7. Share-Based Payments

The Company measures the cost of services received from employees, directors and consultants in exchange for an award of equity instruments based on the fair value of the award on the date of grant, and recognizes compensation expense on a straight-line basis over the vesting period or over the period ending on the date a participant becomes eligible for retirement, if earlier.

The Company granted approximately 1.6 million stock options during both the nine months ended June 30, 2014 and the nine months ended June 30, 2013. In addition the Company granted approximately 247,000 and 128,000 restricted share awards to its employees and consultants during the nine months ended June 30, 2014 and 2013, respectively. These amounts include 130,952 stock options issued and 210,820 restricted stock awards made during the three months ended June 30, 2014 in connection with the executive management transition plan announced in May 2014. Upon issuance of such grants, the Company recognized accelerated share-based compensation expense of $8.8 million and $5.9 million in the nine months ended June 30, 2014 and 2013, respectively, in connection with certain retirement eligible employees who are eligible to continue vesting awards upon retirement under the provisions of the Sally Beauty Holdings, Inc. 2010 Omnibus Incentive Plan (the “2010 Plan”) and certain predecessor share-based compensation plans such as the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan (the “2007 Plan”). During the three months ended June 30, 2014, the accelerated share-based compensation expense was $3.5 million. In addition, the Company granted approximately 27,000 and 36,000 restricted stock units to its non-employee directors during the nine months ended June 30, 2014 and 2013, respectively.

The following table presents the total compensation cost charged against income and included in selling, general and administrative expenses for all share-based compensation arrangements and the related tax benefits recognized in our consolidated statements of earnings (in thousands):

	Three Months Ended June 30,				Nine Months Ended June 30,
	2014		2013		2014		2013
Share-based compensation expense	$	6,507	$	3,190	$	18,297	$	15,503
Income tax benefit related to share-based compensation expense	$	2,472	$	1,161	$	6,819	$	5,731

Stock Option Awards

Each option has an exercise price equal to the closing market price of the Company’s common stock on the date of grant and generally has a maximum term of 10 years. Options generally vest ratably over a four year period and are generally subject to forfeiture until the vesting period is complete, subject to certain retirement provisions contained in the 2010 Plan and certain predecessor share-based compensation plans such as the 2007 Plan.

The following table presents a summary of the activity for the Company’s stock option awards for the nine months ended June 30, 2014:

	Number of Outstanding Options (in Thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value (in Thousands)
Outstanding at September 30, 2013	10,408		$	12.89	6.2	$	138,139
Granted	1,596		26.22
Exercised	(2,207	)	9.90
Forfeited or expired	(288	)	21.16
Outstanding at June 30, 2014	9,509		$	15.57	6.4	$	92,175

Exercisable at June 30, 2014	5,411		$	10.92	5.1	$	76,636

The following table summarizes additional information about stock options outstanding under the Company’s share-based compensation plans:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding at June 30, 2014 (in Thousands)	Weighted Average Remaining Contractual Term (in Years)	Weighted Average Exercise Price		Number Exercisable at June 30, 2014 (in Thousands)	Weighted Average Exercise Price
$2.00 – 9.66	3,145	3.9	$	7.60	3,145	$	7.60
$11.39–26.30	6,364	7.5	19.50		2,266	15.52
Total	9,509	6.4	$	15.57	5,411	$	10.92

The Company uses the Black-Scholes option pricing model to value the Company’s stock options for each stock option award. Using this option pricing model, the fair value of each stock option award is estimated on the date of grant. The fair value of the Company’s stock option awards is expensed on a straight-line basis over the vesting period (generally four years) of the stock options or to the date a participant becomes eligible for retirement, if earlier.

The weighted average assumptions relating to the valuation of the Company’s stock options are as follows:

	Nine Months Ended June 30,
	2014		2013
Expected life (in years)	5.0		5.0
Expected volatility for the Company’s stock	47.3	%	56.3	%
Risk-free interest rate	1.3	%	0.8	%
Dividend yield	0.0	%	0.0	%

The expected life of options represents the period of time that the options granted are expected to be outstanding and is based on historical experience of employees of the Company who have been granted stock options. The risk-free interest rate is based on the zero-coupon U.S. Treasury notes with a comparable term as of the date of the grant. Since the Company does not currently expect to pay dividends, the dividend yield used is 0%.

