5. Share-Based Compensation

Overview

As of December 31, 2016, the Company has two active equity compensation plans. A description of these plans is as follows:

Nonemployee Directors’ Deferred Stock Compensation Plan

Pursuant to the Essendant Inc. Nonemployee Directors’ Deferred Stock Compensation Plan, non-employee directors may defer receipt of all or a portion of their retainer and meeting fees. Fees deferred are credited quarterly to each participating director in the form of stock units, based on the fair market value of the Company’s common stock on the quarterly deferral date. Each stock unit account generally is distributed and settled in whole shares of the Company’s common stock on a one-for-one basis, with a cash-out of any fractional stock unit interests, after the participant ceases to serve as a Company director. For each of the years ended December 31, 2016, 2015 and 2014, the Company recorded compensation expense of $0.1 million. As of December 31, 2016, 2015 and 2014 the accumulated number of stock units outstanding under this plan was 40,189, 41,051, and 43,082, respectively.

2015 Long-Term Incentive Plan (“LTIP”)

In May 2015, the Company’s shareholders approved the LTIP to, among other things, attract and retain managerial talent, further align the interest of key associates to those of the Company’s stockholders and provide competitive compensation to key associates. Award vehicles include, but are not limited to, stock options, restricted stock awards, restricted stock units (“RSUs”) and performance-based awards. Associates and non-employee directors of the Company are eligible to become participants in the LTIP, except that non-employee directors may not be granted stock options.

Accounting For Share-Based Compensation

The following table summarizes the share-based compensation expense (in thousands):

	Year Ended December 31,
	2016			2015			2014
Numerator:
Pre-tax expense	$	10,202		$	7,895		$	8,195
Tax effect		(3,846	)		(3,000	)		(3,114	)
After tax expense	$	6,356		$	4,895		$	5,081
Denominator:
Denominator for basic shares—Weighted average shares		36,580			37,457			38,705
Denominator for diluted shares—Adjusted weighted average shares and the effect of dilutive securities		36,918			37,457			39,130
Net expense per share:
Net expense per share—basic	$	0.17		$	0.13		$	0.13
Net expense per share—diluted	$	0.17		$	0.13		$	0.13

The following tables summarize the intrinsic value of options outstanding, exercisable, and exercised for the applicable periods listed below (in thousands):

	As of December 31,				Year ended December 31,
	Outstanding		Exercisable		Exercised
2016	$	-	$	-	$	535
2015		1,253		1,253		902
2014		6,092		4,543		537

The following tables summarize the intrinsic value of restricted shares outstanding and vested for the applicable periods listed below (in thousands):

	As of December 31,		Year ended December 31,
	Outstanding		Vested
2016	$	29,056	$	4,705
2015		34,981		8,159
2014		45,928		10,976

The aggregate intrinsic values summarized in the tables above are based on the closing sale price per share for the Company’s common stock on the last day of trading in each year which was $20.90, $32.51, and $42.16 per share for the years ended December 31, 2016, 2015 and 2014, respectively. Additionally, the aggregate intrinsic value of options exercisable does not include the value of options for which the exercise price exceeds the stock price as of the last day of trading in each year.

Stock Options

In 2016 and 2015, there were no stock options granted and therefore, at December 31, 2016, there was no unrecognized compensation cost related to stock option awards granted.

The following table summarizes the transactions, excluding restricted stock, under the Company’s equity compensation plans for the last three years:

				Weighted					Weighted					Weighted
				Average					Average					Average
				Exercise					Exercise					Exercise
	2016			Price		2015			Price		2014			Price
Options outstanding—January 1		448,687		$	33.31		727,378		$	33.81		812,160		$	33.70
Granted		-			-		-			-		5,538			45.89
Exercised		(82,228	)		24.94		(77,918	)		24.11		(32,610	)		24.43
Cancelled		(35,988	)		38.69		(200,773	)		38.71		(57,710	)		38.74
Expired		(100,938	)		31.13		-			-		-			-
Options outstanding—December 31		229,533		$	36.42		448,687		$	33.31		727,378		$	33.81
Number of options exercisable		229,533		$	36.42		195,402		$	26.11		273,320		$	25.54

The following table summarizes proceeds related to option exercises and related tax benefits for the years ended December 31, 2016, 2015 and 2014 (in thousands):

	Years Ended December 31,
	2016		2015		2014

Proceeds from options exercised		2,097		1,939		814
Tax Benefit		199		340		203

The following table summarizes outstanding and exercisable options granted under the Company’s equity compensation plans as of December 31, 2016:

			Remaining
			Contractual
Exercise Prices	Outstanding		Life (Years)		Exercisable
25.00-30.00		60,216		0.6		60,216
30.01-35.00		2,246		0.4		2,246
35.01-40.00		161,533		6.1		161,533
45.01-50.00		5,538		7.0		5,538
Total		229,533				229,533

Restricted Stock and Restricted Stock Units

The Company granted 554,491 shares of restricted stock and 276,110 restricted stock units (“RSUs”) during 2016. During 2015, the Company granted 462,697 shares of restricted stock and 162,092 restricted stock units (“RSUs”). During 2014, the Company granted 253,042 shares of restricted stock and 176,717 RSUs. The majority of the RSUs granted in 2016 and 2015 vest in 2019 and 2018, respectively, and the majority of the RSUs granted in 2014 vest in three annual installments based on the terms of the agreements. The 2016 and 2015 RSUs vest to the extent earned based on the Company’s cumulative net income and cumulative working capital efficiency against target goals. Certain grants made in 2016 include total shareholder return as a metric for vesting as well. The 2014 RSUs are based on net income attainment each year of the vesting period. The performance-based RSUs granted in 2016, 2015, and 2014 have a minimum and maximum payout of zero to 200%. Included in the 2016, 2015, and 2014 grants were 383,196, 333,268, and 271,594 shares of restricted stock and RSUs granted to employees who were not executive officers, as of December 31, 2016, 2015 and 2014, respectively. In addition, there were 55,120, 30,778, and 20,664 shares of restricted stock and RSUs granted to non-employee directors during the years ended December 31, 2016, 2015 and 2014, respectively. For the years ended December 31, 2016, 2015 and 2014, there were also 392,285, 260,743, and 137,501 shares of restricted stock and RSUs granted to executive officers, respectively. The restricted stock granted to executive officers vests with respect to each officer in annual increments over three years, provided that the officer is still employed as of the anniversary date of the grant, and the Company’s cumulative diluted earnings per share for the four calendar quarters immediately preceding the vesting date exceed $0.50 per diluted share as defined in the officers’ restricted stock agreement. As of December 31, 2016, there was $16.8 million of total unrecognized compensation cost related to non-vested restricted stock and RSUs granted. The cost is expected to be recognized over a weighted-average period of 2.0 years. The following table summarizes restricted stock and RSU transactions for the last three years.

				Weighted					Weighted					Weighted
				Average					Average					Average
				Grant Date					Grant Date					Grant Date
Restricted Stock and RSUs	2016			Fair Value		2015			Fair Value		2014			Fair Value
Nonvested—January 1		1,076,000		$	36.13		1,089,374		$	31.23		1,041,189		$	31.24
Granted		830,601			24.34		624,789			36.79		429,759			40.52
Vested		(196,394	)		37.32		(212,537	)		33.94		(237,739	)		41.59
Cancelled		(319,965	)		36.31		(425,626	)		34.58		(143,835	)		34.04
Nonvested—December 31		1,390,242		$	28.88		1,076,000		$	36.13		1,089,374		$	31.23