EQUITY-BASED COMPENSATION

In December 2011, the Company adopted the 2011 Oaktree Capital Group, LLC Equity Incentive Plan (the “2011 Plan”). The 2011 Plan provides for the granting of options, unit appreciation rights, restricted unit awards, unit bonus awards, phantom equity awards or other unit-based awards to senior executives, directors, officers, certain employees, consultants, and advisors of the Company and its affiliates. As of December 31, 2014, a maximum of 22,658,508 units have been authorized to be awarded pursuant to the 2011 Plan, and 7,047,186 units (including 2,000,000 EVUs and 33,608 phantom units) have been awarded (of which 6,877,186 units have been issued) under the 2011 Plan. A total of 4,954,976 OCGH units were awarded and issued pursuant to the 2007 Oaktree Capital Group Equity Incentive Plan, which was discontinued for future issuances on March 28, 2012. Each Class A and OCGH 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 152,852,620 as of December 31, 2014.

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.

Restricted Unit Awards

In 2014, the Company granted 1,770,418 restricted OCGH units to certain of its employees and 7,164 Class A units to certain of its directors, subject to equal annual vesting generally over periods of three to ten years. As of December 31, 2014, the Company expected to recognize compensation expense on its unvested restricted unit awards of $133.7 million over a weighted average period of 4.6 years. Please see note 18 for additional equity awards granted subsequent to December 31, 2014, as part of the year-end 2014 compensation process.

The Company utilizes a contemporaneous valuation report in determining fair value at the date of grant for OCGH and Class A 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 increased from approximately three years in the first quarter of 2012 to approximately five years in the most recent valuation in 2014. 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 25% for units granted from January 1, 2012 to March 31, 2012, 30% from April 1, 2012 to March 31, 2013, 25% from April 1, 2013 to April 30, 2014, and 20% from May 1, 2014 to December 31, 2014. The increase in the discount percentage beginning April 1, 2012 was primarily due to an increase in the estimated time to liquidity, while the subsequent declines in the discount rate were primarily attributable to lower 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.

The following table summarizes the status of the Company’s unvested restricted unit awards and a summary of changes for the periods presented (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, 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
Granted	7,164		58.88		—		—		1,770,418		43.98
Vested	(4,697	)	44.54		—		—		(1,109,170	)	24.90
Forfeited	—		—		—		—		(55,978	)	34.42
Balance, December 31, 2014	19,049		$	50.63	—		$	—	5,070,992		$	36.21

As of December 31, 2014, unvested restricted unit awards were expected to vest as follows:



	Number of Units	Weighted average Remaining Service Term (Years)
Class A units	19,049	2.8
OCGH units	5,070,992	4.6

Equity Value Units

EVUs represent special limited partnership units in OCGH that entitle the holder the right to receive a one-time special distribution that will be settled in OCGH units, based on value created during the service period (“Term”) in excess of a fixed “Base Value.” The value created will be measured on a per unit basis, based on Class A unit trading prices and certain components of quarterly distributions with respect to interim periods during the Term. EVUs also give the holder the right, subject to service vesting and Oaktree performance relative to the accreting Base Value, to receive certain quarterly distributions from OCGH. EVUs do not entitle the holder to any voting rights.

On December 2, 2014, the Company granted 2,000,000 EVUs to Jay S. Wintrob, its Chief Executive Officer, subject to a five-year cliff vest schedule. As of December 31, 2014, the Company expected to recognize compensation expense on its unvested EVUs of $14.7 million over the next 5.0 years. The grant agreement provides Mr. Wintrob with certain liquidity rights in respect of the one-time special distribution that will be settled in OCGH units. The Company has accounted for those EVUs subject to such liquidity rights as liability-classified awards. As of December 31, 2014, there were 1,000,000 equity-classified EVUs and 1,000,000 liability-classified EVUs outstanding. Please see note 18 for information regarding subsequent amendments made to certain terms of the EVUs granted to Mr. Wintrob.

The fair value of EVUs was determined using a Monte Carlo simulation model at the grant date for equity-classified EVUs and at the period end date for liability-classified EVUs. The fair value is affected by the Class A unit trading price as well as assumptions regarding a number of complex and subjective variables, including expected Class A unit trading price volatility, risk-free interest rate, expected distributions and projected exercise behavior. The fair value of equity-classified EVUs reflects a 20% discount for lack of marketability for OCGH units that will be issued upon vesting as discussed above, and the calculation of the expense assumes a 0% forfeiture rate.