The weighted average fair value at the date of grant of the stock options issued by the Company in the nine months ended June 30, 2014 and 2013 was $11.08 and $11.29 per option, respectively. The total intrinsic value of options exercised during the nine months ended June 30, 2014 was $40.9 million. The cash proceeds from these option exercises were $21.9 million and the tax benefit realized from these option exercises was $15.1 million.

At June 30, 2014, approximately $16.3 million of total unrecognized compensation costs related to unvested stock option awards are expected to be recognized over the weighted average period of 2.4 years.

Stock Awards

Restricted Stock Awards

The Company from time to time grants restricted stock awards to employees and consultants under the 2010 Plan. A restricted stock award is an award of shares of the Company’s common stock (which have full voting and dividend rights but are restricted with regard to sale or transfer) the restrictions over which lapse ratably over a specified period of time (generally five years). Restricted stock awards are independent of stock option grants and are generally subject to forfeiture if employment terminates prior to these restrictions lapsing, subject to certain retirement provisions of the 2010 Plan and certain predecessor share-based compensation plans such as the 2007 Plan.

The fair value of the Company’s restricted stock awards is expensed on a straight-line basis over the period (generally five years) in which the restrictions on these stock awards lapse (“vesting”) or over the period ending on the date a participant becomes eligible for retirement, if earlier. For these purposes, the fair value of the restricted stock award is determined based on the closing market price of the Company’s common stock on the date of grant.

During the three months ended June 30, 2014, the Company granted 210,820 restricted stock awards in connection with the executive management transition plan announced in May 2014.

The following table presents a summary of the activity for the Company’s restricted stock awards for the nine months ended June 30, 2014:

Restricted Stock Awards	Number of Shares (in Thousands)		Weighted Average Fair Value Per Share		Weighted Average Remaining Vesting Term (in Years)
Unvested at September 30, 2013	337		$	16.30	3.1
Granted	247		26.57
Vested	(108	)	12.95
Forfeited	(33	)	21.10
Unvested at June 30, 2014	443		$	22.49	3.5

At June 30, 2014, approximately $3.8 million of total unrecognized compensation costs related to unvested restricted stock awards are expected to be recognized over the weighted average period of 3.5 years.

Restricted Stock Units

The Company currently grants Restricted Stock Unit (“RSU” or “RSUs”) awards, which generally vest within one year from the date of grant, pursuant to the 2010 Plan. To date, the Company has only granted RSU awards to its non-employee directors. RSUs represent an unsecured promise of the Company to issue shares of the Company’s common stock. Unless forfeited prior to the vesting date, RSUs are converted into shares of the Company’s common stock generally on the vesting date. An independent director who receives an RSU award may elect, upon receipt of such award, to defer until a later date delivery of the shares of common stock of the Company that would otherwise be issued to such director on the vesting date. RSUs granted prior to the fiscal year 2012, are generally retained by the Company as deferred stock units that are not distributed until six months after the independent director’s service as a director terminates. RSUs are independent of stock option grants and are generally subject to forfeiture if service terminates prior to the vesting of the units. Participants have no voting rights with respect to unvested RSUs. Under the 2010 Plan, the Company may settle the vested deferred stock units with shares of the Company’s common stock or in cash.

The Company expenses the cost of the RSUs, which is determined to be the fair value of the RSUs at the date of grant, on a straight-line basis over the vesting period (generally one year). For these purposes, the fair value of the RSU is determined based on the closing market price of the Company’s common stock on the date of grant.

The following table presents a summary of the activity for the Company’s RSUs for the nine months ended June 30, 2014:

Restricted Stock Units	Number of Shares (in Thousands)	Weighted Average Fair Value Per Share		Weighted Average Remaining Vesting Term (in Years)
Unvested at September 30, 2013	—	$	—	—
Granted	27	26.30
Vested	—	—
Forfeited	—	—
Unvested at June 30, 2014	27	$	26.30	0.3

At June 30, 2014, approximately $0.2 million of total unrecognized compensation costs related to unvested RSUs are expected to be recognized over the weighted average period of 0.3 years.