SHARE-BASED COMPENSATION AND EQUITY

Dividends On the basis of amounts declared and paid, the annualized dividends per share were $1.12, $1.08 and $1.04 for the years ended December 31, 2011, 2010 and 2009, respectively.

Share-Based Compensation Cost The Company recognizes costs resulting from all share-based payment transactions based on the fair market value of the award as of the grant date. Awards are valued at fair value and compensation cost is recognized on a straight-line basis over the requisite periods of each award. The Company estimated forfeiture rates are based on historical experience. To cover the exercise and/or vesting of its share-based payments, the Company generally issues new shares from its authorized, unissued share pool. The number of common shares that may be issued pursuant to the Amended and Restated 1991 Equity and Performance Incentive Plan (as amended and restated as of April 13, 2009) (1991 Plan) was 7,873,644, of which 3,045,311 shares were available for issuance at December 31, 2011.

The following table summarizes the components of the Company’s employee and non-employee share-based compensation programs recognized as selling and administrative expense for the years ended December 31:



	2011			2010			2009
Stock options:
Pre-tax compensation expense	$	3,486		$	3,540		$	3,127
Tax benefit	(1,238		)	(1,310		)	(1,157		)
Stock option expense, net of tax	$	2,248		$	2,230		$	1,970

Restricted Stock Units:
Pre-tax compensation expense	$	5,734		$	4,355		$	3,775
Tax benefit	(1,845		)	(1,611		)	(1,397		)
RSU expense, net of tax	$	3,889		$	2,744		$	2,378

Performance shares:
Pre-tax compensation expense	$	4,076		$	3,820		$	4,192
Tax benefit	(1,459		)	(1,413		)	(1,551		)
Performance share expense, net of tax	$	2,617		$	2,407		$	2,641

Deferred shares:
Pre-tax compensation expense	$	1,000		$	826		$	816
Tax benefit	(370		)	(306		)	(302		)
Deferred share expense, net of tax	$	630		$	520		$	514

Total share-based compensation:
Pre-tax compensation expense	$	14,296		$	12,541		$	11,910
Tax benefit	(4,912		)	(4,640		)	(4,407		)
Total share-based compensation, net of tax	$	9,384		$	7,901		$	7,503

The following table summarizes information related to unrecognized share-based compensation costs as of December 31, 2011:



	Unrecognized Cost		Weighted-Average Period
			(years)
Stock options	$	6,463	2.2
RSUs	9,646		1.7
Performance shares	4,749		1.0
Deferred shares	206		0.3
	$	21,064

EMPLOYEE SHARE-BASED COMPENSATION AWARDS

Stock options, RSUs, restricted shares and performance shares have been issued to officers and other management employees under the Company’s 1991 Plan.

Stock Options

Stock options generally vest over a four- or five-year period and have a maturity of ten years from the issuance date. Option exercise prices equal the closing price of the Company’s common stock on the date of grant. The estimated fair value of the options granted was calculated using a Black-Scholes option pricing model using the following assumptions:



	2011		2010		2009
Expected life (in years)	6-7		6-7		5-6
Weighted-average volatility	40	%	40	%	40	%
Risk-free interest rate	1.15 - 3.05%		2.77 - 3.15%		1.76 - 2.55%
Expected dividend yield	2.74 - 2.97%		2.44 - 2.63%		2.23 - 2.43%

The Company uses historical data to estimate option exercise timing within the valuation model. Employees with similar historical exercise behavior with regard to timing and forfeiture rates are considered separately for valuation and attribution purposes. Expected volatility is based on historical volatility of the price of the Company’s common shares. The risk-free rate of interest is based on a zero-coupon U.S. government instrument over the expected life of the equity instrument. The expected dividend yield is based on actual dividends paid per share and the price of the Company’s common shares.

Options outstanding and exercisable as of December 31, 2011 and changes during the year ended were as follows:



	Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value (1)
	(in thousands)		(per share)		(in years)
Outstanding at January 1, 2011	3,152		$	36.67
Expired or forfeited	(239	)	35.46
Exercised	(150	)	33.30
Granted	438		33.06
Outstanding at December 31, 2011	3,201		$	36.70	5	$	3,805
Options exercisable at December 31, 2011	2,166		$	39.86	3	$	1,940
Options vested and expected to vest (2) at December 31, 2011	3,177		$	36.75	5	$	3,760

(1)

The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company’s closing share price on the last trading day of the year in 2011 and the exercise price, multiplied by the number of “in-the-money” options) that would have been received by the option holders had all option holders exercised their options on December 31, 2011. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s common shares.


(2)	The expected to vest options are the result of applying the pre-vesting forfeiture rate assumption to total outstanding non-vested options.

