SHARE-BASED COMPENSATION

Share-Based Compensation Plan

We have a stock option plan that provides for the grant of stock options to key employees, directors and non-employee consultants. Stock options generally vest after three to six years of continuous service from the date of grant and have a contractual term of 10 years. Once options become exercisable, the employee can purchase shares of our common stock at the market price on the date we granted the option. We account for share-based compensation utilizing the fair value recognition pursuant to ASC 718, Stock Compensation. During fourth quarter of 2016, we adopted ASU No. 2016-09 "Improvements to Employee Share-Based Payment Accounting," See Note 1 - "Summary of Significant Accounting Policies" for further information.

As of December 31, 2016, there were 2.9 million shares available for future grants under the plan from the 20.0 million shares previously approved by the shareholders.

Determining Fair Value of Stock Compensation

Valuation and Amortization Method. We estimate the fair value of share-based awards granted using the Black-Scholes option valuation model. We amortize the fair value of all awards on a straight-line basis over the requisite service periods, which are generally the vesting periods.

Expected Life. The expected life of awards granted represents the period of time that they are expected to be outstanding. The expected life represents the weighted-average period the stock options are expected to be outstanding based primarily on the options’ vesting terms, remaining contractual life and the employees’ expected exercise based on historical patterns.

Expected Volatility. Using the Black-Scholes option valuation model, we estimate the volatility of our common stock at the date of grant based on the historical volatility of our common stock.

Risk-Free Interest Rate. We base the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award.

Expected Dividend Yield. We have not paid any cash dividends on our common stock in more than ten years and we do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model.

Expected Forfeitures. We use historical data to estimate pre-vesting option forfeitures. We record share-based compensation only for those awards that are expected to vest.

The following weighted average assumptions were used for options granted:



	Years Ended December 31,
	2016		2015		2014
Expected life (in years)	6.0		6.0		6.0
Expected volatility	29.3	%	28.3	%	30.9	%
Risk-free interest rate	1.8	%	1.7	%	1.8	%
Expected forfeiture rate	—	%	1.7	%	3.0	%

The following table summarizes share-based compensation expense related to share-based awards which is recorded in the statements of comprehensive income:



	Years Ended December 31,
	2016			2015			2014
Cost of software services, maintenance and subscriptions	$	6,548		$	3,380		$	2,177
Selling, general and administrative expenses	23,199			16,802			12,642
Total share-based compensation expenses	29,747			20,182			14,819
Tax benefit	(30,059		)	(5,986		)	(4,237		)
Net (decrease) increase in net income	$	(312	)	$	14,196		$	10,582

Adoption of ASU 2016-09 resulted in the recognition of excess tax benefits in our provision for income taxes rather than paid-in capital of $29.6 million for period ended December 31, 2016.

Stock Option Activity

Options granted, exercised, forfeited and expired are summarized as follows:



	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Outstanding at December 31, 2013	5,720		$	34.66
Granted	675		94.15
Exercised	(855	)	17.17
Forfeited	(3	)	37.44
Outstanding at December 31, 2014	5,537		44.61
Granted	747		145.71
Exercised	(1,118	)	20.71
Forfeited	(2	)	19.61
Outstanding at December 31, 2015	5,164		64.43
Granted	846		147.25
Exercised	(827	)	28.43
Forfeited	(27	)	95.33
Outstanding at December 31, 2016	5,156		83.64		7	$	320,924
Exercisable at December 31, 2016	2,311		58.07		6	$	198,460

We had unvested options to purchase 2.8 million shares with a weighted average grant date exercise price of $104.91 as of December 31, 2016 and unvested options to purchase 3.1 million shares with a weighted average grant date exercise price of $78.86 as of December 31, 2015. As of December 31, 2016, we had $80.1 million of total unrecognized compensation cost related to unvested options, net of expected forfeitures, which is expected to be amortized over a weighted average amortization period of 3.2 years.

Other information pertaining to option activity was as follows during the twelve months ended December 31:



	2016		2015		2014
Weighted average grant-date fair value of stock options granted	$	46.89	$	45.17	$	31.32
Total intrinsic value of stock options exercised	103,703		149,542		69,768

Employee Stock Purchase Plan

Under our Employee Stock Purchase Plan (“ESPP”) participants may contribute up to 15% of their annual compensation to purchase common shares of Tyler. The purchase price of the shares is equal to 85% of the closing price of Tyler shares on the last day of each quarterly offering period. As of December 31, 2016, there were 847,000 shares available for future grants under the ESPP from the 2.0 million shares previously approved by the stockholders.