22. Share-based payments

Share-based payments consist of the following compensation costs recognized in selling, general and administrative expenses:



	Three months ended				Nine months ended
	September 30,				September 30,
		2016		2015		2016		2015
Stock option compensation expense	$	1,555	$	1,038	$	4,025	$	3,094
Share unit expense:
Equity-classified PSUs		736		-		1,222		-
Liability-classified share units		1,515		(12)		8,295		3,907
Employee share purchase plan -
employer contributions		403		346		1,152		977
	$	4,209	$	1,372	$	14,694	$	7,978

Stock option plan

The Company has a stock option plan that provides for the award of stock options to selected employees, directors and officers of the Company. Stock option activity for the nine months ended September 30, 2016 and the year ended December 31, 2015 is presented below:



					WA
	Common			WA	remaining			Aggregate
	shares under			exercise	contractual			intrinsic
	option	price			life (in years)	value

Outstanding, December 31, 2014	3,897,791			22.09
Granted	880,706			25.50
Exercised	(1,412,535)			21.11			$	9,426
Forfeited	(89,884)			23.10

Outstanding, December 31, 2015	3,276,078			23.40
Granted	1,268,101			24.34
Exercised	(920,798)			22.48			$	7,047
Forfeited	(82,256)			24.31

Outstanding, September 30, 2016	3,541,125		$	23.96	7.7		$	39,352

Exercisable, September 30, 2016	1,413,544		$	22.97	5.8		$	17,110

The fair value of the stock option grants is estimated on the date of the grant using the Black-Scholes option pricing model. The significant assumptions used to estimate the fair value of stock options granted during the nine months ended September 30, 2016 and 2015 are presented in the following table on a weighted average basis:



Nine months ended September 30,	2016	2015
Risk free interest rate	1.1%	1.8%
Expected dividend yield	2.36%	2.18%
Expected lives of the stock options	5 years	5 years
Expected volatility	26.9%	26.4%

22. Share-based payments (continued)

Stock option plan (continued)

Risk free interest rate is the US Treasury Department five-year treasury yield curve rate on the date of the grant. Expected dividend yield assumes a continuation of the most recent quarterly dividend payments. Expected life of options is based on the age of the options on the exercise date over the past 25 years. Expected volatility is based on the historical common share price volatility over the past five years.

The compensation expense arising from option grants is amortized over the relevant vesting periods of the underlying options. As at September 30, 2016, the unrecognized stock-based compensation cost related to the non-vested stock options was $5,495,000, which is expected to be recognized over a weighted average period of 2.3 years.

Share unit plans

Share unit activity for the nine months ended September 30, 2016 and the year ended December 31, 2015 is presented below:



	Equity-classified awards			Liability-classified awards
	PSUs			PSUs (1)			Restricted share units			DSUs
		WA grant			WA grant			WA grant			WA grant
			date fair			date fair			date fair			date fair
	Number		value	Number		value	Number		value	Number		value
Outstanding, December 31, 2014	-	$	-	238,573	$	23.38	403,587	$	22.32	42,289	$	22.33
Granted	-		-	218,699		24.57	20,528		26.38	29,072		26.07
Vested and settled	-		-	(6,870)		22.22	(28,887)		22.53	(13,365)		22.34
Forfeited	-		-	(28,817)		23.23	(62,274)		21.56	-		-

Outstanding, December 31, 2015	-	$	-	421,585	$	24.03	332,954	$	22.70	57,996	$	24.21
Granted	6,593		30.41	255,728		23.25	3,836		27.68	13,489		27.66
Transferred to (from) equity
awards on modification	257,934		27.34	(257,934)		23.86	-		-	-		-
Vested and settled	-		-	(68,683)		23.08	(158,704)		22.14	(1,847)		25.28
Forfeited	(11,663)		27.41	(38,341)		22.69	(15,050)		22.68	-		-

Outstanding, September 30, 2016	252,864	$	27.43	312,355	$	23.90	163,036	$	23.36	69,638	$	24.85

(1)

Liability-classified PSUs include PSUs awarded under the employee PSU plan, the sign-on grant PSU plan, and other PSUs plans in place prior to 2015 that are cash-settled and not subject to market vesting conditions.

As at September 30, 2016, the unrecognized share unit expense related to equity-classified PSUs was $5,708,000, which is expected to be recognized over a weighted average period of 2.0 years. The unrecognized share unit expense related to liability-classified PSUs was $6,215,000, which is expected to be recognized over a weighted average period of 2.0 years. The unrecognized share unit expense related to liability-classified restricted share units (“RSUs”) was $985,000, which is expected to be recognized over a weighted average period of 0.7 years. There is no unrecognized share unit expense related to liability-classified DSUs as they vest immediately upon grant.

Senior executive and employee PSU plans

In 2015 and 2016, the Company granted share units under two new PSU plans, a senior executive PSU plan and an employee PSU plan (the “new plans”). Under the new plans, the number of PSUs that vest is conditional upon specified market, service, and performance vesting conditions being met.

22. Share-based payments (continued)

Share unit plans (continued)

Senior executive and employee PSU plans (continued)

The market vesting condition is based on the relative performance of the Company’s share price in comparison to the performance of a pre-determined portfolio of other companies’ share prices. The non-market vesting conditions are based on the achievement of specific performance measures and can result in participants earning between 0% and 200% of the target number of PSUs granted.

