Note 18. Stock and Incentive Programs for Employees and Directors

The Company recognizes compensation expense based on estimated grant date fair values for all share-based awards issued to employees and directors, including stock options, restricted stock units and performance share units. The Company estimates the fair value of share-based awards based on assumptions as of the grant date. The Company recognizes these compensation costs for only those awards expected to vest, on a straight-line basis over the requisite service period of the award, which is generally the vesting term of three to four years for restricted stock awards and stock options and the performance period for performance share units. The Company estimates the number of awards expected to vest based, in part, on historical forfeiture rates and also based on management’s expectations of employee turnover within the specific employee groups receiving each type of award. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates.

Impact of Spinoff Transactions and Reverse Stock Split

On October 1, 2016, in connection with the spinoff transactions, the Company adjusted its outstanding share-based awards in accordance with the terms of the Separation and Distribution Agreement (the “Equitable Adjustment”). For purposes of the vesting of these share-based awards, continued employment or service with the Company or with Donnelley Financial or LSC is treated as continued employment for purposes of the Company’s, Donnelley Financial’s, and LSC’ share-based awards. The adjustments were as follows:

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Stock options, RSUs and PSUs awards granted prior to January 1, 2015 were converted into the same number of RR Donnelley stock options (with an adjusted exercise price), RSUs and PSUs as well as an equal number of both Donnelley Financial and LSC stock options, RSUs and PSUs. The underlying performance conditions for the PSU’s were modified to end the performance period as of September 30, 2016 with no change to the vesting period.

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RSUs and PSUs awards granted after January 1, 2015 were converted into RSUs and PSUs of each participant’s employer post spinoff. The underlying performance conditions for the PSU’s were modified to end the performance period as of September 30, 2016 with no change to the vesting period.

The modified awards in RR Donnelley stock were also adjusted to reflect the impact of the 1-for-3 reverse stock split discussed in Note 1, Basis of Presentation.

No incremental fair value, or compensation cost, was recognized as a result of the above modifications.

Share-Based Compensation Expense

The total share-based compensation expense for continuing operations was $7.4 million, $10.1 million and $10.1 million for the years ended December 31, 2016, 2015 and 2014, respectively. The resulting income tax benefit was $2.9 million, $3.9 million and $3.9 million for the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, $12.1 million of total unrecognized compensation expense related to share-based compensation plans is expected to be recognized over a weighted-average period of 1.7 years. Excess tax benefits, shown as financing cash inflows in the Consolidated Statements of Cash Flows, were $2.6 million, $3.2 million and $2.9 million for the years ended December 31, 2016, 2015 and 2014, respectively.

Share-Based Compensation Plans

The Company has one share-based compensation plan under which it may grant future awards, as described below, and one terminated or expired share-based compensation plan under which awards remain outstanding.

The 2012 Performance Incentive Plan (the “2012 PIP”) was approved by stockholders to provide incentives to key employees of the Company and its subsidiaries. Awards under the 2012 PIP are generally not restricted to any specific form or structure and could include, without limitation, stock options, stock units, restricted stock awards, cash or stock bonuses and stock appreciation rights. There were 10.0 million shares, or 3.3 million adjusted for the stock split, of common stock reserved and authorized for issuance under the 2012 PIP. At December 31, 2016, there were 1.1 million shares of common stock authorized and available for grant under the 2012 PIP.

General Terms of Awards

Under various incentive plans, the Company has granted certain employees non-qualified stock options, restricted stock units, and performance share units. The Human Resources Committee of the Board of Directors has discretion to establish the terms and conditions for grants, including the number of shares, vesting and required service or other performance criteria. The maximum term of any award under the 2012 PIP and previous plans is ten years.

The exercise price of a stock option is equal to the closing price of the Company’s common stock on the option grant date and generally vest over four years. Options generally expire ten years from the date of grant or five years after the date of retirement, whichever is earlier.

The rights granted to the recipient of restricted stock unit awards generally accrue ratably over the restriction or vesting period, which is generally four years. The Company has also granted restricted stock unit awards which cliff vest three years from the grant date. Restricted stock unit awards are subject to forfeiture upon termination of employment prior to vesting, subject in some cases to early vesting upon specified events, including death or permanent disability of the grantee, termination of the grantee’s employment under certain circumstances or a change in control of the Company. The Company records compensation expense of restricted stock unit awards based on the fair value of the awards at the date of grant ratably over the period during which the restrictions lapse. Dividends are not paid on restricted stock units.

