Stock-Based Compensation Plans

12 Months Ended

Oct. 31, 2020

Stock-Based Compensation Plans [Abstract]

Stock-Based Compensation Plans

13.Stock-Based Compensation Plans

Compensation expense recognized by the Company related to its stock-based compensation plans for the years ended October 31, 2020, 2019 and 2018 was as follows:

(in thousands)		2020		2019		2018
Omnibus Incentive Plans:
Restricted stock	$	209,217	$	57,821	$	52,312
Stock options		23,234		21,949		23,531
Deferred stock units		1,745		915		1,008
Employee Stock Purchase Plans		525		355		793
Employee Stock Purchase Incentive Plan		1,096		512		877
Atlanta Capital Plan		1,604		2,280		2,969
Atlanta Capital Phantom Incentive Plan		1,810		1,087		567
Parametric Plan		-		3,461		3,177
Parametric Phantom Incentive Plan		55		3,533		2,821
Total stock-based compensation expense	$	239,286	$	91,913	$	88,055

The total income tax benefit recognized for stock-based compensation arrangements was $58.2 million, $21.3 million and $21.7 million for the years ended October 31, 2020, 2019 and 2018, respectively.

Omnibus Incentive Plans

The 2013 Omnibus Incentive Plan, as amended and restated (2013 Plan), which is administered by the Compensation Committee of the Board, allows for awards of options to acquire shares of the Company’s Non-Voting Common Stock, restricted shares of the Company’s Non-Voting Common Stock (restricted stock awards), restricted stock units and deferred stock units relating to the Company’s Non-Voting Common Stock to eligible employees and non-employee Directors. The 2013 Plan also allows for the issuance of shares to settle phantom incentive units awarded to employees of Atlanta Capital and Parametric. The 2013 Plan contains change in control provisions that may accelerate the vesting of certain awards. A total of 34.5 million shares of Non-Voting Common Stock have been reserved for issuance under the 2013 Plan. Through October 31, 2020, 11.1 million shares of restricted stock, options to purchase 17.9 million shares and 0.1 million shares to settle phantom incentive units have been issued pursuant to the 2013 Plan.

Restricted stock units

Pursuant to the terms of the Agreement and Plan of Merger with Morgan Stanley (Merger Agreement), any stock-based awards granted by the Company subsequent to obtaining the consent of the Voting Trust to approve and adopt the Merger Agreement on October 7, 2020 through the closing date of the merger will be granted in the form of restricted stock units. Each restricted stock unit granted under the 2013 Plan represents the forfeitable right to receive one share of the Company’s Non-Voting Common Stock upon vesting. Restricted stock units are accounted for as equity awards and vest over three years pursuant to a graded vesting schedule. Holders of restricted stock units have forfeitable rights to dividend equivalents equal to the dividends declared on the Company’s Non-Voting Common Stock during the vesting period

through the closing date of the merger. Dividend equivalents are reinvested in the form of additional restricted stock units that are credited to the corresponding restricted stock unit award when the Company pays dividends (including the special cash dividend described further in Note 15) on its Non-Voting Common Stock, and vest at the same time as the corresponding restricted stock unit award. The fair value of each restricted stock unit is indexed to the unadjusted observable closing market price of the Company’s Non-Voting Common Stock. As of October 31, 2020, no restricted stock units have been awarded under the 2013 Plan.

Subsequent event

In November 2020, the Company granted a total of 1.7 million restricted stock units under the 2013 Plan at a grant date fair value of $60.43 per unit. Separately, as discussed further in Note 15, the Company paid a special cash dividend of $4.25 per share on December 18, 2020. On that date, 0.1 million of additional restricted stock units were credited to the corresponding restricted stock unit awards at a fair value of $65.29 per unit.

Restricted stock awards

Restricted stock awards granted under the 2013 Plan are accounted for as equity awards and vest over five years pursuant to a graduated vesting schedule. Holders of restricted stock awards have forfeitable rights to dividends equal to the dividends declared on the Company’s Non-Voting Common Stock during the vesting period. These dividends are not paid in cash to holders of restricted stock until the awards vest.

