Share-Based Compensation

12 Months Ended

Dec. 31, 2019

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Share-based plans. The Company grants long-term equity-based incentives and awards for the benefit of its employees and directors under the shareholder approved Polaris 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 24,325,000 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 one to four years from the award date and expire after ten years. In addition, since 2007, the Company has granted a total of 196,000 deferred stock units to its non-employee directors under the Omnibus Plan (15,000, 12,000 and 11,000 in 2019, 2018 and 2017, respectively), which will be converted into common stock when the director’s board service ends or upon a change in control. Restricted units and performance-based restricted units (collectively restricted stock) awarded under the Omnibus Plan generally vests after a one to four year period. The final number of shares issued under performance-based awards are dependent on achievement of certain performance measures.

Under the Polaris Inc. Deferred Compensation Plan for Directors (“Director Plan”) and the Omnibus 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. Alternatively, these common stock equivalents may be diversified into other investments until board service ends, pursuant to the terms of the Director Plan. A maximum of 500,000 shares of common stock has been authorized under the Director Plan of which 73,000 common stock equivalents have been earned and 427,000 shares have been issued to retired directors as of December 31, 2019. Authorized shares under the Director Plan were exhausted in 2017. Since 2017, the Company has granted a total of 35,000 common stock equivalents to its non-employee directors under the Omnibus Plan (14,000 in 2019, 10,000 in 2018, and11,000 in 2017), which will be converted into common stock when their board service ends. As of December 31, 2019 and 2018, Polaris’ liability under the plans for the common stock equivalents totaled $11,035,000 and $7,253,000, 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. Long term incentive program awards are granted in restricted stock units and stock options and therefore treated as equity awards.

Share-based compensation expense. The amount of compensation cost for share-based awards recognized during a period is based on the portion of the awards that are ultimately expected to vest. The Company estimates 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,
	2019		2018		2017
Option awards	$	21,847	$	23,393	$	18,423
Other share-based awards	48,002		28,513		28,844
Total share-based compensation before tax	69,849		51,906		47,267
Tax benefit	16,624		12,354		17,555
Total share-based compensation expense included in net income	$	53,225	$	39,552	$	29,712

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 awards on the date of grant under ASC Topic 718, Polaris has used the Black-Scholes model for stock options, and the Monte Carlo simulation model for employee performance restricted stock units that include a market condition. Assumptions utilized in the model are evaluated and revised, as necessary, to reflect market conditions and experience.

At December 31, 2019, there was $91,538,000 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 1.37 years. Included in unrecognized share-based compensation expense is approximately $22,841,000 related to stock options and $68,697,000 for restricted stock.

General stock option and restricted stock information. The following summarizes stock option activity and the weighted average exercise price for the Omnibus Plan for the year ended December 31, 2019:



	Omnibus Plan (Active)
	Options Outstanding		Weighted Average Exercise Price
Balance as of December 31, 2018	4,575,926		$	99.53
Granted	1,460,602		86.21
Exercised	(166,008	)	65.90
Forfeited	(216,262	)	105.95
Balance as of December 31, 2019	5,654,258		$	96.83

Vested or expected to vest as of December 31, 2019	5,654,258		$	96.83
Options exercisable as of December 31, 2019	2,802,466		$	103.08

The weighted average remaining contractual life of options outstanding and of options outstanding and exercisable as of December 31, 2019 was 6.61 years and 5.07 years, respectively.

The following assumptions were used to estimate the weighted average fair value of options of $19.54, $26.50 and $18.45 granted during the years ended December 31, 2019, 2018 and 2017, respectively:



	For the Years Ended December 31,
	2019		2018		2017
Weighted-average volatility	32	%	30	%	29	%
Expected dividend yield	2.9	%	2.1	%	2.6	%
Expected term (in years)	4.5		4.4		4.7
Weighted average risk free interest rate	2.5	%	2.6	%	1.9	%

The total intrinsic value of options exercised during the year ended December 31, 2019 was $5,136,000. The total intrinsic value of options outstanding and of options outstanding and exercisable at December 31, 2019, was $73,730,000 and $35,503,000, 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 grant date fair value for performance awards with a total shareholder return (TSR) market condition were estimated using a Monte Carlo simulation model utilizing the following weighted-average assumptions:



	For the Years Ended December 31,
	2019		2018		2017
Weighted-average volatility	34	%	33	%	31	%
Expected dividend yield	2.7	%	2.1	%	2.5	%
Expected term (in years)	3.0		3.0		3.0
Weighted average risk free interest rate	2.4	%	2.3	%	1.5	%

The Company used its historical stock price as the basis for the Company’s volatility assumption. The assumed risk-free interest rates were based on U.S. Treasury rates in effect at the time of grant. The expected term was based on the vesting period. The weighted-average fair value used to record compensation expense for TSR performance share awards granted during 2019, 2018, and 2017 was $96.38, $106.43, and $82.14 per award, respectively.

The following table summarizes restricted stock activity for the year ended December 31, 2019:



	Shares Outstanding		Weighted Average Grant Price
Balance as of December 31, 2018	1,641,197		$	92.19
Granted	545,365		89.75
Vested	(314,555	)	90.39
Canceled/Forfeited	(485,998	)	76.36
Balance as of December 31, 2019	1,386,009		$	96.92
Expected to vest as of December 31, 2019	1,397,750		$	96.79

The shares granted above include 125,000 performance restricted stock unit awards. These performance grants are the number of shares that would be earned at the target level of performance. The number of shares of Polaris common stock that could actually be delivered at the end of the three-year performance period for performance restricted stock units may be anywhere from 0% to 200% of target for each performance share, depending on the performance of the Company during such performance period.

The total intrinsic value of restricted stock expected to vest as of December 31, 2019 was $142,151,000. 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, 2019, 2018 and 2017 were $89.75, $114.42 and $85.97, respectively.