The Company also issues restricted stock units as share-based compensation for members of the Board of Directors. Director restricted stock units granted after January 2009 vest ratably over three years from the date of grant with the opportunity to defer any tranche of vesting restricted stock units until termination of service on the Board of Directors. Awards granted between January 2008 and January 2009 vested ratably over three years from the date of grant and were amended in May 2009 to provide the opportunity to defer any tranche of vesting restricted stock units until termination of service on the Board of Directors. For awards granted prior to January 2008, one-third of the restricted stock units vested on the third anniversary of the grant date, and the remaining two-thirds of the restricted stock units vested upon termination of the holder’s service on the Board of Directors; the holder could also elect to defer delivery of the initial one-third of the restricted stock units until termination of service on the Board of Directors. In the event of termination of a holder’s service on the Board of Directors prior to a vesting date, all restricted stock units of such holder will vest. All awards granted prior to December 31, 2007 are payable in shares of common stock or cash. In 2009, the option to have awards paid in cash was removed for awards granted in 2008 and future years. Awards that may be paid in cash are classified as liability awards due to their expected settlement in cash, and are included in accrued liabilities in the Consolidated Balance Sheets. Approximately 12,148, 86,372 and 86,372 restricted stock units classified as liability awards were outstanding at December 31, 2016, 2015 and 2014, respectively. Compensation expense for these awards is measured based upon the fair value of the awards at the end of each reporting period. Awards payable only in shares are classified as equity awards due to their expected settlement in common stock. Compensation expense for these awards is measured based upon the fair value of the awards at the date of grant. Dividend equivalents are accrued for shares awarded to the Board of Directors and paid in the form of cash.

The Company has granted performance share unit awards to certain executive officers and senior management. Distributions under these awards are payable at the end of their respective performance periods in common stock or cash, at the Company’s discretion. The number of share units that vest can range from zero to 150% for the 2015 awards and from zero to 100% for the 2014 awards, depending on achievement of a targeted performance metric for a performance period of three years inclusive of the year in which the award was granted. These awards are subject to forfeiture upon termination by the Company under certain circumstances prior to vesting. The Company expenses the cost of the performance share unit awards based on the fair value of the awards at the date of grant and the estimated achievement of the performance metric, ratably over the performance period of three years.

Stock Options

There were no options granted during the years ended December 31, 2016 and 2015.

Stock option awards as of December 31, 2016 and 2015, and changes during the year ended December 31, 2016 were as follows:

	Shares Under Option (thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (millions)
Outstanding at December 31, 2015		3,707		$	19.66		3.6	$	8.4
Exercised		(85	)		13.23
Cancelled/forfeited/expired		(3	)		15.77
Equitable adjustment		(2,068	)		28.50
Outstanding at December 31, 2016		1,551			37.19		2.2		1.7
Vested and exercisable at December 31, 2016		1,551		$	37.19		2.2	$	1.7

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on December 31, 2016 and 2015, respectively, 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 in-the-money options on December 31, 2016 and 2015. Total intrinsic value of options exercised for the years ended December 31, 2016, 2015 and 2014 was $0.3 million, $0.8 million and $1.1 million, respectively.

There was no unrecognized compensation expense related to stock options as of December 31, 2016.

Cash proceeds received from the option exercises for the year ended December 31, 2016, 2015 and 2014 was $1.1 million, $1.8 million and $1.6 million, respectively.

Restricted Stock Units

Nonvested restricted stock unit awards as of December 31, 2016 and 2015, and changes during the year ended December 31, 2016 were as follows:

	Shares (thousands)			Weighted Average Grant Date Fair Value
Nonvested at December 31, 2015		1,670		$	13.72
Granted		1,746			14.97
Vested		(730	)		12.37
Forfeited		(118	)		14.56
Equitable adjustment		(1,735	)		13.77
Nonvested at December 31, 2016		833		$	17.23

As of December 31, 2016, there was $11.8 million of unrecognized share-based compensation which will be recognized over a weighted-average period of 2.4 years. The fair value of these awards was determined based on the Company’s stock price on the grant date reduced by the present value of expected dividends through the vesting period.

Performance Share Units

Nonvested performance share unit awards as of December 31, 2016 and 2015, and changes during the year ended December 31, 2016, were as follows:

	Shares (thousands)			Weighted Average Grant Date Fair Value
Nonvested at December 31, 2015		732		$	16.61
Forfeited		(46	)		16.67
Vested		(95	)		16.46
Equitable adjustment		(554	)		16.59
Nonvested at December 31, 2016		37		$	16.73

As of December 31, 2016, there was $0.3 million of unrecognized compensation expense related to performance share unit awards, which is expected to be recognized over a weighted average period of one year.