SHARE-BASED COMPENSATION

12 Months Ended

Dec. 31, 2019

Share-based Payment Arrangement [Abstract]

Share-Based Compensation Plan

In May 2018, stockholders approved the Tyler Technologies, Inc. 2018 Stock Incentive Plan ("the 2018 Plan") which amended and restated the existing Tyler Technologies, Inc. 2010 Stock Option Plan ("the 2010 Plan"). Upon stockholder approval of the 2018 Plan, the remaining shares available for grant under the 2010 Plan were added to the shares authorized for grant under the 2018 Plan. Additionally, any awards previously granted under the 2010 Plan that expire unexercised or are forfeited are added to the shares authorized for grant under the 2018 Plan.

During fiscal year 2019, we granted stock awards under the 2018 Plan in the form of stock options, restricted stock units and performance share units. 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. Restricted stock unit grants generally vest ratably over three to five years of continuous service from the date of grant. Each performance share unit represents the right to receive one share of our common stock based on our achievement of certain financial performance targets during applicable performance periods. We account for share-based compensation utilizing the fair value recognition pursuant to ASC 718, Stock Compensation.

As of December 31, 2019, there were 3.1 million shares available for future grants under the plan from the 22.9 million shares previously approved by the shareholders.

Determining Fair Value of Stock Compensation

Valuation and Amortization Method. We estimate the fair value of stock option awards granted using the Black-Scholes option valuation model. For restricted stock unit and performance stock unit awards, 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,
	2019		2018		2017
Expected life (in years)	6.0		6.0		6.0
Expected volatility	26.6	%	26.7	%	28.1	%
Risk-free interest rate	1.8	%	2.7	%	2.0	%
Expected forfeiture rate	—	%	—	%	—	%

Share-Based Award Activity

The following table summarizes restricted stock unit and performance stock unit activity during fiscal year 2019 (shares in thousands):



	Number of Shares		Weighted Average Grant Date Fair Value per Share
Unvested at January 1, 2018	—		$	—
Granted	336		221.29
Vested	—		—
Forfeited	(2	)	229.75
Unvested at December 31, 2018	334		221.25
Granted	256		241.19
Vested	(76	)	221.15
Forfeited	(14	)	229.75
Unvested at December 31, 2019	500		$	231.57

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, 2016	5,156		$	83.64
Granted	824		176.26
Exercised	(1,113	)	44.80
Forfeited	(50	)	134.83
Outstanding at December 31, 2017	4,817		107.91
Granted	432		208.21
Exercised	(1,126	)	66.53
Forfeited	(31	)	158.80
Outstanding at December 31, 2018	4,092		129.51
Granted	162		251.58
Exercised	(999	)	96.92
Forfeited	(29	)	174.54
Outstanding at December 31, 2019	3,226		$	145.27	6	$	499,124
Exercisable at December 31, 2019	2,067		$	121.07	6	$	369,938

We had unvested options to purchase 1.2 million shares with a weighted average grant date exercise price of $188.48 as of December 31, 2019, and unvested options to purchase 1.7 million shares with a weighted average grant date exercise price of $169.24 as of December 31, 2018.

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



	2019		2018		2017
Weighted average grant-date fair value of stock options granted	$	74.54	$	66.52	$	55.56
Total intrinsic value of stock options exercised	$	155,899	$	176,716	$	137,699

Share-Based Compensation Expense

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



	Years Ended December 31,
	2019			2018			2017
Cost of software services, maintenance and subscriptions	$	15,002		$	13,588		$	9,415
Selling, general and administrative expenses	44,965			39,152			27,933
Total share-based compensation expenses	59,967			52,740			37,348
Excess tax benefit	(29,819		)	(32,487		)	(40,624		)
Net decrease (increase) in net income	$	30,148		$	20,253		$	(3,276	)

As of December 31, 2019, we had $148.7 million of total unrecognized compensation cost related to unvested options and restricted stock units, net of expected forfeitures, which is expected to be amortized over a weighted average amortization period of 2.5 years.

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, 2019, there were 702,000 shares available for future issuances the ESPP from the 2.0 million shares previously approved by the stockholders.