Share-Based Payments

Share-based payments made to employees include performance-based stock unit awards, market-based stock unit awards, restricted stock units, restricted shares, and stock options. Share-based payments are also made to members of our Board of Directors through the issuance of common stock and deferred stock units. A description of each of these share-based payments is provided below.

For the three months ended March 31, 2018 and 2017, compensation expense related to share-based payments was as follows (in thousands of dollars):



	Three Months Ended March 31,
	2018		2017
Pre-tax	$	8,377	$	6,069
After-tax	$	6,639	$	4,057

For the three months ended March 31, 2018 and 2017, we recognized $1.2 million and $2.6 million, respectively, in excess tax benefits related to share-based payments in our Condensed Consolidated Statements of Operations. This tax benefit represents the amount by which the tax deduction resulting from the vesting of share-based payments in the period exceeded the tax benefit initially recognized in our Condensed Consolidated Financial Statements.

As of March 31, 2018, unrecognized compensation expense related to the unvested portion of share-based payments to employees was $45.6 million. This compensation expense is expected to be amortized over a weighted-average period of approximately 2.5 years. We do not capitalize any compensation expense related to share-based payments to employees.

Subsequent Event: Shareholder Approval of 2018 Equity Incentive Plan—The Board of Directors adopted the Sotheby’s 2018 Equity Incentive Plan (the “Equity Plan”) on February 28, 2018, which was approved by Sotheby's stockholders on May 3, 2018. The Equity Plan replaces the Sotheby’s Restricted Stock Unit Plan (as amended and restated, the "Restricted Stock Unit Plan") and the Sotheby’s 1997 Stock Option Plan (collectively, the “Prior Plans”), which are discussed in more detail below. The Equity Plan permits the issuance of restricted stock, restricted stock units, performance shares, performance share units, stock options, stock appreciation rights (or, "SAR's"), and other equity-related awards. No further awards will be granted under the Prior Plans after May 3, 2018. However, the terms and conditions of the Prior Plans and related award agreements will continue to apply to all awards granted prior to May 3, 2018 under the Prior Plans.

As of May 3, 2018, 6.2 million shares were available for future awards issued pursuant to the new Equity Plan. The Equity Plan is a fungible share plan. Each option or SAR granted under the Equity Plan will count as one share from the available share pool. Each full-value award granted under the Equity Plan, including restricted stock units and performance share units, will count as 2.14 shares from the available pool.

Restricted Stock Unit Plan—Prior to May 3, 2018, the Restricted Stock Unit Plan provided for the issuance of restricted stock units ("RSU's") and restricted shares to employees. Awards made under the Restricted Stock Unit Plan were subject to the approval of the Compensation Committee of our Board of Directors. In making awards under the Restricted Stock Unit Plan, the Compensation Committee took into account the nature of the services rendered by employees, their present and potential future contributions to Sotheby's success, and such other factors as the Compensation Committee in its discretion deemed relevant.

RSU's and restricted shares issued under the Restricted Stock Unit Plan generally vest evenly over a three-year service period. Prior to vesting, holders of RSU's and restricted shares issued under the Restricted Stock Unit Plan are entitled to receive non-forfeitable dividend equivalents and dividends, respectively, at the same rate as dividends are paid on our common stock (if and when such dividends are paid). Prior to vesting, holders of RSU's issued under the Restricted Stock Unit Plan do not have voting rights, while holders of restricted shares have voting rights. RSU's and restricted shares may not be sold, assigned, transferred, pledged or otherwise encumbered until they vest.

For RSU's and restricted shares issued after May 3, 2018 under the new Equity Plan, dividend equivalents will generally be credited to holders of RSU's at the same rate as dividends are paid on our common stock (if and when such dividends are paid), but will only be paid for RSU's and restricted shares that vest.

Performance Share Units (or "PSU's") are RSU's that generally vest over three or four-year service periods, subject to the achievement of certain profitability targets (for awards granted prior to 2016) or certain return on invested capital ("ROIC") targets (for awards granted beginning in 2016). Prior to vesting, holders of PSU's do not have voting rights and are not entitled to receive dividends or dividend equivalents. Dividend equivalents are generally credited to holders of PSU's at the same rate as dividends are paid on our common stock (if and when such dividends are paid), but are only paid for PSU's that vest and become shares of our common stock. PSU's may not be sold, assigned, transferred, pledged or otherwise encumbered until they vest.

For the three months ended March 31, 2018, the Compensation Committee approved share-based payment awards with a total grant date fair value of $32.2 million, as follows:

•

283,019 PSU's with a grant date fair value of $13.2 million and a single vesting opportunity after a three-year service period. These PSU's provide the recipient with an opportunity to vest in incremental PSU's of up to 100% of the initial units awarded subject to the achievement of certain ROIC targets, for a total maximum vesting opportunity of 200% of the initial award. The maximum number of shares of common stock that may be payable with respect to these awards is 566,038.


•	400,881 RSU's with a grant date fair value of $19 million and annual vesting opportunities over a three-year service period.

Summary of Outstanding Share-Based Payment Awards—For the three months ended March 31, 2018, changes to the number of outstanding RSU’s, PSU’s, and restricted shares were as follows (shares in thousands):



	Restricted Shares, RSU's and PSU's		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2018	1,922		$	36.59
Granted	684		$	47.07
Vested	(519	)	$	38.84
Canceled	(94	)	$	41.74
Outstanding at March 31, 2018	1,993		$	39.35

As of March 31, 2018, 2 million shares were available for future awards issued pursuant to the Restricted Stock Unit Plan. As noted above, upon stockholder approval of the new Equity Plan on May 3, 2018, 6.2 million shares were available for issuance for future awards issued pursuant to the new Equity Plan. The aggregate fair value of RSU’s and PSU's that vested during the three months ended March 31, 2018 and 2017 was $26.5 million and $36 million, respectively, based on the closing stock price on the dates the shares vested.

Stock Options—Prior to May 3, 2018, stock options were issued pursuant to the 1997 Stock Option Plan and were exercisable into authorized, but unissued shares of our common stock. These stock options vested evenly over four years and expired ten years after the date of grant. In the fourth quarter of 2017, the remaining 50,000 stock options that were outstanding under the 1997 Stock Option Plan were exercised at an exercise price of $22.11. As of March 31, 2018, there were no stock options outstanding or exercisable, and 104,100 shares of our common stock were available for the issuance of stock options under the 1997 Stock Option Plan. As noted above, upon stockholder approval of the new Equity Plan on May 3, 2018, 6.2 million shares were available for issuance for future awards issued pursuant to the new Equity Plan.

Directors Stock Plan—Common stock is issued quarterly under the Sotheby’s Stock Compensation Plan for Non-Employee Directors (as amended and restated, the “Directors Stock Plan”). Directors may elect to receive this compensation in the form of deferred stock units, which are credited in an amount that is equal to the number of shares of common stock the director otherwise would have received. The number of shares of common stock awarded is calculated using the closing price of the common stock on the New York Stock Exchange on the business day immediately prior to the quarterly grant date. Deferred stock units are held until a director’s termination of service, at which time the units are settled on a one-for one basis in shares of our common stock on the first day of the calendar month following the date of termination. For the three months ended March 31, 2018 and 2017, we recognized $0.3 million and $0.2 million, respectively, within General and Administrative Expenses in our Condensed Consolidated Statements of Operations related to common stock shares awarded under the Directors Stock Plan. As of March 31, 2018, 173,671 deferred stock units were outstanding under the Directors Stock Plan and 109,997 units were available for future issuance.