Note 5 — Share-Based Compensation

Refer to Notes 1 and 18 of the Company’s audited financial statements for the year ended December 31, 2016, which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC, for a discussion regarding the Company’s share-based compensation plans and policy.

Share-Based Compensation

Share-based compensation costs are classified as selling, general and administrative expenses on the Company’s statements of income and corporate administration and other expenses for segment reporting purposes. TSYS’ share-based compensation costs are expensed, rather than capitalized, as these awards are typically granted to individuals not involved in capitalizable activities.

Below is a summary of share-based compensation expense for the three and nine months ended September 30, 2017 and 2016:


	Three months ended September 30,					Nine months ended September 30,
(in thousands)	2017		2016	Percent Change		2017		2016	Percent Change
Share-based compensation	$	8,407	13,069	(35.7)	%	$	28,462	33,792	(15.8)	%

Nonvested Share Awards - Time-Based

The Company granted shares of TSYS common stock to certain key employees. The nonvested stock bonus awards are typically for services to be provided in the future and vest over a period of up to four years. The market value of the TSYS common stock as of the date of issuance is charged as compensation expense over the vesting periods of the awards. As of September 30, 2017, there was approximately $19.7 million of unrecognized compensation cost related to time-based nonvested share awards.




		Nine months ended September 30,
	2017		2016
Number of shares granted		323,497	331,733
Market value (in millions)	$	17.7	15.3

Performance- and Market-Based Awards

The Company granted performance- and market-based shares to certain key employees. The performance- and market-based goals are established by the Compensation Committee of the Board of Directors and will vest up to a maximum of 200%. During the first nine months of 2017 and 2016, the Compensation Committee established performance goals based on adjusted diluted EPS, adjusted EPS, revenue growth, corporate accountability operating income (CAOI) growth, net revenue and revenues before reimbursable items. The Company’s market-based awards are based upon the Company’s Total Shareholder Return (TSR) as compared to the TSR of the companies in the S&P 500 over the performance period.

Compensation expense for performance shares is measured on the grant date based on the quoted market price of TSYS common stock. The Company estimates the probability of achieving the goals through the performance period and expenses the awards on a straight-line basis. The fair value of market-based awards is estimated on the grant date using a Monte Carlo simulation model. The Company expenses market-based awards on a straight-line basis. Compensation costs related to performance- and market-based shares are recognized through the longer of the performance period or the vesting period. As of September 30, 2017, there was approximately $19.8 million of unrecognized compensation cost related to TSYS performance-based awards that is expected to be recognized through December 2019. As of September 30, 2017, there was approximately $2.7 million of unrecognized compensation cost related to TSYS market-based awards that is expected to be recognized through December 2019.

The following table summarizes the performance-based awards granted during the first nine months of 2017 and 2016:


Year Awarded	Performance Period Ending	Performance Measure	Number of Shares Granted	Period Expensed Through
2017	December 2019	Adjusted Diluted EPS1	103,297	December 2019
2017	December 2017	Net Revenue and Adjusted Diluted EPS1	146,094	December 2019
2016	December 2016	Revenues before Reimbursable Items4 and Adjusted EPS3	15,605	December 2016
2016	December 2017	Adjusted EPS3	14,940	December 2017
2016	December 2018	Merchant Segment Net Revenue, Corporate Accountability Operating Income and attainment of synergies from TransFirst acquisition	29,332	December 2018
2016	December 2018	Revenue Growth and CAOI Growth2	67,517	December 2018
2016	December 2018	Merchant Segment Net Revenue and Corporate Accountability Operating Income	78,220	December 2018
2016	December 2018	Adjusted EPS3	122,284	December 2018
2016	December 2016	Revenues before Reimbursable Items4 and Adjusted EPS3	144,995	December 2018

Adjusted Diluted EPS is adjusted earnings divided by weighted average diluted shares outstanding used for diluted EPS calculations. Adjusted earnings is net income excluding the after-tax impact of share-based compensation expenses, amortization of acquisition intangibles, merger and acquisition expenses for completed acquisitions and litigation claims, judgments or settlement expenses and related legal expenses.

CAOI is adjusted segment operating income and includes corporate administrative expenses. Adjusted segment operating income is defined in Note 7.

Adjusted EPS is adjusted earnings divided by weighted average shares outstanding used for basic EPS.

⁴

Revenues before Reimbursable Items is total revenue less reimbursable items which consist of out-of-pocket expenses which are reimbursed by the Company’s clients. These expenses consist primarily of postage, access fees and third-party software.

The following table summarizes the market-based awards granted during the first nine months of 2017 and 2016:


Year Awarded	Performance Period Ending	Performance Measure	Number of Shares Granted	Period Expensed Through
2017	December 2019	TSR	44,275	December 2019
2016	December 2017	TSR	6,403	December 2017
2016	December 2018	TSR	52,404	December 2018

Stock Option Awards

The Company granted stock options to certain key executives. The grants will vest over a period of up to three years.

The weighted average fair value of the option grants was estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions:



		Nine months ended September 30,
	2017			2016
Number of options granted		548,265		687,685
Weighted average exercise price	$	54.90		47.01
Risk-free interest rate		1.78	%	1.24	%
Expected volatility		21.71	%	21.53	%
Expected term (years)		4.60		4.50
Dividend yield		0.73	%	0.86	%
Weighted average fair value	$	10.83		8.50

As of September 30, 2017, there was approximately $4.8 million of unrecognized compensation cost related to TSYS stock options that is expected to be recognized over a remaining weighted average period of 1.7 years.