10.

Stock Option Plans

On May 16, 2017, our stockholders approved the Arthur J. Gallagher 2017 Long-Term Incentive Plan (which we refer to as the LTIP), which replaced our previous stockholder-approved Arthur J. Gallagher & Co. 2014 Long-Term Incentive Plan (which we refer to as the 2014 LTIP). The LTIP term began May 16, 2017 and terminates on the date of the annual meeting of stockholders in 2027, unless terminated earlier by our board of directors. All of our officers, employees and non-employee directors are eligible to receive awards under the LTIP. The compensation committee of our board of directors determines the annual number of shares delivered under the LTIP. The LTIP provides for non-qualified and incentive stock options, stock appreciation rights, restricted stock and restricted stock units, any or all of which may be made contingent upon the achievement of performance criteria.

Shares of our common stock available for issuance under the LTIP include authorized and unissued shares of common stock or authorized and issued shares of common stock reacquired and held as treasury shares or otherwise, or a combination thereof. The number of available shares will be reduced by the aggregate number of shares that become subject to outstanding awards granted under the LTIP. To the extent that shares subject to an outstanding award granted under either the LTIP or prior equity plans are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such award or by reason of the settlement of such award in cash, then such shares will again be available for grant under the LTIP.

The maximum number of shares available under the LTIP for restricted stock, restricted stock unit awards and performance unit awards settled with stock (i.e., all awards other than stock options and stock appreciation rights) is 3.3 million as of December 31, 2018.

The LTIP provides for the grant of stock options, which may be either tax-qualified incentive stock options or non-qualified options and stock appreciation rights. The compensation committee determines the period for the exercise of a non-qualified stock option, tax-qualified incentive stock option or stock appreciation right, provided that no option can be exercised later than seven years after its date of grant. The exercise price of a non-qualified stock option or tax-qualified incentive stock option and the base price of a stock appreciation right cannot be less than 100% of the fair market value of a share of our common stock on the date of grant, provided that the base price of a stock appreciation right granted in tandem with an option will be the exercise price of the related option.

Upon exercise, the option exercise price may be paid in cash, by the delivery of previously owned shares of our common stock, through a net-exercise arrangement, or through a broker-assisted cashless exercise arrangement. The compensation committee determines all of the terms relating to the exercise, cancellation or other disposition of an option or stock appreciation right upon a termination of employment, whether by reason of disability, retirement, death or any other reason. Stock option and stock appreciation right awards under the LTIP are non-transferable.

On March 15, 2018, the compensation committee granted 1,261,000 options under the 2017 LTIP to our officers and key employees that become exercisable at the rate of 34%, 33% and 33% on the anniversary date of the grant in 2021, 2022 and 2023, respectively. On March 16, 2017, the compensation committee granted 1,650,400 options under the 2014 LTIP to our officers and key employees that become exercisable at the rate of 34%, 33% and 33% on the anniversary date of the grant in 2020, 2021 and 2022, respectively. On March 17, 2016, the compensation committee granted 2,576,000 options to our officers and key employees that become exercisable at the rate of 34%, 33% and 33% on the anniversary date of the grant in 2019, 2020 and 2021, respectively. The 2018, 2017 and 2016 options expire seven years from the date of grant, or earlier in the event of certain terminations of employment. For certain of our executive officers age 55 or older, stock options awarded in 2018, 2017 and 2016 are no longer subject to forfeiture upon such officers’ departure from the company after two years from the date of grant.

Our stock option plans provide for the immediate vesting of all outstanding stock option grants in the event of a change in control of our company, as defined in the applicable plan documents.

During 2018, 2017 and 2016, we recognized $13.7 million, $17.3 million and $14.7 million, respectively, of compensation expense related to our stock option grants.

For purposes of expense recognition in 2018, 2017 and 2016, the estimated fair values of the stock option grants are amortized to expense over the options’ vesting period. We estimated the fair value of stock options at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:


	Year Ended December 31,
	2018			2017			2016
Expected dividend yield		2.3	%		2.8	%		3.0	%
Expected risk-free interest rate		2.7	%		2.3	%		1.6	%
Volatility		15.1	%		27.2	%		27.7	%
Expected life (in years)		5.5			5.0			5.5

Option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. Because our employee and director stock options have characteristics significantly different from those of traded options, and because changes in the selective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee and non-employee director stock options. The weighted average fair value per option for all options granted during 2018, 2017 and 2016, as determined on the grant date using the Black-Scholes option pricing model, was $9.27, $11.42 and $8.45, respectively.

The following is a summary of our stock option activity and related information for 2018 and 2017 (in millions, except exercise price and year data):


	Shares Under Option			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value

Year Ended December 31, 2018
Beginning balance		9.5		$	45.27
Granted		1.3			70.74
Exercised		(1.6	)		37.85
Forfeited or canceled		(0.4	)		49.23

Ending balance		8.8		$	50.16		3.86	$	206.8

Exercisable at end of year		2.1		$	42.84		1.83	$	64.4

Ending unvested and expected to vest		6.5		$	52.14		4.46	$	140.3

Year Ended December 31, 2017
Beginning balance		9.5		$	41.45
Granted		1.7			56.87
Exercised		(1.3	)		33.11
Forfeited or canceled		(0.4	)		44.48

Ending balance		9.5		$	45.27		3.99	$	171.5

Exercisable at end of year		2.1		$	37.81		1.75	$	52.7

Ending unvested and expected to vest		7.2		$	47.30		4.64	$	115.8

Options with respect to 14.4 million shares (less any shares of restricted stock issued under the LTIP - see Note 12 to these consolidated financial statements) were available for grant under the LTIP at December 31, 2018.

The total intrinsic value of options exercised during 2018, 2017 and 2016 amounted to $54.2 million, $33.7 million and $19.3 million, respectively. As of December 31, 2018, we had approximately $30.8 million of total unrecognized compensation cost related to nonvested options. We expect to recognize that cost over a weighted average period of approximately four years.

Other information regarding stock options outstanding and exercisable at December 31, 2018 is summarized as follows (in millions, except exercise price and year data):


	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Term (in years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$ 35.71 - $ 39.17		0.9		0.92	$	38.20		0.9	$	38.20
43.71 - 43.71		2.3		4.21		43.71		—		—
46.17 - 46.87		2.8		2.75		46.48		1.1		46.61
47.92 - 63.60		1.6		5.20		56.81		—		—
70.74 - 70.74		1.2		6.21		70.74		0.1		70.74

$ 35.71 - $ 70.74		8.8		3.86	$	50.16		2.1	$	42.84