10. Stock-Based Compensation
The Knight Capital Group, Inc. 2010 Equity Incentive Plan ("2010 Plan") was established to provide long-term incentive compensation to employees and directors of the Company. The 2010 Plan is administered by the Compensation Committee of the Company's Board of Directors, and allows for the grant of options, stock appreciation rights, restricted stock and restricted stock units (collectively, the "awards"), as defined by the 2010 Plan. In addition to overall limitations on the aggregate number of awards that may be granted, the 2010 Plan also limits the number of awards that may be granted to a single individual. The 2010 Plan replaced prior stockholder-approved equity plans for future equity grants and no additional grants will be made under those historical stock plans. However, the terms and conditions of any outstanding equity grants under the historical stock plans were not affected. As of June 30, 2011, the Company has not issued any stock appreciation rights. In addition, the Company established the Knight Capital Group, Inc. 2009 Inducement Award Plan (the "Inducement Plan")(along with the 2010 Plan, the "Stock Plans") which is used under limited circumstances for equity grants to new hires.
Unvested awards granted before September 1, 2010 are canceled if employment is terminated for any reason before the end of the relevant vesting period. For annual incentive awards granted after September 1, 2010, full vesting is given where an employee has been terminated without cause by the Company. For all other awards granted after September 1, 2010 unvested awards are generally canceled if employment is terminated for any reason before the end of the relevant vesting period.
Restricted Shares and Restricted Stock Units
Eligible employees and directors may receive restricted shares and/or restricted stock units (collectively "restricted awards") as a portion of their total compensation. The majority of restricted awards vest ratably over three years. During 2009, the Company established the Inducement Plan, and issued 197,000 restricted shares as inducement awards pursuant to this plan during the six months ended June 30, 2010. These shares were issued out of treasury and vest ratably over three years. The Company did not issue any awards pursuant to the Inducement Plan during the six months ended June 30, 2011. The Company has also issued restricted awards that vest based upon the market price of Knight's common stock reaching a certain price for a specified period of time ("Market Shares"). There were no Market Shares granted in 2011 or 2010. The Company has the right to fully vest employees and directors in their restricted stock units upon retirement and in certain other circumstances.
The Company measures compensation cost related to restricted awards other than Market Shares based on the fair value of the Company's common stock at the date of grant, which the Stock Plans define as the average of the high and low sales price on the business day prior to the grant date. The Company determines compensation cost for Market Shares based upon the fair value of such awards at date of grant and projected median vesting periods, both of which are based on statistical simulation models. The principal assumptions utilized in valuing Market Shares and determining their median vesting periods include: 1) risk-free interest rate – estimate is based on the yield of U.S. zero coupon securities with a maturity equal to the expected life of the award; 2) expected volatility – estimate is based on several factors including implied volatility of market-traded options on the Company's common stock on the grant date and the historical volatility of the Company's common stock; and 3) maximum life – based upon the maximum contractual life of the award.
Compensation expense relating to restricted awards, primarily recorded in Employee compensation and benefits, and the corresponding income tax benefit, which is recorded in Income tax expense on the Consolidated Statements of Operations are presented in the following table (in millions):
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For the three months ended June 30, |
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2011 |
|
|
2010 |
|
|
Restricted award compensation expense |
|
$ |
12.8 |
|
|
$ |
13.3 |
|
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|
|
|
|
|
|
|
|
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Income tax benefit |
|
$ |
5.0 |
|
|
$ |
5.3 |
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|
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For the six months ended June 30, |
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2011 |
|
|
2010 |
|
|
Restricted award compensation expense |
|
$ |
27.5 |
|
|
$ |
26.3 |
|
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|
|
|
|
|
|
|
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Income tax benefit |
|
$ |
10.8 |
|
|
$ |
10.5 |
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The following table summarizes restricted awards activity during the six months ended June 30, 2011 (shares and units in thousands):
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Restricted Shares |
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Restricted Stock Units |
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Number of
Shares |
|
|
Weighted-
Average
Grant date
Fair Value |
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Number
of Units |
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Weighted-
Average
Grant date
Fair Value |
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Outstanding at January 1, 2011 |
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1,154.7 |
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$ |
16.60 |
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|
6,329.1 |
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$ |
15.08 |
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Granted |
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- |
|
|
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- |
|
|
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5,286.9 |
|
|
|
13.84 |
|
|
Vested |
|
|
(715.1 |
) |
|
|
16.69 |
|
|
|
(1,555.9 |
) |
|
|
16.92 |
|
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Forfeited |
|
|
(16.0 |
) |
|
|
15.73 |
|
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|
(1,753.3 |
) |
|
|
14.92 |
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Outstanding at June 30, 2011 |
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423.6 |
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$ |
16.47 |
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8,306.7 |
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$ |
14.57 |
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There is $78.7 million of unamortized compensation related to unvested restricted awards outstanding at June 30, 2011. The cost of these unvested restricted awards is expected to be recognized over a weighted average life of 2.0 years.
