12. Share-Based Payments and Dividends

Share-Based Payments—Share-based payments to employees include performance-based equity compensation, restricted stock, restricted stock units and stock options, as discussed in more detail below. For the three and six months ended June 30, 2011 and 2010, compensation expense related to share-based payments, which is reflected within Salaries and Related Costs in Sotheby's Condensed Consolidated Statements of Operations, is summarized as follows (in thousands of dollars):


	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Pre-Tax	$	5,669	$	4,786	$	10,399	$	10,636
After-Tax	$	3,806	$	3,045	$	7,340	$	6,959

For the six months ended June 30, 2011, Sotheby's realized $7.2 million of excess tax benefits related to share-based payment arrangements. These excess tax benefits represent the amount by which the tax deduction ultimately received by Sotheby's as a result of the exercise or vesting of share-based payments exceeds the tax benefit initially recognized upon the amortization of compensation expense for these awards. Such excess tax benefits are recognized in Additional Paid-in Capital in the Condensed Consolidated Balance Sheets and are classified within Cash Provided (Used) by Financing Activities in the Condensed Consolidated Statements of Cash Flows.

As of June 30, 2011, unrecognized compensation expense related to the unvested portion of share-based payments was approximately $29.6 million. This compensation expense is expected to be amortized over a weighted-average period of approximately 3.3 years. Sotheby's does not capitalize any compensation expense related to share-based payments to employees.

Sotheby's Restricted Stock Unit Plan—The Sotheby's Restricted Stock Unit Plan (the "Restricted Stock Unit Plan") provides for the issuance of unvested shares of Common Stock ("Restricted Stock") and Restricted Stock Units ("RSU's") to employees, subject to the approval of the Compensation Committee of Sotheby's 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 contributions to Sotheby's success, and such other factors as the Compensation Committee in its discretion deems relevant.

Restricted Stock and RSU's generally vest evenly over a four year service period. Prior to vesting, holders of Restricted Stock have voting rights and are entitled to receive dividends, while holders of RSU's do not have voting rights, but are entitled to receive dividend equivalents. Dividends and dividend equivalents paid to holders of unvested Restricted Stock and RSU's are not forfeitable. Restricted Stock and RSU's may not be sold, assigned, transferred, pledged or otherwise encumbered until they vest.

Performance Share Units—Performance Share Units (or "PSU's") are RSU's issued pursuant to the Restricted Stock Unit Plan which vest ratably, generally over four years, if Sotheby's achieves 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. PSU's may not be sold, assigned, transferred, pledged or otherwise encumbered until they vest. The Compensation Committee believes that PSU's better align Sotheby's variable compensation strategy with its financial performance and the cyclical nature of the art market and further align the interests of Sotheby's management with its shareholders. Accordingly, Sotheby's intends to grant future equity awards in the form of PSU's with performance and service conditions, rather than RSU's with service conditions only.

Effective September 1, 2010, Sotheby's entered into a new employment agreement with William F. Ruprecht, its President and Chief Executive Officer. This employment agreement is for a four-year term ending on August 31, 2014, with one year renewals thereafter unless Sotheby's or Mr. Ruprecht provides notice of non-renewal at least five months prior to the end of the term or an annual extension. Among other things, Mr. Ruprecht's employment agreement entitles him to annual PSU grants beginning in 2011 subject to minimum ($3.5 million) and maximum ($4.5 million) levels, the value of which are determined at the discretion of the Compensation Committee.

Summary of Restricted Stock, RSU's and PSU's—For the six months ended June 30, 2011, changes in the number of outstanding Restricted Stock, RSU's and PSU's were as follows (shares in thousands):


	Restricted Stock, RSU's and PSU's			Weighted Average Grant Date Fair Value
Outstanding at January 1, 2011		2,370		$	18.86
Granted		628		$	41.80
Vested		(988	)	$	23.17
Canceled		(1	)	$	30.87

Outstanding at June 30, 2011		2,009		$	23.91

In the first quarter of 2011, Sotheby's issued 627,566 PSU's with a grant date fair value of $26.2 million as follows: (i) 526,903 PSU's with a fair value of $22 million related to Sotheby's incentive compensation programs and (ii) 100,663 PSU's with a fair value of $4.25 million issued to Mr. Ruprecht in relation to his September 2010 employment agreement, as discussed above.

In March 2011, 242,539 PSU's awarded in February 2010 vested as a result of the achievement of the corresponding profitability target for the year ended December 31, 2010. In addition, in March 2011, 120,000 Restricted Stock shares granted to Mr. Ruprecht in April 2006 vested as a result of the achievement of a five-year profitability target. The aggregate fair value of Restricted Stock, RSU's and PSU's that vested during the six months ended June 30, 2011 and 2010 was $44.9 million and $17.8 million, respectively, based on the closing price of Sotheby's Common Stock on the dates the shares vested.

As of June 30, 2011, 1.6 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 expire ten years after the date of grant. Changes in the number of stock options outstanding for the six months ended June 30, 2011 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, 2011		512		$	21.82
Granted		—		$	—
Exercised		(121	)	$	21.44

Outstanding at June 30, 2011		391		$	21.94		8.4	$	8,444

Exercisable at June 30, 2011		16		$	17.84		6.5	$	404

The aggregate intrinsic value of options exercised during the six months ended June 30, 2011 and 2010, was $3.2 million and $2 million, respectively. Cash received from the exercise of stock options that were exercised during the six months ended June 30, 2011 was $2.6 million. Cash received from the exercise of stock options that were exercised during the six months ended June 30, 2010 totaled $5.3 million. Sotheby's also received $4.1 million in cash in January 2010 for stock options that were exercised in late December 2009. For the six months ended June 30, 2011 and 2010, the excess tax benefits realized from the exercise of stock options totaled $0.8 million and $0.6 million, respectively.

Noortman Master Paintings ("NMP")—On June 7, 2006, Sotheby's entered into a sale and purchase agreement (the "Purchase Agreement") with Arcimboldo S.A. ("Arcimboldo") pursuant to which Sotheby's acquired all of the issued and outstanding shares of capital stock of NMP. Pursuant to the Purchase Agreement, Sotheby's paid initial consideration (the "Initial Consideration") in the form of 1,946,849 shares of Sotheby's Common Stock. Pursuant to the Purchase Agreement, if NMP failed to achieve a minimum level of financial performance during the five years following the closing of the transaction, up to 20% of the Initial Consideration will be transferred back to Sotheby's. The minimum level of financial performance was not achieved as of June 30, 2011, and as a result, approximately 150,000 shares of Sotheby's Common Stock will be transferred back to Sotheby's in the third quarter of 2011. For the three and six months ended June 30, 2011, Sotheby's recorded expense of $0.2 million and a net benefit of $0.6 million, respectively, to compensation expense as the result of adjustments to management's prior estimates of the number of shares of Common Stock that will be transferred back to Sotheby's.

Dividends—During the three and six months ended June 30, 2011, Sotheby's paid dividends of $3.4 million and $6.9 million, respectively. On August 3, 2011, Sotheby's Board of Directors declared a quarterly dividend of $0.05 per share (approximately $3.4 million) to be paid to shareholders of record as of September 1, 2011 on September 15, 2011.

The declaration and payment of future dividends to shareholders is at the discretion of Sotheby's Board of Directors and will depend on many factors, including Sotheby's financial condition, cash flows, legal requirements and other factors as the Board of Directors deems relevant.