STOCK-BASED COMPENSATION

The Company grants stock options, RSUs, RSAs and PSUs to certain employees and directors of the Company under the 2015 Equity and Incentive Award Plan and previously did so under the 2001 Stock Option and Incentive Award Plan (the "2015 Plan" and "2001 Plan"). The 2001 Plan was originally approved by the Company’s shareholders in May 2001 and was amended and restated with shareholder approval in May 2009 and discontinued with the approval of the 2015 Plan on May 6, 2015. Beginning in 2015, as part of the Company’s long-term incentive compensation program ("LTIP Plan") and pursuant to the Company’s 2001 Plan and 2015 Plan, the Company granted a mix of stock options, time-based restricted stock and performance share units to key executives and managers.

As of December 31, 2018, the aggregate number of shares of common stock that may be issued or transferred under the 2015 Plan is 1,441,744.

The Company has elected a policy to estimate forfeitures in determining the amount of stock compensation expense. Total stock-based compensation expense was $28.2 million (including $0.2 million of expense related to the Company's Employee Stock Purchase Plan ("ESPP") discussed further below), $27.4 million and $21.5 million for the years ended December 31, 2018, 2017 and 2016, respectively. These costs were 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 $6.9 million, $10.4 million and $8.2 million in the years ended December 31, 2018, 2017 and 2016, respectively. Benefits of tax deductions in excess of recognized compensation cost, which are included in operating cash flows, were $5.7 million and $1.1 million for the years ended December 31, 2018 and 2017, respectively. Tax deductions less than recognized compensation cost were $0.7 million for the year ended December 31, 2016.

As of December 31, 2018, there was $24.6 million of total unrecognized compensation expense related to non-vested stock-based compensation which is expected to be recognized over a period of 1.3 years.

Stock Options

Under the Company’s 2001 Plan, options granted become exercisable after a period of one to five years and unexercised options lapse 10 years after the date of grant. Under the Company’s 2015 Plan, options granted to date become exercisable after a period of one to three years and unexercised options lapse 10 years after the date of the grant. Unvested options are subject to forfeiture upon termination of service for both plans. The Company recognizes compensation expense for options that have a graded vesting schedule on a straight-line basis over the requisite service period. 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 361,000, 518,000 and 634,000 stock options during the years ended December 31, 2018, 2017 and 2016, respectively. The weighted-average fair value of options granted and the weighted-average assumptions used in the Black-Scholes-Merton option pricing model for such grants were as follows:



	2018			2017			2016
Dividend Yield	0.3		%	0.4		%	0.4		%
Expected Volatility	34.8		%	32.8		%	34.2		%
Risk-free Interest Rate	2.6		%	1.9		%	1.3		%
Expected Term (in years)	5.3			5.3			5.3
Weighted-average Fair Value of Stock Options Granted	$	16.54		$	8.55		$	7.10

The following table summarizes information about stock options outstanding at December 31, 2018:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding December 31, 2018	Weighted Average Remaining Contractual Life (in Years)	Weighted Average Exercise Price		Number Exercisable December 31, 2018	Weighted Average Exercise Price
$19.92-20.00	33,250	1.15	$	19.92	33,250	$	19.92
20.01-30.00	1,174,285	7.29	25.50		666,915	25.47
30.01-40.00	116,496	6.07	32.13		116,496	32.13
40.01-47.26	352,650	9.18	47.26		—	—
19.92-47.26	1,676,681	7.48	30.42		816,661	26.20

The table below summarizes option activity for the year ended December 31, 2018:



	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, 2018	1,652		$	25.56
Granted	361		47.26
Exercised	(296	)	23.90
Forfeited/expired	(40	)	29.77
Outstanding at December 31, 2018	1,677		30.42		7.48	$	19,496	$	9.98
Expected to Vest	844		34.20		8.35	6,624		11.42
Exercisable at December 31, 2018	817		26.20		6.55	12,947		8.36

The aggregate intrinsic value amounts in the table above represent the closing price of the Company’s common stock on December 31, 2018 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 $6.6 million, $2.6 million and $0.4 million during the years ended December 31, 2018, 2017 and 2016, respectively. The total grant-date fair value of options vested during the year ended December 31, 2018, 2017 and 2016 was $3.5 million, $1.7 million and $1.4 million, respectively.

