Share-Based Compensation

9 Months Ended

Sep. 30, 2012

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 $121,189 and $95,528 for the three months ended September 30, 2012 and 2011, respectively, with a corresponding income tax benefit of $42,416 and $32,480, respectively. We charged compensation expense for our stock compensation plans against income before income taxes of $360,915 and $165,014 for the nine months ended September 30, 2012 and 2011, respectively, with a corresponding income tax benefit of $126,320 and $56,105. At September 30, 2012, we had $568,748 of unrecognized compensation cost related to nonvested share-based compensation granted under our stock compensation plans. We expect to recognize this cost over a weighted average period of 7.3 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 $22,714 and $2.2 million for the three months ended September 30, 2012 and 2011, respectively. We recorded implied dividends of $40,726 and $2.3 million for the nine months ended September 30, 2012 and 2011, respectively.

We received cash from option exercises under all stock compensation plans for the three months ended September 30, 2012 and 2011 of $187,025 and $0, respectively. We received cash from option exercises under all stock compensation plans for the nine months ended September 30, 2012 and 2011 of $1.0 million and $0, respectively. We realized actual tax benefits for the tax deductions from option exercises of share-based compensation of $10,475 and $0 for the three months ended September 30, 2012 and 2011, respectively. We realized actual tax benefits for the tax deductions from option exercises of share-based compensation of $49,517 and $0 for the nine months ended September 30, 2012 and 2011, respectively.