Note 2. Share-Based Compensation

Share-based plans: The Company grants long-term equity-based incentives and rewards for the benefit of its employees, directors and consultants under the 2007 Omnibus Incentive Plan (the “Omnibus Plan”), 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 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, since 2007 the Company has granted a total of 118,000 deferred stock units to its non-employee directors under the Omnibus Plan (12,000, 16,000 and 20,000 in 2012, 2011 and 2010, 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 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 234,000 equivalents have been earned and an additional 230,000 shares have been issued to retired directors as of December 31, 2012. As of December 31, 2012 and 2011, Polaris’ liability under the plan totaled $19,699,000 and $13,933,000, respectively.

Polaris maintains a long term incentive program 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. Awards granted through 2011 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 had 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, 2012 and 2011, Polaris’ liability under the plan totaled $66,586,000 and $93,765,000, respectively. Beginning in 2012, long term incentive program awards are granted in restricted stock units and therefore treated as equity awards. All remaining conditions of the long term incentive program have remained the same as prior to 2012.

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 (in thousands):


	For the Year Ended December 31,
	2012		2011		2010
Option plan	$	16,497	$	9,948	$	6,132
Other share-based awards		56,770		63,872		52,807

Total share-based compensation before tax		73,267		73,820		58,939
Tax benefit		27,401		27,929		23,039

Total share-based compensation expense included in Net income	$	45,866	$	45,891	$	35,900

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, 2012, there was $46,317,000 of total unrecognized share-based compensation expense related to unvested share-based equity awards. Unrecognized share-based compensation expense is expected to be recognized over a weighted-average period of 1.59 years. Included in unrecognized share-based compensation is approximately $25,311,000 related to stock options and $21,006,000 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, 2012, 2011 and 2010:


	Omnibus Plan (Active)					Option Plan (Frozen)					Director Stock Option Plan (Frozen)
	Outstanding Shares			Weighted Average Exercise Price		Outstanding Shares			Weighted Average Exercise Price		Outstanding Shares			Weighted Average Exercise Price
Balance as of December 31, 2009		2,837,800		$	16.89		6,439,246		$	19.15		176,000		$	23.03

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

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

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

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

Granted		570,700			66.19		—			—		—			—
Exercised		(861,397	)		22.54		(744,974	)		25.84		(64,000	)	$	22.62
Forfeited		(61,630	)		40.95		—			—		—			—

Balance as of December 31, 2012		4,330,410		$	35.50		353,572		$	23.47		16,000		$	27.10

Vested or expected to vest as of December 31, 2012		4,330,410		$	35.50		353,572		$	23.47		16,000		$	27.10

Options exercisable as of December 31, 2012		864,558		$	21.69		353,572		$	23.47		16,000		$	27.10

The weighted average remaining contractual life of outstanding options was 7.13 years as of December 31, 2012.

The following assumptions were used to estimate the weighted average fair value of options of $23.40, $18.44, and $9.30 granted during the years ended December 31, 2012, 2011, and 2010, respectively:


	For the Year Ended December 31,
	2012			2011			2010
Weighted-average volatility		50	%		49	%		48	%
Expected dividend yield		2.2	%		1.9	%		3.0	%
Expected term (in years)		4.6			4.7			5.1
Weighted average risk free interest rate		0.7	%		1.4	%		2.5	%

The total intrinsic value of options exercised during the year ended December 31, 2012 was $92,864,000. The total intrinsic value of options outstanding and exercisable at December 31, 2012, 2011, and 2010 was $76,372,000, $67,466,000, and $40,795,000, respectively. The total intrinsic values are 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, 2012:


	Shares Outstanding			Weighted Average Grant Price
Balance as of December 31, 2011		424,248		$	30.09

Granted		333,800			70.12
Vested		(206,000	)		21.55
Canceled/Forfeited		(7,616	)		61.99

Balance as of December 31, 2012		544,432		$	57.15

Expected to vest as of December 31, 2012		544,432		$	57.15

The total intrinsic value of restricted stock expected to vest as of December 31, 2012 was $45,814,000. The total intrinsic value 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, 2012, 2011, and 2010 were $70.12, $42.54, and $28.95, respectively.