Restricted Stock

Shares of restricted stock units or restricted stock awards (collectively, "restricted stock") may be granted to employees and directors under the 2015 Plan and typically vest over approximately one to three-year periods; under the 2001 Plan restricted stock typically vests over approximately one to five-year periods. Restricted stock grants are generally settled in stock and may be subject to one or more objective employment, performance or other forfeiture conditions as established at the time of grant. The Company generally recognizes compensation expense for restricted stock with a graded vesting schedule on a straight-line basis over the requisite service period as restricted stock are generally not subject to Company performance metrics. Compensation expense for performance-based restricted stock is recognized on an accelerated basis over the vesting period based on the Company’s projected assessment of the level of performance that will be achieved and earned. Shares are issued from the Company’s treasury shares upon vesting. Any shares of restricted stock that are forfeited may again become available for issuance.

The fair value of restricted stock is generally based on the fair market value of the Company’s common stock on the date of grant.

In 2011, the Company established a restricted stock program as a component of the 2001 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. These grants began vesting in 2016.

During 2013, the Company granted performance-based restricted stock to certain executive officers. During 2016, the performance-based restricted stock under this program vested with the completion of the three-year service period and the achievement of specific performance criteria. The compensation expense associated with these awards was recognized on an accelerated basis over the vesting period based on the Company’s projected assessment of the level of performance that would be achieved and earned.

During 2015, 2016 and 2017, the Company granted performance-based restricted stock to certain executive officers that vest over a three-year service period and with the achievement of specific performance criteria. The compensation expense associated with these awards is recognized on an accelerated basis over the respective vesting periods based on the Company's projected assessment of the level of performance that will be achieved and earned. As of December 31, 2018, there are no performance-based restricted shares still subject to performance conditions.

The Company granted 248,000, 375,000 and 379,000 shares of restricted stock at weighted-average fair values of $46.01, $29.27 and $22.81 in the years ended December 31, 2018, 2017 and 2016, respectively. The following table summarizes information about restricted stock activity during 2018:



	Restricted Stock (In Thousands)		Weighted Average Fair Value
Non-vested at January 1, 2018	947		$	27.96
Granted	248		46.01
Vested	(544	)	28.33
Forfeited	(62	)	37.46
Non-vested at December 31, 2018	589		34.18

The total vest-date fair value of restricted stock described above that vested during the year was $24.8 million, $9.9 million and $3.8 million in the years ended December 31, 2018, 2017 and 2016, respectively.

Performance Share Units

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 various performance criteria, which have included adjusted EBITDA, revenue and invoice volume levels of the respective segments and return on capital for Aaron's, Inc. Beginning in 2016, the Company added adjusted pre-tax profit and production volume levels as additional performance criteria for certain segments. When the performance criteria are met, the award is earned and one-third of the award vests. One-third of the remaining earned award is subject to an additional one-year service period and one-third of the remaining earned award is subject to an additional two-year service period. Shares are issued from the Company’s treasury shares upon vesting. The number of performance-based shares which could potentially be issued ranges from zero to 200% of the target award.

The fair value of performance share units is based on the fair market value of the Company’s common stock on the date of grant. The compensation expense associated with these awards is amortized on an accelerated basis 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 2018:



	Performance Share Units (In Thousands)		Weighted Average Fair Value
Non-vested at January 1, 2018	822		$	26.31
Granted	486		38.51
Vested	(458	)	26.96
Forfeited/unearned	(51	)	30.06
Non-vested at December 31, 2018	799		33.11

The total vest-date fair value of performance share units described above that vested during the period was $22.6 million, $7.9 million and $3.4 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Employee Stock Purchase Plan

Effective May 9, 2018, the Company's Board of Directors and shareholders approved the Employee Stock Purchase Plan ("ESPP"), which is a tax-qualified plan under Section 423 of the Internal Revenue Code. The purpose of the Company's ESPP is to encourage ownership of the Company's common stock by eligible employees of Aaron's, Inc. and certain Aaron's subsidiaries. Under the ESPP, eligible employees are allowed to purchase common stock of the Company during six-month offering periods at the lower of: (i) 85% of the closing trading price per share of the common stock on the first trading date of an offering period in which a participant is enrolled; or (ii) 85% of the closing trading price per share of the common stock on the last day of an offering period. Employees participating in the ESPP can contribute up to an amount not exceeding 10% of their base salary and wages to a maximum of $25,000 annually.

The compensation cost related to the ESPP is measured on the grant date based on eligible employees' expected withholdings and is recognized over each six-month offering period. During the year ended December 31, 2018, total compensation cost recognized in connection with the ESPP was $0.2 million. These costs were included as a component of operating expenses in the consolidated statements of earnings. During the year ended December 31, 2018, the Company issued 25,239 shares under the ESPP at a purchase price of $35.74. As of December 31, 2018, the aggregate number of shares of common stock that may be issued under the ESPP is 174,761.