A summary of restricted stock activity for the year ended October 31, 2020 is as follows:

		Weighted-
		Average
		Grant Date
(share amounts in thousands)	Shares	Fair Value
Unvested, beginning of period	5,377	$	42.72
Granted	1,694		46.36
Vested	(6,957)		43.57
Forfeited	(114)		44.59
Unvested, end of period	-	$	-

The total fair value of restricted stock vested during the years ended October 31, 2020, 2019 and 2018 was $303.1 million, $52.7 million and $47.2 million, respectively.

Pursuant to the terms of the change in control provisions for restricted stock awards under the 2013 Plan, upon obtaining the consent of the Voting Trust to approve and adopt the Merger Agreement on October 7, 2020, the outstanding and unvested restricted stock awards held by employees were immediately vested in full. As a result, the Company recognized the remaining grant-date fair-value attributable to these awards of $140.7 million as compensation expense on that date.

Subsequent event

The terms of the Merger Agreement with Morgan Stanley contemplate the payment of a special cash dividend of $4.25 per share on the Company’s Common Stock. The Company declared the special cash dividend on November 23, 2020 to shareholders of record on December 4, 2020. The dividend was paid on December 18, 2020. In addition to receiving the special dividend payment on shares of the Company’s

Common Stock held on the record date, current and former employees also received a cash payment equivalent to the special dividend amount on restricted shares that were sold to the Company upon vesting of their restricted stock awards to meet payroll tax withholding obligations. Payments in lieu of the special dividend on restricted shares sold to meet payroll tax withholding obligations totaling $7.5 million will be recorded as compensation expense in the first quarter of fiscal 2021.

Stock options

Options to purchase Non-Voting Common Stock granted under the 2013 Plan and predecessor plans are accounted for as equity awards. Stock options expire ten years from the date of grant and vest over five years pursuant to a graduated vesting schedule and may not be granted with an exercise price that is less than the fair market value of the stock as of the close of business on the date of grant. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model incorporates assumptions as to dividend yield, expected volatility, an appropriate risk-free interest rate and the expected life of the option. Many of these assumptions require management’s judgment. The dividend yield assumption represents the Company’s expected dividend yield based on its historical dividend payouts and the stock price at the date of grant. The expected volatility assumption is based upon the historical price fluctuations of the Company’s Non-Voting Common Stock. The Company uses historical data to estimate the expected life of options granted. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve at the time of grant.

The weighted-average fair values per share of stock options granted during the years ended October 31, 2020, 2019 and 2018 using the Black-Scholes option valuation model were as follows:

		2020		2019		2018
Weighted-average grant date fair value
of options granted	$	7.41	$	9.07	$	10.55
Assumptions:
Dividend yield		3.1% to 4.60%		3.1% to 3.50%		2.4%
Expected volatility		23% to 24%		24% to 31%		24%
Risk-free interest rate		0.50% to 1.60%		2.60% to 3.10%		2.30% to 2.80%
Expected life of options		7.2 years		7.2 years		7.2 years

A summary of stock option activity for the year ended October 31, 2020 is as follows:

(share and intrinsic value amounts in thousands)	Shares	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Options outstanding, beginning of period	17,599	$	37.22
Granted	2,888		46.21
Exercised	(3,390)		31.78
Forfeited/expired	(25)		40.78
Options outstanding, end of period	17,072	$	39.81	5.8	$	341,062
Options exercisable, end of period	8,190	$	35.68	4.0	$	197,436

The Company received $105.6 million, $43.5 million and $68.4 million related to the exercise of options for the fiscal years ended October 31, 2020, 2019 and 2018, respectively. Shares issued upon exercise of options represent newly issued shares. The total intrinsic value of options exercised during the years ended October 31, 2020, 2019 and 2018 was $63.8 million, $23.4 million and $65.1 million, respectively. The total fair value of options that vested during the year ended October 31, 2020 was $22.4 million.

