STOCK OPTIONS AND RESTRICTED STOCK

The Company grants stock options, restricted stock units, restricted stock awards and performance share units to certain employees and directors of the Company under the 2001 Stock Option and Incentive Award Plan (the “2001 Incentive Award Plan”). This plan was originally approved by the Company’s shareholders in May 2001 and was amended and restated with shareholder approval in May 2009. As of December 31, 2014, the aggregate number of shares of common stock that may be issued or transferred under the 2011 Incentive Award Plan is 13,825,827.

Total stock-based compensation expense was $10.9 million, $2.3 million and $6.5 million in 2014, 2013 and 2012, respectively. Stock-based compensation expense for the year ended December 31, 2014 included $5.1 million related to the accelerated vesting of restricted stock and stock options upon the retirement of the Company’s Chief Executive Officer in 2014, as provided for in his employment agreement. These costs were included in the line item “Retirement and Vacation Charges” in the consolidated statements of earnings. All other stock-based compensation expense was included as a component of operating expenses in the consolidated statements of earnings.

The total income tax benefit recognized in the consolidated statements of earnings for stock-based compensation arrangements was $3.8 million, $889,000 and $2.4 million in 2014, 2013 and 2012, respectively. Benefits of tax deductions in excess of recognized compensation cost, which are included in financing cash flows, were $1.4 million, $1.4 million and $6.0 million for the years ended 2014, 2013 and 2012, respectively.

As of December 31, 2014, there was $16.5 million of total unrecognized compensation expense related to non-vested stock-based compensation which is expected to be recognized over a period of 2.6 years.

Stock Options

Under the Company’s 2001 Incentive Award Plan, options granted to date become exercisable after a period of one to five years and unexercised options lapse ten years after the date of the grant. Options are subject to forfeiture upon termination of service. The Company recognizes compensation expense for awards with graded vesting on a straight-line basis over the requisite service period for each separately vesting portion of the award. Shares are issued from the Company’s treasury shares upon share option exercises.

The Company determines the fair value of stock options on the grant date using a Black-Scholes-Merton option pricing model that incorporates expected volatility, expected option life, risk-free interest rates and expected dividend yields. The expected volatility is based on implied volatilities from traded options on the Company’s stock and the historical volatility of the Company’s common stock over the most recent period generally commensurate with the expected estimated life of each respective grant. The expected lives of options are based on the Company’s historical option exercise experience. The Company believes that the historical experience method is the best estimate of future exercise patterns. The risk-free interest rates are determined using the implied yield available for zero-coupon United States government issues with a remaining term equal to the expected life of the grant. The expected dividend yields are based on the approved annual dividend rate in effect and market price of the underlying common stock at the time of grant. No assumption for a future dividend rate increase has been included unless there is an approved plan to increase the dividend in the near term.

The Company granted 351,000 stock options during 2014. No stock options were granted in 2013 or 2012. The weighted-average fair value of options granted in 2014 and the weighted-average assumptions used in the Black-Scholes-Merton option pricing model for such grants were as follows:



	2014
Dividend Yield	.3		%
Expected Volatility	31.9		%
Risk-free Interest Rate	1.9		%
Expected Term (in years)	6.2
Weighted-average Fair Value of Stock Options Granted	$	9.61

The following table summarizes information about stock options outstanding at December 31, 2014:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding December 31, 2014	Weighted Average Remaining Contractual Life (in Years)	Weighted Average Exercise Price		Number Exercisable December 31, 2014	Weighted Average Exercise Price
$10.01-15.00	236,250	3.79	$	14.11	236,250	$	14.11
15.01-20.00	112,500	5.15	19.92		52,500	19.92
20.01-25.00	7,521	9.85	24.98		—	—
25.01-30.29	267,243	9.62	28.65		—	—
10.01-30.29	623,514	6.61	21.52		288,750	15.16

The table below summarizes option activity for the year ended December 31, 2014:



	Options (In Thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value (in Thousands)		Weighted Average Fair Value
Outstanding at January 1, 2014	687		$	15.95
Granted	351		28.82
Exercised	(307	)	15.60
Forfeited/expired	(107	)	26.72
Outstanding at December 31, 2014	624		21.52		6.61	$	5,643	$	8.35
Expected to Vest at December 31, 2014	323		27.27		8.96	1,065		9.81
Exercisable at December 31, 2014	289		15.16		4.04	4,449		6.60

The aggregate intrinsic value amounts in the table above represent the closing price of the Company’s common stock on December 31, 2014 in excess of the exercise price, multiplied by the number of in-the-money stock options as of that same date. Options outstanding that are expected to vest are net of estimated future option forfeitures.

