9)	Stock Based Compensation

We recognize compensation expense of all employee and non-employee director share-based compensation awards in the financial statements based upon the fair value of the awards over the requisite service or vesting period, less anticipated forfeitures. We account for stock awards by recognizing the fair value of the awarded stock at the grant date as compensation expense over the vesting period, less anticipated forfeitures.

In the years ended December 31, 2016, 2015, and 2014, approximately $4.3 million, $3.7 million, and $2.6 million, respectively of compensation expense was recognized in selling, general and administrative expense for all share-based awards. The compensation expense recognized in the years ended December 31, 2016, 2015 and 2014 related to stock options was $0.8 million, $0.9 million and $1.3 million, respectively. The compensation expense related to stock awards in the years ended December 31, 2016, 2015 and 2014 was $2.3 million, $2.4 million and $1.3 million, respectively. The compensation expense related to performance based awards in the year ended December 31, 2016 and 2015, was $1.2 and $0.4 million, respectively.

As of December 31, 2016, we have approximately 2,300 maximum shares that can be issued as options, stock appreciation rights, and/or other stock based awards.

Stock Option Awards

Option awards are typically granted to non-executive directors and key employees on an annual basis. A single option grant is typically awarded to eligible employees and non-executive directors each year if and when granted by the Compensation Committee of the Board of Directors and occasionally individual grants are awarded to eligible employees. All employee and non-executive directors are awarded options at an exercise price equal to the closing price of our stock on the date of grant. The term life of options is ten years with vesting periods of generally three years for key employees and one year for non-executive directors. The fair value of our options cannot be determined by market value as they are not traded in an open market. Accordingly, the Black Scholes financial pricing model is utilized to determine fair value based on certain assumptions discussed below.

During 2016, 2015 and 2014, we granted options to purchase 167,000, 54,600, and 108,620 shares, respectively, to certain key employees and non-employee directors. The weighted average grant date fair value of the options granted during the years ended December 31, 2016, 2015 and 2014 was $5.02, $12.61 and $9.48, respectively. Upon exercise of stock options, new shares of our stock are issued. The weighted average assumptions relevant to determining the fair value at the dates of grant are below:


	2016			2015			2014
Term		6 years			6 years			6 years
Risk free interest rate		1.43	%		1.43	%		1.75	%
Dividend yield		2.48	%		1.11	%		1.43	%
Expected volatility		59.23	%		59.22	%		56.75	%
Expected forfeiture rate		3.00	%		3.00	%		3.00	%

The expected volatility rate is derived from our actual common stock historical volatility over the same time period as the expected term. The volatility rate is derived by mathematical formula utilizing daily closing price data.

The expected dividend yield is derived by a mathematical formula which uses the expected annual dividends over the expected term divided by the fair market value of our common stock at the grant date.

The average risk-free interest rate is derived from United States Department of Treasury published interest rates of daily yield curves for the same time period as the expected term.

The forfeiture rate is determined from examining the historical pre-vesting forfeiture patterns of past option issuances to key employees. While the forfeiture rate is not an input of the Black Scholes model for determining the fair value of the options, it is an important determinant of stock option compensation expense to be recorded.

The term is derived from using the “Simplified Method” of determining stock option terms as described under the Securities and Exchange Commission’s Staff Accounting Bulletin 107.

The following table provides a reconciliation of option activity for the year ended December 31, 2016:


Options	Shares (000)			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding at January 1, 2016		1,034		$	12.09
Granted		167		$	11.31
Exercised		(270	)	$	10.49
Forfeited or expired		(34	)	$	17.52

Outstanding at December 31, 2016		897		$	12.22		5.9		6,479	(1)

Exercisable at December 31, 2016		686		$	11.59		4.9		5,267	(1)

⁽¹⁾	The intrinsic value is the amount by which the market price of our stock was greater than the exercise price of any individual option grant at December 31, 2016.

As of December 31, 2016, there was approximately $0.6 million, $1.0 million and $2.0 million of unrecognized compensation costs for stock options, restricted stock and performance based awards, respectively, to be recognized over approximately two years.

Cash proceeds from the exercise of options in the years ended December 31, 2016, 2015, and 2014 totaled approximately $2.6 million, $2.0 million, and $1.7 million, respectively. For the years ended December 31, 2016, 2015 and 2014, proceeds from stock options were presented exclusive of tax benefits in the Financing Activities section of the Consolidated Statements of Cash Flows. The total intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014 was $2.9 million, $2.6 million and $2.0 million, respectively.