As of October 31, 2020, there was $37.5 million of compensation cost related to unvested stock options granted under the 2013 Plan and predecessor plans not yet recognized. That cost is expected to be recognized over a weighted-average period of 2.3 years.

Pursuant to the terms of the Merger Agreement with Morgan Stanley, upon the completion of the proposed acquisition of Eaton Vance by Morgan Stanley, each then outstanding and unexercised stock option, whether vested or unvested, will be deemed to have been vested in full, and cancelled and converted into the right to receive a cash payment at closing.

Subsequent event

The terms of the Merger Agreement with Morgan Stanley contemplate the payment of an amount of cash equivalent to the special cash dividend noted above to each holder of an outstanding and unexercised stock option as of the record date of December 4, 2020. The payment was calculated as the product of $4.25 times the number of shares of Non-Voting Common Stock underlying any unexercised option awards on the record date. Payments to current and former employees in lieu of the special dividend on outstanding stock options that have vested will be recorded as a charge to retained earnings totaling $42.3 million. Payments to current and former employees in lieu of the special dividend on outstanding stock options that are unvested will be recorded as compensation expense totaling $25.1 million in the first quarter of fiscal 2021.

Deferred stock units

Deferred stock units issued to non-employee Directors under the 2013 Plan are accounted for as liability awards. Once the awards are granted, the non-employee Directors have the right to receive cash payments related to such awards upon separation from the Company (other than for cause). Because there is no substantive service condition for the vesting of these awards, deferred stock units are considered fully vested for accounting purposes on the grant date and the entire fair value of these awards

is recognized as compensation cost on that date. During fiscal 2020 and 2019, deferred stock units were issued to non-employee Directors under the 2013 Plan. The total liability attributable to deferred stock units included as a component of accrued compensation on the Company’s Consolidated Balance Sheet was $3.2 million and $1.7 million as of October 31, 2020 and 2019, respectively. The Company made cash payments of $0.2 million, $0.5 million and $0.4 million in the fiscal years ended October 31, 2020, 2019 and 2018, respectively, to settle deferred stock unit award liabilities. Pursuant to the terms of the Merger Agreement with Morgan Stanley, all outstanding deferred stock units will be deemed to have vested and converted into the right to receive cash upon the close of the transaction.

Employee Stock Purchase Plans

The 2013 Employee Stock Purchase Plan (Qualified ESPP) and the 2013 Nonqualified Employee Stock Purchase Plan (Nonqualified ESPP) (together, Employee Stock Purchase Plans), which are administered by the Compensation Committee of the Board, permit eligible employees to direct up to a maximum of $12,500 per six-month offering period toward the purchase of Non-Voting Common Stock at the lower of 90 percent of the market price of the Non-Voting Common Stock at the beginning or at the end of each offering period. The Qualified ESPP qualifies under Section 423 of the U.S. Internal Revenue Code of 1986, as amended (Internal Revenue Code). A total of 0.5 million and 0.1 million shares of the Company’s Non-Voting Common Stock have been reserved for issuance under the Qualified ESPP and Nonqualified ESPP, respectively. Through October 31, 2020, 0.6 million shares have been issued pursuant to the Employee Stock Purchase Plans.

The Company received $3.0 million, $3.2 million and $3.2 million related to shares issued under the Employee Stock Purchase Plans for the years ended October 31, 2020, 2019 and 2018, respectively.

Subsequent event

The Company received $1.6 million related to shares issued under the Employee Stock Purchase Plans for the six-month offering period that concluded in November 2020. Pursuant to the terms of the Merger Agreement with Morgan Stanley, this will be the final offering period of the Employee Stock Purchase Plans.

Employee Stock Purchase Incentive Plan

The 2013 Incentive Compensation Nonqualified Employee Stock Purchase Plan (Employee Stock Purchase Incentive Plan), which is administered by the Compensation Committee of the Board, permits employees to direct up to half of their incentive bonuses and commissions toward the purchase of the Company’s Non-Voting Common Stock at the lower of 90 percent of the market price of the Non-Voting Common Stock at the beginning or at the end of each quarterly offering period. A total of 0.9 million shares of the Company’s Non-Voting Common Stock have been reserved for issuance under the Employee Stock Purchase Incentive Plan. Through October 31, 2020, 0.8 million shares have been issued pursuant to the Employee Stock Purchase Incentive Plan.

