8. Stock-Based Compensation

Legg Mason's stock-based compensation includes stock options, an employee stock purchase plan, market-based performance shares payable in common stock, restricted stock awards and units, affiliate management equity plans and deferred compensation payable in stock. Shares available for issuance under the active equity incentive stock plan as of September 30, 2015, were 6,738. 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 or five years and expire within eight to ten years from the date of grant.

As further discussed below, the components of our total stock-based compensation expense for the three and six months ended September 30, 2015 and 2014 were as follows:



	Three Months Ended September 30,				Six Months Ended September 30,
	2015		2014		2015		2014
Stock options	$	2,234	$	2,953	$	5,039	$	6,217
Restricted stock and restricted stock units	12,455		12,083		26,353		23,289
Employee stock purchase plan	116		109		440		398
Affiliate management equity plans	1,302		1,301		2,603		2,603
Non-employee director awards	1,150		1,425		1,150		1,550
Performance share units	907		290		1,443		482
Employee stock trust	7		32		13		160
Total stock-based compensation expense	$	18,171	$	18,193	$	37,041	$	34,699

Stock Options

Stock option transactions under Legg Mason's equity incentive plans during the six months ended September 30, 2015 and 2014 are summarized below:



	Six Months Ended September 30,
	2015				2014
	Number of Shares		Weighted-Average Exercise Price Per Share		Number of Shares		Weighted-Average Exercise Price Per Share
Options outstanding at March 31	4,432		$	39.58	4,801		$	43.02
Granted	876		54.52		916		47.64
Exercised	(192	)	32.42		(453	)	30.76
Canceled/forfeited	(388	)	95.68		(522	)	93.59
Options outstanding at September 30	4,728		$	38.04	4,742		$	39.52

At September 30, 2015, options were exercisable for 2,703 shares and the weighted-average exercise price was $31.69. Stock options exercisable at September 30, 2015, have a weighted-average remaining contractual life of 4.2 years. Unamortized compensation cost at September 30, 2015, was $19,716 and was related to unvested options exercisable for 2,025 shares. The unamortized compensation cost at September 30, 2015, is expected to be recognized over a weighted-average period of 1.8 years.

The weighted-average fair value of service-based stock options granted during the six months ended September 30, 2015 and 2014, using the Black-Scholes option pricing model, was $11.26 and $12.03 per share, respectively.

The following weighted-average assumptions were used in the model for grants in fiscal 2015 and 2014:



	Six Months Ended September 30,
	2015		2014
Expected dividend yield	1.18	%	1.04	%
Risk-free interest rate	1.44	%	1.51	%
Expected volatility	24.37	%	29.53	%
Expected life (in years)	4.97		4.94

Legg Mason uses an equally weighted combination of both implied and historical volatility to measure expected volatility for calculating Black-Scholes option values.

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 are included in the outstanding options table above. The award had a grant date fair value of $5,525 and was subject to vesting requirements, all of which had been satisfied by May 2015. The vesting requirements were as follows: 25% over a two-year service period; 25% over a two-year service period and was subject to Legg Mason's common stock price equaling or exceeding $36.46 for 20 consecutive trading days; 25% was subject to Legg Mason's common stock price equaling or exceeding $41.46 for 20 consecutive trading days; and 25% was subject to Legg Mason's common stock price equaling or exceeding $46.46 for 20 consecutive trading days; and a requirement that certain shares received upon exercise are retained for a two-year period. In each of January and June 2014, 25% (50% in aggregate) of this award vested when the Legg Mason stock price met and exceeded $41.46 and $46.46, respectively, for 20 consecutive trading days. In May 2015 the remaining 50% of this award vested when the two-year service period was satisfied.

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

Restricted stock and restricted stock unit transactions during the six months ended September 30, 2015 and 2014, are summarized below:



	Six Months Ended September 30,
	2015				2014
	Number of Shares		Weighted-Average Grant Date Value		Number of Shares		Weighted-Average Grant Date Value
Unvested shares at March 31	3,050		$	37.38	3,334		$	30.77
Granted	981		54.31		1,159		47.77
Vested	(1,230	)	34.74		(1,303	)	30.90
Canceled/forfeited	(39	)	40.93		(100	)	36.14
Unvested shares at September 30	2,762		$	44.52	3,090		$	36.92

Unamortized compensation cost related to unvested restricted stock and restricted stock unit awards at September 30, 2015, of $95,434 is expected to be recognized over a weighted-average period of 1.8 years.

Other

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. On March 31, 2014, a similar management equity plan was implemented by Legg Mason with a grant to certain key employees of ClearBridge Investments, LLC ("ClearBridge"). Independent valuations determined the aggregate cost of the awards to be approximately $9,000 and $16,000 for Permal and ClearBridge, respectively, which will be recognized as Compensation and benefits expense in the Consolidated Statements of Income over the related vesting periods, through December 2017 and March 2019, respectively. Both arrangements provide that one-half of the respective cost will be absorbed by the affiliates' incentive pool. As of September 30, 2015, the redemption amount of vested units under both plans, as if they were currently redeemable, aggregated approximately $16,100.

As of September 30, 2015 and 2014, non-employee directors held 53 and 45 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 table above. During each of the six months ended September 30, 2015 and 2014, non-employee directors were granted 8 restricted stock units. During the six months ended September 30, 2015 and 2014, non-employee directors were granted 16 and 23 shares of common stock, respectively, at a fair value of $1,150 and $1,550, respectively. During the six months ended September 30, 2015, there were no restricted stock units distributed and during the six months ended September 30, 2014, there were 27 restricted stock units distributed. During the six months ended September 30, 2015 and 2014, non-employee directors did not exercise any stock options. During the six months ended September 30, 2015 there were no stock options canceled or forfeited related to non-employee directors, and during the six months ended September 30, 2014, there were 32 stock options canceled or forfeited related to non-employee directors.

In May 2015 and 2014, Legg Mason granted certain executive officers a total of 107 and 78 performance share units, respectively, as part of their fiscal 2015 and 2014 incentive award with an aggregate value of $4,312 and $3,457, respectively. The vesting of performance share units granted in May 2015 and 2014 and the number of shares payable at vesting are determined based on Legg Mason’s relative total stockholder return over a three-year period ending March 31, 2018 and 2017, respectively. The grant date fair value per unit for the May 2015 and 2014 performance share units of $40.29 and $44.11, respectively, was estimated as of the grant date using a Monte Carlo pricing model with the following assumptions:



	2015		2014
Expected dividend yield	1.46	%	1.33	%
Risk-free interest rate	0.86	%	0.75	%
Expected volatility	22.63	%	30.81	%

During fiscal 2012, Legg Mason established a long-term incentive plan (the "LTIP") under its equity incentive plan, which provided an additional element of compensation that is based on performance, determined as the achievement of a pre-defined amount of Legg Mason’s cumulative adjusted earnings per share over a three year performance period. Under the LTIP, executive officers were granted cash value performance units in the quarter ended September 2012 for a total targeted amount of $1,850. The September 2012 grant performance period ended March 31, 2015 and resulted in a payment amount of $1,000 that was settled in cash on May 31, 2015.