Share-Based Compensation and Employee Ownership Plans

Share-based compensation plans in place after the Transactions

The Company issues share based compensation under Cowen Holdings' previously established 2006 Equity and Incentive Plan, the 2007 Equity and Incentive Plan and the Cowen Group, Inc. 2010 Equity and Incentive Plan (collectively, the “Equity Plans”). The Equity Plans permit the grant of options, restricted shares, restricted stock units and other equity based awards to the Company's employees, consultants and directors for up to 17,725,000 shares of common stock. Stock options granted generally vest over two to five year periods and expire seven years from the date of grant. Restricted shares and restricted share units issued may be immediately vested or may generally vest over a two to five year period. As of December 31, 2011, there were approximately 0.7 million shares available for future issuance under the Equity Plans. On January 1, 2012, 8.2 million shares were added to the shares available under the 2010 Equity and Incentive Plan to bring the total equal to 7.5% of the Company's outstanding shares of stock.

In addition to the Equity Plans, certain employees of the Company were issued RCG membership interests by RCG, a related party of the Company, in connection with the Transactions (the “RCG Grants”). Substantially all of the assets owned by RCG consist of shares of common stock of the Company. Accordingly, upon withdrawal of capital from RCG, members receive either distributions in kind of shares of common stock of the Company, or the proceeds from the sale of shares of the Company's common stock attributable to their capital accounts. The RCG Grants are subject to a service condition and vest to each employee over a period of approximately three years. Any RCG Grants forfeited are redistributed to the remaining stakeholders in RCG, which includes both employees and non-employees. The RCG Grants represent awards to employees of the Company by a related party, as compensation for services provided to the Company. As such, the expense related to these grants is included in the compensation expense of the Company, with a corresponding credit to stockholders equity.

The Company measures compensation cost for share based awards according to the equity method. In accordance with the expense recognition provisions of those standards, the Company amortizes unearned compensation associated with share based awards on a straight-line basis over the vesting period of the option or award. In relation to awards under the Equity Plans, the Company recognized expense of $22.9 million, $14.1 million and $2.3 million for the years ended December 31, 2011, 2010 and 2009, respectively. The income tax effect recognized for the Equity Plans was a benefit of $11.5 million, $6 million and $1 million for the years ended December 31, 2011, 2010 and 2009, respectively.

In relation to awards under the RCG Grants, the Company recognized expense of $5.4 million, $6.5 million and $1.3 million for the years ended December 31, 2011, 2010 and 2009, respectively. The income tax effect recognized for the RCG Grants was a benefit of $2.1 million, $2.6 million and $0.5 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Stock Options

The fair value of each option award is estimated on the date of grant utilizing a Black-Scholes option valuation model that uses the following assumptions:

Expected term. Expected term represents the period of time that options granted are expected to be outstanding. The Company elected to use the "simplified" calculation method, as applicable to companies that lack extensive historical data. The mid-point between the vesting date and the contractual expiration date is used as the expected term under this method.

Expected volatility. Based on the lack of sufficient historical data for the Company's own shares, the Company bases its expected volatility on a representative peer group.

Risk free rate. The risk-free rate for periods within the expected term of the option is based on the interest rate of a traded zero-coupon U.S. Treasury bond with a term equal to the options' expected term on the date of grant.

Dividend yield. The Company has not paid and does not expect to pay dividends in the foreseeable future. Accordingly, the assumed dividend yield is zero.

In connection with the Transactions, 892,782 stock options of Cowen Holdings common stock outstanding at the effective time of the merger were converted into stock options of the Company on a one-for-one basis. There were no other stock options granted or exercised during the years ended December 31, 2011 and 2010.

