Share-Based Compensation

6 Months Ended

Jun. 30, 2019

Share-Based Compensation

Share-Based Compensation

Note 7 — Share-Based Compensation

Refer to Notes 1 and 18 of the Company’s audited financial statements for the year ended December 31, 2018, which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, 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 Consolidated 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 six months ended June 30, 2019 and 2018:

	Three months ended			Six months ended
	June 30,			June 30,
(in thousands)	2019		2018	2019	2018
Share-based compensation	$	11,500	14,230	22,214	20,524

Nonvested Share Awards - Time-Based

The Company granted awards 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 June 30, 2019, there was approximately $35.2 million of unrecognized compensation cost related to time-based nonvested share awards.

	Six months ended
	June 30,
	2019		2018
Number of shares granted		316,755	320,853
Market value (in millions)	$	29.2	28.6

Performance- and Market-Based Awards

The Company granted performance- and market-based awards 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 six months of 2019 and 2018, the Compensation Committee established performance goals based primarily on various financial and market-based measures. 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 determined at the end of the performance period for 2018 awards and determined using a twenty day average of the fair market value at the beginning and end of the performance period for 2019 awards.

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 June 30, 2019, there was approximately $22.3 million of unrecognized compensation cost related to TSYS performance-based awards that is expected to be recognized through December 2021. As of June 30, 2019, there was

approximately $3.4 million of unrecognized compensation cost related to TSYS market-based awards that is expected to be recognized through December 2021.

During the six months ended June 30, 2019 and 2018, the Company granted performance-based awards based on non-financial metrics and the following performance measures:

Performance Measure	Definition of Measure
Adjusted diluted EPS	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 expense, amortization of acquisition intangibles, merger and acquisition expenses for completed acquisitions and litigation claims, judgments or settlement expenses and related legal expenses.
Net revenue	Net revenue is total revenues less reimbursable items that are recorded by TSYS as expense.
Adjusted EBITDA	Adjusted EBITDA is net income excluding equity in income of equity investments, nonoperating income/(expense), income taxes, depreciation, amortization, share-based compensation expenses and other items.

The number of performance-based shares with a one- to two-year performance period granted during the six months ended June 30, 2019 and 2018 totaled 86,779 and 95,904, respectively. The number of performance-based shares with a three-year performance period granted during the six months ended June 30, 2019 and 2018, totaled 79,132 and 79,218, respectively. The grants awarded with a three-year performance period during the first six months of 2019 and 2018 will be expensed through December 31, 2021 and 2020, respectively.

The number of market-based awards granted during the six months ended June 30, 2019 and 2018 were 30,856 and 33,940, respectively. The performance measure for the market-based awards is the Company’s TSR as compared to the TSR of the companies in the S&P 500 determined at the end of the performance period for 2018 awards and determined using a twenty day average of the fair market value at the beginning and end of the performance period for 2019 awards.

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:

		Six months ended
		June 30,
	2019			2018
Number of options granted		233,667		360,118
Weighted average exercise price	$	92.37		86.90
Risk-free interest rate		2.47	%	2.55	%
Expected volatility		22.79	%	21.80	%
Expected term (years)		4.8		4.8
Dividend yield		0.56	%	0.60	%
Weighted average fair value	$	21.98		19.23

As of June 30, 2019, there was approximately $5.1 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.