10.Stock-Based Compensation

Stock Incentive Plans

DISH Network maintains stock incentive plans to attract and retain officers, directors and key employees. Our employees participate in the DISH Network stock incentive plans. Stock awards under these plans include both performance and non-performance based stock incentives. As of December 31, 2016, there were outstanding under these plans stock options to acquire 7.9 million shares of DISH Network’s Class A common stock and 1.3 million restricted stock units associated with our employees. Stock options granted on or prior to December 31, 2016 were granted with exercise prices equal to or greater than the market value of DISH Network Class A common stock at the date of grant and with a maximum term of approximately ten years. While historically DISH Network has issued stock awards subject to vesting, typically at the rate of 20% per year, some stock awards have been granted with immediate vesting and other stock awards vest only upon the achievement of certain DISH Network-specific subscriber, operational and/or financial goals. As of December 31, 2016, DISH Network had 67.6 million shares of its Class A common stock available for future grant under its stock incentive plans.

Exercise prices for DISH Network stock options outstanding and exercisable associated with our employees as of December 31, 2016 were as follows:


					Options Outstanding				Options Exercisable
					Number Outstanding as of December 31, 2016	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number Exercisable as of December 31, 2016	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price
$	—	-	$	10.00	207,400	1.51	$	6.34	207,400	1.51	$	6.35
$	10.01	-	$	20.00	1,885,085	3.47	$	15.44	85,085	2.94	$	16.73
$	20.01	-	$	30.00	1,617,876	4.41	$	26.64	1,067,876	4.22	$	25.98
$	30.01	-	$	40.00	1,426,222	5.88	$	36.11	257,822	5.40	$	34.96
$	40.01	-	$	50.00	428,900	9.08	$	46.22	7,800	2.03	$	42.84
$	50.01	-	$	60.00	1,532,000	8.53	$	56.98	48,500	4.00	$	57.58
$	60.01	-	$	70.00	796,250	7.11	$	66.56	189,050	7.16	$	65.51
$	70.01	-	$	80.00	20,000	3.00	$	72.89	20,000	3.00	$	72.89
$	—	-	$	80.00	7,913,733	5.69	$	36.22	1,883,533	4.29	$	29.98

Stock Award Activity

DISH Network stock option activity associated with our employees was as follows:


	For the Years Ended December 31,
	2016			2015			2014
	Options	Weighted- Average Exercise Price		Options	Weighted- Average Exercise Price		Options	Weighted- Average Exercise Price
Total options outstanding, beginning of period	6,807,169	$	31.17	10,214,344	$	25.29	11,938,090	$	22.49
Granted	1,901,000	$	54.41	452,000	$	69.11	667,750	$	63.23
Exercised	(403,834)	$	23.26	(1,731,975)	$	16.26	(2,233,496)	$	20.49
Forfeited and cancelled	(390,602)	$	50.28	(2,127,200)	$	23.12	(158,000)	$	41.84
Total options outstanding, end of period	7,913,733	$	36.22	6,807,169	$	31.17	10,214,344	$	25.29
Performance-based options outstanding, end of period (1)	4,312,000	$	31.39	3,904,500	$	28.03	5,926,500	$	25.15
Exercisable at end of period	1,883,533	$	29.98	1,927,069	$	26.87	3,107,544	$	19.81

(1)

These stock options are included in the caption “Total options outstanding, end of period.” See discussion of the 2005 LTIP, 2008 LTIP, 2013 LTIP and Other Employee Performance Awards below.

We realized tax benefits from stock awards exercised as follows:


	For the Years Ended December 31,
	2016		2015		2014
	(In thousands)
Tax benefit from stock awards exercised	$	5,006	$	33,716	$	42,334

Based on the closing market price of DISH Network Class A common stock on December 31, 2016, the aggregate intrinsic value of stock options associated with our employees was as follows:


	As of December 31, 2016
	Options		Options
	Outstanding		Exercisable
	(In thousands)
Aggregate intrinsic value	$	179,033	$	54,382

DISH Network restricted stock unit activity associated with our employees was as follows:


	For the Years Ended December 31,
	2016			2015			2014
	Restricted Stock Awards		Weighted- Average Grant Date Fair Value	Restricted Stock Awards		Weighted- Average Grant Date Fair Value	Restricted Stock Awards		Weighted- Average Grant Date Fair Value
Total restricted stock units outstanding, beginning of period	1,382,250	$	32.01	1,731,332	$	32.60	1,863,165	$	29.27
Granted	67,060	$	56.35	62,530	$	68.79	316,500	$	63.57
Vested	(60)	$	49.15	(125,280)	$	63.92	(278,000)	$	45.04
Forfeited and cancelled	(113,250)	$	45.12	(286,332)	$	29.67	(170,333)	$	33.43
Total restricted stock units outstanding, end of period (1)	1,336,000	$	32.11	1,382,250	$	32.01	1,731,332	$	32.60

(1)

All restricted stock units outstanding are Restricted Performance Units. See discussion of the 2005 LTIP, 2008 LTIP, 2013 LTIP and Other Employee Performance Awards below.

Long-Term Performance-Based Plans

2005 LTIP. During 2005, DISH Network adopted a long-term, performance-based stock incentive plan (the “2005 LTIP”). The 2005 LTIP provided stock options and restricted stock units, either alone or in combination, which vested over seven years at the rate of 10% per year during the first four years, and at the rate of 20% per year thereafter. Exercise of the stock awards was subject to the foregoing vesting schedule and a performance condition that a DISH Network-specific subscriber goal be achieved by March 31, 2015. The performance condition was not achieved, none of the awards became exercisable and the 2005 LTIP expired by its terms on March 31, 2015.

2008 LTIP. During 2008, DISH Network adopted a long-term, performance-based stock incentive plan (the “2008 LTIP”). The 2008 LTIP provided stock options and restricted stock units, either alone or in combination, which vested based on DISH Network-specific subscriber and financial goals. As of June 30, 2013, 100% of the eligible 2008 LTIP awards had vested.

2013 LTIP. During 2013, DISH Network adopted a long-term, performance-based stock incentive plan (the “2013 LTIP”). The 2013 LTIP provides stock options and restricted stock units in combination, which vest based on DISH Network-specific subscriber and financial goals. Exercise of the stock awards is contingent on achieving these goals by September 30, 2022.

Although no awards vest until DISH Network attains the performance goals, compensation related to the 2013 LTIP will be recorded based on DISH Network’s assessment of the probability of meeting the remaining goals. If the remaining goals are probable of being achieved, we will begin recognizing the associated non-cash, stock-based compensation expense on our Consolidated Statements of Operations and Comprehensive Income (Loss) over the estimated period to achieve the goal.

During the years ended December 31, 2015, 2014, 2013, DISH Network determined that 30%, 10% and 20%, respectively, of the 2013 LTIP performance goals were probable of achievement. During the year ended December 31, 2016, no additional 2013 LTIP performance goals were deemed probable of achievement. As a result, we recorded non-cash, stock-based compensation expense for the years ended December 31, 2016, 2015 and 2014, as indicated in the table below titled “Non-Cash, Stock-Based Compensation Expense Recognized.” As of December 31, 2016, approximately 20% of the 2013 LTIP awards had vested.

2017 LTIP. On December 2, 2016, DISH Network adopted a long-term, performance-based stock incentive plan (the “2017 LTIP”). The 2017 LTIP provides stock options, which vest based on DISH Network-specific subscriber and financial goals. Awards were initially granted under the 2017 LTIP as of January 1, 2017. Exercise of the stock awards is contingent on achieving these goals by December 31, 2020.

Although no awards vest until DISH Network attains the performance goals, compensation related to the 2017 LTIP will be recorded based on DISH Network’s assessment of the probability of meeting the performance goals. If the performance goals are probable of being achieved, we will begin recognizing the associated non-cash, stock-based compensation expense on our Consolidated Statements of Operations and Comprehensive Income (Loss) over the estimated period to achieve the goal.

Other Employee Performance Awards. In addition to the above long-term, performance stock incentive plans, DISH Network has other stock awards that vest based on certain other DISH Network-specific subscriber, operational and/or financial goals. Exercise of these stock awards is contingent on achieving certain performance goals.

