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 equity incentive stock plan as of September 30, 2016, were 3,598. 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 Legg Mason's total stock-based compensation expense for the three and six months ended September 30, 2016 and 2015, were as follows:



	Three Months Ended September 30,				Six Months Ended September 30,
	2016		2015		2016		2015
Stock options	$	2,042	$	2,234	$	4,284	$	5,039
Restricted stock and restricted stock units	12,741		12,455		27,314		26,353
Employee stock purchase plan	116		116		417		440
Affiliate management equity plans	435		1,302		19,934		2,603
Non-employee director awards	1,150		1,150		1,150		1,150
Performance share units	1,019		907		1,869		1,443
Employee stock trust	7		7		13		13
Total stock-based compensation expense	$	17,510	$	18,171	$	54,981	$	37,041

Stock Options

Stock option transactions under Legg Mason's equity incentive plans during the six months ended September 30, 2016 and 2015 are summarized below:



	Six Months Ended September 30,
	2016				2015
	Number of Shares		Weighted-Average Exercise Price Per Share		Number of Shares		Weighted-Average Exercise Price Per Share
Options outstanding at March 31	4,506		$	38.48	4,432		$	39.58
Granted	753		31.31		876		54.52
Exercised	(109	)	28.31		(192	)	32.42
Canceled/forfeited	(319	)	36.42		(388	)	95.68
Options outstanding at September 30	4,831		$	37.73	4,728		$	38.04

At September 30, 2016, options were exercisable for 2,896 shares with a weighted-average exercise price of $34.46 and a weighted average remaining contractual life of 4.2 years. Unamortized compensation cost related to unvested options for 1,935 shares at September 30, 2016, was $16,038, which is expected to be recognized over a weighted-average period of 1.7 years.

The weighted-average fair value of service-based stock options granted during the six months ended September 30, 2016 and 2015, excluding those granted to our Chief Executive Officer in May 2013 discussed below, using the Black-Scholes option pricing model, was $7.78 and $11.26 per share, respectively.

The following weighted-average assumptions were used in the model for grants in fiscal 2017 and 2016:



	Six Months Ended September 30,
	2016		2015
Expected dividend yield	1.45	%	1.18	%
Risk-free interest rate	1.25	%	1.44	%
Expected volatility	30.95	%	24.37	%
Expected life (in years)	5.02		4.97

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 when the final 50% of the award vested at the end of the two-year service 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

Restricted stock and restricted stock unit transactions during the six months ended September 30, 2016 and 2015, are summarized below:



	Six Months Ended September 30,
	2016				2015
	Number of Shares		Weighted-Average Grant Date Value		Number of Shares		Weighted-Average Grant Date Value
Unvested shares at March 31	3,058		$	43.34	3,050		$	37.38
Granted	1,653		31.26		981		54.31
Vested	(1,186	)	38.95		(1,230	)	34.74
Canceled/forfeited	(95	)	43.12		(39	)	40.93
Unvested shares at September 30	3,430		$	39.01	2,762		$	44.52

Unamortized compensation cost related to unvested restricted stock and restricted stock unit awards at September 30, 2016, of $100,943 is expected to be recognized over a weighted-average period of 1.8 years.

Affiliate Management Equity Plans

In connection with the acquisition of Clarion Partners in April 2016, as further discussed in Note 3, Legg Mason implemented a management equity plan for the management team of Clarion Partners that entitles certain of its key employees to participate in 15% of the future growth, if any, of the Clarion Partners enterprise value (subject to appropriate discounts) subsequent to the date of the grant. The initial grant under the plan vested immediately and the related grant-date fair value of $15,200, determined by independent valuation, was recognized as Compensation and benefits expense in the Consolidated Statement of Income and reflected in the Consolidated Balance Sheet as Redeemable noncontrolling interest. Future grants under the plan will vest 20% annually over five years, and will result in the recognition of additional compensation expense over the related vesting period. Subject to various conditions, including the passage of time, vested plan units can be put to Legg Mason for settlement at fair value. Legg Mason can also call plan units, generally post employment, for settlement at fair value. As of September 30, 2016, the redemption amount of units under the plan was $18,700.

