Share-Based Compensation

Share-based plans. The Company grants long-term equity-based incentives and rewards for the benefit of its employees and directors under the shareholder approved Polaris Industries Inc. 2007 Omnibus Incentive Plan (as amended) (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, the Restricted Stock 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 canceled 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 138,000 deferred stock units to its non-employee directors under the Omnibus Plan (9,000, 12,000 and 12,000 in 2014, 2013 and 2012, 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.

The Option Plan, which is frozen, was used to issue incentive and nonqualified stock options to certain employees. Options granted to date generally vest three years from the award date and expire after ten years. The Director Stock Option Plan, which is frozen and contains no unexercised awards as of December 31, 2014, was used to issue nonqualified stock options to non-employee directors.

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 may annually elect to receive common stock equivalents in lieu of director 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 101,000 equivalents have been earned and an additional 381,000 shares have been issued to retired directors as of December 31, 2014. As of December 31, 2014 and 2013, Polaris’ liability under the plan totaled $15,217,000 and $17,031,000, 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 were paid in cash and were 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, 2013, Polaris’ liability under the plan totaled $57,166,000, and the final cash payout was made in 2014. 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 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 Years Ended December 31,
	2014		2013		2012
Option plan	$	24,428	$	22,245	$	16,497
Other share-based awards	26,574		57,640		56,770
Total share-based compensation before tax	51,002		79,885		73,267
Tax benefit	19,039		29,835		27,401
Total share-based compensation expense included in net income	$	31,963	$	50,050	$	45,866

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, 2014, there was $82,778,000 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 1.50 years. Included in unrecognized share-based compensation is approximately $36,746,000 related to stock options and $46,032,000 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, 2014, 2013 and 2012:



	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, 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
Granted	1,037,729		87.06		—		—		—		—
Exercised	(821,679	)	24.45		(191,141	)	23.23		(16,000	)	27.10
Forfeited	(80,380	)	47.55		—		—		—		—
Balance as of December 31, 2013	4,466,080		$	49.29	162,431		$	23.74	—		—
Granted	705,564		130.10		—		—		—		—
Exercised	(866,917	)	30.33		(96,398	)	23.77		—		—
Forfeited	(98,215	)	65.14		(2,800	)	22.43		—		—
Balance as of December 31, 2014	4,206,512		$	66.38	63,233		$	23.76	—		—
Vested or expected to vest as of December 31, 2014	4,206,512		$	66.38	63,233		$	23.76	—		—
Options exercisable as of December 31, 2014	1,640,169		$	32.52	63,233		$	23.76	—		—

The weighted average remaining contractual life of options outstanding and of options outstanding and exercisable as of December 31, 2014 was 6.83 years and 5.17 years, respectively.

The following assumptions were used to estimate the weighted average fair value of options of $39.97, $30.43, and $23.40 granted during the years ended December 31, 2014, 2013, and 2012, respectively:



	For the Years Ended December 31,
	2014		2013		2012
Weighted-average volatility	40	%	49	%	50	%
Expected dividend yield	1.5	%	1.9	%	2.2	%
Expected term (in years)	4.5		4.4		4.6
Weighted average risk free interest rate	1.6	%	0.9	%	0.7	%

The total intrinsic value of options exercised during the year ended December 31, 2014 was $108,584,000. The total intrinsic value of options outstanding and of options outstanding and exercisable at December 31, 2014, was $365,160,000 and $202,788,000, 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, 2014:



	Shares Outstanding		Weighted Average Grant Price
Balance as of December 31, 2013	770,967		$	74.47
Granted	407,626		134.34
Vested	(65,020	)	50.29
Canceled/Forfeited	(35,842	)	87.12
Balance as of December 31, 2014	1,077,731		$	98.15
Expected to vest as of December 31, 2014	895,243		$	94.80

The total intrinsic value of restricted stock expected to vest as of December 31, 2014 was $135,396,000. 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 Omnibus Plan for the years ended December 31, 2014, 2013, and 2012 were $134.34, $88.84, and $70.12, respectively.