The Company received $4.0 million, $4.6 million and $4.9 million related to shares issued under the Employee Stock Purchase Incentive Plan for the years ended October 31, 2020, 2019 and 2018, respectively.

Subsequent event

The Company received $2.0 million related to shares issued under the Employee Stock Purchase Incentive Plan for the quarterly offering period that concluded in November 2020. Pursuant to the terms of the Merger Agreement with Morgan Stanley, this will be the final offering period of the Employee Stock Purchase Incentive Plan.

Atlanta Capital and Parametric Long-Term Equity Incentive Plans

The Atlanta Capital Plan and the Parametric Plan allow for awards of profit units of Atlanta Capital and Parametric, respectively, to key employees that are accounted for as equity awards. The Company did not grant any profit interests under either the Atlanta Capital Plan or the Parametric Plan in fiscal 2020, 2019, or 2018. Profit units granted vest over five years and entitle the holders to quarterly distributions of available cash flow.

As of October 31, 2020, there was $0.8 million of compensation cost related to unvested profit units previously granted under the Atlanta Capital Plan not yet recognized. That cost is expected to be recognized over a weighted-average period of 1.0 year. The compensation cost attributable to these awards was measured at the grant date using the unadjusted per unit equity value of Atlanta Capital described further in the phantom incentive plan section of this Note below. A total of 323,016 profit units have been issued pursuant to the Atlanta Capital Plan through October 31, 2020.

During the fourth quarter of fiscal 2019, the Company purchased all of the outstanding profit units held by current and former employees under the Parametric Plan (see Note 10). The Company accelerated the vesting of these units and recognized all of the remaining compensation cost attributable to these units, which totaled $1.6 million, in the fourth quarter of fiscal 2019. The Company terminated the Parametric Plan in the first quarter of fiscal 2020.

Subsequent event

Pursuant to the terms of the Merger Agreement with Morgan Stanley, in December 2020 the Company offered and obtained the consent of the holders of the remaining outstanding profit units under the Atlanta Capital Plan to vest and purchase such profit units for cash at fair value. Upon vesting, the remaining unrecognized grant date fair value attributable to these awards was recognized as compensation expense. The Company expects to purchase the profit units by December 31, 2020.

Atlanta Capital and Parametric Phantom Incentive Plans

The 2017 Atlanta Capital Phantom Incentive Plan (Atlanta Capital Phantom Incentive Plan), and the 2016 Parametric Phantom Incentive Plan and the 2018 Parametric Phantom Incentive Plan (collectively, Parametric Phantom Incentive Plans) are long-term equity incentive plans that provide for the award of phantom incentive units to eligible employees of Atlanta Capital and Parametric, respectively. Phantom incentive units are accounted for as equity awards and vest over five years.

The fair value of each phantom incentive unit is indexed to the equity value of Atlanta Capital or Parametric, as applicable, determined on a per unit basis at least annually utilizing an appraisal of each entity that is developed using two weighted valuation techniques: specifically, an income approach and a market approach. The appraisals are prepared by an independent valuation firm and approved by management. The income approach employs a discounted cash flow model to ascribe an enterprise value to each entity that takes into account projections of future cash flows developed utilizing the best

information available and market-based assumptions that are consistent with other comparable publicly traded investment management companies of a similar size, including current period actual results, historical trends, forecasted results provided by management and extended by the independent valuation firm, and an appropriate risk-adjusted discount rate that takes into consideration an estimated weighted average cost of capital. The market approach ascribes an enterprise value to each entity by applying market multiples of other comparable publicly traded investment management companies of a similar size. At the grant date, the per unit equity value is adjusted to take into consideration that holders of these units are not entitled to receive distributions of future earnings from Atlanta Capital or Parametric, as applicable, nor are they entitled to receive dividend or dividend equivalents from these entities. At the vesting date, the fair value of each vested phantom incentive unit is measured; however, no adjustment to the per unit equity value is made. These awards are settled in shares of the Company’s Non-Voting Common Stock under the 2013 Plan determined based on the unadjusted per unit equity value and the closing market price of the stock observed on the vesting date.