Prior to May 2, 2016, the Company was only able to settle the PSU awards under the new plans in cash, and as such, both new plans were classified as liability awards. On May 2, 2016 (the “modification date”), the shareholders approved amendments to the new plans, allowing the Company to choose whether to settle the awards in cash or in shares. With respect to settling in shares, the new settlement options allow the Company to either (i) arrange for the purchase shares on the open market on the employee’s behalf based on the cash value that otherwise would be delivered, or (ii) to issue a number of shares equal to the number of units that vest.

Under the first option, the shareholders authorized an unlimited number of open-market purchases of common shares for settlement of the PSUs. Under the second option, the shareholders authorized 1,000,000 shares to be issued for settlement of the PSUs.

On the modification date, the employee PSU plan remained classified as a liability and the senior executive PSU plan awards were reclassified to equity awards, based on the Company’s settlement intentions for each plan. The fair value of the senior executive awards outstanding on the modification date was $27.34. The share unit liability, representing the portion of the fair value attributable to past service, was $2,105,000, which was reclassified to equity on that date. No incremental compensation was recognized as a result of the modification. Unrecognized compensation expense based on the fair value of the senior executive PSU awards on the modification date will be amortized over the remaining service period.

Because the PSUs awarded under the new plans are contingently redeemable in cash in the event of death of the participant, on the modification date, the Company reclassified $2,175,000 to temporary equity, representing the portion of the contingent redemption amount of the senior executive PSU awards as if redeemable on May 2, 2016, to the extent attributable to prior service.

PSUs awarded under the new plans are subject to market vesting conditions. The fair value of the liability-classified PSUs awarded under the employee PSU plan is estimated on the date of grant and at each reporting date using a binomial model. The significant assumptions used to estimate the fair value of the liability-classified PSUs awarded under the employee PSU plan during the nine months ended September 30, 2016 and 2015 are presented in the following table on a weighted average basis:



Nine months ended September 30,	2016	2015
Risk free interest rate	1.2%	1.3%
Expected dividend yield	2.49%	2.17%
Expected lives of the PSUs	3 years	3 years
Expected volatility	29.9%	29.4%
Average expected volatility of comparable companies	37.0%	32.8%

22. Share-based payments (continued)

Senior executive and employee PSU plans (continued)

Risk free interest rate is estimated using Bloomberg’s U.S. dollar Swap Rate as of the valuation date. Expected dividend yield assumes a continuation of the most recent quarterly dividend payments. Given the limited historical information available for the PSUs, the Company estimated the expected life of PSUs with reference to the expected life of stock options. Stock options have five-year expected lives, whereas PSUs vest after three years. As such, the Company estimates the expected life of the PSUs to equal the three-year vesting period. Expected volatility is estimated from Bloomberg’s volatility surface of the common shares as of the valuation date.

The fair value of the equity-classified PSUs was estimated on the modification date using the same binomial model and the same significant assumptions as the liability-classified PSUs during the nine months ended September 30, 2016.

Sign-on grant PSUs

On August 11, 2014, the Company awarded 102,375 one-time sign-on grant PSUs (the “SOG PSUs”). The SOG PSUs are cash-settled and subject to market vesting conditions related to the Company’s share performance over rolling two, three, four, and five-year periods.

The fair value of the liability-classified SOG PSUs is estimated on the date of grant and at each reporting date using a binomial model. The significant assumptions used to estimate the fair value of the SOG PSUs during the nine months ended September 30, 2016 and 2015 are presented in the following table on a weighted average basis:



Nine months ended September 30,	2016	2015
Risk free interest rate	1.0%	1.4%
Expected dividend yield	2.34%	2.12%
Expected volatility	28.2%	33.1%

Risk free interest rate is estimated using Bloomberg’s U.S. dollar Swap Rate as of the valuation date. Expected dividend yield assumes a continuation of the most recent quarterly dividend payments. Given the limited historical information available for the SOG PSUs, the Company estimated the expected life of PSUs with reference to the expected life of stock options. Stock options have five-year expected lives. Comparatively, the SOG PSUs vest in four tranches with the last tranche vesting five years after the grant date. As such, the Company estimates the expected lives of each tranche of SOG PSUs to equal the respective vesting period for the tranche, which is two, three, four, or five years. Expected volatility is estimated from Bloomberg’s volatility surface of the common shares as of the valuation date.

Other PSUs

The Company also has other liability-classified PSUs granted under plans in place prior to 2015 that are cash-settled and not subject to market vesting conditions. The fair values of these liability-classified PSUs is estimated on grant date and at each reporting date using the 20-day volume weighted average price of the Company’s common shares listed on the New York Stock Exchange.

RSUs and DSUs

The Company has RSU and DSU plans that are cash-settled and not subject to market vesting conditions. Fair values of share units under these plans are estimated on grant date and at each reporting date using the 20-day volume weighted average price of the Company’s common shares listed on the New York Stock Exchange. DSUs are granted under the DSU plan to members of the Board of Directors.

22. Share-based payments (continued)

Employee share purchase plan

The Company has an employee share purchase plan that allows all employees that have completed 60 days of service to contribute funds to purchase common shares at the current market value at the time of share purchase. Employees may contribute up to 4% of their salary. The Company will match between 50% and 100% of employees’ contributions, depending on the length of service of each employee with the Company.