Additional compensation related to these awards will be recorded based on DISH Network’s assessment of the probability of meeting the remaining performance goals. If the remaining goals are probable of being achieved, we will begin recognizing the associated non-cash, stock-based compensation expense on our Consolidated Statements of Operations and Comprehensive Income (Loss) over the estimated period to achieve the goal. See the table below titled “Estimated Remaining Non-Cash, Stock-Based Compensation Expense.”

Although no awards vest until the performance goals are attained, DISH Network determined that certain goals were probable of achievement and, as a result, we recorded non-cash, stock-based compensation expense for the years ended December 31, 2016, 2015 and 2014, as indicated in the table below titled “Non-Cash, Stock-Based Compensation Expense Recognized.”

Given the competitive nature of DISH Network’s business, small variations in subscriber churn, gross new subscriber activation rates and certain other factors can significantly impact subscriber growth. Consequently, while it was determined that achievement of certain DISH Network-specific subscriber, operational and/or financial goals was not probable as of December 31, 2016, that assessment could change in the future.

The non-cash, stock-based compensation expense associated with these awards for our employees was as follows:


	For the Years Ended December 31,
Non-Cash, Stock-Based Compensation Expense Recognized	2016		2015		2014
	(In thousands)
2013 LTIP	$	2,565	$	10,157	$	12,361
Other employee performance awards		1,424		1,694		14,095
Total non-cash, stock-based compensation expense recognized for performance-based awards	$	3,989	$	11,851	$	26,456


Estimated Remaining Non-Cash, Stock-Based Compensation Expense	2013 LTIP		Other Employee Performance Awards
	(In thousands)
Expense estimated to be recognized during 2017	$	7,067	$	1,070
Estimated contingent expense subsequent to 2017		40,469		134,580
Total estimated remaining expense over the term of the plan	$	47,536	$	135,650

Of the 7.9 million stock options and 1.3 million restricted stock units outstanding under the DISH Network stock incentive plans associated with our employees as of December 31, 2016, the following awards were outstanding pursuant to the performance based stock incentive plans:


	As of December 31, 2016
Performance-Based Stock Options	Number of Awards	Weighted- Average Grant Price
2013 LTIP	1,472,000	$	43.50
Other employee performance awards	2,840,000	$	25.12
Total	4,312,000	$	31.39

Restricted Performance Units
2013 LTIP	736,000
Other employee performance awards	600,000
Total	1,336,000

Stock-Based Compensation

Total non-cash, stock-based compensation expense for all of our employees is shown in the following table for the years ended December 31, 2016, 2015 and 2014 and was allocated to the same expense categories as the base compensation for such employees:


	For the Years Ended December 31,
	2016		2015		2014
	(In thousands)
Subscriber-related	$	694	$	2,164	$	1,859
General and administrative		12,343		17,035		32,165
Total non-cash, stock based compensation	$	13,037	$	19,199	$	34,024

As of December 31, 2016, our total unrecognized compensation cost related to the non-performance based unvested stock awards was $22 million and will be recognized over a weighted-average period of approximately two years. Share-based compensation expense is recognized based on stock awards ultimately expected to vest.

Valuation

The fair value of each stock option granted for the years ended December 31, 2016, 2015 and 2014 was estimated at the date of the grant using a Black-Scholes option valuation model with the following assumptions:


	For the Years Ended December 31,
Stock Options	2016							2015							2014
Risk-free interest rate		1.06	%	-		2.27	%		1.40	%	-		2.19	%		1.80	%	-		2.84	%
Volatility factor		26.12	%	-		33.37	%		26.42	%	-		36.22	%		28.53	%	-		38.62	%
Expected term of options in years		5.4		-		10.0			5.5		-		7.8			5.5		-		9.0
Weighted-average fair value of options granted	$	12.45		-	$	26.86		$	16.14		-	$	29.73		$	19.08		-	$	29.20

While DISH Network currently does not intend to declare dividends on its common stock, it may elect to do so from time to time. Accordingly, the dividend yield percentage used in the Black-Scholes option valuation model was set at zero for all periods. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded stock options which have no vesting restrictions and are fully transferable. Consequently, our estimate of fair value may differ from other valuation models. Further, the Black-Scholes option valuation model requires the input of highly subjective assumptions. Changes in these subjective input assumptions can materially affect the fair value estimate.

We will continue to evaluate the assumptions used to derive the estimated fair value of DISH Network’s stock options as new events or changes in circumstances become known.