Share-Based Compensation

Under terms of its share-based compensation plans, Con-way grants various types of share-based compensation awards to employees and directors. The plans provide for awards in the form of nonvested stock (also known as restricted stock), performance-share plan units ("PSPUs"), stock options and stock appreciation rights (“SARs”).

Con-way recognizes expense on a straight-line basis over the shorter of (1) the requisite service period stated in the award or (2) the period from the grant date of the award up to the employee’s retirement-eligibility date if the award contains an accelerated-vesting provision. The following expense was recognized for share-based compensation:



(Dollars in thousands)	Years ended December 31,
	2012			2011			2010
Salaries, wages and employee benefits	$	14,464		$	12,764		$	15,020
Deferred income tax benefit	(5,616		)	(4,935		)	(5,803		)
Net share-based compensation expense	$	8,848		$	7,829		$	9,217

As a result of executive severances in the third-quarter of 2010, Con-way modified the terms of outstanding awards for four executives. The modification resulted in the immediate vesting of certain awards and, as a result, Con-way recognized $1.1 million of expense.

The fair value of each stock option and SAR grant is estimated using the Black-Scholes option-pricing model, which considers the risk-free interest rate, and the expected award term, volatility and dividend yield. The risk-free interest rate is determined using the U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the award. The expected term of the award is derived from a binomial lattice model, and is based on the historical rate of voluntary exercises, post-vesting terminations and volatility. Expected volatility is based on the historical volatility of Con-way’s common stock over the most recent period equal to the expected term of the award.

At December 31, 2012, Con-way had 4,069,637 common shares available for the grant of stock options, nonvested stock or other share-based compensation under its equity plans. Shares are issued from Con-way’s balance of authorized common stock.

Nonvested Stock

Awards granted to directors prior to 2012 generally have three-year graded-vesting terms, while those granted in 2012 generally vest one year from the award date. Awards granted to employees generally vest three years from the award date. Nonvested stock awards provide for accelerated vesting as a result of a change in control, death or disability (as defined in the award agreement). The awards allow for pro-rata vesting if the award recipient leaves Con-way due to a qualifying retirement during the vesting period. Shares of nonvested stock that are eligible for dividends are valued at the market price of Con-way's common stock at the date of the award. Those awards that are not eligible for dividends are valued at the market price of Con-way’s common stock at the date of award, reduced by the present value of the dividends not received during the vesting period.

The following table summarizes nonvested stock activity for 2012:



	Number of Awards		Weighted- Average Grant-Date Fair Value
Outstanding at December 31, 2011	864,533		$	28.00
Awarded – Employees	312,817		30.37
Awarded – Directors	25,180		33.75
Vested	(341,345	)	22.32
Forfeited	(43,866	)	31.91
Outstanding at December 31, 2012	817,319		$	31.25

The total fair value of nonvested stock that vested in 2012, 2011 and 2010 was $11.0 million, $5.4 million and $3.3 million, respectively, based on Con-way’s closing common stock price on the vesting date. At December 31, 2012, the total unrecorded deferred compensation cost of shares of nonvested stock, net of forfeitures, was $11.6 million, which is expected to be recognized over a weighted-average period of 1.56 years.

Performance-share Plan Units

The PSPUs vest three years from the grant date if certain performance criteria are achieved. The number of shares the award recipients ultimately receive can range from 0% to 200% of the grant target depending on achievement relative to the performance criteria. PSPUs are subject to forfeiture if any award recipient ceases to be an active full-time employee prior to the end of the three-year period, subject in some cases to early vesting upon specified events, including death or disability of the award recipient, or termination of employment following a change in control of Con-way. The awards allow for pro-rata vesting if the award recipient leaves Con-way due to a qualifying retirement during the vesting period. The PSPUs are valued at the market price of Con-way's common stock at the date of the award, reduced by the present value of the dividends not received during the three-year vesting period. The amount of expense recorded each period is based on Con-way's current estimate of the number of shares that will ultimately vest.

