2. Equity-Based Compensation

Equity Based Compensation Plans

The Manhattan Associates, Inc. 1998 Stock Incentive Plan (the “1998 Plan”) was adopted by the Board of Directors and approved by the shareholders in February 1998. Options granted under the 1998 Plan cannot have a term exceeding ten years. Options typically have an annual graded vesting schedule over four years and vest based on service conditions. Following approval of the Manhattan Associates, Inc. 2007 Stock Incentive Plan (the “2007 Plan”) discussed below, the Company may not make any additional awards under the 1998 Plan.

The 2007 Plan was initially approved by the shareholders of the Company in May 2007 and was subsequently amended in May 2009 and May 2011. The 2007 Plan provides for the grant of stock options, restricted stock, restricted stock units, and stock appreciation rights. Vesting conditions can be service-based or performance-based, or a combination of both.

As amended, a maximum of 7,500,000 shares are available for grant under the 2007 Plan. Each stock option or stock appreciation right granted is counted against the maximum share limitation as one share, and each share of restricted stock or restricted stock unit granted (including those that are service based or performance based) counts against the maximum share limitation as two shares. Options and stock appreciation rights cannot have a term exceeding seven years. As of December 31, 2012, there were 3,533,966 shares available for issuance under the amended 2007 Plan. The 1998 and 2007 Plans are administered by the Compensation Committee of the Board of Directors. The committee has the authority to interpret the provisions thereof.

In January 2010 the Compensation Committee of the Board of Directors approved certain changes to the Company’s historical equity incentive grant practices, with the objective to optimize its performance and retention strength while managing program share usage to improve long-term equity overhang. The changes eliminated stock option awards in favor of 100% restricted stock grants, which for the 2010 and 2011 awards contain vesting provisions that are 50% service based and 50% performance based for employee awards and 100% service based for non-employee members of the Board of Directors (“Outside Directors”). The equity compensation program change for employees was effective January 2010 and for Outside Directors was effective May 2010. The employee awards have a four year vesting period, with the performance portion tied to annual revenue and earnings per share targets. The awards to Outside Directors have a one year vesting period. The Company recognizes compensation cost for service-based restricted awards with graded vesting on a straight-line basis over the entire vesting period, with the amount of compensation cost recognized at any date at least equal to the portion of the grant-date value of the award that is vested at that date. For its performance-based restricted stock awards with graded vesting, the Company recognizes compensation cost on an accelerated basis applying straight-line expensing for each separately vesting portion of each award.

In January 2012, in order to simplify equity grant administration, the Company changed its practice of granting restricted stock in favor of granting restricted stock units, or RSUs, which convert to the Company’s common stock upon vesting. There is no material difference between the grant of restricted stock and the grant of RSUs to either the Company or the recipients receiving the grants; however, in contrast to the granting of restricted stock, no stock will actually be issued under the granting of RSUs until the units vest. The Company does not currently grant stock options.

Stock Option Awards

The Company recorded equity-based compensation related to stock options granted prior to 2011 of $0.6 million, $2.0 million, and $3.8 million during the years ended December 31, 2012, 2011, and 2010, respectively. A summary of changes in outstanding options for the year ended December 31, 2012 is as follows:


	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Average Intrinsic Value (in thousands)
Outstanding at January 1, 2012		1,633,566		$	24.79
Exercised		(1,252,634	)		25.61
Forfeited and expired		(9,182	)		21.08

Outstanding at December 31, 2012		371,750		$	22.13		2.1	$	14,206

Vested or expected to vest at December 31, 2012		351,574		$	22.46		2.1	$	13,317
Exercisable at December 31, 2012		278,868		$	24.09		1.8	$	10,109

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the year ended December 31, 2010:


	2010
Dividend yield		0	%
Expected volatility		36	%
Risk-free interest rate at the date of grant		2.4	%
Expected life (in years)		4.0

No stock options were granted in 2011 or 2012.

Expected volatilities are based on a combination of historical volatility of the Company’s stock and implied volatility of the Company’s publicly traded stock options. Due to the limited trading volume of the Company’s publicly traded options, the Company places a greater emphasis on historical volatility. The Company also uses historical data to estimate the term that options are expected to be outstanding and the forfeiture rate of options granted. The risk-free interest rate is based on the U.S. Treasury zero-coupon issues with a term approximating the expected term. Using these assumptions, the weighted average grant-date fair values of the stock options granted during the year ended December 31, 2010 was $7.82.

Options with graded vesting are valued as a single award. The total value of the award is expensed on a straight line basis over the vesting period with the amount of compensation cost recognized at any date at least equal to the portion of the grant-date fair value of the award that is vested at that date. The total intrinsic value of options exercised during the years ended December 31, 2012, 2011, and 2010 based on market value at the exercise dates was $31.2 million, $25.8 million, and $11.9 million, respectively. As of December 31, 2012, unrecognized compensation cost related to unvested stock option awards totaled less than $0.1 million and is expected to be recognized over a weighted average period of less than one year.

Restricted Stock and RSU Awards

A summary of changes in unvested shares/units of restricted stock for the year ended December 31, 2012 are as follows:


	Number of Shares			Grant Date Fair Value
Outstanding at January 1, 2012		655,155		$	25.84
Granted		227,748			44.08
Vested		(252,285	)		25.62
Forfeited		(33,419	)		29.07

Outstanding at December 31, 2012		597,199		$	32.70

The Company recorded equity-based compensation related to restricted stock and RSUs of $7.7 million, $8.4 million, and $6.6 million during the years ended December 31, 2012, 2011, and 2010, respectively. The total fair value of restricted stock awards vested during the years ended December 31, 2012, 2011, and 2010, based on market value at the vesting dates was $15.2 million, $10.8 million, and $3.6 million, respectively. As of December 31, 2012, unrecognized compensation cost related to unvested restricted stock awards totaled $9.8 million and is expected to be recognized over a weighted average period of approximately 2.2 years.

Included in the RSU grants for the year ended December 31, 2012, are 98,202 units that have performance-based vesting criteria. As noted above, the performance criteria are tied to the Company’s 2012 financial performance. As of December 31, 2012, the performance criteria for the fiscal year were met and the associated equity-based compensation expense has been recognized for the portion of the award attributable to 2012 services.

The Company recognizes compensation cost for service-based restricted stock awards with graded vesting on a straight-line basis over the entire vesting period, with the amount of compensation cost recognized at any date at least equal to the portion of the grant-date value of the award that is vested at that date. For performance-based restricted stock awards with graded vesting, the Company recognizes compensation cost on an accelerated basis applying straight-line expensing for each separately vesting portion of each award.