8. Stock-Based Compensation

Legg Mason's stock-based compensation includes stock options, restricted stock awards and units, employee stock purchase plans, deferred compensation payable in stock, and other stock-based compensation. Shares available for issuance under the active equity incentive stock plan as of June 30, 2013, were 8,929. 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.

Stock Options

Compensation expense relating to stock options for the three months ended June 30, 2013, and 2012 was $3,241 and $3,283, respectively.

Stock option transactions during the three months ended June 30, 2013 and 2012, respectively, are summarized below:



	Three Months Ended June 30,
	2013				2012
	Number of Shares		Weighted-Average Exercise Price Per Share		Number of Shares		Weighted-Average Exercise Price Per Share
Options outstanding at March 31	5,361		$	53.13	5,624		$	57.78
Granted	1,215		33.64		966		23.72
Exercised	(262	)	29.95		—		—
Canceled/forfeited	(101	)	67.42		(263	)	65.61
Options outstanding at June 30	6,213		$	50.07	6,327		$	52.25

At June 30, 2013 and 2012, options were exercisable for 3,434, and 3,412 shares, respectively, and the weighted-average exercise prices were $65.80, and $70.23, respectively. Stock options exercisable at June 30, 2013 and 2012, have a weighted-average remaining contractual life of 2.8 and 3.0 years, respectively. Unamortized compensation cost at June 30, 2013 and 2012 was $27,663 and $28,368, respectively and is related to unvested options for 2,779 and 2,915 shares, respectively. The unamortized compensation cost at June 30, 2013 and 2012 is expected to be recognized over weighted-average periods of 1.8 and 1.9 years, respectively.

The weighted-average fair value of service-based stock option grants during the three months ended June 30, 2013, and 2012, excluding those granted to our Chief Executive Officer in May 2013 discussed below, using the Black-Scholes option pricing model, was $12.13 and $9.47 per share, respectively.

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



	Three Months Ended June 30,
	2013		2012
Expected dividend yield	1.54	%	1.44	%
Risk-free interest rate	0.80	%	0.81	%
Expected volatility	45.08	%	51.80	%
Expected life (in years)	4.93		5.02

In May 2013, Legg Mason awarded options to purchase 500 shares of Legg Mason, Inc. common stock at an exercise price of $31.46, equal to the then current market value of Legg Mason's common stock, to its Chief Executive Officer, which is included in the outstanding options presented in the table above. The award had a grant date fair value of $5,525 and is subject to vesting requirements, 25% of which vests over a two-year service period; 25% of which vests over a two-year service period and is subject to Legg Mason common stock price equaling or exceeding $36.46 for 20 consecutive trading days; 25% of which is subject to Legg Mason's common stock price equaling or exceeding $41.46 for 20 consecutive trading days; and 25% of which is subject to Legg Mason's common stock price equaling or exceeding $46.46 for 20 consecutive trading days; as well as a requirement that certain shares received upon exercise are retained for a two-year period.

The weighted-average fair value per share for these awards of $11.05 was estimated as of the grant date using a grant price of $31.46, and a Monte Carlo option pricing model with the following assumptions:



Expected dividend yield	1.48	%
Risk-free interest rate	0.86	%
Expected volatility	44.05	%

Restricted Stock

Compensation expense relating to restricted stock and restricted stock units for the three months ended June 30, 2013 and 2012, was $11,948 and $9,307, respectively.

Restricted stock and restricted stock unit transactions during the three months ended June 30, 2013 and 2012, respectively, are summarized below:



	Three Months Ended June 30,
	2013				2012
	Number of Shares		Weighted-Average Grant Date Value		Number of Shares		Weighted-Average Grant Date Value
Unvested shares at March 31	3,738		$	27.99	2,873		$	33.83
Granted	1,278		35.16		1,842		23.72
Vested	(1,224	)	28.82		(881	)	32.41
Canceled/forfeited	(48	)	29.62		(27	)	30.86
Unvested shares at June 30	3,744		$	30.15	3,807		$	29.29

Unamortized compensation cost related to unvested restricted stock and restricted stock unit awards at June 30, 2013 and 2012 of $98,510 and $96,936, respectively, are both expected to be recognized over a weighted-average period of 1.9 years.

Other

Compensation expense relating to the stock purchase plan and deferred compensation payable in stock for the three months ended June 30, 2013 and 2012, was $145 and $144, respectively.

On June 28, 2013, Legg Mason implemented a management equity plan and granted units to key employees of Permal that entitle them to participate in 15% of the future growth of the Permal enterprise value (subject to appropriate discounts), if any, subsequent to the grant date. An independent valuation determined the aggregate cost of the current award to be approximately $9,000, which will be recognized as Compensation expense in the Consolidated Statements of Income over the related vest period, through December 2017.

During the three months ended June 30, 2013, a non-employee director was granted 4 shares of common stock at a fair value of $125. As of June 30, 2013 and 2012, non-employee directors held 112 and 184 stock options, respectively, which are included in the outstanding options presented in the table above. As of June 30, 2013 and 2012, non-employee directors held 91 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. There were no stock option or restricted stock unit transactions related to non-employee directors during the three months ended June 30, 2013 and 2012.