STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS

The following table presents stock-based compensation expense included in the Company’s consolidated statements of income (in thousands):



	Year Ended December 31,
	2018		2017		2016
Cost of portal revenues, exclusive of depreciation & amortization	$	1,516	$	1,276	$	1,390
Cost of software & services revenues, exclusive of depreciation & amortization	151		86		62
Selling & administrative	4,671		4,102		4,545
Stock-based compensation expense before income taxes	$	6,338	$	5,464	$	5,997

Stock option and restricted stock plans

The Company has a stock compensation plan (the “NIC Plan”) to provide for the granting of restricted stock awards, incentive stock options or non-qualified stock options to encourage certain employees of the Company and its subsidiaries, and directors of the Company to participate in the ownership of the Company and to provide additional incentive for such employees and directors to promote the success of its business through sharing in the future growth of such business. The Company did not grant any stock options in 2018, 2017, or 2016 and has no stock options currently outstanding. Instead, the Company currently expects to continue to grant only restricted stock awards.

As approved by the Company’s Board of Directors and stockholders, the Company is authorized to grant 15,825,223 common shares under the NIC Plan. The Company made non-material changes to the NIC Plan in 2016 to increase grantee tax withholding rights under new accounting rules that became effective for the Company in 2017. At December 31, 2018, a total of 3,482,300 shares were available for future grants under the NIC Plan.

Restricted stock

During 2018, the Compensation Committee of the Board of Directors of the Company (the “Committee”) granted to certain management-level employees and executive officers, service-based restricted stock awards totaling 350,054 shares with a grant-date fair value totaling approximately $4.9 million. Such restricted stock awards vest beginning one year from the date of grant in annual installments of 25%. In addition, non-employee directors of the Company were granted service-based restricted stock awards totaling 54,584 shares with a grant-date fair value totaling approximately $0.8 million. Such restricted stock awards vest one year from the date of grant.

During the first quarter of 2018, the Committee also granted to certain executive officers performance-based restricted stock awards pursuant to the terms of the Company’s executive compensation program totaling 177,730 shares with a grant-date fair value totaling approximately $2.4 million, which represents the maximum number of shares the executive officers can earn at the end of a three-year performance period ending December 31, 2020.

The actual number of shares earned will be based on the Company’s performance related to the following performance criteria over the performance period:


•	Operating income growth (three-year compound annual growth rate);


•	Total consolidated revenue growth (three-year compound annual growth rate); and


•	Return on invested capital (three-year average).

At the end of the three-year period, the executive officers are eligible to receive up to a specified number of shares based upon the Company’s performance relative to these performance criteria over the performance period. In addition, the executive officers will accrue dividend equivalents for any cash dividends declared during the performance period, payable in the form of additional shares of Company common stock, based upon the maximum number of shares to be earned by the executive officers for each performance-based restricted stock award. Such hypothetical cash dividend payment shall be divided by the fair value of the Company’s common stock on the dividend payment date to determine the maximum number of notional shares to be awarded. At the end of the three-year performance period and on the date some or all of the shares are paid under the agreement, a pro rata number of notional dividend shares will be converted into an equivalent number of dividend shares paid and granted to the executive officers based upon the actual number of underlying shares earned during the performance period.

At December 31, 2018, the three-year performance period related to the performance-based restricted stock awards granted to certain executive officers on February 22, 2016 ended. Based on the Company’s actual financial results from 2016 through 2018, 64,846 of the shares and 4,226 dividend shares were earned. The remaining 73,345 shares subject to the awards will be forfeited in the first quarter of 2019.

At December 31, 2017, the three-year performance period related to the performance-based restricted stock awards granted to certain executive officers on February 23, 2015 ended. Based on the Company’s actual financial results from 2015 through 2017, no shares or dividend equivalent shares were earned. The 91,820 shares subject to the awards were forfeited.

At December 31, 2016, the three-year performance period related to the performance-based restricted stock awards granted to certain executive officers on February 24, 2014 ended. Based on the Company’s actual financial results from 2014 through 2016, 59,437 of the shares and 4,945 dividend shares were earned. The remaining 21,503 shares subject to the awards were forfeited.