The following table summarizes the Company's stock option activity for the year ended December 31, 2011:



	Shares Subject to Option		Weighted Average Exercise Price/Share			Weighted Average Remaining Term	Aggregate Intrinsic Value(1)
						(in years)	(dollars in thousands)
Balance outstanding at December 31, 2009	892,782		$	15.06		3.81
Options granted	150,003		3.96		(2)
Options acquired	—		—
Options exercised	—		—
Options forfeited	—		—
Options expired	(149,353	)	16.00
Balance outstanding at December 31, 2010	893,432		$	13.04		3.5
Options granted	—		—
Options acquired	—		—
Options expired	(27,004	)	16
Balance outstanding at December 31, 2011	866,428		$	12.95		2.53	$	—
Options exercisable at December 31, 2010	743,429		$	14.87		2.87	$	—
Options exercisable at December 31, 2011	716,425		$	14.83		1.89	$	—


(1)	Based on the Company's closing stock price of $2.59 on December 31, 2011 and $4.69 on December 31, 2010.


(2)	The weighted average grant date fair value was $1.84.

As of December 31, 2011, the unrecognized compensation expense related to the Company's grant of stock options was insignificant.

Restricted Shares and Restricted Stock Units Granted to Employees

In connection with the Transactions, 185,828 restricted shares of Cowen Holdings common stock outstanding at the effective time of the merger were converted into restricted shares of the Company on a one-for-one basis. Restricted shares and restricted stock units are referred to collectively as restricted stock. The following table summarizes the Company's restricted share and restricted stock unit activity for the year ended December 31, 2011:



	Nonvested Restricted Shares and Restricted Stock Units		Weighted-Average Grant Date Fair Value
Balance outstanding at December 31, 2009	2,554,182		$	6.90
Granted	6,220,608		4.61
Vested	(1,561,317	)	5.48
Cancelled	(856,438	)	4.15
Forfeited	(569,014	)	5.26
Balance outstanding at December 31, 2010	5,788,021		$	5.39
Granted	6,153,187		4.27
Vested	(3,979,730	)	3.38
Cancelled	(7,735	)	4.31
Forfeited	(436,061	)	4.82
Balance outstanding at December 31, 2011	7,517,682		$	5.57

The fair value of restricted stock is determined based on the number of shares granted and the quoted price of the Company's common stock on the date of grant.

As of December 31, 2011, there was $24.6 million of unrecognized compensation expense related to the Company's grant of nonvested restricted shares and restricted stock units to employees. Unrecognized compensation expense related to nonvested restricted shares and restricted stock units granted to employees is expected to be recognized over a weighted-average period of 1.28 years.

RCG Grants

The following table summarizes the Company's RCG Grants activity for the year ended December 31, 2011:



	Nonvested RCG Grants			Weighted-Average Grant Date Fair Value
Balance outstanding at December 31, 2009	2,859,426			$	7.30
Granted	—			—
Vested	(91,502	)		—
Forfeited	(129,846	)	*	—
Balance outstanding at December 31, 2010	2,638,078			$	7.30
Granted	—			—
Vested	(1,297,726	)		7.30
Forfeited	(42,139	)	*	7.30
Balance outstanding at December 31, 2011	1,298,213			$	—

* Forfeitures of non vested RCG Grants are reallocated to other interests within RCG Holdings, LLC.

The fair value of the RCG Grants was determined based on the number of the Company's shares underlying the RCG membership interest and the quoted price of the Company's common stock on the date of the Transactions.

As of December 31, 2011 there was $4.7 million of unrecognized compensation expense related to the Company's RCG Grants. Unrecognized compensation expense related to RCG Grants is expected to be recognized over a weighted-average period of 0.83 years.

Restricted Shares and Restricted Stock Units Granted to Non-employee Board Members

There were 163,554 restricted stock units awarded, which were immediately vested and expensed upon grant, during the year ended December 31, 2011. Vested awards of 73,480 were delivered to non-employee members of the Company's Board of Directors during the year ended December 31, 2011. As of December 31, 2011 there were 188,128 restricted stock units outstanding for awards to non-employee members of the Company's Board of Directors.

