Share-Based Compensation

Stockholder Approved Equity Compensation Plans

As of September 30, 2013, we maintained one share-based incentive compensation plan, the Kilroy Realty 2006 Incentive Award Plan as amended (the “2006 Plan”). As of September 30, 2013, 28,355 shares were available for grant under the 2006 Plan. The number of shares that remains available for grant is calculated using the weighted share counting provisions set forth in the 2006 Plan, which are based on the type of awards that are granted. The maximum number of shares available for grant subject to full value awards (which generally include equity awards other than options and stock appreciation rights) was 9,711 shares as of September 30, 2013.

On April 4, 2013, the Executive Compensation Committee of the Company’s Board of Directors granted 19,084 RSUs to the Company’s Chief Operating Officer as part of his modified employment agreement. Fifty-percent of the RSUs granted are scheduled to vest in six equal annual installments beginning on December 31, 2013 through December 31, 2018. The grant date fair value of these time-based RSUs was $0.5 million, which was based on the $53.05 closing share price of the Company’s common stock on the New York Stock Exchange on the grant date. Compensation expense will be recognized on a straight-line basis over the service vesting period for these time-based RSUs. The remaining 50% of the RSUs granted are scheduled to vest in six equal annual installments for each calendar year during 2013 through 2018 based on the achievement of certain absolute or relative total shareholder return goals measured annually or, if neither of the shareholder return hurdles are achieved for an applicable year during the performance period, those RSUs will remain eligible to vest in a subsequent year (ending in 2018) based on the achievement of a cumulative total shareholder return goal. The grant date fair value of these market measure-based RSUs was $0.4 million and was calculated using a Monte Carlo simulation pricing model based on the assumptions in the table below. The grant date fair value is allocated among each of the six annual vesting tranches for these market measure-based RSUs and compensation expense will be recognized over the service vesting period using the accelerated expense attribution method.

The computation of expected volatility is based on a blend of the historical volatility of our shares of common stock over 12 years as that is expected to be most consistent with future volatility and equates to a time period twice as long as the six year term of the RSUs and implied volatility data based on the observed pricing of six month publicly-traded options on our shares of common stock. The risk-free interest rate is based on the yield curve on zero-coupon U.S. Treasury STRIP securities in effect at the grant date. The expected dividend yield is estimated by examining the average of the historical dividend yield levels over the six year term of the RSUs and our current annualized dividend yield as of the grant date. The expected life of the RSUs is equal to the six year vesting period.



	April 2013 Market-Measure based RSU Grant
Grant date fair value per share	$44.55
Expected share price volatility	27.00%
Risk-free interest rate	0.90%
Dividend yield	3.60%
Expected life	6 years

On April 4, 2013, the terms of 61,327 time-based RSUs granted to certain officers of the Company in January 2013 were modified to include market and performance-based vesting requirements based on certain total shareholder return and FFO per share targets. The RSUs will vest in five equal annual installments over the five-years requisite service period based on the achievement of certain absolute or relative total shareholder return goals measured annually or, if neither of the shareholder return hurdles are achieved for an applicable year during the performance period, those RSUs will remain eligible to vest in a subsequent year (ending in 2018) based on the achievement of a cumulative total shareholder return goal, as well as (in each case) continued employment through the applicable vesting date. The Company’s closing stock price on the date of modification was $53.05. The compensation expense related to the modified RSUs will be recognized using the accelerated attribution expense method through the remainder of the five-year requisite service period.

On March 30, 2012, the Executive Compensation Committee of the Company’s Board of Directors granted 103,239 RSUs to the Company’s Chief Executive Officer. The RSUs granted vest in seven equal annual installments for each calendar year during 2012 through 2018 based on the achievement of certain absolute or relative total shareholder return goals measured annually or, if neither of the shareholder return hurdles are achieved for an applicable year during the performance period, those RSUs will remain eligible to vest in a subsequent year (ending in 2018) based on the achievement of a cumulative total shareholder return goal, as well as (in each case) continued employment through the applicable vesting date.

Summary of Market-Measure Based RSUs

A summary of our market-measure based RSU activity from January 1, 2013 through September 30, 2013 is presented below:



	Nonvested RSUs			Vested RSUs	Total RSUs
	Amount	Weighted-Average Grant Date Fair Value Per Share		Vested RSUs	Total RSUs
Outstanding at January 1, 2013	88,491	$	41.20	14,748	103,239
Granted	9,542	44.55		—	9,542
Vested	—	—		—	—
Settled	—			—	—
Issuance of dividend equivalents	—			—	—
Modified from time based ⁽¹⁾	61,327	53.05		—	61,327
Canceled				—	—
Outstanding as of September 30, 2013	159,360	$	45.96	14,748	174,108

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(1)	On April 4, 2013 the terms of time-based RSU’s granted to certain officers of the Company in January were modified to include market-measure and performance-based vesting requirements.

