Stock-Based Compensation

Stock-Based Compensation Plans

Our shareholders approved the Morningstar 2011 Stock Incentive Plan (the 2011 Plan) on May 17, 2011. As of that date we stopped granting awards under the Morningstar 2004 Stock Incentive Plan (the 2004 Plan). The 2004 Plan amended and restated the Morningstar 1993 Stock Option Plan, the Morningstar 2000 Stock Option Plan, and the Morningstar 2001 Stock Option Plan.

The 2011 Plan provides for a variety of stock-based awards, including, among other things, stock options, restricted stock units, and restricted stock. We granted stock options, restricted stock units, and restricted stock under the 2004 Plan.

All of our employees and our non-employee directors are eligible for awards under the 2011 Plan.

Grants awarded under the 2011 Plan or the 2004 Plan that are forfeited, canceled, settled, or otherwise terminated without a distribution of shares, or shares withheld by us in connection with the exercise of options, will be available for awards under the 2011 Plan. Any shares subject to awards under the 2011 Plan, but not under the 2004 Plan, that are withheld by us in connection with the payment of any required income tax withholding will be available for awards under the 2011 Plan.

The following table summarizes the number of shares available for future grants under our 2011 Plan:



		As of December 31
(000)		2013
Shares available for future grants		4,501

Accounting for Stock-Based Compensation Awards

The following table summarizes our stock-based compensation expense and the related income tax benefit we recorded in the past three years:



($000)	2013		2012		2011
Restricted stock units	$	14,163	$	13,451	$	12,765
Restricted stock	388		5,013		2,196
Stock options	492		441		342
Total stock-based compensation expense	$	15,043	$	18,905	$	15,303

Income tax benefit related to the stock-based compensation expense	$	4,027	$	3,686	$	3,535

The following table summarizes the amount of unrecognized stock-based compensation expense as of December 31, 2013 and the expected number of months over which the expense will be recognized:



	Unrecognized stock-based compensation expense ($000)		Expected amortization period (months)
Restricted stock units	$	31,306	33
Restricted stock	517		16
Stock options	585		16
Total unrecognized stock-based compensation expense	$	32,408	32

In accordance with FASB ASC 718, Compensation—Stock Compensation, we estimate forfeitures of employee stock-based awards and recognize compensation cost only for those awards expected to vest. We adjust the stock-based compensation expense during the third quarter to reflect those awards that ultimately vested and update our estimate of the forfeiture rate that will be applied to awards not yet vested.

Restricted Stock Units

Restricted stock units represent the right to receive a share of Morningstar common stock when that unit vests. Restricted stock units granted to employees generally vest ratably over a four-year period. Restricted stock units granted to non-employee directors vest ratably over a three-year period. For restricted stock units granted through December 31, 2008, employees could elect to defer receipt of the Morningstar common stock issued upon vesting of the restricted stock unit.

We measure the fair value of our restricted stock units on the date of grant based on the closing market price of the underlying common stock on the day prior to grant. We amortize that value to stock-based compensation expense, net of estimated forfeitures, ratably over the vesting period.

The following table summarizes restricted stock unit activity during the past three years:



Restricted Stock Units (RSUs)	Unvested		Vested but Deferred		Total		Weighted Average Grant Date Value per RSU
RSUs Outstanding - January 1, 2011	777,666		45,189		822,855		$	47.14
Granted	292,398		—		292,398		57.36
Dividend equivalents	2,673		—		2,673		48.57
Vested	(256,623	)	—		(256,623	)	48.28
Vested but deferred	(1,753	)	1,753		—		—
Issued	—		(26,866	)	(26,866	)	46.69
Forfeited	(73,318	)	—		(73,318	)	47.59
RSUs Outstanding - December 31, 2011	741,043		20,076		761,119		50.66
Granted	341,282		—		341,282		56.26
Dividend equivalents	6,405		130		6,535		52.02
Vested	(270,695	)	—		(270,695	)	50.12
Vested but deferred	(892	)	892		—		—
Issued	—		(2,316	)	(2,316	)	73.28
Forfeited	(89,998	)	—		(89,998	)	50.84
RSUs Outstanding - December 31, 2012	727,145		18,782		745,927		53.37
Granted	287,848		—		287,848		72.04
Dividend equivalents	2,773		157		2,930		57.39
Vested	(278,549	)	—		(278,549	)	50.41
Issued	—		(2,257	)	(2,257	)	49.40
Forfeited	(59,215	)	—		(59,215	)	57.58
RSUs Outstanding - December 31, 2013	680,002		16,682		696,684		62.02

Restricted Stock

In conjunction with the Realpoint acquisition in May 2010, we issued 199,174 shares of restricted stock to the selling employee-shareholders under the 2004 Stock Incentive Plan. The restricted stock vests ratably over a five-year period from the acquisition date and may be subject to forfeiture if the holder terminates his or her employment during the vesting period.

Because of the terms of the restricted share agreements prepared in conjunction with the Realpoint acquisition, we account for the grant of restricted shares as stock-based compensation expense and not as part of the acquisition consideration.

