SHARE-BASED COMPENSATION

On May 4, 2012, the Franklin Electric Co., Inc. 2012 Stock Plan (the "2012 Stock Plan") was approved by the Company's shareholders. The Board of Directors of the Company had approved the 2012 Stock Plan on February 24, 2012. The 2012 Stock Plan is a stock-based compensation plan that provides for discretionary grants of stock options, stock awards, and stock unit awards to key employees and non-employee directors. The 2012 Stock Plan authorizes 1,200,000 shares for issuance as follows:



2012 Stock Plan		Authorized Shares
Stock Options		840,000
Stock/Stock Unit Awards		360,000

The Company also maintains the Amended and Restated Franklin Electric Co., Inc. Stock Plan (the “Stock Plan”) which, as amended in 2009, provided for discretionary grants of stock options and stock awards. The Stock Plan authorized 2,200,000 shares for issuance as follows:



Stock Plan	Authorized Shares
Stock Options	1,600,000
Stock Awards	600,000

All options remaining for grant under the Stock Plan were awarded during the first six months of 2012. The Company currently issues new shares from its common stock balance to satisfy option exercises and stock and stock unit awards under the 2012 Stock Plan and the Stock Plan.

The total share-based compensation expense recognized in 2012, 2011, and 2010 was $6.3 million, $4.0 million, and $4.3 million, respectively.

Stock Options:

Under the above plans, the exercise price of each option equals the market price of the Company’s common stock on the date of grant and the options expire 10 years after the date of the grant. Options granted to employees vest at 20 or 25 percent a year and become fully vested and exercisable after 5 years or 4 years, respectively. Subject to the terms of the plans, in general, the aggregate option price and any applicable tax withholdings may be satisfied in cash or its equivalent, by the plan participant’s delivery of shares of the Company’s common stock having a fair market value at the time of exercise equal to the aggregate option price and/or the applicable tax withholdings or, under the Stock Plan, by having shares otherwise subject to the award withheld by the Company or via cash-less exercise through a broker-dealer.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model with a single approach and amortized using a straight-line attribution method over the option’s vesting period. Options granted to retirement eligible employees are immediately expensed. The Company uses historical data to estimate the expected volatility of its stock, the weighted average expected life, the period of time options granted are expected to be outstanding, and its dividend yield. The risk-free rates for periods within the contractual life of the option are based on the U.S. Treasury yield curve in effect at the time of the grant.

The assumptions used for the Black-Scholes model to determine the fair value of options granted during 2012, 2011, and 2010, are as follows:



	2012		2011		2010
Risk-free interest rate	1.01	%	2.49	%	1.61 - 3.20%
Dividend yield	1.12	%	1.23	%	0.65 - 1.72%
Weighted-average dividend yield	1.12	%	1.07	%	0.95	%
Volatility factor	0.388		0.431		0.355 - 0.398
Weighted-average volatility	0.388		0.432		0.396
Expected term	6.0 years		6.3 years		6.3 years
Forfeiture rate	3.99	%	3.59	%	2.70	%

A summary of the Company’s outstanding stock option activity and related information is as follows:



(Shares in thousands)
Stock Options	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value (000’s)
Outstanding at beginning of 2010	1,979		$	26.84
Granted	157		29.03
Exercised	(271	)	18.63
Forfeited	(48	)	35.64
Outstanding at beginning of 2011	1,817		$	27.95
Granted	113		43.43
Exercised	(346	)	24.86
Forfeited	(15	)	37.16
Outstanding at beginning of 2012	1,569		$	29.66
Granted	125		48.19
Exercised	(579	)	26.58
Forfeited	(23	)	45.82
Outstanding at end of period	1,092		$	33.38	5.50 years	$	29,134
Expected to vest after applying forfeiture rate	1,083		$	33.30	5.48 years	$	28,968
Vested and exercisable at end of period	692		$	32.95	4.21 years	$	18,747



	2012		2011		2010
Weighted average grant-date fair value of options	$	16.38	$	17.41	$	6.29



(In millions)	2012		2011		2010
Intrinsic value of options exercised	$	16.5	$	7.3	$	3.9
Cash received from the exercise of options	15.4		8.6		5.0
Fair value of shares vested	2.4		2.5		4.2
Tax benefit	6.5		2.1		1.3

There were no share-based liabilities paid during the 2012 and 2011 fiscal years, respectively.

A summary of the Company’s non-vested stock option activity and related information is as follows:



(Shares in thousands)	Shares		Weighted-Average Grant- Date Fair Value
Non-vested at beginning of 2011	714		$	23.40
Granted	113		43.43
Vested	(278	)	25.38
Forfeited	(2	)	24.10
Non-vested at beginning of 2012	547		$	26.53
Granted	125		48.19
Vested	(264	)	25.34
Forfeited	(7	)	45.82
Non-vested at end of period	401		$	34.13

As of December 29, 2012, there was $1.9 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans related to stock options. That cost is expected to be recognized over a weighted-average period of 2.31 years.

Stock/Stock Unit Awards:

Under the 2012 Stock Plan, non-employee directors and employees may be granted stock awards and stock units, including grants of restricted shares of the Company’s common stock.

Stock awards to non-employee directors are fully vested when made. Stock/stock unit awards to employees generally cliff vest over 4 years and may be contingent on the attainment of certain performance goals. Dividends are paid to the recipient prior to vesting, except that dividends on performance-based stock awards under the 2012 Stock Plan will be paid only to the extent the performance goals are met. Stock/stock unit awards granted to retirement eligible employees were immediately expensed in 2012 and 2011.

A summary of the Company’s restricted stock/stock unit award activity and related information is as follows:



(Shares in thousands)	Shares		Weighted-Average Grant- Date Fair Value
Non-vested at beginning of 2011	128		$	31.86
Awarded	68		43.40
Vested	(3	)	38.45
Forfeited	(21	)	46.79
Non-vested at beginning of 2012	172		$	34.47
Awarded	104		49.79
Vested	(38	)	31.86
Forfeited	(9	)	36.95
Non-vested at end of period	229		$	41.79

As of December 29, 2012, there was $5.3 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2012 Stock Plan and Stock Plan related to stock awards. That cost is expected to be recognized over a weighted-average period of 2.84 years.