Phantom incentive units are not reserved for issuance; rather, the Company determines the number of authorized phantom incentive unit awards annually on the first business day of the fiscal year. The awards are subject to the Non-Voting Common Stock reserves defined under the 2013 Plan, as described above.

Atlanta Capital Phantom Incentive Plan

A summary of phantom incentive unit activity for the year ended October 31, 2020 is presented below:

		Weighted-
	Phantom	Average
	Incentive	Grant Date
	Units	Fair Value
Unvested, beginning of period	37,470	$	137.52
Granted	23,938		150.42
Vested	(4,941)		138.68
Unvested, end of period	56,467	$	142.89

As of October 31, 2020, there was $5.6 million of compensation cost related to unvested awards granted under the Atlantic Capital Phantom Incentive Plan not yet recognized. That cost is expected to be recognized over a weighted-average period of 3.2 years.

Subsequent event

Pursuant to the terms of the Merger Agreement with Morgan Stanley, all outstanding unvested awards granted under the Atlanta Capital Phantom Incentive Plan vested and settled in shares of the Company’s Non-Voting Common Stock on December 3, 2020. Upon vesting, the remaining unrecognized grant date fair value attributable to these awards was recognized as compensation expense.

Parametric Phantom Incentive Plans

The terms of the 2018 Parametric Phantom Incentive Plan (2018 Parametric Plan) are substantially equivalent to the 2016 Parametric Phantom Incentive Plan (2016 Parametric Plan), except that under the 2018 Parametric Plan, the awards are unitized such that one unit of Parametric is equivalent to 100 phantom incentive units (under the 2016 Parametric Plan, one unit of Parametric is equivalent to one phantom incentive unit).

A summary of phantom incentive unit activity for the year ended October 31, 2020 under the 2016 Parametric Plan is presented below:

		Weighted-
		Average
	Phantom	Grant Date
	Incentive	Fair Value
	Units	Per Unit
Unvested, beginning of period	75	$	2,091.93
Vested	(15)		2,062.75
Forfeited	(5)		2,208.66
Unvested, end of period	55	$	2,089.28

A summary of phantom incentive unit activity for the year ended October 31, 2020 under the 2018 Parametric Plan is presented below:

		Weighted-
		Average
	Phantom	Grant Date
	Incentive	Fair Value
	Units	Per Unit
Unvested, beginning of period	5,897	$	22.82
Vested	(591)		22.81
Forfeited	(638)		22.80
Unvested, end of period	4,668	$	22.82

As of October 31, 2020, there was $0.1 million of unrecognized compensation cost related to unvested awards granted under each of the 2016 Parametric Plan and the 2018 Parametric Plan. The expense associated with these awards is expected to be recognized over a weighted-average period of 1.7 years and 3.0 years, respectively.

Subsequent event

Pursuant to the terms of the Merger Agreement with Morgan Stanley, all outstanding unvested awards granted under each of the 2016 Parametric Plan and the 2018 Parametric Plan vested and settled in shares of the Company’s Non-Voting Common Stock on December 4, 2020. Upon vesting, the remaining unrecognized grant date fair value attributable to these awards was recognized as compensation expense.

Stock Option Income Deferral Plan

The Company has established an unfunded, non-qualified Stock Option Income Deferral Plan to permit key employees to defer recognition of income upon exercise of non-qualified stock options previously granted by the Company. As of October 31, 2020, options to purchase 0.2 million shares have been exercised and placed in trust with the Company.

Subsequent event

In connection with the proposed acquisition of Eaton Vance by Morgan Stanley, the Board has consented to the termination of the Stock Option Income Deferral Plan. All outstanding positions in such plan will close and settle in shares of the Company’s Non-Voting Common Stock prior to the close of the proposed acquisition of Eaton Vance by Morgan Stanley.