SHARE-BASED COMPENSATION AND BENEFIT PLANS

12 Months Ended

Dec. 31, 2020

SHARE-BASED COMPENSATION AND BENEFIT PLANS

10. SHARE-BASED COMPENSATION AND BENEFIT PLANS

Share-Based Compensation Plans

We maintain the 2014 Incentive Compensation Plan (the “2014 Plan”) that provides for the award of a broad variety of share-based compensation alternatives such as non-vested restricted stock, non-qualified stock options, incentive stock options, performance awards, dividend equivalents, deferred stock and stock appreciation rights at no less than 100% of the market price on the date the award is granted. To date, awards under the 2014 Plan consist of non-qualified stock options and non-vested restricted stock.

Under the 2014 Plan, the number of shares of Common and Class B common stock available for issuance is (i) 2,000,000, plus (ii) 45,421 shares of Common stock or Class B common stock that remained available for grant in connection with awards under the 2001 Plan as of the date our shareholders approved the 2014 Plan plus (iii) shares underlying currently outstanding awards issued under the 2001 Plan, which shares become reissuable under the 2014 Plan to the extent that such underlying shares are not issued due to their forfeiture, expiration, termination or otherwise. A total of 915,752 shares of Common stock, net of cancellations, and 968,166 shares of Class B common stock, had been awarded under the 2014 Plan as of December 31, 2020. As of December 31, 2020, 161,503 shares of common stock were reserved for future grants under the 2014 Plan. Options under the 2014 Plan vest over two to four years of service and have contractual terms of five years. Awards of non-vested restricted stock, which are granted at no cost to the employee, vest upon attainment of a specified age, generally toward the end of an employee’s career at age 62 or older. Vesting may be accelerated in certain circumstances prior to the original vesting date.

The following is a summary of stock option activity under the 2014 Plan as of and for the year ended December 31, 2020:

	Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Options outstanding at December 31, 2019		584,675		$	159.34
Granted		161,500			207.60
Exercised		(135,809	)		146.90
Forfeited		(25,250	)		175.76
Options outstanding at December 31, 2020		585,116		$	174.83		3.22	$	30,729
Options exercisable at December 31, 2020		89,697		$	161.15		2.27	$	5,866

The following is a summary of non-vested restricted stock activity as of and for the year ended December 31, 2020:

	Shares			Weighted- Average Grant Date Fair Value
Non-vested restricted stock outstanding at December 31, 2019		3,191,705		$	68.63
Granted		184,265			193.89
Vested		(37,274	)		108.36
Forfeited		(3,589	)		164.94
Non-vested restricted stock outstanding at December 31, 2020		3,335,107		$	75.00

The weighted-average grant date fair value of non-vested restricted stock granted during 2020, 2019, and 2018 was $193.89, $151.58, and $167.06, respectively. The fair value of non-vested restricted stock that vested during 2020, 2019, and 2018 was $7,354, $4,931, and $9,637, respectively.

During 2020, 11,693 shares of Common and Class B common stock with an aggregate fair market value of $2,299 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of restricted stock. During 2019, 9,824 shares of Common and Class B common stock with an aggregate fair market value of $1,518 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of restricted stock. During 2018, 21,754 shares of Common and Class B common stock with an aggregate fair market value of $3,775 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of restricted stock. These shares were retired upon delivery.

Share-Based Compensation Fair Value Assumptions

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing valuation model based on the weighted-average assumptions noted in the table below. The fair value of each stock option award, which is subject to graded vesting, is expensed, net of estimated forfeitures, on a straight-line basis over the requisite service period for each separately vesting portion of the stock option. We use historical data to estimate stock option forfeitures. The expected term of stock option awards granted represents the period of time that stock option awards granted are expected to be outstanding and was calculated using the simplified method for plain vanilla options, which we believe provides a reasonable estimate of expected life based on our historical data. The risk-free rate for periods within the contractual life of the stock option award is based on the yield curve of a zero-coupon United States Treasury bond on the date the stock option award is granted with a maturity equal to the expected term of the stock option award. Expected volatility is based on historical volatility of our stock.

