Note 2. Share-Based Employee Compensation

Share-based plans: Polaris maintains an Omnibus Incentive Plan (“Omnibus Plan”) under which the Company grants long-term equity-based incentives and rewards for the benefit of its employees, directors and consultants, which were previously provided under several separate incentive and compensatory plans. Upon approval by the shareholders of the Omnibus Plan in April 2007, the Polaris Industries Inc. 1995 Stock Option Plan (“Option Plan”), the 1999 Broad Based Stock Option Plan (“Broad Based Plan”), the Restricted Stock Plan (“Restricted Plan”) and the 2003 Non-Employee Director Stock Option Plan (“Director Stock Option Plan” and, collectively with the Option Plan, Restricted Plan and Broad Based Plan, the “Prior Plans”) were frozen and no further grants or awards have since been or will be made under such plans. A maximum of 13,500,000 shares of common stock are available for issuance under the Omnibus Plan, together with additional shares cancelled or forfeited under the Prior Plans.

Stock option awards granted to date under the Omnibus Plan generally vest two to four years from the award date and expire after ten years. In addition, the Company has granted a total of 106,000 deferred stock units to its non-employee directors under the Omnibus Plan since 2007 (16,000, 20,000 and 32,000 in 2011, 2010 and 2009, respectively) which will be converted into common stock when the director’s board service ends or upon a change in control. Restricted shares awarded under the Omnibus Plan to date generally contain restrictions which lapse after a two to four year period if Polaris achieves certain performance measures.

Under the Option Plan, incentive and nonqualified stock options for a maximum of 16,400,000 shares of common stock could be issued to certain employees. Options granted to date generally vest three years from the award date and expire after ten years.

Under the Broad Based Plan, incentive stock options for a maximum of 1,400,000 shares of common stock could be issued to substantially all Polaris employees. Options with respect to 1,350,800 shares of common stock were granted under this plan during 1999 at an exercise price of $7.89 and of the options initially granted under the Broad Based Plan, an aggregate of 1,036,800 vested in March 2002. This plan and any outstanding options expired in 2009.

Under the Restricted Plan, a maximum of 4,700,000 shares of common stock could be awarded as an incentive to certain employees with no cash payments required from the recipient. The majority of the outstanding awards contain restrictions which lapse after a two to four year period if Polaris achieves certain performance measures.

Under the Director Stock Option Plan, nonqualified stock options for a maximum of 400,000 shares of common stock could be issued to non-employee directors. Each non-employee director as of the date of the annual shareholders meetings through 2006 was granted an option to purchase 8,000 shares of common stock at a price per share equal to the fair market value as of the date of grant. Options became exercisable as of the date of the next annual shareholders meeting following the date of grant and must be exercised no later than 10 years from the date of grant.

Under the Polaris Industries Inc. Deferred Compensation Plan for Directors (“Director Plan”), members of the Board of Directors who are not Polaris officers or employees receive annual grants of common stock equivalents and may also elect to receive additional common stock equivalents in lieu of director’s fees, which will be converted into common stock when board service ends. A maximum of 500,000 shares of common stock has been authorized under this plan of which 248,900 equivalents have been earned and an additional 200,400 shares have been issued to retired directors as of December 31, 2011. As of December 31, 2011 and 2010, Polaris’ liability under the plan totaled $13,933,000 and $8,992,000, respectively.

Polaris maintains a Long Term Incentive Plan under which awards are issued to provide incentives for certain employees to attain and maintain the highest standards of performance and to attract and retain employees of outstanding competence and ability with no cash payments required from the recipient. The awards are paid in cash and are based on certain Company performance measures that are measured over a period of three consecutive calendar years. At the beginning of the plan cycle, participants have the option to receive a cash value at the time of awards or a cash value tied to Polaris stock price movement over the three year plan cycle. At December 31, 2011 and 2010, Polaris’ liability under the plan totaled $93,765,000 and $49,745,000, respectively.

Share-based compensation expense: The amount of compensation cost for share-based awards to be recognized during a period is based on the portion of the awards that are ultimately expected to vest. The Company estimates stock option forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company analyzes historical data to estimate pre-vesting forfeitures and records share compensation expense for those awards expected to vest.

Total share-based compensation expenses were as follows:


	For the Year Ended December 31,
(In thousands)	2011		2010		2009
Option plan	$	9,948	$	6,132	$	4,653
Other share-based awards		63,872		52,807		12,354

Total share-based compensation before tax		73,820		58,939		17,007
Tax benefit		27,929		23,039		6,620

Total share-based compensation expense included in Net income	$	45,891	$	35,900	$	10,387

These share-based compensation expenses are reflected in Cost of sales and Operating expenses in the accompanying consolidated statements of income. For purposes of determining the estimated fair value of option awards on the date of grant under ASC Topic 718, Polaris has used the Black-Scholes option-pricing model. Assumptions utilized in the model are evaluated and revised, as necessary, to reflect market conditions and experience.

At December 31, 2011, there was $35,567,000 of total unrecognized share-based compensation expense related to unvested share-based awards. Unrecognized share-based compensation expense is expected to be recognized over a weighted-average period of 1.80 years. Included in unrecognized share-based compensation is approximately $28,997,000 related to stock options and $6,570,000 for restricted stock.

