20. Share-based payments

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



Three months ended March 31,		2017		2016
Stock option compensation expense	$	1,311		1,070
Share unit expense:
Equity-classified PSUs		1,012		-
Liability-classified share units		(407)		1,272
Employee share purchase plan -
employer contributions		436		353
	$	2,352	$	2,695

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 three months ended March 31, 2017 is presented below:



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

Outstanding, December 31, 2016	3,366,714		$	24.02	7.5		$	33,601
Granted	757,898			32.16
Exercised	(132,950)			25.67			$	913
Forfeited	(3,188)			24.19
Outstanding, March 31, 2017	3,988,474		$	25.51	7.8		$	29,468
Exercisable, March 31, 2017	1,869,010		$	23.36	6.4		$	17,823

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 three months ended March 31, 2017 and 2016 are presented in the following table on a weighted average basis:



Three months ended March 31,	2017	2016
Risk free interest rate	2.1%	1.2%
Expected dividend yield	2.05%	2.68%
Expected lives of the stock options	5 years	5 years
Expected volatility	27.9%	26.5%

As at March 31, 2017, the unrecognized stock-based compensation cost related to the non-vested stock options was $8,425,000, which is expected to be recognized over a weighted average period of 2.6 years.

20. Share-based payments (continued)

Share unit plans

Share unit activity for the three months ended March 31, 2017 is presented below:



	Equity-classified awards			Liability-classified awards
	PSUs			PSUs (1)			Restricted share units ("RSUs")			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, 2016	243,968	$	27.48	311,329	$	23.96	160,009	$	23.37	73,520	$	25.41
Granted	92,934		31.68	86,162		31.69	749		32.76	4,202		32.77
Vested and settled (2)	-		-	-		-	-		-	-
Forfeited	-		-	(1,062)		23.28	-		-	-		-
Outstanding, March 31, 2017	336,902	$	28.64	396,429	$	25.64	160,758	$	23.41	77,722	$	25.81

(1)

Liability-classified PSUs include PSUs awarded under the employee PSU plan and the previous 2013 PSU plan, in place prior to 2015 that are cash-settled and not subject to market vesting conditions.

(2)

Included in this total are 49,871 liability-classified PSUs and 151,589 RSUs that were vested but not settled at March 31, 2017. These vested share units had WA grant date fair values of $23.78 and $23.38 respectively.

As at March 31, 2017, the unrecognized share unit expense related to equity-classified PSUs was $7,073,000, which is expected to be recognized over a weighted average period of 2.1 years. The unrecognized share unit expense related to liability-classified PSUs was $7,134,000, which is expected to be recognized over a weighted average period of 2.1 years. The unrecognized share unit expense related to liability-classified RSUs was $118,000, which is expected to be recognized over a weighted average period of 1.2 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

The Company grants PSUs under 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.

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 three months ended March 31, 2017 and 2016 are presented in the following table on a weighted average basis:



Three months ended March 31,	2017	2016
Risk free interest rate	1.4%	1.2%
Expected dividend yield	1.92%	2.49%
Expected lives of the PSUs	3 years	3 years
Expected volatility	28.2%	29.9%
Average expected volatility of comparable companies	37.0%	37.0%

20. Share-based payments (continued)

Share unit plans (continued)

Senior executive and employee PSU plans (continued)

Sign-on grant PSUs

On August 11, 2014, the Company awarded 102,375 one-time sign-on grant PSUs (the “SOG PSUs”) pursuant to the 2013 PSU plan. 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 three months ended March 31, 2017 and 2016 are presented in the following table on a weighted average basis:



Three months ended March 31,	2017	2016
Risk free interest rate	1.7%	1.0%
Expected dividend yield	2.37%	2.69%
Expected volatility	28.6%	27.9%

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.