SHARE-BASED COMPENSATION

The Company records share-based compensation awards using a fair value method and recognizes compensation expense for an amount equal to the fair value of the share-based payment issued in its financial statements. The Company’s share-based compensation plans include programs for stock options, restricted stock units (RSUs), performance share units (PSUs), and deferred compensation.

In connection with the spin-off of the commercial and residential security businesses, the provisions of our existing compensation plans required adjustments to the number and terms of outstanding employee stock options, stock appreciation rights (SARs), RSUs and PSUs to preserve the intrinsic value of the awards immediately before and after the spin-off. The outstanding awards will continue to vest over the original vesting period, which is generally three years from the grant date.

The stock awards held as of December 1, 2013 were adjusted as follows:

•

Stock options and SARs: Holders of Ingersoll Rand vested stock option and SARs awards received one stock option of Allegion for every three Ingersoll Rand vested and exercisable stock options held. The exercise price for each award was also adjusted to preserve the overall intrinsic value of the awards. Unvested stock options held at the time of the spin-off were converted into stock options of the holder’s employer following the spin-off, with the number of underlying shares and the exercise price adjusted accordingly to preserve the overall intrinsic value of the awards.


•	Restricted stock units: Ingersoll Rand restricted stock units were converted into restricted stock units of the holder’s employer following the spin-off with adjustments to the number of underlying shares as appropriate to preserve the intrinsic value of such awards immediately prior to the spin-off.


•	Performance share units: Participants with active and outstanding performance share units had the number of units held adjusted for the change in Ingersoll Rand stock price before and after the spin-off. A corresponding adjustment was made to the calculation of earnings per share and total shareholder return to appropriately reflect the spin-off.

Under the Company's incentive stock plan, the total number of ordinary shares authorized by the shareholders is 20.0 million, of which 16.3 million remains available as of December 31, 2014 for future incentive awards.

Compensation Expense

Share-based compensation expense related to continuing operations is included in Selling and administrative expenses. The following table summarizes the expenses recognized:



In millions	2014		2013		2012
Stock options	$	16.4	$	23.0	$	5.7
RSUs	24.6		29.9		22.0
PSUs	24.2		20.2		22.5
Deferred compensation	1.9		1.9		0.1
Other	0.6		2.9		2.3
Pre-tax expense	67.7		77.9		52.6
Tax benefit	25.9		29.8		20.1
After-tax expense	$	41.8	$	48.1	$	32.5
Amounts recorded in continuing operations	$	41.8	$	43.4	$	28.6
Amounts recorded in discontinued operations	—		4.7		3.9
Total	$	41.8	$	48.1	$	32.5

During 2012, the Company recorded a correcting adjustment resulting in the reversal of $13.5 million ($8.3 million after tax) of previously charged compensation expense related to the accounting for stock option forfeitures. The Company does not believe the correcting adjustment is material to 2012 or to any of its previously issued annual or interim financial statements.

Stock Options / RSUs

Eligible participants may receive (i) stock options, (ii) RSUs or (iii) a combination of both stock options and RSUs. The fair value of each of the Company’s stock option and RSU awards is expensed on a straight-line basis over the required service period, which is generally the 3-year vesting period. However, for stock options and RSUs granted to retirement eligible employees, the Company recognizes expense for the fair value at the grant date.

The average fair value of the stock options granted for the year ended December 31, 2014 and 2013 was estimated to be $14.29 per share and $16.55 per share, respectively, using the Black-Scholes option-pricing model. The following assumptions were used:



	2014		2013
Dividend yield	1.67	%	1.60	%
Volatility	31.43	%	42.15	%
Risk-free rate of return	1.46	%	0.85	%
Expected life	4.9		5.1

Expected volatility -- The expected volatility is based on a weighted average of the Company’s implied volatility and the most recent historical volatility of the Company’s stock commensurate with the expected life.

Risk-free interest rate --The Company applies a yield curve of continuous risk-free rates based upon the published US Treasury spot rates on the grant date.

Expected life -- The expected life of the Company’s stock option awards represents the weighted-average of the actual period since the grant date for all exercised or cancelled options and an expected period for all outstanding options.

Dividend yield -- The Company determines the dividend yield based upon the expected quarterly dividend payments as of the grant date and the current fair market value of the Company’s stock.

Forfeiture Rate -- The Company analyzes historical data of forfeited options to develop a reasonable expectation of the number of options to forfeit prior to vesting per year. This expected forfeiture rate is applied to the Company’s ongoing compensation expense; however, all expense is adjusted to reflect actual vestings and forfeitures.

