Share-Based Payments

Share-Based Payments—Share-based payments to employees include performance-based stock unit awards, restricted stock units, and stock options. Each type of share-based payment is explained below. Compensation expense related to share-based payments is recorded as a component of Salaries and Related Costs in the Consolidated Income Statements, except for share-based payment expense of $3.6 million recognized in 2014 as a result of the amended employment agreement with and resignation of William F. Ruprecht, Sotheby's CEO, which is classified as a component of CEO Separation Costs in the Consolidated Income Statements (see Note 23).

In 2014, 2013, and 2012, compensation expense related to share-based payments, including the $3.6 million classified within CEO Separation Costs, was as follows (in thousands of dollars):



	2014		2013		2012
Pre-Tax	$	27,061	$	22,350	$	19,240
After-Tax	$	17,683	$	15,299	$	13,078

In 2014, 2013, and 2012, Sotheby's realized $3.6 million, $3.5 million, and $2.8 million respectively, of excess tax benefits related to share-based payment arrangements. These tax benefits represent the amount by which the tax deduction resulting from the exercise or vesting of share-based payments exceeded the tax benefit initially recognized in the financial statements upon the amortization of compensation expense for these awards. Such excess tax benefits are recognized in the Consolidated Balance Sheets as an increase to Additional Paid-in Capital and are classified within Financing Activities in the Consolidated Statements of Cash Flows.

As of December 31, 2014, unrecognized compensation expense related to the unvested portion of share-based payments was $20.4 million. This compensation expense is expected to be amortized over a weighted-average period of approximately 2.1 years. Sotheby’s does not capitalize any compensation expense related to share-based payments to employees.

Sotheby's Restricted Stock Unit Plan—Sotheby's Restricted Stock Unit Plan (the “Restricted Stock Unit Plan”) provides for the issuance of Restricted Stock Units (“RSU's”) to employees, subject to the approval of the Compensation Committee of the Board of Directors (the “Compensation Committee”). In making awards under the Restricted Stock Unit Plan, the Compensation Committee takes into account the nature of the services rendered by employees, their present and potential future contributions to Sotheby's success, and such other factors as the Compensation Committee in its discretion deems relevant.

RSU's vest evenly over a three-year service period. Prior to vesting, holders of RSU's do not have voting rights, but are entitled to receive dividend equivalents. Dividend equivalents paid to holders of unvested RSU's are not forfeitable. RSU's may not be sold, assigned, transferred, pledged or otherwise encumbered until they vest.

Performance Share Units (or “PSU's”) are RSU's that generally vest over three or four years, subject to the achievement of certain profitability targets. Prior to vesting, holders of PSU's do not have voting rights and are not entitled to receive dividends or dividend equivalents. Dividend equivalents are credited to holders of PSU's and are only paid for the portion of PSU's that vest and become shares of Common Stock. PSU's may not be sold, assigned, transferred, pledged or otherwise encumbered until they vest.

In February 2014, Sotheby's issued share-based payment awards with a total fair value of $29.1 million, as follows: (i) 423,203 PSU's with a fair value of $18.9 million and a single vesting opportunity after a three-year service period, including 344,692 PSU's with a fair value of $15.4 million, related almost entirely to Sotheby's incentive compensation programs, and 78,511 PSU's with a fair value of $3.5 million issued to William F. Ruprecht, CEO, in accordance with the terms of his then employment agreement, and (ii) 227,936 RSU's with annual vesting over a three-year service period and a fair value of $10.2 million related almost entirely to Sotheby's incentive compensation programs.

In February 2015, Sotheby's issued share-based payment awards with a total fair value of $28.2 million, as follows:


•	384,664 PSU's with a fair value of $16.9 million and a single vesting opportunity after a three-year service period, including:


◦	304,882 PSU's with a fair value of $13.4 million related almost entirely to Sotheby's incentive compensation programs, and


◦	79,782 PSU's with a fair value of $3.5 million issued to William F. Ruprecht, CEO. In accordance with the terms of his amended employment agreement, when Mr. Ruprecht terminates employment, the pro-rata number of PSU's corresponding to the number of days not worked in 2015 will be forfeited.


•	258,827 RSU's with annual vesting over a three-year service period and a fair value of $11.3 million related almost entirely to Sotheby's incentive compensation programs.

Summary of RSU’s and PSU’s—In 2014, changes to the number of outstanding RSU’s and PSU’s were as follows (shares in thousands):



	Restricted Stock Shares, RSU’s and PSU’s		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2014	1,823		$	35.37
Granted	651		$	44.68
Vested	(604	)	$	30.21
Canceled	(64	)	$	39.05
Outstanding at December 31, 2014	1,806		$	40.32

The aggregate fair value of RSU’s and PSU's that vested during 2014, 2013, and 2012 was $28.1 million, $26.9 million, and $28.1 million, respectively, based on the closing stock price on the dates the shares vested. As of December 31, 2014, 3.6 million shares were available for future awards pursuant to the Restricted Stock Unit Plan.

Stock Options—Stock options issued pursuant to the Sotheby's 1997 Stock Option Plan are exercisable into authorized but unissued shares of Common Stock. Stock options vest evenly over four years and generally expire 10 years after the date of grant.

On February 9, 2010, the Compensation Committee approved a grant of 0.5 million stock options with a grant date fair value of $10.48 per share to five senior executives. These stock options have an exercise price of $22.11 and vest evenly over four years. Prior to this grant, no stock options were issued by Sotheby’s since 2005, and no stock options have been granted from 2011 to 2014. As of December 31, 2014, 104,100 shares of Common Stock were available for the issuance of stock options under the Stock Option Plan.

In 2014, changes to the number of stock options outstanding were as follows (options and aggregate intrinsic value in thousands):



	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at January 1, 2014	93		$	22.11
Canceled	—		$	22.11
Exercised	(43	)	$	22.11
Outstanding at December 31, 2014	50		$	22.11	5.1	$	1,054
Exercisable at December 31, 2014	50		$	22.11	5.1	$	1,054

The aggregate intrinsic value of options exercised during 2014, 2013, and 2012 was $1.2 million, $3.5 million, and $0.6 million, respectively. Cash received from stock options that were exercised during 2014, 2013, and 2012 totaled $1 million, $4 million, and $1 million, respectively. In 2014, 2013, and 2012, the related excess tax benefit realized from the exercise of stock options was $0.3 million, $0.7 million, and $0.1 million, respectively.