The aggregate intrinsic value of options exercised, which represents the value of the Company’s common stock at the time of exercise in excess of the exercise price, was $4.4 million, $11.0 million and $20.0 million in 2014, 2013 and 2012, respectively. The total grant-date fair value of options vested was $1.3 million, $2.7 million and $2.2 million in 2014, 2013 and 2012, respectively.

Restricted Stock

Shares of restricted stock or restricted stock units (collectively, “restricted stock”) may be granted to employees and directors under the 2001 Incentive Award Plan and typically vest over approximately one to five year periods. Restricted stock grants may be subject to one or more objective employment, performance or other forfeiture conditions as established at the time of grant. Any shares of restricted stock that are forfeited may again become available for issuance.

The fair value of restricted stock is based on the fair market value of the Company’s common stock on the date of grant. The Company recognizes the fair value of time-based restricted stock as compensation expense on a straight-line basis over the vesting period.

In 2011, the Company established a restricted stock program as a component of the 2001 Incentive Award Plan, referred to as the Aaron’s Management Performance Plan (“AMP Plan”). Under the AMP Plan, which expired on December 31, 2012, restricted shares were granted quarterly to eligible participants upon achievement of certain pre-tax profit and revenue levels by the employees’ operating units or the overall Company. Restricted stock granted under the AMP Plan vests over four to five years from the date of grant. Plan participants included certain vice presidents, director level employees and other key personnel in the Company’s home office, divisional vice presidents and regional managers.

During 2012 and 2013, the Company granted performance-based restricted stock to certain executive officers. The performance-based restricted stock under this program is released at the completion of a three-year period only upon the achievement of specific performance criteria over three annual performance periods. The compensation expense associated with these awards is amortized ratably over the vesting period based on the Company’s projected assessment of the level of performance that will be achieved and earned.

The Company granted 548,000, 307,000 and 368,000 shares of restricted stock at weighted-average fair values of $29.11, $29.23 and $26.08 in 2014, 2013 and 2012, respectively. The following table summarizes information about restricted stock activity during 2014:



	Restricted Stock (In Thousands)			Weighted Average Fair Value
Non-vested at January 1, 2014	682			$	25.77
Granted	548			29.11
Vested	(365	)		24.21
Forfeited	(167	)		27.69
Non-vested at December 31, 2014	698		¹	28.75

¹The outstanding non-vested restricted stock as of December 31, 2014 includes 75,000 shares that are subject to performance conditions.

The total vest-date fair value of restricted stock and the performance share units described below that vested during the year was $11.1 million, $184,000 and $2.2 million in 2014, 2013 and 2012, respectively.

Performance Share Units

In 2014, as part of the Company’s long-term incentive compensation program (“LTIP Plan”) and pursuant to the Company’s 2001 Incentive Award Plan, the Company granted a mix of stock options, time-based restricted stock and performance share units to key executives and managers. For performance share units, which are generally settled in stock, the number of shares earned is determined at the end of the one-year performance period based upon achievement of certain pre-tax profit and revenue levels of the Company. If the performance criteria are met, the award is earned, which is then subject to a holding period of two years in order for the shares to be released. The number of performance-based shares which could potentially be issued ranges from zero to 200% of the target award.

The compensation expense associated with these awards is amortized ratably over the vesting period based on the Company’s projected assessment of the level of performance that will be achieved and earned. In the event the Company determines it is no longer probable that the minimum performance criteria specified in the plan will be achieved, all previously recognized compensation expense is reversed in the period such a determination is made.

The following table summarizes information about performance share unit activity during 2014:



	Performance Share Units (In Thousands)		Weighted Average Fair Value
Non-vested at January 1, 2014	—		$	—
Granted	167		32.14
Vested	(36	)	32.48
Forfeited/unearned	(20	)	32.22
Non-vested at December 31, 2014	111		32.01

Retirement-Related Modifications

In connection with the retirement of the Company’s founder and Chairman of the Board in 2012, during the year ended December 31, 2012, the Company recorded a $10.4 million charge to operating expenses, of which $1.7 million related to the accelerated vesting of 75,000 shares of restricted stock and 25,000 stock options. The total incremental cost resulting from the modification, due primarily to increases in the Company’s stock price as of the modification date compared to the grant date, was $1.2 million in 2012. There were no similar modification charges in 2014 or 2013.