The following table summarizes PSPU activity for 2012:



	Number of Awards		Weighted- Average Grant-Date Fair Value
Outstanding at December 31, 2011	—		$	—
Awarded	252,557		29.67
Forfeited	(16,573	)	29.67
Outstanding at December 31, 2012	235,984		$	29.67

At December 31, 2012, the total unrecorded deferred compensation cost of shares of PSPUs, net of forfeitures, was $5.4 million, which is expected to be recognized over a weighted-average period of 2.10 years.

Stock Options

Stock options are granted at prices equal to the market value of the common stock on the date of grant and expire 10 years from the date of grant. Stock options are granted with three-year graded-vesting terms, under which one-third of the award vests each year. Certain option awards provide for accelerated vesting as a result of a change in control, qualifying retirement, death or disability (as defined in the stock option plans).

The following table summarizes stock option activity for 2012:



	Number of Options		Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2011	2,650,863		$	35.59
Granted	9,007		29.73
Exercised	(150,213	)	23.70
Expired or cancelled	(109,397	)	41.36
Outstanding at December 31, 2012	2,400,260		$	36.05	4.93	$	4,432
Exercisable at December 31, 2012	2,012,356		$	36.76	4.31	$	4,415

The aggregate intrinsic value reported in the table above represents the total pretax value that would have been received by employees and directors had all of the holders exercised their in-the-money stock options on December 31, 2012.

The following table summarizes stock option exercise activity:



(Dollars in thousands)	2012		2011		2010
Aggregate intrinsic value of exercised options	$	1,614	$	3,513	$	1,925
Cash received from exercise of options	3,560		5,532		3,459
Tax benefit realized from exercise of options	629		1,370		751

At December 31, 2012, the total unrecorded deferred compensation cost of stock options, net of forfeitures, was $2.6 million, which is expected to be recognized over a weighted-average period of 1.10 years.

The following is a summary of the weighted-average assumptions used in the Black-Scholes option-pricing model and the calculated weighted-average grant-date fair value:



	2012			2011			2010
Estimated fair value	$	11.79		$	12.64		N/A
Risk-free interest rate	0.7		%	2.2		%	N/A
Expected term (years)	4.91			4.73			N/A
Expected volatility	52		%	48		%	N/A
Expected dividend yield	1.37		%	1.24		%	N/A

Stock Appreciation Rights

The cash-settled SARs were granted at the stock price on the grant date and have a three-year graded-vesting term. The awards provide for accelerated vesting if the employee ceases employment due to retirement, death, disability, or a change in control (as defined in the SAR agreement). The SARs are liability-classified awards and, as a result, Con-way re-measures the fair value of the awards each reporting period until the awards are settled. During the vesting period, compensation cost is recognized based on the proportionate amount of service rendered to date. Con-way will recognize any changes in fair value after the vesting period as compensation cost in the current period. The ultimate expense recognized for the SARs is equal to the intrinsic value at settlement. Con-way’s accrued liability for cash-settled SARs of $3.6 million and $3.1 million at December 31, 2012 and 2011 was determined using a weighted-average fair value of $7.43 and $10.85 per SAR at December 31, 2012 and 2011 respectively.

The following table summarizes SAR activity for 2012:



	Number of Rights		Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2011	523,106		$	28.92
Exercised	(15,748	)	28.92
Outstanding at December 31, 2012	507,358		$	28.92	7.11	—
Exercisable at December 31, 2012	348,712		$	28.92	7.11	—

The following table summarizes SAR exercise activity:



(Dollars in thousands)	2012		2011		2010
Cash paid to settle exercised SARs	$	51	$	559	$	148
Realized tax benefit	20		218		58

At December 31, 2012, the total unrecorded deferred compensation cost of SARs, net of forfeitures, was $0.2 million, which is expected to be recognized in January 2013 when the SARs become fully vested.

The following is a summary of the weighted-average assumptions used in the Black-Scholes option-pricing model at the grant date and the calculated weighted-average fair value:



	2010
Estimated fair value	$	10.78
Risk-free interest rate	2.4		%
Expected term (years)	4.30
Expected volatility	48		%
Expected dividend yield	1.38		%