EQUITY-BASED COMPENSATION

As a part of the May 2007 Restructuring, the OCGH unitholders exchanged their interests in the Predecessor Company for units in OCGH. As a result of the service requirement, the OCGH units subject to the risk of forfeiture, equal to $4,644.8 million based on the fair value of Class A units sold in the 2007 Private Offering, were charged to compensation expense over the service period from May 25, 2007 through January 2, 2012. These units vested 20% on each of January 2, 2008, 2009, 2010, 2011 and 2012. The Company expensed this equity-based compensation with a corresponding increase in capital.

Pursuant to the Company’s exchange agreement, as amended, the general partner of OCGH may elect at its discretion to declare an open period during which an OCGH unitholder may exchange its unrestricted vested OCGH units for, at the option of the Company’s board of directors, Class A units, an equivalent amount of cash based on then-prevailing market prices, other consideration of equal value, or any combination of the foregoing. The general partner determines the number of units eligible for exchange within a given open period and, if the OCGH unitholders request to exchange a number of units in excess of the amount eligible for exchange, the general partner determines which units to exchange taking into account appropriate factors. Upon approval by the Company’s board of directors, OCGH units selected for exchange in accordance with the foregoing will be exchanged, at the option of the board of directors, into Class A units, an equivalent amount of cash based on then-prevailing market prices, other consideration of equal value, or any combination of the foregoing pursuant to the terms of the exchange agreement.

The exchange agreement generally provides that (a) such OCGH units will be acquired by the Intermediate Holding Companies in exchange for, at the option of the Company’s board of directors, Class A units, an equivalent amount of cash based on then-prevailing market prices, other consideration of equal value, or any combination of the foregoing, (b) the OCGH units acquired by the Intermediate Holding Companies may then be redeemed by OCGH in exchange for Oaktree Operating Group units, (c) the Intermediate Holding Companies may exchange Oaktree Operating Group units with each other such that, immediately after such exchange, each Intermediate Holding Company holds Oaktree Operating Group units only in the Oaktree Operating Group entity for which such Intermediate Holding Company serves as the general partner and (d) the Company will cancel a corresponding number of Class B units. The partnership agreement of OCGH generally provides that, in the event an employee’s employment with the Oaktree Operating Group is terminated for any reason, the unvested portion of his or her OCGH units will be forfeited, unless the termination is due to his or her death or disability.

The Company utilizes a contemporaneous valuation report in determining fair value at the date of grant for OCGH unit awards. Each valuation report is based on the market price of Oaktree's Class A units, which were traded on the GSTrUE OTC market prior to listing on the NYSE. A discount is then applied to the Class A unit market price to reflect the lack of marketability for the OCGH units. The determination of an appropriate discount for lack of marketability is based on a review of discounts on the sale of restricted shares of publicly traded companies and multi-period put-based quantitative methods. Factors that influence the size of the discount for lack of marketability include (a) the estimated time it would take for an OCGH unitholder to exchange units into Class A units, (b) the volatility of the Company's business, (c) thin trading of the Class A units, and (d) prior to the initial public offering in April 2012, restrictive trading of the Class A units. Each of these factors is subject to significant judgment.

The estimated time-to-liquidity assumption has increased from approximately three years in the first quarter of 2011 to approximately five years in the most recent valuation in 2013. The estimated time to liquidity is influenced primarily by the need for (a) the general partner of OCGH to elect in its discretion to declare an open period during which an OCGH unitholder may exchange his or her unrestricted vested OCGH units for, at the option of the Company's board of directors, Class A units on a one-for-one basis, an equivalent amount of cash based on then-prevailing market prices, other consideration of equal value or any combination of the foregoing, and (b) the approval of the Company's board of directors to exchange such OCGH units into any of the foregoing. Board approval is based primarily on the objective of maintaining an orderly market for Oaktree's units, but may take into account any other factors that the board may deem appropriate in its sole discretion. Volatility is estimated from historical and implied volatilities of comparable public alternative asset management companies. Prior to the Company's initial public offering in April 2012, three comparable publicly-owned alternative asset managers were used in the volatility calculation. Subsequent to the Company's initial public offering in April 2012, three additional comparable companies, in addition to the Company, were included in the volatility calculations.

