Compensation Plans

Stock-Based Compensation Plans

The Company maintains two stock-based compensation plans, the Piper Jaffray Companies Amended and Restated 2003 Annual and Long-Term Incentive Plan (the "Incentive Plan") and the 2016 Employment Inducement Award Plan (the "Inducement Plan"). The Company’s equity awards are recognized on the consolidated statements of operations at grant date fair value over the service period of the award, net of estimated forfeitures.

The following table provides a summary of the Company’s outstanding equity awards (in shares or units) as of December 31, 2016:



Incentive Plan
Restricted Stock
Annual grants	1,309,440
Sign-on grants	280,945
	1,590,385
Inducement Plan
Restricted Stock	269,491

Total restricted stock related to compensation	1,859,876

Simmons Deal Consideration (1)	1,014,241

Total restricted stock outstanding	2,874,117

Incentive Plan
Restricted Stock Units
Market condition leadership grants	374,460

Incentive Plan
Stock Options	30,613


(1)	The Company issued restricted stock with service conditions as part of deal consideration for the acquisition of Simmons. See Note 4 for further discussion.

Incentive Plan

The Incentive Plan permits the grant of equity awards, including restricted stock, restricted stock units and non-qualified stock options, to the Company’s employees and directors for up to 8.2 million shares of common stock (0.9 million shares remained available for future issuance under the Incentive Plan as of December 31, 2016). The Company believes that such awards help align the interests of employees and directors with those of shareholders and serve as an employee retention tool. The Incentive Plan provides for accelerated vesting of awards if there is a severance event, a change in control of the Company (as defined in the Incentive Plan), in the event of a participant’s death, and at the discretion of the compensation committee of the Company’s board of directors.

Restricted Stock Awards

Restricted stock grants are valued at the market price of the Company’s common stock on the date of grant and are amortized over the requisite service period. The Company grants shares of restricted stock to employees as part of year-end compensation ("Annual Grants") and upon initial hiring or as a retention award ("Sign-on Grants").

The Company’s Annual Grants are made each year in February. Annual Grants vest ratably over three years in equal installments. The Annual Grants provide for continued vesting after termination of employment, so long as the employee does not violate certain post-termination restrictions set forth in the award agreement or any agreements entered into upon termination. The Company determined the service inception date precedes the grant date for the Annual Grants, and that the post-termination restrictions do not meet the criteria for an in-substance service condition, as defined by ASC 718. Accordingly, restricted stock granted as part of the Annual Grants is expensed in the one-year period in which those awards are deemed to be earned, which is generally the calendar year preceding the February grant date. For example, the Company recognized compensation expense during fiscal 2016 for its February 2017 Annual Grant. If an equity award related to the Annual Grants is forfeited as a result of violating the post-termination restrictions, the lower of the fair value of the award at grant date or the fair value of the award at the date of forfeiture is recorded within the consolidated statements of operations as a reversal of compensation expense.

Sign-on Grants are used as a recruiting tool for new employees and are issued to current employees as a retention tool. These awards have both cliff and ratable vesting terms, and the employees must fulfill service requirements in exchange for rights to the awards. Compensation expense is amortized on a straight-line basis from the grant date over the requisite service period, generally one to five years. Employees forfeit unvested shares upon termination of employment and a reversal of compensation expense is recorded.

Annually, the Company grants stock to its non-employee directors. The stock-based compensation paid to non-employee directors is fully expensed on the grant date and included within outside services expense on the consolidated statements of operations.

Restricted Stock Units

The Company grants restricted stock units to its leadership team ("Leadership Grants"). The units will vest and convert to shares of common stock at the end of each 36-month performance period only if the Company's stock performance satisfies predetermined market conditions over the performance period. Under the terms of the grants, the number of units that will vest and convert to shares will be based on the Company's stock performance achieving specified targets during each performance period as described below. Compensation expense is amortized on a straight-line basis over the three-year requisite service period based on the fair value of the award on the grant date. The market condition must be met for the awards to vest and compensation cost will be recognized regardless if the market condition is satisfied. Employees forfeit unvested share units upon termination of employment with a corresponding reversal of compensation expense.

