Share-Based Compensation

GATX provides equity awards to its employees under its GATX Corporation 2012 Incentive Award Plan (the “2012 Plan”), which was adopted in 2012 and superseded the GATX Corporation 2004 Equity Incentive Compensation Plan. The plan provides for the granting of stock options, stock appreciation rights (“SARs”), restricted shares and phantom stock awards. As of December 31, 2012, 3.5 million shares were authorized under the 2012 Plan and 3.5 million shares were available for future issuance. GATX recognizes compensation expense for its equity awards in selling, general and administrative expenses over the service period of each award. For 2012, 2011 and 2010, share-based compensation expense was $12.2 million, $11.0 million and $8.0 million, respectively, and related tax benefits were $4.6 million, $4.1 million and $3.0 million, respectively. These awards are more fully described below.

Stock Option and SAR Awards

Stock option and SARs provide for the purchase of shares of common stock and may be granted for periods not longer than seven years from the grant date. SARs entitle the holder to receive the difference between the market price of GATX’s common stock at the time of exercise and the exercise price, either in shares of common stock, cash or a combination thereof, at GATX’s discretion. Options entitle the holder to purchase shares of GATX common stock at a specified exercise price. Dividends accrue on all options and SARs and are paid upon vesting. Dividends continue to be paid until the options or SARs are exercised, cancelled or expire. The exercise price for stock options and SARs is equal to the average of the high and low trading prices of GATX common stock on the date of grant. Compensation expense is recognized on a straight-line basis over the applicable vesting period. Since 2006, only SARs have been awarded. SARs vest and become exercisable in 1/3 annual increments over three years.

The estimated fair value of a SAR is the sum of the value derived using the Black-Scholes option pricing model and the present value of dividends expected to be paid over the expected term of the SAR. The Black-Scholes valuation incorporates various assumptions, including expected term, expected volatility, and risk free interest rates. Expected term is based on historical exercise patterns and post-vesting terminations. Expected volatility is based on the historical volatility of GATX’s stock price over a period equal to the expected term. Risk-free interest rates are based on the implied yield on U.S. Treasury zero-coupon bond issues with a remaining term equal to the expected term.

The weighted average fair value for GATX’s SARs and the assumptions used to estimate fair value were:



	2012			2011			2010
Weighted average estimated fair value	$	18.48		$	13.88		$	11.13
Quarterly dividend rate	$	0.29		$	0.29		$	0.28
Expected term of SAR, in years	4.7			4.3			4.3
Risk-free interest rate	1.0		%	1.6		%	2.0		%
Dividend yield	2.7		%	3.4		%	4.3		%
Expected stock price volatility	43.3		%	41.9		%	41.8		%
Present value of dividends	$	5.37		$	4.76		$	4.55

Certain data with respect to stock option and SAR activity for the year ended December 31, 2012, were:



	Number of Options and SARs (in thousands)	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Outstanding at beginning of the year	1,879	$	31.08
Granted	350	43.99
Exercised	(341)	28.99			$	4.9
Forfeited/Cancelled	(10)	37.15
Expired	(6)	38.95
Outstanding at end of the year	1,872	33.82		3.7	18.0
Vested and exercisable at end of the year	1,146	31.48		2.6	13.8

The total intrinsic value of options and SARs exercised during the years ended December 31, 2012, 2011 and 2010 was $4.9 million, $4.5 million and $1.0 million, respectively. As of December 31, 2012, there was $6.3 million of unrecognized compensation expense related to nonvested SARs, which is expected to be recognized over a weighted average period of 1.7 years.

Restricted and Performance Share Awards

Restricted shares entitle the recipient to receive a specified number of restricted shares of common stock upon vesting. Restricted shares do not carry voting rights and are not transferable prior to the expiration of a specified restriction period, generally three years, as determined by the Compensation Committee of the Board of Directors ( the “Compensation Committee”). Dividends accrue on all restricted shares and are paid upon vesting. Compensation expense is recognized for these awards over the applicable vesting period.

Performance shares are restricted shares that are granted to key employees based on the achievement of certain strategic objectives. The shares are converted to common stock based on the achievement of predetermined performance goals at the end of a specified performance period as determined by the Compensation Committee. An estimate of the number of shares expected to vest as a result of actual performance against the performance criteria is made at the time of grant to determine total compensation expense to be recognized. The estimate is reevaluated annually and total compensation expense is adjusted for any changes in the estimate, with a cumulative catch up adjustment (i.e., the cumulative effect of applying the change in estimate retrospectively) recognized in the period of change. Compensation expense is recognized for these awards over the applicable vesting period, generally three years.

GATX values its restricted and performance share awards based on the average of the high and low values of its stock on the grant date. As of December 31, 2012, there was $6.6 million of unrecognized compensation expense related to these awards, which is expected to be recognized over a weighted average period of 1.8 years.

Certain data with respect to restricted and performance share activity for the year ended December 31, 2012, were:



	Number of Share Units Outstanding		Weighted Average Grant-Date Fair Value
Restricted Shares:
Nonvested at beginning of the year	333,837		$	29.04
Granted	75,580		43.71
Vested	(134,508	)	25.10
Forfeited	(7,919	)	33.87
Nonvested at end of the year	266,990		35.03
Performance Shares:
Nonvested at beginning of the year	188,434		$	30.36
Granted	76,780		44.02
Net increase due to estimated performance	9,567		40.81
Vested	(85,575	)	25.96
Nonvested at end of the year	189,206		38.42

The total fair value of restricted and performance shares that vested during the years ended December 31, 2012, 2011 and 2010, was $5.6 million, $2.7 million and $2.5 million, respectively.

Phantom Stock Awards

Phantom stock is granted to non-employee directors as a component of their compensation for service on GATX’s Board of Directors. In accordance with the terms of the phantom stock awards, each director is credited with a quantity of units that equate to, but are not, common shares in the Company. Phantom stock awards are dividend participating with all dividends reinvested in additional phantom shares at the average of the high and low trading prices of GATX stock on the dividend payment date. Settlement of whole units of phantom stock will be made in shares of common stock and fractional units will be paid in cash at the expiration of each director’s service on the Board and/or in accordance with his or her deferral election. In 2012, GATX granted 20,722 units of phantom stock and 135,261 units were outstanding as of December 31, 2012.