In valuing employee unit grants, the discount percentage applied to the Class A then-prevailing trading price was 30% for units granted in the three-year period ended December 31, 2013, except for those units granted in the first quarter of 2012 and after the first quarter of 2013, for which the discount was 25%. The decline in the discount percentage in the first quarter of 2012 was primarily attributable to declining volatility. The subsequent increase in the discount percentage in the third quarter of 2012 was primarily due to an increase in the estimated time to liquidity, while the decline in the discount rate after the first quarter of 2013 was primarily attributable to declining volatility. The calculation of compensation expense assumes a forfeiture rate of up to 1.5% annually, based on expected employee turnover. Compensation expense is revised annually or more frequently, as necessary, to adjust for actual forfeitures and to reflect expense only for those units that ultimately vest. In each period presented, forfeitures were not materially different from the assumed rate.

A total of 4,954,976 OCGH units were awarded and issued pursuant to the 2007 Oaktree Capital Group Equity Incentive Plan (the “2007 Plan”) before the Plan was discontinued on March 28, 2012. As of December 31, 2013, a maximum of 22,567,265 units have been authorized to be awarded pursuant to the 2011 Oaktree Capital Group, LLC Equity Incentive Plan (the “2011 Plan”), and 3,206,379 units (including 15,000 phantom units) have been awarded (of which 3,016,379 have been issued) under the 2011 Plan. Units under the 2011 Plan can be awarded in the form of options, unit appreciation rights, restricted unit awards, unit bonus awards, phantom equity awards or other unit-based awards. Each unit, when issued, represents an indirect interest in one Oaktree Operating Group unit. Total vested and unvested Class A and OCGH units issued and outstanding were 151,056,717 as of December 31, 2013.

In 2013, the Company granted 663,000 restricted OCGH units and 100,000 deferred OCGH units to certain of its employees and 8,508 Class A units to certain of its directors, subject to equal annual vesting generally over periods of five to ten years. As of December 31, 2013, the Company expected to recognize compensation expense on its unvested equity-based awards of $100.5 million over a weighted average period of 5.0 years. Please see note 17 for additional equity awards granted subsequent to December 31, 2013.

A summary of the status of the Company’s unvested equity-based awards as of December 31, 2013 and a summary of changes for the three years then ended are presented below (actual dollars per unit):



	Class A Units				Class C Units				OCGH Units
	Number of Units		Weighted Average Grant Date Fair Value		Number of Units		Weighted Average Grant Date Fair Value		Number of Units		Weighted Average Grant Date Fair Value
Balance, December 31, 2010	—		$	—	1,800		$	24.75	44,867,807		$	43.48
Granted	—		—		—		—		1,523,300		25.12
Vested	—		—		(600	)	24.75		(22,229,038	)	43.29
Forfeited	—		—		—		—		(31,500	)	25.16
Balance, December 31, 2011	—		—		1,200		24.75		24,130,569		41.13
Granted	14,969		43.14		—		—		2,457,502		32.55
Vested	(3,900	)	44.00		(600	)	24.75		(21,652,473	)	43.11
Exchanged	600		24.75		(600	)	24.75		—		—
Forfeited	—		—		—		—		(33,250	)	28.74
Balance, December 31, 2012	11,669		41.91		—		—		4,902,348		28.17
Granted	8,508		47.83		—		—		763,000		34.60
Vested	(3,595	)	40.07		—		—		(1,152,026	)	24.10
Forfeited	—		—		—		—		(47,600	)	29.54
Balance, December 31, 2013	16,582		$	45.34	—		$	—	4,465,722		$	30.30

As of December 31, 2013, unvested units were expected to vest as follows:



	Number of Units	Weighted average Remaining Service Term (Years)
Class A units	16,582	3.5
OCGH units	4,465,722	5.0