Stock Options
The Company's policy is to grant options for the purchase of shares of Class A Common Stock at an exercise price not less than market value, which the Stock Plans define as the average of the high and low sales price on the business day prior to the grant date. Options generally vest ratably over a three- or four-year period and expire on the fifth or tenth anniversary of the grant date, pursuant to the terms of the applicable option award agreement. The Company has the right to fully vest employees and directors in their stock options upon retirement and in certain other circumstances. The Company's policy is to issue new shares upon share option exercises by its employees and directors.
The fair value of each option granted is estimated as of its respective grant date using the Black-Scholes option-pricing model. Stock options granted have exercise prices equal to the market value of the Company's common stock at the date of grant as defined by the Stock Plans. The principal assumptions utilized in valuing options and the methodology for estimating such model inputs include: 1) risk-free interest rate – estimate is based on the yield of U.S. zero coupon securities with a maturity equal to the expected life of the option; 2) expected volatility – estimate is based on several factors including implied volatility of market-traded options on the Company's common stock on the grant date and the historical volatility of the Company's common stock; and 3) expected option life – estimate is based on internal studies of historical experience and projected exercise behavior based on different employee groups and specific option characteristics, including the effect of employee terminations. The Company did not grant any options during the six months ended June 30, 2011. During the six months ended June 30, 2010, the Company granted 1.2 million options to employees. Based on the results of the model, the weighted-average fair value of the stock options granted during the six months ended June 30, 2010 was $4.93.
Compensation expense relating to stock options, all of which was recorded in Employee compensation and benefits, and the corresponding income tax benefit, which is recorded in Income tax expense on the Consolidated Statements of Operations are as follows (in millions):
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For the three months ended June 30, |
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2011 |
|
|
2010 |
|
|
Stock option compensation expense |
|
$ |
0.2 |
|
|
$ |
0.7 |
|
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|
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Income tax benefit |
|
$ |
0.1 |
|
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$ |
0.3 |
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For the six months ended June 30, |
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2011 |
|
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2010 |
|
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Stock option compensation expense |
|
$ |
0.7 |
|
|
$ |
1.8 |
|
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Income tax benefit |
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$ |
0.3 |
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$ |
0.7 |
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The following table summarizes stock option activity during the six months ended June 30, 2011 (stock options in thousands):
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Number of
Stock Options |
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|
Weighted-
Average
Exercise
Price |
|
|
Outstanding at January 1, 2011 |
|
|
3,739.9 |
|
|
$ |
14.06 |
|
|
Granted at market value |
|
|
- |
|
|
|
- |
|
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Exercised |
|
|
(61.7 |
) |
|
|
10.44 |
|
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Forfeited or expired |
|
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(668.2 |
) |
|
|
16.76 |
|
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Outstanding at June 30, 2011 |
|
|
3,010.0 |
|
|
$ |
13.53 |
|
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|
|
|
|
|
|
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Exercisable at June 30, 2011 |
|
|
2,386.0 |
|
|
$ |
12.91 |
|
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Available for future grants at June 30, 2011* |
|
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9,001.0 |
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Totals may not add due to rounding. |
There is $2.2 million of unrecognized compensation related to unvested stock options outstanding at June 30, 2011. The cost of these unvested awards is expected to be recognized over a weighted average life of 1.5 years. |