We measured the fair value of the restricted stock on the date of grant based on the closing market price of our common stock on the day prior to the grant. We amortize the fair value of $9,363,000 to stock-based compensation expense over the vesting period. The stock-based compensation expense recorded in 2012 and 2011 includes approximately $3,238,000 and $396,000, respectively, of expense recognized upon the accelerated vesting of restricted stock. We have assumed that all of the remaining restricted stock will ultimately vest, and therefore we have not incorporated a forfeiture rate for purposes of determining the stock-based compensation expense.

Stock Options

Stock options granted to employees vest ratably over a four-year period. Grants to our non-employee directors vest ratably over a three-year period. All grants expire 10 years after the date of grant. Almost all of the outstanding options granted under the 2004 Stock Incentive Plan have a premium price feature in which the exercise price increases over the term of the option at a rate equal to the 10-year Treasury bond yield as of the date of grant. Options granted under the 2011 Plan have an exercise price equal to the fair market value on the grant date.

In May 2011, we granted 86,106 stock options under the 2004 Stock Incentive Plan. In November 2011, we granted 6,095 stock options under the 2011 Plan. We estimated the fair value of the options on the grant date using a Black-Scholes option-pricing model. The weighted average fair value of options granted during 2011 was $23.81 per share, based on the following assumptions:



Assumptions for Black-Scholes Option Pricing Model
Expected life (years):	7.4
Volatility factor:	35.1	%
Dividend yield:	0.35	%
Interest rate:	2.87	%

The following tables summarize stock option activity in the past three years for our various stock option grants. The first table includes activity for options granted at an exercise price below the fair value per share of our common stock on the grant date; the second table includes activity for all other option grants.



	2013				2012				2011
Options Granted At an Exercise Price Below the Fair Value Per Share on the Grant Date	Underlying Shares		Weighted Average Exercise Price		Underlying Shares		Weighted Average Exercise Price		Underlying Shares		Weighted Average Exercise Price
Options outstanding—beginning of year	282,695		$	20.55	398,859		$	19.72	648,885		$	18.91
Granted	—		—		—		—		—		—
Canceled	(250	)	21.48		(650	)	14.70		—		—
Exercised	(102,886	)	21.09		(115,514	)	20.19		(250,026	)	19.25
Options outstanding—end of year	179,559		21.47		282,695		20.55		398,859		19.72

Options exercisable—end of year	179,559		$	21.47	282,695		$	20.55	398,859		$	19.72



	2013				2012				2011
All Other Option Grants, Excluding Activity Shown Above	Underlying Shares		Weighted Average Exercise Price		Underlying Shares		Weighted Average Exercise Price		Underlying Shares		Weighted Average Exercise Price
Options outstanding—beginning of year	391,784		$	28.98	818,552		$	22.76	1,207,540		$	17.09
Granted	—		—		—		—		92,201		57.42
Canceled	(1,352	)	16.19		(22,330	)	39.75		(1,960	)	16.04
Exercised	(136,460	)	16.84		(404,438	)	16.60		(479,229	)	16.17
Options outstanding—end of year	253,972		36.48		391,784		28.98		818,552		22.76

Options exercisable—end of year	219,449		$	33.18	337,684		$	24.42	726,351		$	18.36

The following table summarizes the total intrinsic value (difference between the market value of our stock on the date of exercise and the exercise price of the option) of options exercised:



($000)	2013		2012		2011
Intrinsic value of options exercised	$	12,801	$	22,526	$	29,899

The table below shows additional information for options outstanding and exercisable as of December 31, 2013:



	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number of Options	Weighted Average Remaining Contractual Life (years)	Weighted Average Exercise Price		Aggregate Intrinsic Value ($000)		Exercisable Shares	Weighted Average Remaining Contractual Life (years)	Weighted Average Exercise Price		Aggregate Intrinsic Value ($000)
$14.70	285	0.93	$	14.70	$	18	285	0.93	$	14.70	$	18
$21.40 - $48.90	361,571	1.17	24.88		19,238		361,571	1.17	24.88		19,238
$57.28 - $59.35	71,675	7.52	57.46		1,479		37,152	7.52	57.45		710

$14.70 - $59.35	433,531	2.22	30.26		$	20,735	399,008	1.76	27.91		$	19,966

Vested or Expected to Vest
$14.70 - $59.35	433,531	2.22	$	30.26	$	20,735

The aggregate intrinsic value in the table above represents the total pretax intrinsic value all option holders would have received if they had exercised all outstanding options on December 31, 2013. The intrinsic value is based on our closing stock price of $78.09 on that date.

Excess Tax Benefits Related to Stock-Based Compensation

FASB ASC 718, Compensation—Stock Compensation, requires that we classify the cash flows that result from excess tax benefits as financing cash flows. Excess tax benefits correspond to the portion of the tax deduction taken on our income tax return that exceeds the amount of tax benefit related to the compensation cost recognized in our Statement of Income. The following table summarizes our excess tax benefits for the past three years:



($000)	2013		2012		2011
Excess tax benefits related to stock-based compensation	$	5,898	$	7,210	$	9,525