Note 10. Share-Based Employee Compensation

As of June 30, 2016, 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 (the "2004 Incentive Plan") and the 2013 Non-Employee Directors Stock Incentive Plan (the "2013 Directors 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 and six months ended June 30, 2016 and 2015 for share-based compensation, including expense for stock options, restricted stock units, phantom stock units, cash settled stock appreciation rights and performance share units.



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
	(In thousands)
Cost of sales	$	180	$	106	$	322	$	443
Operating expenses	2,303		1,191		4,213		6,224
Total cost of share-based compensation included in income, before income tax	$	2,483	$	1,297	$	4,535	$	6,667

Stock Options

Stock options granted under the 2004 Incentive Plan are valued using the Black-Scholes option-pricing model on the date of grant. The model uses various assumptions, including a risk-free interest rate, the estimated term of the options, the estimated stock price volatility, and the estimated dividend yield. Compensation expense for stock options is recognized over the vesting period and is reduced by an estimate for forfeitures, which is based on the Company’s historical forfeitures of unvested options and awards.

There were no stock options granted during the first six months of 2016 or 2015. Total compensation expense recognized for stock options during the three months ended June 30, 2016 and 2015 was $8,000 and $368,000, respectively. Total compensation expense recognized for stock options during the six months ended June 30, 2016 and 2015 was $129,000 and $744,000, respectively. At June 30, 2016, the total amount of unamortized expense related to stock options was $64,000, which will be recognized over a weighted-average period of 1.9 years.

Restricted Stock Units

Restricted stock units granted under the 2004 Incentive Plan and 2013 Directors Plan are valued at the Company’s closing stock price on the date of grant and generally vest within a one- to three-year period. Compensation expense for restricted stock units is recognized over the vesting period and is reduced by an estimate for forfeitures. During the three months ended June 30, 2016 and 2015, the Company granted 43,000 and 142,000 shares underlying restricted stock units, respectively, at a weighted average grant-date fair value of $9.22 and $9.50, respectively. During the six months ended June 30, 2016 and 2015, the Company granted 539,000and 548,000 shares underlying restricted stock units, respectively, at a weighted average grant-date fair value of $8.66 and $8.29, respectively.

Total compensation expense, net of estimated forfeitures, recognized for restricted stock units during the three months ended June 30, 2016 and 2015 was $1,062,000 and $841,000, respectively, and $2,102,000 and $1,761,000 for the six months ended June 30, 2016 and 2015, respectively. At June 30, 2016, the Company had $7,119,000 of total unamortized 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 1.7 years.

Performance Share Units

Performance share units granted under the 2004 Incentive Plan are stock-based awards in which the number of shares ultimately received depends on the Company's performance against specified metrics over a one- to three-year performance period from the date of grant. These performance metrics are 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 is fixed based upon the degree of achievement of the performance goals. The number of shares that could be issued can range from 50% to 200% of the participant's target award. Performance share units are initially valued at the Company's closing stock price on the date of grant. Compensation expense, net of estimated forfeitures, is recognized over the vesting period and will vary based on remeasurements during the performance period. If the performance metrics are not probable of achievement during the performance period, compensation expense would be reversed. The awards are forfeited if the threshold performance metrics are not achieved as of the end of the performance period. The performance units cliff-vest in full at the end of a three-year period.

The Company granted 420,000 and 509,000 shares underlying performance units during the six months ended June 30, 2016 and 2015, respectively, at a weighted average grant-date fair value of $8.61 and $7.96 per share, respectively. There were no performance share units granted during the three months ended June 30, 2016. The Company granted 26,000 shares underlying performance units during the three months ended June 30, 2015 at a weighted average grant-date fair value of $9.55.

During the three months ended June 30, 2016 and 2015, the Company recognized total compensation expense, net of estimated forfeitures, for performance share units of $1,064,000 and $526,000, respectively, and $2,097,000 and $1,056,000 during the six months ended June 30, 2016 and 2015, respectively. At June 30, 2016, unamortized compensation expense related to these awards was $7,047,000, which is expected to be recognized over a weighted-average period of 1.6 years.

Phantom Stock Units

Phantom stock units granted under the 2004 Incentive Plan are a form of share-based awards that are indexed to the Company’s stock and are settled in cash. Because phantom stock units 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 common stock.

There were no phantom stock units granted during the three and six months ended June 30, 2016 or 2015. The Company did not recognize expense related to phantom stock units as of June 30, 2016. The Company recognized $73,000 and $390,000 of compensation expense related to previously granted phantom stock units during the three and six months ended June 30, 2015, respectively. All of the previously granted phantom stock units were fully vested as of December 31, 2015.

Stock Appreciation Rights

Cash settled stock appreciation rights ("SARs") granted under the 2004 Incentive Plan are valued using the Black-Scholes option-pricing model on the date of grant. 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. As of June 30, 2016, all outstanding SARs were fully vested.

There were no SARs granted during the first six months of 2016 or 2015. The Company recognized $350,000 and reversed $511,000 of compensation expense related to previously granted SARs during the three months ended June 30, 2016 and 2015, respectively, and recognized $207,000 and $2,716,000 of compensation expense related to previously granted SARs during the six months ended June 30, 2016 and 2015, respectively. Accrued compensation expense for these awards was $361,000 and $1,460,000 at June 30, 2016 and December 31, 2015, respectively, which was recorded in accrued employee compensation and benefits in the accompanying consolidated condensed balance sheets.