Up to 50 percent of the award can be earned based on the Company’s total shareholder return relative to members of a predetermined peer group and up to 50 percent of the award can be earned based on the Company’s total shareholder return. The fair value of the awards on the grant date was determined using a Monte Carlo simulation with the following assumptions:



	Risk-free	Expected Stock
Grant Year	Interest Rate	Price Volatility
2016	0.98%	34.9%
2015	0.90%	29.8%
2014	0.82%	41.3%

Because a portion of the award vesting depends on the Company’s total shareholder return relative to a peer group, the valuation modeled the performance of the peer group as well as the correlation between the Company and the peer group. The expected stock price volatility assumptions were determined using historical volatility, as correlation coefficients can only be developed through historical volatility. The risk-free interest rates were determined based on three-year U.S. Treasury bond yields.

Stock Options

The Company previously granted options to purchase Piper Jaffray Companies common stock to employees and non-employee directors in fiscal years 2004 through 2008. Employee and director options were expensed by the Company on a straight-line basis over the required service period, based on the estimated fair value of the award on the date of grant using a Black-Scholes option-pricing model. As described above pertaining to the Company’s Annual Grants of restricted shares, stock options granted to employees were expensed in the calendar year preceding the annual February grant date. For example, the Company recognized compensation expense during fiscal 2007 for its February 2008 option grant. The maximum term of the stock options granted to employees and directors is ten years. The Company has not granted stock options since 2008.

Inducement Plan

The Company established the Inducement Plan in conjunction with the acquisition of Simmons. The Company granted $11.6 million (286,776 shares) in restricted stock under the Inducement Plan on May 15, 2016. These shares cliff vest in three years. Inducement Plan awards are amortized as compensation expense on a straight-line basis over the vesting period. Employees forfeit unvested Inducement Plan shares upon termination of employment and a reversal of compensation expense is recorded.

Stock-Based Compensation Activity

The Company recorded compensation expense of $53.7 million, $48.2 million and $28.2 million for the years ended December 31, 2016, 2015 and 2014, respectively, related to employee restricted stock and restricted stock unit awards. Forfeitures were $1.4 million, $0.5 million and $0.7 million for the years ended December 31, 2016, 2015 and 2014, respectively. The tax benefit related to stock-based compensation costs totaled $14.0 million, $18.8 million and $11.0 million for the years ended December 31, 2016, 2015 and 2014, respectively.

The following table summarizes the changes in the Company’s unvested restricted stock:



	Unvested		Weighted Average
	Restricted Stock		Grant Date
	(in Shares)		Fair Value
December 31, 2013	1,582,062		$	35.25
Granted	421,728		40.57
Vested	(883,761	)	36.22
Canceled	(24,724	)	36.02
December 31, 2014	1,095,305		$	36.51
Granted	783,758		51.08
Vested	(575,716	)	34.72
Canceled	(15,432	)	40.83
December 31, 2015	1,287,915		$	46.20
Granted	2,359,672		41.87
Vested	(623,961	)	44.89
Canceled	(149,509	)	42.49
December 31, 2016	2,874,117		$	43.12

The fair value of restricted stock that vested during the years ended December 31, 2016, 2015 and 2014 was $28.0 million, $20.0 million and $32.0 million, respectively.

The following table summarizes the changes in the Company’s unvested restricted stock units:



	Unvested		Weighted Average
	Restricted		Grant Date
	Stock Units		Fair Value
December 31, 2013	290,536		$	15.83
Granted	115,290		23.42
Vested	—		—
Canceled	—		—
December 31, 2014	405,826		$	17.99
Granted	123,687		21.83
Vested	(149,814	)	12.12
Canceled	(23,457	)	12.12
December 31, 2015	356,242		$	22.18
Granted	135,483		19.93
Vested	(117,265	)	21.32
Canceled	—		—
December 31, 2016	374,460		$	21.63

As of December 31, 2016, there was $46.0 million of total unrecognized compensation cost related to restricted stock and restricted stock units expected to be recognized over a weighted average period of 2.1 years.