For stock options granted prior to the spin-off, the weighted-average exercise prices in the table below reflect the historical exercise prices. Changes in options outstanding under the plans for the years 2014, 2013 and 2012 are as follows:



	Shares subject to option		Weighted- average exercise price		Aggregate intrinsic value (millions)		Weighted- average remaining life
December 31, 2011	18,615,276		$	33.97
Granted	1,463,352		40.67
Exercised	(5,578,783	)	28.87
Cancelled	(408,883	)	41.30
December 31, 2012	14,090,962		36.47
Granted	1,341,602		52.71
Exercised	(6,994,024	)	35.33
Cancelled	(110,496	)	44.57
Impact of Spin-off	371,984		****
December 31, 2013	8,700,028		31.87
Granted	1,160,057		59.82
Exercised	(2,253,094	)	31.04
Cancelled	(104,378	)	47.85
Outstanding December 31, 2014	7,502,613		$	36.21	$	203.9	5.5
Exercisable December 31, 2014	5,127,891		$	30.47	$	168.8	4.3

The following table summarizes information concerning currently outstanding and exercisable options as adjusted for the spin-off as discussed above:



					Options outstanding				Options exercisable
Range of exercise price					Number outstanding at December 31, 2014	Weighted- average remaining life	Weighted- average exercise price		Number outstanding at December 31, 2014	Weighted- average remaining life	Weighted- average exercise price
10.01		—	20.00		610,934	2.7	15.03		610,934	2.7	15.03
20.01		—	30.00		1,303,401	4.4	25.60		1,302,062	4.4	25.60
30.01		—	40.00		3,164,061	4.6	33.98		2,746,192	4.2	34.22
40.01		—	50.00		1,306,079	7.4	41.95		460,016	6.3	41.88
50.01		—	60.00		1,118,138	9.1	59.79		8,687	3.5	59.83
$	15.03	—	$	59.83	7,502,613	5.5	$	36.21	5,127,891	4.3	$	30.47

At December 31, 2014, there was $12.7 million of total unrecognized compensation cost from stock option arrangements granted under the plan, which is primarily related to unvested shares of non-retirement eligible employees. The aggregate intrinsic value of options exercised during the year ended December 31, 2014 and 2013 was $67.4 million and $155.5 million, respectively. Generally, stock options expire ten years from their date of grant.

For restricted stock awarded prior to the spin-off, grant price information in the table below reflects historical market prices. The following table summarizes RSU activity for the years 2014, 2013 and 2012:



	RSUs		Weighted- average grant date fair value
Outstanding and unvested at December 31, 2011	1,307,173		$	35.00
Granted	643,822		40.74
Vested	(575,214	)	30.05
Cancelled	(91,089	)	38.92
Outstanding and unvested at December 31, 2012	1,284,692		$	39.81
Granted	685,441		53.78
Vested	(669,079	)	38.44
Cancelled	(63,954	)	43.98
Impact of Spin-off	103,882		****
Outstanding and unvested at December 31, 2013	1,340,982		$	38.49
Granted	378,873		59.79
Vested	(630,185	)	35.73
Cancelled	(41,921	)	45.14
Outstanding and unvested at December 31, 2014	1,047,749		$	47.60

At December 31, 2014, there was $19.4 million of total unrecognized compensation cost from RSU arrangements granted under the plan, which is related to unvested shares of non-retirement eligible employees.

Performance Shares

The Company has a Performance Share Program (PSP) for key employees. The program provides awards in the form of PSUs based on performance against pre-established objectives. The annual target award level is expressed as a number of the Company's ordinary shares. All PSUs are settled in the form of ordinary shares.

Awards granted prior to 2012 are earned based upon the Company's relative earnings-per-share (EPS) growth as compared to the industrial group of companies in the S&P 500 Index over the 3-year performance period.

Beginning with the 2012 grant year, PSU awards are earned based 50% upon a performance condition, measured at each reporting period by relative EPS growth to the industrial group of companies in the S&P 500 Index and the fair market value of the Company's stock on the date of grant, and 50% upon a market condition, measured by the Company's relative total shareholder return (TSR) as compared to the TSR of the industrial group of companies in the S&P 500 Index over the 3-year performance period. The fair value of the market condition is estimated using a Monte Carlo Simulation approach in a risk-neutral framework based upon historical volatility, risk-free rates and correlation matrix.

The grant price information for performance share units awarded prior to the spin-off reflects historical market prices which were not adjusted to reflect the spin-off. The following table summarizes PSU activity for the maximum number of shares that may be issued for the years 2014, 2013 and 2012:



	PSUs		Weighted-average grant date fair value
Outstanding and unvested at December 31, 2011	2,632,996		$	27.76
Granted	649,668		50.75
Vested	—		—
Forfeited	(1,423,028	)	18.68
Outstanding and unvested at December 31, 2012	1,859,636		$	40.30
Granted	580,910		61.24
Vested	(718,040	)	34.94
Forfeited	(150,636	)	51.43
Impact of spin-off	380,780		****
Outstanding and unvested at December 31, 2013	1,952,650		$	39.20
Granted	473,988		66.22
Vested	(604,649	)	27.84
Forfeited	(36,991	)	44.33
Outstanding and unvested at December 31, 2014	1,784,998		$	50.12

At December 31, 2014, there was $16.8 million of total unrecognized compensation cost from the PSP based on current performance, which is related to unvested shares. This compensation will be recognized over the required service period, which is generally the three-year vesting period.

Deferred Compensation

The Company allows key employees to defer a portion of their eligible compensation into a number of investment choices, including its ordinary share equivalents. Any amounts invested in ordinary share equivalents will be settled in ordinary shares of the Company at the time of distribution.

Other Plans

The Company has not granted SARs since 2006 and does not anticipate additional grants in the future. As of December 31, 2014, there were 55,000 SARs outstanding, all of which are vested and expire 10 years from the date of grant. All SARs exercised are settled with the Company’s ordinary shares.