Note 12. Share-Based Employee Compensation

As of March 31, 2017, 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 months ended March 31, 2017 and 2016 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 March 31,
	2017		2016
	(In thousands)
Cost of sales	$	217	$	142
Operating expenses	2,968		1,910
Total cost of share-based compensation included in income, before income tax	$	3,185	$	2,052

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 three months of 2017 or 2016. Total compensation expense recognized for stock options during the three months ended March 31, 2017 and 2016 was $8,000 and $121,000, respectively. At March 31, 2017, the total amount of unamortized expense related to stock options was $39,000, which will be recognized over a weighted-average period of 1.2 years.

Restricted Stock Units

Restricted stock units awarded under the 2004 Incentive Plan and the 2013 Directors Plan are recorded at the Company’s closing stock price on the date of grant. Restricted stock units generally vest over 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 March 31, 2017 and 2016, the Company granted 465,000 and 493,000 shares underlying restricted stock units, respectively, at a weighted average grant-date fair value of $10.13 and $8.61, respectively.

Total compensation expense, net of estimated forfeitures, recognized for restricted stock units during the three months ended March 31, 2017 and 2016 was $1,221,000 and $1,040,000, respectively. At March 31, 2017, the Company had $10,285,000 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 2.7 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 0% 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 the anticipated performance level 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 on the third anniversary of the date of grant.

The Company granted 370,000 and 420,000 shares underlying performance units during the three months ended March 31, 2017 and 2016, respectively, at a weighted average grant-date fair value of $10.10 and $8.61 per share, respectively. The awards granted in 2017 and 2016 are subject to a three-year performance period provided that (i) if certain first year performance goals are achieved, the participant could earn up to 50% of the three-year target award shares, subject to continued service through the vesting date, and (ii) if certain cumulative first and second year performance goals are achieved, the participant could earn up to an aggregate of 80% of the three-year target award shares (which includes any shares earned during the first year), subject to continued service through the vesting date. Based on the Company’s performance in 2016, participants earned a minimum of 50% of the target award shares granted in 2016, subject to continued service through the vesting date.

During the three months ended March 31, 2017 and 2016, the Company recognized total compensation expense, net of estimated forfeitures, for performance share units of $1,988,000 and $1,033,000, respectively. At March 31, 2017, unamortized compensation expense related to these awards was $9,167,000, which is expected to be recognized over a weighted-average period of 1.8 years.

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 generally vest over a three-year period. As of March 31, 2017, all outstanding SARs were fully vested.

There were no SARs granted during the first three months of 2017 or 2016. The Company reversed $32,000 and $143,000 of compensation expense related to previously granted SARs during the three months ended March 31, 2017 and 2016, respectively. Accrued compensation expense for these awards was $0 and $224,000 at March 31, 2017 and December 31, 2016, respectively, which was recorded in accrued employee compensation and benefits in the accompanying consolidated condensed balance sheets.