The following table summarizes the changes in the Company’s outstanding stock options:



					Weighted Average
			Weighted		Remaining
	Options		Average		Contractual Term	Aggregate
	Outstanding		Exercise Price		(in Years)	Intrinsic Value
December 31, 2013	469,289		$	44.83	2.0	$	288,318
Granted	—		—
Exercised	(137,864	)	39.55
Canceled	(55	)	39.62
Expired	(113,497	)	47.72
December 31, 2014	217,873		$	46.66	2.0	$	3,066,839
Granted	—		—
Exercised	(50,671	)	36.62
Canceled	—		—
Expired	(10,001	)	39.62
December 31, 2015	157,201		$	50.35	1.6	$	—
Granted	—		—
Exercised	(104,175	)	43.75
Canceled	—		—
Expired	(22,413	)	59.83
December 31, 2016	30,613		$	65.86	0.3	$	203,291

Options exercisable at December 31, 2014	217,873		$	46.66	2.0	$	3,066,839
Options exercisable at December 31, 2015	157,201		$	50.35	1.6	$	—
Options exercisable at December 31, 2016	30,613		$	65.86	0.3	$	203,291

Additional information regarding Piper Jaffray Companies options outstanding as of December 31, 2016 is as follows:



	Options Outstanding				Exercisable Options
		Weighted Average
		Remaining	Weighted			Weighted
Range of		Contractual	Average			Average
Exercise Prices	Shares	Life (in Years)	Exercise Price		Shares	Exercise Price
$41.09	4,502	1.1	$	41.09	4,502	$	41.09
$70.13	26,111	0.1	$	70.13	26,111	$	70.13

As of December 31, 2016, there was no unrecognized compensation cost related to stock options expected to be recognized over future years. The intrinsic value of options exercised and the resulting tax benefit realized was $2.0 million and $0.8 million, respectively, for the year ended December 31, 2016. For the year ended December 31, 2015, the intrinsic value of options exercised and the resulting tax benefit realized was $0.9 million and $0.3 million, respectively. For the year ended December 31, 2014, the intrinsic value of options exercised and the resulting tax benefit realized was $1.7 million and $0.7 million, respectively.

The Company has a policy of issuing shares out of treasury (to the extent available) to satisfy share option exercises and restricted stock vesting. The Company expects to withhold approximately 0.3 million shares from employee equity awards vesting in 2017, related to employee individual income tax withholding obligations on restricted stock vesting. For accounting purposes, withholding shares to cover employees’ tax obligations is deemed to be a repurchase of shares by the Company.

Deferred Compensation Plans

The Company maintains various deferred compensation arrangements for employees.

The nonqualified deferred compensation plan is an unfunded plan which allows certain highly compensated employees, at their election, to defer a percentage of their base salary, commissions and/or cash bonuses. The deferrals vest immediately and are non-forfeitable. The amounts deferred under this plan are held in a grantor trust. The Company invests, as a principal, in investments to economically hedge its obligation under the nonqualified deferred compensation plan. Investments in the grantor trust, consisting of mutual funds, totaled $24.4 million and $14.6 million as of December 31, 2016 and 2015, respectively, and are included in investments on the consolidated statements of financial condition. The compensation deferred by the employees is expensed in the period earned. The deferred compensation liability was $24.5 million and $14.5 million as of December 31, 2016 and 2015, respectively. Changes in the fair value of the investments made by the Company are reported in investment income and changes in the corresponding deferred compensation liability are reflected as compensation and benefits expense on the consolidated statements of operations.

The Piper Jaffray Companies Mutual Fund Restricted Share Investment Plan is a fully funded deferred compensation plan which allows eligible employees to elect to receive a portion of the incentive compensation they would otherwise receive in the form of restricted stock, instead in restricted mutual fund shares ("MFRS Awards") of investment funds. MFRS Awards are awarded to qualifying employees in February of each year, and represent a portion of their compensation for performance in the preceding year similar to the Company's Annual Grants. MFRS Awards vest ratably over three years in equal installments and provide for continued vesting after termination of employment so long as the employee does not violate certain post-termination restrictions set forth in the award agreement or any agreement entered into upon termination. Forfeitures are recorded as a reduction of compensation and benefits expense within the consolidated statements of operations. MFRS Awards are owned by employee recipients (subject to the aforementioned vesting restrictions) and as such are not included on the consolidated statements of financial condition.

The Company has also granted MFRS Awards to new employees as a recruiting tool. Employees must fulfill service requirements in exchange for rights to the awards. Compensation expense from these awards will be amortized on a straight-line basis over the requisite service period of two to five years.

The Company recorded compensation expense of $17.5 million, $26.6 million and $20.0 million for the years ended December 31, 2016, 2015 and 2014, respectively, related to employee MFRS Awards. Total compensation cost includes year-end compensation for MFRS Awards and the amortization of sign-on MFRS Awards, less forfeitures. Forfeitures were immaterial for the years ended December 31, 2016, 2015 and 2014, respectively.