334

Stock Options Expense Information

A summary of amounts recorded and to be recorded for stock-based compensation related to stock options follows:


(Dollars in thousands)	2020		2019		2018
Compensation expense recorded in Selling, general and administrative expenses	$	2,304	$	1,801	$	1,528
Deferred income tax benefits related to compensation expense		484		378		321
Total fair value of stock options vested		465		1,387		1,390
Unrecognized compensation cost		2,039		1,469		606
Expected weighted-average recognition period for unrecognized compensation, in years		1.8		2.2		2.7

Performance Share Units

General Information

Performance share units, expressed as shares of the Company’s common stock, are earned only if the Company meets specific performance targets over a three year period. The grants have a vesting period of three years.

The Plan allows for payout of up to 200% of the vesting-date fair value of the awards. We pay half of the earned value in cash and half in unrestricted shares of common stock. The portion of the grants that will be paid in cash are treated as liability awards, and therefore, we remeasure our liability and the related compensation expense at each balance sheet date, based on fair value. We treat the portion of the grants that will be settled with common stock as equity awards, and therefore, the amount of stock-based compensation we record over the performance period is based on the fair value on the grant date. The compensation expense and number of shares expected to vest for all performance share units are adjusted each reporting period for the achievement of the performance share units’ performance metrics, based upon our best estimate using available information.

Performance Share Unit Valuation Model and Method Information

The estimated fair value of performance share units granted in 2020, 2019 and 2018 is based on the closing price of the Company’s common stock on the date of issuance and recorded based on achievement of target performance metrics. As of December 31, 2020, we had 0.2 million and 0.2 million performance share units outstanding associated with our 2020 and 2019 grants, respectively.

The weighted average grant date fair value of our performance share units was $14.64 for shares granted in 2020, $17.61 for shares granted in 2019 and $22.92 for shares granted in 2018. All performance share units are initially expensed at target and are evaluated each reporting period for likelihood of achieving the performance metrics, and the expense is adjusted, as appropriate.

Performance Share Unit Activity Information

A summary of performance share unit activity follows:



			Weighted-
			Average
			Remaining
	Number of		Contractual
	Units		Term
Outstanding at December 31, 2019		452,000
Granted		284,894
Earned		(243,394)
Forfeited or expired		(11,502)
Outstanding at December 31, 2020		481,998		1.2
Vested or expected to vest at December 31, 2020		481,998		1.2

Performance Share Unit Expense Information

A summary of amounts recorded and to be recorded for stock-based compensation related to performance share units follows:



(Dollars in thousands)	2020		2019		2018
Compensation expense recorded in Selling, general and administrative expenses	$	3,270	$	3,607	$	4,152
Deferred income tax benefits related to compensation expense		773		757		872
Unrecognized compensation cost		3,417		2,730		3,599
Expected weighted-average recognition period for unrecognized compensation, in years		1.5		1.6		1.4

Restricted Stock Units

We granted 0.2 million, 0.2 million and 0.1 million restricted stock units in 2020, 2019, and 2018, respectively. Fair value of restricted stock units is determined based on the closing price of the Company’s common stock on the date of issuance. Restricted stock units are expressed as equivalent shares of the Company’s common stock, and have a three year vesting period. Total expense included in Selling, general and administrative expense related to restricted stock units granted in 2020, 2019 and 2018 was $2.4 million, $1.7 million and $2.2 million, respectively. Total unrecognized compensation cost in 2020, 2019 and 2018 was $2.8 million, $2.8 million and $2.8 million, respectively.

Directors’ Deferred Compensation

Separate from the Plan, the Company has established the Ferro Corporation Deferred Compensation Plan for Non-employee Directors, permitting its non-employee directors to voluntarily defer all or a portion of their compensation. The voluntarily deferred amounts are placed in individual accounts in a benefit trust known as a “rabbi trust” and invested in the Company’s common stock with dividends reinvested in additional shares. All disbursements from the trust are made in the Company’s common stock. The stock held in the rabbi trust is classified as treasury stock in shareholders’ equity and the deferred compensation obligation that is required to be settled in shares of the Company’s common stock, is classified as paid-in capital. The rabbi trust held 0.1 million shares, valued at $1.6 million, at December 31, 2020, and 0.1 million shares, valued at $1.6 million, at December 31, 2019.