The aggregate intrinsic value of options exercised for the years ended December 31, 2011, 2010 and 2009 was $936, $510 and $422, respectively. The weighted-average grant-date fair value of stock options granted for the years ended December 31, 2011, 2010 and 2009 was $10.90, $9.46 and $7.85, respectively. Total fair value of stock options vested during the years ended December 31, 2011, 2010 and 2009 was $2,967, $3,059 and $3,045, respectively. Exercise of options during the year ended December 31, 2011, 2010 and 2009 resulted in cash receipts of $4,043, $3,332 and $1,514, respectively. The tax (benefit) expense during the years ended December 31, 2011, 2010 and 2009 related to the exercise of employee stock options were $(1,362), $1,705 and $1,160, respectively.

Restricted Stock Units

Each RSU provides for the issuance of one common share of the Company at no cost to the holder and generally vests after three to seven years. During the vesting period, employees are paid the cash equivalent of dividends on RSUs. Non-vested RSUs are forfeited upon termination unless the Board of Directors determines otherwise.

Non-vested RSUs outstanding as of December 31, 2011 and changes during the year ended were as follows:



	Number of Shares		Weighted-Average Grant-Date Fair Value
	(in thousands)
Non-vested at January 1, 2011	594		$	29.06
Forfeited	(48	)	41.09
Vested	(115	)	28.10
Granted	286		32.86
Non-vested at December 31, 2011	717		$	30.69

The weighted-average grant-date fair value of RSUs granted for the years ended December 31, 2011, 2010 and 2009 was $32.86, $27.16 and $24.99, respectively. The total fair value of RSUs vested during the years ended December 31, 2011, 2010 and 2009 was $3,226, $3,989 and $3,830, respectively.

Performance Shares

Performance shares are granted based on certain management objectives, as determined by the Board of Directors each year. Each performance share earned entitles the holder to one common share of the Company. The performance share objectives are generally calculated over a three-year period and no shares are granted unless certain management threshold objectives are met.

Non-vested performance shares outstanding as of December 31, 2011 and changes during the year ended were as follows:



	Number of Shares		Weighted-Average Grant-Date Fair Value
	(in thousands)
Non-vested at January 1, 2011	742		$	31.15
Forfeited	(89	)	30.12
Vested	(174	)	29.04
Granted	248		39.74
Non-vested at December 31, 2011	727		$	34.70

Non-vested performance shares are based on a maximum potential payout. Actual shares granted at the end of the performance period may be less than the maximum potential payout level depending on achievement of performance share objectives. The weighted-average grant-date fair value of performance shares granted for the years ended December 31, 2011, 2010 and 2009 was $39.74, $35.89 and $29.25, respectively. The total fair value of performance shares vested during the years ended December 31, 2011, 2010 and 2009 was $5,041, $3,026 and $5,327, respectively.

NON-EMPLOYEE SHARE BASED COMPENSATION AWARDS

Director Deferred Shares

Deferred shares have been issued to non-employee directors under the 1991 Plan. Deferred shares provide for the issuance of a common share of the Company at no cost to the holder. Deferred shares vest in either a six- or twelve-month period and are issued at the end of the deferral period. During the vesting period and until the common shares are issued, non-employee directors are paid the cash equivalent of dividends on deferred shares.

Non-vested deferred shares as of December 31, 2011 and changes during the year ended were as follows:



	Number of Shares		Weighted-Average Grant-Date Fair Value
	(in thousands)
Non-vested at January 1, 2011	14		$	33.28
Vested	(26	)	33.61
Granted	31		33.98
Non-vested at December 31, 2011	19		$	33.98
Vested at December 31, 2011	96		$	33.88
Outstanding at December 31, 2011	115		$	33.90

The weighted-average grant-date fair value of deferred shares granted for the years ended December 31, 2011, 2010 and 2009 was $33.98, $33.28 and $25.52, respectively. The aggregate intrinsic value of deferred shares released during the years ended December 31, 2011, 2010 and 2009 was $247, $0 and $158, respectively. Total fair value of deferred shares vested for the years ended December 31, 2011, 2010 and 2009 was $887, $819 and $843, respectively.

Other Non-employee Share-Based Compensation

In connection with the acquisition of Diebold Colombia, S.A. in December 2006, the Company issued 6,652 restricted shares with a grant-date fair value of $46.00 per share. These restricted shares vested in November 2011. In December 2005, the Company also issued warrants to purchase 34,789 common shares with an exercise price of $46.00 per share and grant-date fair value of $14.66 per share. The grant-date fair value of the warrants was valued using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 4.45 percent, dividend yield of 1.63 percent, expected volatility of 30 percent, and contractual life of six years. The warrants will expire in December 2016.