Note 13. Share-Based Employee Compensation

As of March 31, 2014, the Company had two shareholder approved stock plans under which shares were available for equity-based awards: the Callaway Golf Company Amended and Restated 2004 Incentive Plan and the 2013 Non-Employee Directors Stock Incentive Director Plan. From time to time, the Company grants stock options, restricted stock units, phantom stock units, stock appreciation rights and other awards under these plans.

The table below summarizes the amounts recognized in the financial statements for the three months ended March 31, 2014 and 2013 for share-based compensation, including expense for stock options, restricted stock units, phantom stock units, cash settled stock appreciation rights and performance share units. The increase in share-based compensation expense in the first quarter of 2014 compared to the same quarter in the prior year was due to a 54% increase in the Company's stock price period over period, which increased the remeasured value of cash-settled awards at the end the first quarter of 2014 compared to the first quarter of 2013.



	Three Months Ended March 31,
(In thousands)	2014		2013
Cost of sales	$	309	$	80
Operating expenses	5,026		1,239
Total cost of share-based compensation included in income, before income tax	$	5,335	$	1,319

Stock Options

During the three months ended March 31, 2013, the Company granted 1,784,000 shares underlying stock options at a weighted average grant-date fair value of $2.46 per share based on the Black Scholes option-pricing model. There were no stock options granted during the first quarter of 2014. Total compensation expense recognized for stock options was $379,000 during both the three months ended March 31, 2014 and 2013.

The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The model uses various assumptions, including a risk-free interest rate, the expected term of the options, the expected stock price volatility, and the expected dividend yield. Compensation expense for employee stock options is recognized over the vesting term and is reduced by an estimate for forfeitures, which is based on the Company’s historical forfeitures of unvested options and awards. The table below summarizes the weighted average Black-Scholes fair value assumptions used in the valuation of stock options granted during the three months ended March 31, 2013. There were no stock options granted during the first quarter of 2014.



	Three Months Ended March 31,
	2013
Dividend yield	0.6	%
Expected volatility	48.8	%
Risk free interest rate	0.6	%
Expected life	4.3 years

Restricted Stock Units

Restricted stock units are recorded at the Company’s closing stock price on the date of grant. Restricted stock units generally vest at the end of a three year period. During the three months ended March 31, 2014 and 2013, the Company granted 366,000 and 368,000 shares underlying restricted stock units, respectively, at a weighted average grant-date fair value of $8.17 and $6.52 per share, respectively. Total compensation expense, net of estimated forfeitures, recognized for restricted stock units during the three months ended March 31, 2014 and 2013 was $597,000 and $379,000, respectively.

At March 31, 2014, the Company had $2,613,000 of total unrecognized compensation expense related to non-vested restricted stock units under the Company’s share-based payment plans. That cost is expected to be recognized over a weighted-average period of 1.8 years.

Performance Share Units

Performance share units are a form of stock-based award in which the number of shares ultimately received depends on the Company's performance against specified metrics that are measured over a one year performance period from the date of grant. These performance metrics were established by the Company at the beginning of the performance period. At the end of the performance period, the number of shares of stock that could be issued will be fixed based upon the degree of achievement of the performance goals. The number of shares that could be issued can range from 50% to 150% of the participant's target award. If the performance metrics are not met at the end of the performance period, compensation expense would be reversed and the awards would be forfeited. The performance units vest in full at the end of a three year period.

The Company granted 447,000 performance share units during the first quarter of 2014 at a weighted average grant-date fair value of $8.17 per share. There were no performance share units granted in the first quarter of 2013. At March 31, 2014, the Company recognized total compensation expense, net of estimated forfeitures, of $188,000.

Phantom Stock Units

Phantom stock units ("PSUs") are a form of share-based award that are indexed to the Company’s stock and are settled in cash. Because PSUs are settled in cash, compensation expense recognized over the vesting period will vary based on changes in fair value. Fair value is remeasured at the end of each interim reporting period based on the closing price of the Company’s stock. PSUs vest at the end of a three year period.

There were no PSUs granted in 2014 and 2013. Compensation expense recognized for PSUs during the three months ended March 31, 2014 and 2013 was $572,000 and $265,000, respectively. Accrued compensation expense for PSUs for the three months ended March 31, 2014 was $1,995,000, which was recorded in accrued employee compensation and benefits in the accompanying consolidated condensed balance sheets. At December 31, 2013, the Company accrued $2,830,000, of which $1,439,000 was included in accrued employee compensation and benefits and $1,391,000 was included in long-term incentive compensation and other in the accompanying consolidated condensed balance sheets.

Stock Appreciation Rights

The Company records compensation expense for cash settled stock appreciation rights (“SARs”) based on the estimated fair value on the date of grant using the Black Scholes option-pricing model. SARs are subsequently remeasured at each interim reporting period based on a revised Black Scholes value until they are exercised. SARs vest over a three year period.

There were no SARs granted in 2014 and 2013. The Company recognized compensation expense for SARs of $3,599,000 and $296,000 during the three months ended March 31, 2014 and 2013, respectively. At March 31, 2014, the Company accrued compensation expense of $8,748,000 in accrued employee compensation and benefits in the accompanying consolidated condensed balance sheets. At December 31, 2013, the Company accrued compensation expense of $5,193,000, of which $4,200,000 and $993,000 was included in accrued employee compensation and benefits and long-term incentive compensation and other, respectively, in the accompanying consolidated condensed balance sheets.