General stock option and restricted stock information: The following summarizes stock option activity and the weighted average exercise price for the following plans for the each of the three years ended December 31, 2011, 2010 and 2009:


	Option Plan					Omnibus Plan					Broad Based Plan					Director Stock Option Plan
	Outstanding Shares			Weighted Average Exercise Price		Outstanding Shares			Weighted Average Exercise Price		Outstanding Shares			Weighted Average Exercise Price		Outstanding Shares			Weighted Average Exercise Price
Balance as of December 31, 2008		6,811,698		$	18.71		1,551,800		$	20.70		73,600		$	7.89		176,000		$	23.03

Granted		—			—		1,334,000			12.58		—			—		—			—
Exercised		(331,652	)		9.67		—			—		(67,998	)		7.89		—			—
Forfeited		(40,800	)		22.39		(48,000	)		20.09		(5,602	)		7.89		—			—

Balance as of December 31, 2009		6,439,246		$	19.15		2,837,800		$	16.89		—			—		176,000		$	23.03

Granted		—			—		1,615,812			26.81		—			—		—			—
Exercised		(3,951,986	)		16.50		(6,000	)		24.25		—			—		(72,000	)	$	24.65
Forfeited		(13,500	)		21.49		(138,800	)		18.79		—			—		—			—

Balance as of December 31, 2010		2,473,760		$	23.36		4,308,812		$	20.54		—			—		104,000		$	21.91

Granted		—			—		1,276,500			50.52		—			—		—			—
Exercised		(1,373,414	)		21.98		(865,875	)		16.30		—			—		(16,000	)	$	18.14
Forfeited		(1,800	)		24.27		(36,700	)		26.38		—			—		(8,000	)	$	13.35

Balance as of December 31, 2011		1,098,546		$	25.08		4,682,737		$	29.45		—			—		80,000		$	23.52

Vested or expected to vest as of December 31, 2011		1,098,546		$	25.08		4,480,067		$	29.10		—			—		80,000		$	23.52

Options exercisable as of December 31, 2011		1,098,546		$	25.08		819,725		$	18.26		—			—		80,000		$	23.52

The following table summarizes information about stock options outstanding at December 31, 2011:


	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding at 12/31/11		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number Exercisable at 12/31/11		Weighted Average Exercise Price
$9.90 to $14.25		613,158		6.25	$	10.77		246,158	$	12.00
$14.26 to $21.51		592,625		6.83	$	16.79		326,925	$	17.87
$21.52 to $22.33		976,390		7.06	$	22.15		329,838	$	21.82
$22.34 to $23.21		614,000		6.14	$	22.57		224,000	$	22.53
$23.22 to $29.73		845,350		4.21	$	26.11		801,350	$	26.11
$29.74 to $29.98		839,860		8.71	$	29.98		—		—
$29.99 to $38.46		623,400		8.42	$	37.77		70,000	$	34.80
$38.47 to $64.41		756,500		9.80	$	58.82		—		—

The weighted average remaining contractual life of outstanding options was 7.18 years as of December 31, 2011.

The following assumptions were used to estimate the weighted average fair value of options of $18.44, $9.30, and $2.95 granted during the years ended December 31, 2011, 2010, and 2009, respectively:


	For the Year Ended December 31,
	2011			2010			2009
Weighted-average volatility		49	%		48	%		42	%
Expected dividend yield		1.9	%		3.0	%		6.6	%
Expected term (in years)		4.7			5.1			5.7
Weighted average risk free interest rate		1.4	%		2.5	%		2.2	%

The total intrinsic value of options exercised during the year ended December 31, 2011 was $77,736,000. The total intrinsic value of options outstanding and exercisable at December 31, 2011, 2010, and 2009 was $67,466,000, $40,795,000, and $25,962,000, respectively. The total intrinsic value at each of December 31, 2011, 2010 and 2009 is based on the Company’s closing stock price on the last trading day of the applicable year for in-the-money options.

The following table summarizes restricted stock activity for the year ended December 31, 2011:


	Shares Outstanding			Weighted Average Grant Price
Balance as of December 31, 2010		256,908		$	21.44

Granted		175,340		$	42.54
Vested		(8,000	)	$	25.42
Canceled/Forfeited		—			—

Balance as of December 31, 2011		424,248		$	30.09

Expected to vest as of December 31, 2011		424,248		$	30.09

The total intrinsic value of restricted stock expected to vest as of December 31, 2011 was $23,749,000. The total intrinsic value at December 31, 2011 is based on the Company’s closing stock price on the last trading day of the year. The weighted average fair values at the grant dates of grants awarded under the Restricted Stock Plan for the years ended December 31, 2011, 2010, and 2009 were $42.54, $28.95, and $17.84, respectively.

Employee Savings Plans

Polaris sponsors a qualified non-leveraged employee stock ownership plan (“ESOP”) under which a maximum of 7,200,000 shares of common stock can be awarded. The shares are allocated to eligible participants accounts based on total cash compensation earned during the calendar year. Shares vest immediately and require no cash payments from the recipient. Participants may instruct Polaris to pay respective dividends directly to the participant in cash or reinvest the dividends into the participants ESOP accounts. Substantially all employees are eligible to participate in the ESOP, with the exception of Company officers. Total expense related to the ESOP was $7,011,000, $8,123,000 and $0, in 2011, 2010 and 2009, respectively. As of December 31, 2011 there were 4,659,000 shares vested in the plan.

Polaris sponsors a 401(k) retirement savings plan under which eligible United States employees may choose to contribute up to 50 percent of eligible compensation on a pre-tax basis, subject to certain IRS limitations. The Company matches 100 percent of employee contributions up to a maximum of five percent of eligible compensation. Matching contributions were $8,456,000, $7,073,000, and $6,827,000, in 2011, 2010 and 2009, respectively.