Employee ownership plans in place prior to the Transactions

REOP Program

Prior to the Transactions, RCG sponsored an employee ownership plan ("REOP Program") for certain key employees. Upon the close of the Transactions, all unvested REOP units immediately vested and the plan ceased. The REOP Program provided for the granting of equity interests in RCG to certain participants ("Equity REOP"). Other participants had been granted non-equity awards which tracked the returns of an equity interest in RCG ("Phantom REOP"). Both Equity REOP and Phantom REOP awards vested over a specified service period. Once vested, Equity REOP awards converted to ownership interests in RCG and Phantom REOP awards were settled in cash. Phantom REOP awards had all the same rights and privileges as Equity REOP awards except for their vesting option. Upon vesting RCG settled a portion of the Equity REOP awards in cash in order to fund minimum tax withholding requirements. It was the intention of RCG to settle in cash certain Equity REOP awards in excess of minimum tax withholding requirements. As a result, the Company applied variable accounting for both the Equity REOP and Phantom REOP awards and recorded their fair value as a liability in the consolidated statements of financial condition.

As all unvested Equity REOP and Phantom REOP units vested upon the close of the Transactions, the Company expensed any remaining unvested portions of these awards in November 2009 and the plan was closed. Compensation expense related to the REOP Program was $2.9 million for the year ended December 31, 2009.

For the years ended December 31, 2011, 2010, and 2009, the Company did not capitalize as an asset any compensation expense and had no income tax benefit related to the REOP Program compensation arrangement. There was no compensation payable and no unrecognized compensation expense related to REOP Program awards as of December 31, 2011 and 2010.

The following summarizes the REOP Program awards activity for the year ended December 31, 2009:



	(dollars in thousands)
Unvested awards at January 1, 2009	$	7,334
Awards granted during 2009	—
Awards vested/exercised during 2009	(6,987		)
Awards expired during 2009	—
Awards forfeited during 2009	(347		)
Unvested awards at December 31, 2009	$	—

For the year ended December 31, 2009, cash used to settle awards under the REOP Program was $1.1 million.

Rapp Program

Ramius Alternative Solutions LLC, a wholly owned subsidiary of the Company, sponsors an employee Profit Participation Plan ("Rapp Program") for key employees. The Rapp Program provides for the granting of equity interests in related entities with initial grant values based on a certain percentage of profits of Ramius Alternative Solutions LLC. One half of the amount granted represents equity units in one of the consolidated fund-of-funds products managed by Ramius Alternative Solutions LLC chosen by senior management. Prior to the Transactions, the other half of the amount granted represents equity units of RCG. For any future grants under the Rapp Program, the other half of the amount granted will represent equity units of the Company.

These grants, as well as any income thereon, vest over a specified service period, generally four years. Similar to the REOP Program, on vesting, the Company may settle a portion of the awards in cash in order to fund tax withholding requirements. It was the intention of the Company to settle in cash certain awards in excess of minimum tax withholding requirements. As a result, the Company classified Rapp Program awards as liabilities in the consolidated financial statements. Upon the close of the Transactions, all unvested Rapp Program awards immediately vested.

For the years ended December 31, 2011, 2010 and 2009, there was no award activity in the Rapp Program. Compensation expense related to the Rapp Program was $1.3 million for the year ended December 31, 2009. There was no compensation payable and no unrecognized compensation expense related to Rapp Program awards as of December 31, 2011 or 2010.

The following summarizes the Rapp Program awards activity for the year ended December 31, 2009:



	(dollars in thousands)
Unvested awards at January 1, 2009	$	6,241
Awards granted during 2009	—
Awards vested/exercised during 2009	(5,857		)
Awards expired during 2009	—
Awards forfeited during 2009	(384		)
Unvested awards at December 31, 2009	$	—

For the year ended December 31, 2009, cash used to settle awards under the Rapp Program was $0.7 million.