Share-based compensation:

The Company provides share-based compensation to its directors and certain employees through grants of stock options, TSARs, SARs and deferred, restricted or performance share units.

As at December 31, 2018, the Company had 4,530,865 common shares reserved for future grants of stock options and tandem share appreciation rights under the Company’s stock option plan.

a) Share appreciation rights and tandem share appreciation rights:

All SARs and TSARs granted have a maximum term of seven years with one-third vesting each year after the date of grant. SARs and TSARs units outstanding at December 31, 2018 and 2017 are as follows:



	SARs				TSARs

	Number of units		Exercise price USD		Number of units		Exercise price USD
Outstanding at December 31, 2016	1,511,485		$	42.68	2,416,111		$	42.10
Granted	167,600		50.15		340,200		50.17
Exercised	(213,207	)	32.03		(710,616	)	32.98
Cancelled	(10,801	)	50.18		(2,200	)	34.59
Expired	(5,000	)	25.22		—		—
Outstanding at December 31, 2017	1,450,077		$	45.11	2,043,495		$	46.62
Granted	141,300		55.28		330,400		55.37
Exercised	(669,931	)	39.00		(918,327	)	42.48
Cancelled	(16,582	)	53.12		(8,267	)	47.25
Expired	(7,981	)	28.74		—		—
Outstanding at December 31, 2018	896,883		$	51.27	1,447,301		$	51.24

Information regarding the SARs and TSARs outstanding as at December 31, 2018 is as follows:



	Units outstanding at December 31, 2018				Units exercisable at December 31, 2018

Range of exercise prices	Weighted average remaining contractual life (years)	Number of units outstanding	Weighted average exercise price		Number of units exercisable	Weighted average exercise price
SARs
$25.97 to $35.51	3.96	221,309	$	34.40	105,955	$	34.19
$38.24 to $50.17	3.95	205,951	46.52		99,000	42.59
$54.65 to $78.59	3.73	469,623	61.31		330,923	63.83
	3.84	896,883	$	51.27	535,878	$	54.04
TSARs
$25.97 to $35.51	3.99	347,839	$	34.47	161,261	$	34.32
$38.24 to $50.17	4.41	386,253	47.88		161,902	44.72
$54.65 to $78.59	4.23	713,209	61.24		386,109	66.20
	4.22	1,447,301	$	51.24	709,272	$	54.05

The fair value of each outstanding SARs and TSARs grant was estimated on December 31, 2018 and 2017 using the Black-Scholes option pricing model with the following weighted average assumptions:



	2018			2017
Risk-free interest rate	2.6		%	1.8		%
Expected dividend yield	2.7		%	2.0		%
Expected life of SARs and TSARs (years)	1.5			1.2
Expected volatility	35		%	31		%
Expected forfeitures	0.2		%	0.2		%
Weighted average fair value (USD per share)	$	7.93		$	19.02

Compensation expense for SARs and TSARs is measured based on their fair value and is recognized over the vesting period. Changes in fair value in each period are recognized in net income for the proportion of the service that has been rendered at each reporting date. The fair value as at December 31, 2018 was $18.9 million compared with the recorded liability of $17.3 million. The difference between the fair value and the recorded liability of $1.6 million will be recognized over the weighted average remaining vesting period of approximately 1.6 years.

For the year ended December 31, 2018, compensation expense related to SARs and TSARs included a recovery in cost of sales and operating expenses of $1.2 million (2017 - expense of $45.1 million). This included a recovery of $7.8 million (2017 - expense of $37.8 million) related to the effect of the change in the Company’s share price.

b) Deferred, restricted and performance share units:

Deferred, restricted and performance share units outstanding as at December 31, 2018 and 2017 are as follows:



	Number of deferred share units		Number of restricted share units		Number of performance share units
Outstanding at December 31, 2016	251,017		18,649		572,272
Granted	10,452		8,100		163,500
Performance factor impact on redemption¹	—		—		(102,557	)
Granted in lieu of dividends	5,669		613		14,383
Redeemed	(42,292	)	(6,907	)	(34,186	)
Cancelled	—		—		(8,517	)
Outstanding at December 31, 2017	224,846		20,455		604,895
Granted	7,752		8,700		149,200
Performance factor impact on redemption¹	—		—		(127,733	)
Granted in lieu of dividends	4,495		545		12,303
Redeemed	(28,001	)	(12,339	)	(42,577	)
Cancelled	—		—		(16,310	)
Outstanding at December 31, 2018	209,092		17,361		579,778

Performance share units have a feature where the ultimate number of units that vest are adjusted by a performance factor of the original grant as determined by the Company’s total shareholder return in relation to a predetermined target over the period to vesting. The performance factor is measured based on the weighted-average closing share price for the 90 calendar days on the NASDAQ Global Select Market immediately preceding the year end date that the performance share units vest.

Compensation expense for deferred, restricted and performance share units is measured at fair value based on the market value of the Company’s common shares and is recognized over the vesting period. Changes in fair value are recognized in net income for the proportion of the service that has been rendered at each reporting date. The fair value of deferred, restricted and performance share units as at December 31, 2018 was $36.6 million compared with the recorded liability of $35.3 million. The difference between the fair value and the recorded liability of $1.3 million will be recognized over the weighted average remaining vesting period of approximately 1.4 years.

For the year ended December 31, 2018, compensation expense related to deferred, restricted and performance share units included in cost of sales and operating expenses was a recovery of $5.1 million (2017 - expense of $33.0 million). This included a recovery of $8.9 million (2017 - expense of $29.9 million) related to the effect of the change in the Company’s share price.

c) Stock options:

The exercise price of each stock option is equal to the quoted market price of the Company’s common shares at the date of the grant. Options granted have a maximum term of seven years with one-third of the options vesting each year after the date of grant.

Common shares reserved for outstanding incentive stock options as at December 31, 2018 and 2017 are as follows:



	Number of stock options		Weighted average exercise price
Outstanding at December 31, 2016	344,767		$	40.91
Granted	31,400		50.17
Exercised	(98,274	)	30.90
Cancelled	(15,358	)	52.43
Outstanding at December 31, 2017	262,535		$	45.09
Granted	21,900		54.65
Exercised	(83,114	)	38.89
Cancelled	(3,100	)	57.26
Outstanding at December 31, 2018	198,221		$	48.55

Information regarding the stock options outstanding as at December 31, 2018 is as follows:



	Options outstanding at December 31, 2018				Options exercisable at December 31, 2018

Range of exercise prices	Weighted average remaining contractual life (years)	Number of stock options outstanding	Weighted average exercise price		Number of stock options exercisable	Weighted average exercise price
Options
$25.97 to $35.51	3.98	56,467	$	34.45	35,831	$	34.37
$38.24 to $50.17	3.01	57,754	43.70		39,351	40.67
$54.65 to $78.59	3.61	84,000	61.37		62,100	63.74
	3.54	198,221	$	48.55	137,282	$	49.46

For the year ended December 31, 2018, compensation expense related to stock options was $0.4 million (2017 - $0.5 million).