The following table presents the weighted-average assumptions used for stock options granted:

Years Ended December 31,	2020			2019			2018
Expected term in years		4.25			4.25			4.25
Risk-free interest rate		0.26	%		1.64	%		2.69	%
Expected volatility		20.89	%		18.01	%		17.11	%
Expected dividend yield		3.69	%		3.99	%		3.13	%
Grant date fair value	$	20.76		$	14.81		$	20.05

Exercise of Stock Options

The total intrinsic value of stock options exercised during 2020, 2019, and 2018 was $8,753, $4,153, and $3,500, respectively. Cash received from the exercise of stock options during 2020, 2019, and 2018 was $17,608, $11,703, and $5,006, respectively. The tax benefit from stock option exercises during 2020, 2019, and 2018 was $1,586, $626, and $635, respectively. During 2020, 2019, and 2018, 11,455 shares of Common stock with an aggregate fair market value of $2,343, 799 shares of Common stock with an aggregate fair market value of $134 and 7,027 shares of Common stock with an aggregate fair market value of $1,269, respectively, were withheld as payment in lieu of cash for stock option exercises and related tax withholdings. These shares were retired upon delivery.

Share-Based Compensation Expense

The following table provides information on share-based compensation expense:

Years Ended December 31,	2020		2019		2018
Stock options	$	2,447	$	2,440	$	2,014
Non-vested restricted stock		19,682		14,592		13,494
Share-based compensation expense	$	22,129	$	17,032	$	15,508

At December 31, 2020, there was $4,184 of unrecognized pre-tax compensation expense related to stock options granted under the 2014 Plan, which is expected to be recognized over a weighted-average period of approximately 1.8 years. The total fair value of stock options that vested during 2020, 2019, and 2018 was $2,177, $2,055, and $1,607, respectively.

At December 31, 2020, there was $152,187 of unrecognized pre-tax compensation expense related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of approximately 11 years. Of this amount, approximately $57,000 is related to awards granted to our Chief Executive Officer (“CEO”), of which approximately $4,000, $31,000, and $22,000 vest in approximately 2, 6, and 8 years upon his attainment of age 82, 86, and 88, respectively, and approximately $23,000 is related to awards granted to our President, of which approximately $22,000 and $1,000 vest in approximately 23 and 25 years upon his attainment of age 62 and 64, respectively. In the event that vesting is accelerated for any circumstance, as defined in the related agreements, the remaining unrecognized share-based compensation expense would be immediately recognized as a charge to earnings with a corresponding tax benefit. At December 31, 2020, we were obligated to issue 42,909 shares of non-vested restricted stock to our CEO that vest in 8 years and 35,025 shares of non-vested restricted stock to our President that vest in 23 years in connection with 2020’s performance-based incentive compensation program.

Employee Stock Purchase Plan

The Watsco, Inc. Fourth Amended and Restated 1996 Qualified Employee Stock Purchase Plan (the “ESPP”) provides for up to 1,500,000 shares of Common stock to be available for purchase by our full-time employees with at least 90 days of service. The ESPP allows participating employees to purchase shares of Common stock at a 5% discount to the fair market value at specified times. During 2020, 2019, and 2018, employees purchased 5,121, 5,676, and 5,151 shares of Common stock at an average price of $171.89, $145.09, and $168.21 per share, respectively. Cash dividends received by the ESPP were reinvested in Common stock and resulted in the issuance of 3,964, 5,087, and 4,338 additional shares during 2020, 2019, and 2018, respectively. We received net proceeds of $1,649, $1,638, and $1,585, respectively, during 2020, 2019, and 2018, for shares of our Common stock purchased under the ESPP. At December 31, 2020, 457,408 shares remained available for purchase under the ESPP.

401(k) Plan

We have a profit sharing retirement plan for our employees that is qualified under Section 401(k) of the Internal Revenue Code. Annual matching contributions are made based on a percentage of eligible employee compensation deferrals. The contribution has historically been made with the issuance of Common stock to the plan on behalf of our employees. For the years ended December 31, 2020, 2019, and 2018, we issued 25,216, 30,715, and 17,318 shares of Common stock, respectively, to the plan, representing the Common stock discretionary matching contribution of $4,543, $4,274 and $2,945, respectively.