NOTE 13. LONG-TERM COMPENSATION

The 2012 Long-Term Incentive Plan (“2012 LTIP”) provides for grants of awards to officers, directors, employees and consultants of the Parent or its subsidiaries. Awards can be in the form of: full value awards, stock appreciation rights, stock options (non-qualified options and incentive stock options) and cash incentive awards. Full value awards generally consist of: (i) common stock; (ii) restricted stock units (“RSUs”); (iii) OP LTIP units (“LTIP Units”) and (iv) Prologis Outperformance Plan (“POP”) OP LTIP units (“POP LTIP Units”).

The awards under the 2012 LTIP have been issued under the following components of our equity-based compensation plans and programs at December 31, 2017: (i) POP; (ii) Prologis Promote Plan (“PPP”); (iii) annual long-term incentive (“LTI”) equity award program (“Annual LTI Award”); and (iv) annual bonus exchange program. Under all of these components, certain employees may elect to receive their equity award payout either in the form of RSUs or other equity of the Parent or LTIP Units of the OP. No participant can be granted more than 1.5 million shares of common stock under the 2012 LTIP in any one calendar year. Awards may be made under the 2012 LTIP until it is terminated by the Board or until the ten-year anniversary of the effective date of the plan.

We have 27.2 million shares reserved for issuance, of which 17.2 million shares of common stock were available for future issuance at December 31, 2017. Each LTIP Unit counts as one share of common stock for purposes of calculating the limit on shares that may be issued.

Equity-Based Compensation Plans and Programs

Prologis Outperformance Plan (“POP”)

We allocate participation points to participants under our POP corresponding to three-year performance periods beginning January 1. The fair value of the awards is measured at the grant date and amortized over the period from the grant date to the date at which the awards would become vested. POP awards are earned to the extent our total stockholder return (“TSR”) for the performance period exceeds the TSR for the Morgan Stanley Capital International (“MSCI”) US REIT Index for the same period plus 100 basis points (“Index”). If this outperformance hurdle is met, the compensation pool is equal to 3.0% of the excess value created, subject to a maximum of the greater of $75.0 million or 0.5% of our equity market capitalization at the start of the performance period (“Capitalizations Cap”). Each participant is eligible to receive a percentage of the total compensation pool based on the number of participation points allocated to the participant. If the performance criteria are met, the participants’ points will generally be paid in the form of common stock or POP LTIP Units, as elected by the participant. Annually, a participant may exchange their participation points for POP LTIP Units. If the performance criteria are not met, the participants’ points and POP LTIP Units will be forfeited. If we outperform the Index, but the absolute TSR is not positive, payment will be delayed until our absolute TSR becomes positive. If after seven years our absolute TSR has not become positive, the awards will be forfeited.

Beginning with 2016 – 2018 performance period, the plan requires an additional performance hurdle. The Index performance must be met or exceeded for an additional three years after the initial three-year performance period (“Initial Award”) to earn any amounts above $75.0 million up to the Capitalization Cap (“Excess Award”). One-third of this Excess Award can be earned at the end of each of the three years after the Initial Award is earned, if our performance meets or exceeds the Index in each of such three years. In addition, participants will not be able to sell or transfer any equity they receive as Initial or Excess Awards until three years after the end of the initial performance period.

At December 31, 2017, all awards were equity classified. We use a Monte Carlo valuation model to value the participation points allocated under the POP.

The following table details the assumptions used for each grant based on the year it was granted (dollars in thousands):

	2017			2016			2015
Risk free interest rate		1.49	%		0.99	%		0.86	%
Expected volatility		22.2	%		20.5	%		28.0	%
Aggregate fair value	$	20,400		$	26,600		$	26,500

Total remaining compensation cost related to the POP at December 31, 2017, was $22.9 million, prior to adjustments for capitalized amounts due to our development and leasing activities. The remaining compensation cost will be recognized through 2022, with a weighted average period of 1.1 years.

The performance criteria were met for the 2015 – 2017 and 2014 – 2016 performance periods, which resulted in the pool being awarded in January 2018 and 2017, respectively, in the form of common stock and vested POP LTIP Units. See below for details on these performance periods (dollars and units in thousands):

	2015 – 2017		2014 – 2016
Performance pool	$	110,230	$	62,220
Common stock		582		486
Vested POP LTIP Units and LTIP Units		1,170		698
Grant date fair value	$	62.65	$	52.53

The POP performance criteria were not met for 2013 – 2015 performance period, therefore, no awards were earned and the participants’ points and POP LTIP Units were forfeited. As the POP has market-based performance criteria, there is no adjustment to the expense previously recognized at the completion of the performance period regardless of the outcome.

