Share-Based Compensation

9 Months Ended

Sep. 30, 2011

Share-Based Compensation [Abstract]

Share-Based Compensation

8 - Share–Based Compensation

We measure all share-based payments to employees, including grants of stock options, using a fair-value-based method and the recording of such expense in our consolidated statements of income. In determining the expense we record for stock options granted to directors and employees of our subsidiaries and affiliates other than Donegal Mutual, we estimate the fair value of each option award on the date of grant using the Black-Scholes option pricing model. The significant assumptions we utilize in applying the Black-Scholes option pricing model are the risk-free interest rate, expected term, dividend yield and expected volatility.

We charged compensation expense for our stock compensation plans against income before income taxes of $95,528 for the three months ended September 30, 2011 with a corresponding income tax benefit of $32,480. We charged compensation expense for our stock compensation plans against income before income taxes of $165,014 for the nine months ended September 30, 2011 with a corresponding income tax benefit of $56,105. Compensation expense related to our stock compensation plans was immaterial for the three and nine months ended September 30, 2010. At September 30, 2011, our total unrecognized compensation cost related to nonvested share-based compensation granted under our stock compensation plans was $1.1 million. We expect to recognize this cost over a weighted average period of 7.6 years.

We account for share-based compensation to employees and directors of Donegal Mutual as share-based compensation to employees of a controlling entity. As such, we measure the fair value of the award at the grant date and recognize the fair value as a dividend to Donegal Mutual. This accounting applies to options we grant to employees and directors of Donegal Mutual, the employer of a majority of the employees that provide services to us. We recorded implied dividends of $2.2 million and $1.3 million for the three months ended September 30, 2011 and 2010, respectively. We recorded implied dividends of $2.3 million and $1.3 million for the nine months ended September 30, 2011 and 2010, respectively.

We received no cash from option exercises under all stock option compensation plans for the nine months ended September 30, 2011 and 2010. We realized no tax benefits for tax deductions from option exercises for the nine months ended September 30, 2011 and 2010.