Stock Awards

During the year ended December 31, 2016, 2015 and 2014, we issued 152,510, 114,475 and 114,300 shares, respectively, of our common stock as awards to key employees and non-executive directors. The fair value of the 2016 shares issued was determined by using the grant date price of our common stock with a weighted average grant date value of $11.39. The recognized compensation expense for stock awards in the years ended December 31, 2016, 2015, and 2014 was approximately $2.3 million, $2.4 million, and $1.3 million, respectively. The shares issued in 2016, 2015 and 2014 vest over three years.

Performance Based Awards

On March 16, 2016 and April 30, 2015, we awarded performance share units (the “PSUs”) to our executive officers. The PSUs are a form of long-term incentive compensation designed to directly align the interests of employees to the interests of our stockholders, and to create long-term stockholder value. The awards were made pursuant to the NN, Inc. 2011 Stock Incentive Plan and a Performance Share Unit Agreement.

There were two tranches of PSUs awarded, PSUs based on total shareholder return (“TSR Awards”) and PSUs based on return on invested capital (“ROIC Awards”). The TSR Awards vest, if at all, upon our achieving a specified relative total shareholder return, which will be measured against the total shareholder return of the S&P SmallCap 600 Index during the period beginning on March 16, 2016 and ending December 31, 2018 for the 2016 awards and the period beginning February 1, 2015 and ending December 31, 2017 for the 2015 awards (the “Performance Periods”). The ROIC Awards will vest, if at all, upon our achieving a specified average return on invested capital during the Performance Periods. If the PSUs do not vest at the end of the Performance Periods, the PSUs will expire automatically. Upon vesting, the PSUs will be settled by the issuance of shares of our common stock, subject to the executive officer’s continued employment. The actual number of shares of common stock will be issued to each award recipient at the end of the Performance Periods will be interpolated between a threshold and maximum payout amount based on actual performance results. No dividends will be paid on outstanding PSUs during the Performance Period; however, dividend equivalents will be paid based on the number of shares of common stock that are ultimately earned at the end of the Performance Periods.

With respect to the TSR Awards, a participant will earn 50% of the target number of PSUs for “Threshold Performance,” 100% of the target number of PSUs for “Target Performance,” and 150% of the target number of PSUs for “Maximum Performance.” With respect to the ROIC Awards, a participant will earn 35% of the target number of PSUs for “Threshold Performance,” 100% of the target number of PSUs for “Target Performance,” and 150% of the target number of PSUs for “Maximum Performance. For performance levels falling between the values shown below, the percentages will be determined by interpolation. The following table establish the goals with respect to TSR and ROIC:

TSR:

Threshold Performance

(50% of Shares)

Target Performance
(100% of Shares)

Maximum Performance
(150% of Shares)

35th Percentile

50th Percentile

75th Percentile

ROIC:

Threshold Performance

(35% of Shares)

Target Performance
(100% of Shares)

Maximum Performance
(150% of Shares)

11%

12.5

During 2016 and 2015, we awarded 101,165 and 35,775 TSR Awards and 101,165 and 35,775 ROIC Awards with a grant date fair value of $9.38 and $28.61 for TSR Awards and $11.31 and $25.16 per unit for ROIC Awards, respectively. We estimate the grant date fair value of TSR Awards using the Monte Carlo simulation model, as the total shareholder return metric is considered a market condition under ASC 718. The grant date fair value of ROIC Awards is based on the closing price of a share of our common stock on the date of grant.

The recognized compensation expense for the year ended December 31, 2016 and 2015 was $1.2 million and $0.4 million, respectively, for all PSUs. Unrecognized compensation expense at December 31, 2016 was $2.0 million to be recognized over approximately two years.

During the three months ended June 30, 2016, we recorded an out of period adjustment to correct compensation expense recoded with respect to share-based awards previously granted to executives who, either at the time of such grant or during the applicable vesting period, were eligible to retire from the Company, upon which the vesting of all or a portion of these awards would be accelerated. If the out of period amounts would have been recorded in the appropriate periods, then the Selling, general and administrative expense line item in the Consolidated State of Operations for the years ended December 31, 2015 and 2014 would have been effected by $0.1 million and $32 thousand pre-tax amounts, respectively, increasing expense.