Other Equity-Based Compensation Plans and Programs

Awards may be issued in the form of RSUs or LTIP Units at the participants’ elections under the following equity-based compensation plans and programs. RSUs and LTIP Units are valued based on the market price of the Parent’s common stock on the date the award is granted and is charged to compensation expense over the service period, which is generally three years. Dividends and distributions are paid with respect to both RSUs and LTIP Units during the vesting period, and therefore they are considered participating securities. The value of the dividend is charged to retained earnings for RSUs and the distribution is charged to Net Income Attributable to Noncontrolling Interests in the OP for LTIP Units.

Prologis Promote Plan (“PPP”)

Under the PPP, we establish a compensation pool for certain employees that is equal to 40% of the promotes earned by Prologis from the co-investment ventures representing the third-party portion of the promotes. The awards may be settled in some combination of cash and full value awards, at our election.

Annual LTI Equity Award Program (“Annual LTI Award”)

The Annual LTI Award provides for grants to certain employees subject to our performance against benchmark indices that relate to the most recent year’s performance.

Annual Bonus Exchange Program

Under our bonus exchange program, generally all our employees may elect to receive all or a portion of their annual cash bonus in equity. Equity awards granted through the bonus exchange are generally valued at a premium to the cash bonus exchanged.

Summary of Award Activity

RSUs

Each RSU represents the right to receive one share of common stock of the Parent. The following table summarizes the activity for RSUs for the year ended December 31, 2017 (units in thousands):

	Unvested RSUs			Weighted Average Grant Date Fair Value
Balance at January 1, 2017		1,492		$	40.62
Granted		759			50.76
Vested and distributed		(797	)		41.34
Forfeited		(80	)		44.68
Balance at December 31, 2017		1,374		$	45.57

The fair value of stock awards granted and vested was $32.5 million and $33.7 million for 2016 and $30.9 million and $39.3 million for 2015, respectively, based on the weighted average grant date fair value per unit.

Total remaining compensation cost related to RSUs outstanding at December 31, 2017, was $31.6 million, prior to adjustments for capitalized amounts due to our development and leasing activities. The remaining compensation cost will be recognized through 2021, with a weighted average period of 0.9 years.

LTIP Units

An LTIP Unit represents a partnership interest in the OP. After vesting and the satisfaction of certain conditions, an LTIP Unit may be exchangeable for a common limited partnership unit in the OP and then redeemable for a share of common stock (or cash at our option).

The following table summarizes the activity for LTIP Units for the year ended December 31, 2017 (units in thousands):

	Vested LTIP Units			Unvested LTIP Units			Unvested Weighted Average Grant Date Fair Value
Balance at January 1, 2017		743			1,476		$	40.72
Granted		-			1,041			51.11
Vested LTIP Units		688			(688	)		41.13
Vested POP LTIP Units (1)		698			-		N/A
Conversion to common limited partnership units		(597	)		-		N/A
Balance at December 31, 2017		1,532			1,829		$	46.48

(1)

Vested units were based on the POP performance criteria being met for the 2014 – 2016 performance period and represented the earned award amount. Vested units are included in POP award table above. Unvested POP LTIP Units for the 2014 – 2016 performance period were forfeited to the extent not earned.

The fair value of stock awards granted and vested was $38.0 million and $18.8 million for 2016 and $27.3 million and $11.7 million for 2015, respectively, based on the weighted average grant date fair value per unit.

Total remaining compensation cost related to LTIP Units at December 31, 2017, was $50.6 million, prior to adjustments for capitalized amounts due to our development and leasing activities. The remaining compensation cost will be recognized through 2020, with a weighted average period of 1.0 year.

Stock Options

We have 0.7 million stock options outstanding and exercisable at December 31, 2017, with a weighted average exercise price of $24.68 and a weighted average life of 2.0 years. The aggregate intrinsic value of exercised options was $28.6 million, $45.6 million, and $13.7 million for the years ended December 31, 2017, 2016 and 2015, respectively. No stock options were granted in the three-year period ended December 31, 2017.

Other Plans

The Prologis 401(k) Plan (the “401(k) Plan”) provides for matching employer contributions of $0.50 for every dollar contributed by an employee, up to 6% of the employee’s annual compensation (within the statutory compensation limit). In the 401(k) Plan, vesting in the matching employer contributions is based on the employee’s years of service, with 100% vesting at the completion of one year of service. Our contributions under the matching provisions were $2.8 million, $2.7 million and $2.5 million for 2017, 2016 and 2015, respectively.

We have a non-qualified savings plan that allows highly compensated employees the opportunity to defer the receipt and income taxation of a certain portion of their compensation in excess of the amount permitted under the 401(k) Plan. There has been no employer matching in the three-year period ended December 31, 2017.