Common Stock Incentive Plan

In 2012, our Board of Directors adopted and stockholders approved the Realty Income Corporation 2012 Incentive Award Plan, or the 2012 Plan, to enable us to motivate, attract and retain the services of directors and employees considered essential to our long-term success. The 2012 Plan offers our directors and employees an opportunity to own our stock or rights that will reflect our growth, development and financial success. Under the terms of the 2012 plan, the aggregate number of shares of our common stock subject to options, restricted stock, stock appreciation rights, restricted stock units and other awards, will be no more than 3,985,734 shares. The 2012 Plan has a term of ten years from the date it was adopted by our Board of Directors.

The amount of share-based compensation costs recognized in general and administrative expense on our consolidated statements of income and comprehensive income was $27.3 million during 2018 (including $11.8 million of accelerated equity awards for our former CEO upon his departure from the company), $13.9 million during 2017, and $12.0 million during 2016.

In October 2018, John P. Case departed as our Chief Executive Officer (CEO) and resigned as a member of our Board of Directors. In connection with his departure, we entered into a severance agreement with Mr. Case. Pursuant to the terms of this severance agreement, Mr. Case received a severance payment, which included both cash and stock compensation components. The total value of cash, stock compensation and professional fees incurred as a result of this severance was $28.3 million; however, the net amount, after incorporating accruals for CEO compensation previous to this severance, was $18.7 million, which was recognized in general and administrative expense on our 2018 consolidated statement of income and comprehensive income, and which represents the incremental costs incurred per the reconciliation below (dollars in thousands):



Cash	$	9,817
Stock compensation	17,902
Professional fees	574
Total value of severance	28,293
Amount accrued for CEO compensation prior to separation	(9,642		)
Incremental severance	$	18,651

A. Restricted Stock

The following table summarizes our common stock grant activity under our 2012 Plan.



	2018				2017				2016
	Number of shares		Weighted average price⁽¹⁾		Number of shares		Weighted average price⁽¹⁾		Number of shares		Weighted average price⁽¹⁾
Outstanding nonvested shares, beginning of year	475,768		$	52.32	513,523		$	48.33	456,282		$	30.46
Shares granted	183,952		$	52.21	149,264		$	59.21	260,171		$	54.14
Shares vested	(310,706	)	$	51.05	(183,381	)	$	46.65	(200,066	)	$	43.26
Shares forfeited	(41,193	)	$	53.06	(3,638	)	$	56.57	(2,864	)	$	48.15
Outstanding nonvested shares, end of each period	307,821		$	53.44	475,768		$	52.32	513,523		$	48.33
⁽¹⁾Grant date fair value.

The vesting schedule for shares granted to non-employee directors is as follows:


•	For directors with less than six years of service at the date of grant, shares vest in 33.33% increments on each of the first three anniversaries of the date the shares of stock are granted;


•	For directors with six years of service at the date of grant, shares vest in 50% increments on each of the first two anniversaries of the date the shares of stock are granted;


•	For directors with seven years of service at the date of grant, shares are 100% vested on the first anniversary of the date the shares of stock are granted; and


•	For directors with eight or more years of service at the date of grant, there is immediate vesting as of the date the shares of stock are granted.

During May 2018, we granted 28,000 shares of common stock to the independent members of our Board of Directors, of which 20,000 shares vested immediately, 4,000 shares vest in equal parts over a three-year service period, and 4,000 shares vest in equal parts over a two-year service period. In addition, in July 2018, we granted 8,000 shares of common stock to our two newly appointed independent directors of our Board of Directors, which vest in equal parts over a three-year service period.

Shares granted to employees typically vest annually in equal parts over a four-year service period. During 2018, 147,952 shares were granted to our employees, and vest over a four-year service period.

As of December 31, 2018, the remaining unamortized share-based compensation expense related to restricted stock totaled $12.1 million, which is being amortized on a straight-line basis over the service period of each applicable award. The amount of share-based compensation is based on the fair value of the stock at the grant date. We define the grant date as the date the recipient and Realty Income have a mutual understanding of the key terms and condition of the award, and the recipient of the grant begins to benefit from, or be adversely affected by, subsequent changes in the price of the shares.

B. Performance Shares

During 2018, 2017 and 2016, we granted performance share awards, as well as dividend equivalent rights, to our executive officers. The number of performance shares that vest is based on the achievement of the following performance goals:



2017 & 2018 Performance Awards Metrics	Weighting
Total shareholder return (“TSR”) relative to RMS Index	45	%
TSR relative to JP Morgan Net Lease Peers	26	%
Dividend per share growth rate	16	%
Debt-to-EBITDA ratio	13	%

2016 Performance Awards Metrics	Weighting
Total shareholder return (“TSR”) relative to MSCI US REIT Index	50	%
TSR relative to NAREIT Freestanding Index	20	%
Dividend per share growth rate	20	%
Debt-to-EBITDA ratio	10	%

The performance shares are earned based on our performance, and vest 50% on the first and second January 1 after the end of the three-year performance period, subject to continued service. The performance period for the 2016 performance awards began on January 1, 2016 and ended on December 31, 2018. The performance period for the 2017 performance awards began on January 1, 2017 and will end on December 31, 2019. The performance period for the 2018 performance awards began on January 1, 2018 and will end on December 31, 2020.

The fair value of the performance shares was estimated on the date of grant using a Monte Carlo Simulation model. The following table summarizes our performance share grant activity:



	2018				2017				2016
	Number of performance shares		Weighted average price⁽¹⁾		Number of performance shares		Weighted average price⁽¹⁾		Number of performance shares		Weighted average price⁽¹⁾
Outstanding nonvested shares, beginning of year	245,309		$	62.49	159,751		$	49.95	115,121		$	46.94
Shares granted	256,999		$	51.89	124,681		$	71.79	58,575		$	55.07
Shares vested	(291,785	)	$	54.88	(39,123	)	$	41.60	(10,454	)	$	44.54
Shares forfeited	—		$	—	—		$	—	(3,491	)	$	52.55
Outstanding nonvested shares, end of each period	210,523		$	59.08	245,309		$	62.49	159,751		$	49.95
⁽¹⁾Grant date fair value.

As of December 31, 2018, the remaining share-based compensation expense related to the performance shares totaled $6.4 million and is being recognized on a tranche-by-tranche basis over the service period.

C. Restricted Stock Units

During 2018 and 2017 we also granted restricted stock units that primarily vest over a four-year service period and have the same economic rights as shares of restricted stock:



	2018				2017				2016
	Number of restricted stock units		Weighted average price⁽¹⁾		Number of restricted stock units		Weighted average price⁽¹⁾		Number of restricted stock units		Weighted average price⁽¹⁾
Outstanding nonvested shares, beginning of year	24,869		$	55.97	18,460		$	52.65	10,136		$	52.21
Shares granted	8,383		$	49.96	10,467		$	60.56	14,783		$	52.76
Shares vested	(10,118	)	$	55.01	(4,058	)	$	52.70	(6,459	)	$	52.21
Shares forfeited	(8,166	)	$	53.45	—		$	—	—		$	—
Outstanding nonvested shares, end of each period	14,968		$	54.62	24,869		$	55.97	18,460		$	52.65
⁽¹⁾ Grant date fair value.

As of December 31, 2018, the remaining share-based compensation expense related to the restricted stock units totaled $471,000 and is being recognized on a straight-line basis over the service period.