Share-Based Compensation

The Taubman Company 2008 Omnibus Long-Term Incentive Plan (2008 Omnibus Plan), as amended, which is shareowner approved, provides for the award to directors, officers, employees, and other service providers of the Company of restricted shares, restricted units of limited partnership in the Operating Partnership, options to purchase shares or Operating Partnership units, unrestricted shares or Operating Partnership units, and other awards to acquire up to an aggregate of 8.5 million Company common shares or Operating Partnership units. In addition, non-employee directors have the option to defer their compensation, other than their meeting fees, under a deferred compensation plan.

Non-option awards granted after an amendment of the 2008 Omnibus Plan in 2010 are deducted at a ratio of 1.85 Company common shares or Operating Partnership units, while non-option awards granted prior to the amendment are deducted at a ratio of 2.85. Options are deducted on a one-for-one basis. The amount available for future grants is adjusted when the number of contingently issuable shares or units are settled, for grants that are forfeited, and for options that expire without being exercised.

Prior to the adoption of the 2008 Omnibus Plan, the Company provided share-based compensation through an incentive option plan and non-employee directors' stock grant and deferred compensation plans.

The compensation cost charged to income for the Company’s share-based compensation plans was $3.4 million and $9.8 million for the three and nine months ended September 30, 2014, respectively. The compensation cost charged to income for the Company’s share-based compensation plans was $3.6 million and $9.7 million for the three and nine months ended September 30, 2013, respectively. Compensation cost capitalized as part of properties and deferred leasing costs was $0.4 million and $1.5 million for the three and nine months ended September 30, 2014, respectively, and $0.4 million and $1.2 million for the three and nine months ended September 30, 2013, respectively.

The Company estimated the grant-date fair values of options, performance share units, and restricted share units using the methods discussed in the separate sections below for each type of grant. Expected volatility and dividend yields are based on historical volatility and yields of the Company’s common stock, respectively, as well as other factors. The risk-free interest rates used are based on the U.S. Treasury yield curves in effect at the times of grants. The Company assumes no forfeitures of options or performance share units due to the small number of participants and low turnover rate.

Options

A summary of option activity for the nine months ended September 30, 2014 is presented below:



	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Range of Exercise Prices
Outstanding at January 1, 2014	563,436		$	43.81	2.6	$	31.31	-	$	55.90
Exercised	(42,143	)	42.16
Outstanding at September 30, 2014	521,293		$	43.95	1.9	$	31.31	-	$	55.90

Fully vested options at September 30, 2014	521,293		$	43.95	1.9

No options were granted during the nine months ended September 30, 2014.

The aggregate intrinsic value (the difference between the period end stock price and the option exercise price) of in-the-money options outstanding was $15.1 million as of September 30, 2014.

The total intrinsic value of options exercised during the nine months ended September 30, 2014 and 2013 was $1.4 million and $3.6 million, respectively. Cash received from option exercises for the nine months ended September 30, 2014 and 2013 was $1.8 million and $2.9 million, respectively.

As of September 30, 2014, all options outstanding were fully vested, and there was no unrecognized compensation cost related to options.

Under both the prior option plan and the 2008 Omnibus Plan, vested unit options can be exercised by tendering mature units with a market value equal to the exercise price of the unit options. In 2002, Robert S. Taubman, the Company’s chief executive officer, exercised options for 3.0 million units by tendering 2.1 million mature units and deferring receipt of 0.9 million units under the unit option deferral election. As the Operating Partnership pays distributions, the deferred option units receive their proportionate share of the distributions in the form of cash payments. Under an amendment executed in January 2011, beginning in December 2017 (unless Mr. Taubman retires earlier), the deferred partnership units will be issued in ten annual installments. The deferred units are accounted for as participating securities of the Operating Partnership.

Performance Share Units

In 2014, the Company granted Performance Share Units (PSU) under the 2008 Omnibus Plan. Each PSU represents the right to receive, upon vesting, shares of the Company’s common stock ranging from 0-300% of the PSU based on the Company’s market performance relative to that of a peer group. The units vest in March 2017 if continuous service has been provided, or upon retirement or certain other events (such as death or disability) if earlier. No dividends accumulate during the vesting period.

The Company estimated the value of these PSU granted using a Monte Carlo simulation, considering the Company’s common stock price at the grant dates less the present value of the expected dividends during the vesting periods, historical returns of the Company and the peer group of companies, a risk-free interest rate of 0.70% and a measurement period of approximately three years. The resulting weighted average grant-date fair value was $93.07 per PSU.

A summary of PSU activity for the nine months ended September 30, 2014 is presented below:



	Number of Performance Share Units			Weighted Average Grant Date Fair Value
Outstanding at January 1, 2014	234,863			$	139.18
Vested	(43,858	)	₍₁₎	85.40
Granted	49,157			93.07
Forfeited	(771	)		160.09
Outstanding at September 30, 2014	239,391			$	139.50


(1)	Based on the Company's market performance relative to that of a peer group, the actual number of shares of common stock issued upon vesting during the nine months ended September 30, 2014 equaled 172% of the number of PSU awards vested in the table above.

None of the PSU outstanding at September 30, 2014 were vested. As of September 30, 2014, there was $16.2 million of total unrecognized compensation cost related to nonvested PSU outstanding. This cost is expected to be recognized over an average period of 2.1 years.

Restricted Share Units

In 2014, Restricted Share Units (RSU) were issued under the 2008 Omnibus Plan and represent the right to receive upon vesting one share of the Company’s common stock. The units vest in March 2017, if continuous service has been provided, or upon retirement or certain other events (such as death or disability) if earlier. No dividends accumulate during the vesting period. The Company estimated the values of these RSU using the Company’s common stock at the grant dates deducting the present value of expected dividends during the vesting periods using a risk-free rate of 0.70%. The result of the Company’s valuation was a weighted average grant-date fair value of $63.95 per RSU.

In 2014, the Company also granted a limited number of additional RSU that represent the right to receive upon vesting one share of the Company’s common stock. The units have staggered vesting dates from March 2015 to March 2017, if continuous service has been provided through those periods, or upon retirement or certain other events (such as death or disability) if earlier. No dividends accumulate during the vesting periods. The Company estimated the value of these additional RSU using the Company's common stock price at the grant date deducting the present value of expected dividends during the vesting periods using a risk-free rate of 0.13% to 0.71%. The result of the Company's valuation was a weighted average grant-date fair value of $66.19 per RSU.

A summary of RSU activity for the nine months ended September 30, 2014 is presented below:



	Number of Restricted Share Units		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2014	269,899		$	62.00
Vested	(98,213	)	51.07
Granted (three-year vesting)	106,540		63.95
Granted (staggered vesting)	8,505		66.19
Forfeited	(4,843	)	65.44
Outstanding at September 30, 2014	281,888		$	66.65

None of the RSU outstanding at September 30, 2014 were vested. As of September 30, 2014, there was $8.6 million of total unrecognized compensation cost related to nonvested RSU outstanding. This cost is expected to be recognized over an average period of 1.8 years.