7. Stock-Based Compensation

Legg Mason's stock-based compensation includes stock options, employee stock purchase plans, restricted stock awards and units, performance shares payable in common stock, and deferred compensation payable in stock. Shares available for issuance under the active equity incentive stock plan as of September 30, 2012, were 10,543. Options under Legg Mason’s employee stock plans have been granted at prices not less than 100% of the fair market value. Options are generally exercisable in equal increments over four to five years and expire within eight to ten years from the date of grant.

Compensation expense relating to stock options for the three months ended September 30, 2012 and 2011, was $2,619 and $3,500, respectively, and for the six months ended September 30, 2012 and 2011, was $5,902 and $7,681, respectively.

Stock option transactions during the six months ended September 30, 2012, and 2011, respectively, are summarized below:



	Six Months Ended September 30,
	2012				2011
	Number of shares		Weighted-average exercise price per share		Number of shares		Weighted-average exercise price per share
Options outstanding at March 31	5,624		$	57.78	5,419		$	59.82
Granted	966		23.72		810		33.99
Exercised	(1	)	23.72		(8	)	25.76
Canceled/forfeited	(578	)	56.37		(305	)	47.95
Options outstanding at September 30	6,011		$	52.44	5,916		$	56.95

At September 30, 2012, options were exercisable on 3,586 shares, with a weighted-average exercise price of $68.60 and a weighted-average remaining contractual life of 3.1 years. Unamortized compensation cost related to unvested options (2,425 shares) at September 30, 2012, was $22,912 and is expected to be recognized over a weighted-average period of 1.8 years.

The weighted-average fair value of stock option grants during the six months ended September 30, 2012 and 2011, using the Black-Scholes option pricing model, was $9.47 and $13.13 per share, respectively.

The following weighted-average assumptions were used in the model for grants in fiscal 2013 and 2012:



	Six Months Ended September 30,
	2012		2011
Expected dividend yield	1.44	%	1.39	%
Risk-free interest rate	0.81	%	1.95	%
Expected volatility	51.80	%	47.16	%
Expected life (in years)	5.02		5.12

Compensation expense relating to restricted stock and restricted stock units for the three months ended September 30, 2012 and 2011, was $11,715 and $8,533, respectively, and for the six months ended September 30, 2012 and 2011, was $21,022 and $16,608, respectively.

Compensation expense for the three and six months ended September 30, 2012 includes approximately $1,800 of accelerated stock-based net compensation costs associated with Legg Mason's Chief Executive Officer stepping down in September 2012.

Restricted stock and restricted stock unit transactions during the six months ended September 30, 2012 and 2011, respectively, are summarized below:



	Six Months Ended September 30,
	2012				2011
	Number of shares		Weighted-average grant date value		Number of shares		Weighted-average grant date value
Unvested shares at March 31	2,873		$	33.83	2,637		$	33.01
Granted	2,183		24.04		1,315		33.79
Vested	(903	)	32.26		(700	)	33.86
Canceled/forfeited	(37	)	29.74		(42	)	33.06
Unvested shares at September 30	4,116		$	29.02	3,210		$	33.14

Unamortized compensation cost related to unvested restricted stock and restricted stock unit awards at September 30, 2012 of $92,112 is expected to be recognized over a weighted-average period of 1.8 years. In connection with the change in Legg Mason's Chief Executive Officer, in September 2012 325 shares of restricted stock were granted to certain executives and key employees, with an aggregate value of $8,400. These shares vest on March 31, 2014, and are intended to retain and motivate these employees.

Compensation expense relating to the stock purchase plan and deferred compensation payable in stock for the three months ended September 30, 2012 and 2011, was $92 and $109, respectively, and for the six months ended September 30, 2012 and 2011, was $236 and $284, respectively.

During the six months ended September 30, 2012 and 2011, non-employee directors were granted 16 and 12 restricted stock units and 35 and 31 shares of common stock at a fair value of $1,250 and $1,375, respectively. As of September 30, 2012 and 2011, non-employee directors held 112 and 193 stock options, respectively, which are included in the outstanding options presented in the table above. As of September 30, 2012 and 2011, non-employee directors held 90 and 74 restricted stock units, respectively, which vest on the grant date and are, therefore, not included in the unvested shares of restricted stock and restricted stock units in the table above. During the six months ended September 30, 2012 and 2011, non-employee directors did not exercise any stock options and no restricted stock units were distributed. During the six months ended September 30, 2012 and 2011, there were 72 and 27 non-employee director stock options canceled or forfeited, respectively.

During fiscal 2012, Legg Mason established a long-term incentive plan (the "LTIP") under its equity incentive plan, which provides an additional element of compensation that is based on performance. Under the LTIP, executive officers were granted cash value performance units in the June 2011 quarter and the September 2012 quarter that will vest at the end of their respective three year periods based upon Legg Mason's cumulative adjusted earnings per share over the respective periods. Awards granted under the LTIP may be settled in cash and/or shares of Legg Mason common stock, at the discretion of Legg Mason. The estimated payout amounts of the awards, if any, are expensed over the future vesting periods based on a probability assessment of the expected outcome under the LTIP provisions.

As part of the Company's streamlining initiative, as further discussed in Note 11, the employment of certain recipients of stock option and restricted stock awards has been terminated. The termination benefits extended to these employees included accelerated vesting of their unvested equity incentive awards to January 1, 2012, which precedes dates under the original terms of the awards. The portion of the awards subject to accelerated vesting was revalued and expensed over the new vesting period, the impact of which is included above in fiscal year 2012.