A summary of our market-measure based RSU activity for the nine months ended September 30, 2013 and 2012 is presented below:



	RSUs Granted			RSUs Vested
Nine months ended September 30,	Non-Vested RSUs Issued	Weighted-Average Grant Date Fair Value Per Share		Vested RSUs	Total Vest-Date Fair Value (in thousands)
2013	9,542	$	44.55	—	$	—
2012	103,239	41.20		—	—

Summary of Time-Based RSUs

A summary of our time-based RSU activity from January 1, 2013 through September 30, 2013 is presented below:



	Nonvested RSUs				Vested RSUs		Total RSUs
	Amount		Weighted-Average Grant Date Fair Value Per Share		Vested RSUs		Total RSUs
Outstanding at January 1, 2013	279,102		$	41.30	769,761		1,048,863
Granted, net of forfeitures	173,758		49.45		—		173,758
Vested	(73,574	)	38.80		73,574		—
Settled ⁽¹⁾					(10,342	)	(10,342	)
Issuance of dividend equivalents ⁽²⁾					20,421		20,421
Modified to market-measure based ⁽³⁾	(61,327	)	53.05		—		(61,327	)
Canceled ⁽¹⁾⁽⁴⁾					(3,800	)	(3,800	)
Outstanding as of September 30, 2013	317,959		$	46.13	849,614		1,167,573

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(1)	Represents vested RSUs that are settled in cash or shares of the Company’s common stock.


(2)	RSUs issued as dividend equivalents are vested upon issuance.


(3)	During the second quarter the terms of time-based RSUs granted to certain officers of the Company in January were modified to include market-measure based vesting requirements.


(4)	We accept the return of RSUs, at the current quoted closing share price of the Company’s common stock, to satisfy minimum statutory tax-withholding requirements related to either the issuance, vesting or settlement of RSUs in accordance with the terms of the 2006 Plan.

A summary of our time-based RSU activity for the nine months ended September 30, 2013 and 2012 is presented below:



	RSUs Granted			RSUs Vested
Nine months ended September 30,	Non-Vested RSUs Issued	Weighted-Average Grant Date Fair Value Per Share		Vested RSUs		Total Vest-Date Fair Value ⁽¹⁾ (in thousands)
2013	173,758	$	49.45	(73,574	)	$	3,677
2012	204,829	44.34		(58,940	)	2,420

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(1)	Total fair value of RSUs vested was calculated based on the quoted closing share price of the Company’s common stock on the NYSE on the day of vesting.

Summary of Nonvested Restricted Stock

A summary of our nonvested restricted stock activity from January 1, 2013 through September 30, 2013 is presented below:



	Non-Vested Restricted Stock		Weighted-Average Grant Date Fair Value Per Share
Outstanding at January 1, 2013	95,241		$	40.42
Granted	—		—
Vested ⁽¹⁾	(47,291	)	39.12
Outstanding as of September 30, 2013	47,950		$	41.71

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(1)	The total shares vested include 20,880 shares that were tendered in accordance with the terms of the 2006 Plan to satisfy minimum statutory tax withholding requirements related to the restricted shares that have vested. We accept the return of shares at the current quoted closing share price of the Company’s common stock to satisfy tax obligations.

A summary of our nonvested and vested restricted stock activity for the nine months ended September 30, 2013 and 2012 is presented below:



	Shares Granted			Shares Vested
Nine months ended September 30,	Non-Vested Shares Issued	Weighted-Average Grant Date Fair Value Per Share		Vested Shares		Total Fair Value at Vest Date⁽¹⁾ (in thousands)
2013	—	$	—	(47,291	)	$	2,290
2012	62,137	41.84		(35,623	)	1.388

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(1)	Total fair value of shares vested was calculated based on the quoted closing share price of the Company’s common stock on the NYSE on the date of vesting.

Summary of Stock Options

A summary of our stock option activity from January 1, 2013 through September 30, 2013 is presented below:



	Number of Options		Exercise Price		Remaining Contractual Term (years)
Outstanding at January 1, 2013	1,540,000		$	42.61
Granted	—		—
Exercised	(3,000	)	42.61
Forfeited	(12,000	)	42.61
Outstanding at September 30, 2013 ⁽¹⁾⁽²⁾	1,525,000		$	42.61	8.4

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(1)	As of September 30, 2013, 305,000 of the outstanding stock options were exercisable.


(2)	The total intrinsic value of options outstanding at September 30, 2013 was $11.2 million.

Share-based Compensation Cost Recorded During the Period

The total compensation cost for all share-based compensation programs was $2.5 million and $2.4 million for the three months ended September 30, 2013 and 2012, respectively, and $7.2 million and $6.2 million for the nine months ended September 30, 2013 and 2012, respectively. Of the total share-based compensation costs, $0.2 million and $0.2 million was capitalized as part of real estate assets for the three months ended September 30, 2013 and 2012, respectively, and $0.6 million and $0.7 million for the

nine months ended September 30, 2013 and 2012, respectively. As of September 30, 2013, there was approximately $27.9 million of total unrecognized compensation cost related to nonvested incentive awards granted under share-based compensation arrangements that is expected to be recognized over a weighted-average period of 2.3 years. The remaining compensation cost related to these nonvested incentive awards had been recognized in periods prior to September 30, 2013.