A summary of service-based restricted stock activity for the year ended December 31, 2018 is presented below:



	Service-based Restricted Shares		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2017	609,886		$	19.59
Granted	404,638		$	14.15
Vested	(264,583	)	$	19.29
Canceled	(32,862	)	$	16.75
Outstanding at December 31, 2018	717,079		$	16.58
Expected to vest at December 31, 2018	717,079		$	16.58

The fair value of service-based restricted stock vested during the years ended December 31, 2018, 2017 and 2016 was approximately $5.1 million, $4.7 million and $4.6 million, respectively. The weighted average grant date fair value per share of service-based restricted stock granted during the years ended December 31, 2018, 2017 and 2016 was $14.15, $21.46 and $17.67, respectively.

A summary of performance-based restricted stock activity for the year ended December 31, 2018 is presented below:



	Performance- based Restricted Shares		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2017	340,689		$	18.91
Granted	177,730		$	13.70
Vested	—		$	17.11
Canceled	(91,820	)	$	17.11
Outstanding at December 31, 2018	426,599		$	17.12
Expected to vest at December 31, 2018	93,731		$	17.39

The fair value of performance-based restricted stock vested during the years ended December 31, 2018, 2017 and 2016 was approximately $0 million, $1.2 million and $1.6 million, respectively. The weighted average grant date fair value per share of performance-based restricted stock granted during the years ended December 31, 2018, 2017 and 2016 was $13.70, $22.00 and $17.62, respectively.

At December 31, 2018, the total intrinsic value of unvested restricted stock awards expected to vest was approximately $10.1 million. At December 31, 2018, the Company had approximately $8.2 million of total unrecognized compensation cost related to unvested restricted stock awards. The Company expects to recognize this cost over a weighted average period of approximately two years from December 31, 2018.

Employee stock purchase plan

In 1999, the Company’s Board of Directors approved an employee stock purchase plan (“ESPP”) intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. A total of 2,321,688 shares of NIC common stock have been reserved for issuance under this plan. Terms of the plan permit eligible employees to purchase NIC common stock through payroll deductions up to the lesser of 15% of each employee’s compensation or $25,000. Amounts deducted and accumulated by the participant are used to purchase shares of NIC’s common stock at 85% of the lower of the fair value of the common stock at the beginning or the end of the offering period, as defined in the plan.

In the offering period commencing on April 1, 2017 and ending on March 31, 2018, 122,152 shares were purchased at a price of $11.31 per share, resulting in total cash proceeds to the Company of approximately $1.4 million. In the offering period commencing on April 1, 2016 and ending on March 31, 2017, 86,998 shares were purchased at a price of $15.29 per share, resulting in total cash proceeds to the Company of approximately $1.3 million. In the offering period commencing on April 1, 2015 and ending on March 31, 2016, 74,976 shares were purchased at a price of $14.86 per share, resulting in total cash proceeds to the Company of approximately $1.1 million. The current offering period under this plan commenced on April 1, 2018. The closing fair market value of NIC common stock on the first day of the current offering period was $13.30 per share.

The fair values of the offerings were estimated on the dates of grant using the Black-Scholes model using the assumptions in the following table.



	March 31, 2018 Offering			March 31, 2017 Offering			March 31, 2016 Offering
Risk-free interest rate	2.08		%	1.02		%	0.62		%
Expected dividend yield	2.06		%	2.69		%	3.04		%
Expected life	1.0 year			1.0 year			1.0 year
Expected stock price volatility	35.51		%	23.07		%	28.54		%
Weighted average fair value of ESPP rights	$	3.75		$	4.58		$	4.40

The Black-Scholes option-pricing model was not developed for use in valuing employee ESPP rights but was developed for use in estimating the fair value of traded stock options that have no vesting restrictions and are fully transferable. In addition, it requires the use of subjective assumptions including expectations of future dividends and stock price volatility. Such assumptions are only used for making the required fair value estimate and should not be considered as indicators of future dividend policy or stock price appreciation or should not be used to predict the value ultimately realized by employees who receive equity awards. Because changes in the subjective assumptions can materially affect the fair value estimate and because employee stock options have characteristics significantly different from those of traded options, the use of the Black-Scholes option-pricing model may not provide a reliable estimate of the fair value of ESPP rights.

Defined contribution 401(k) profit sharing plan

The Company and its subsidiaries sponsor a defined contribution 401(k) profit sharing plan. In accordance with the plan, all full-time employees are eligible immediately upon employment and non full-time employees are eligible upon reaching 1,000 hours of service in the relevant period. A discretionary match by the Company of an employee’s contribution of up to 5% of base salary and a discretionary contribution may be made to the plan as determined by the Board of Directors. Expense related to Company matching contributions totaled approximately $2.7 million, $2.7 million and $2.5 million for the years ended December 31, 2018, 2017 and 2016, respectively.