Effective March 1, 2016, Legg Mason executed agreements with the management of its existing wholly-owned subsidiary, Royce, regarding employment arrangements with Royce management, revised revenue sharing, and the implementation of a management equity plan for its key employees. Under the management equity plan, minority equity interests equivalent to 16.9% in the Royce entity were issued to its management team. These interests allow the holders to receive quarterly distributions of a portion of Royce's pre-tax income in amounts equal to the percentage of ownership represented by the equity they hold, subject to payment of Legg Mason's revenue share and reasonable expenses. Future grants under the plan vest immediately and, upon issuance, the related grant-date fair value of equity units will be recognized as Compensation and benefits expense in the Consolidated Statements of Income and reflected in the Consolidated Balance Sheets as Nonredeemable noncontrolling interest. As of September 30, 2016, the estimated redemption amount of units under the plan was $23,186.

On March 31, 2014, Legg Mason implemented a management equity plan and granted units to key employees of its subsidiary ClearBridge Investments, LLC ("ClearBridge") that entitle them to participate in 15% of the future growth, if any, of the ClearBridge enterprise value (subject to appropriate discounts) subsequent to the grant date. Independent valuation determined the aggregate cost of the award to be approximately $16,000, which will be recognized as Compensation and benefits expense in the Consolidated Statements of Income over the related vesting periods through March 2019. Total compensation expense related to the ClearBridge affiliate management equity plan was $817 and $848 for the three months ended September 30, 2016 and 2015, respectively, and $1,635 and $1,695 for the six months ended September 30, 2016 and 2015, respectively. This arrangement provides that one-half of the cost will be absorbed by the ClearBridge incentive pool. As of September 30, 2016, the estimated redemption amount of vested units under the ClearBridge plan, as if they were currently redeemable, aggregated approximately $22,160.

On June 28, 2013, Legg Mason implemented a similar management equity plan with key employees of Permal. Independent valuation determined the aggregate cost of the awards to be approximately $9,000, which was being recognized as Compensation and benefits expense in the Consolidated Statements of Income over the related vesting period through December 2017. In April 2016, in conjunction with the Permal restructuring in preparation for the combination with EnTrust, the Permal management equity plan was liquidated with a payment of $7,150 to its participants, and the remaining $3,481 unamortized cost was expensed during the three months ended June 30, 2016. Compensation expense related to the Permal affiliate management equity plan was $454 and $908 for the three and six months ended September 30, 2015, respectively.

Other

As of September 30, 2016 and 2015, non-employee directors held 65 and 53 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 three months ended September 30, 2016 and 2015, non-employee directors were granted 11 and eight restricted stock units, respectively. During the six months ended September 30, 2016 and 2015, non-employee directors were granted 23 and 16 shares of common stock, respectively, at a fair value of $1,150 for each. During the six months ended September 30, 2016 and 2015, there were no restricted stock units distributed. As of September 30, 2016 and 2015, there were no stock options outstanding related to non-employee directors.

As previously discussed in Note 3, upon the acquisition of Clarion Partners in April 2016, Legg Mason granted certain key employees of Clarion Partners a total of 716 performance-based Legg Mason restricted share units, which are not included in the unvested shares of restricted stock and restricted stock units in the table above, with an aggregate fair value of $11,121, which was included in the purchase price, that vest upon Clarion Partners achieving a certain level of EBITDA, as defined in the purchase agreement, within a designated period after the closing of the acquisition.

In May 2016 and 2015, Legg Mason granted certain executive officers a total of 182 and 107 performance share units, respectively, as part of their fiscal 2016 and 2015 incentive award with an aggregate value of $3,528 and $4,312, respectively. The vesting of performance share units granted in May 2016 and 2015 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, 2019 and 2018, respectively. The grant date fair value per unit for the May 2016 and 2015 performance share units of $19.36 and $40.29, respectively, was estimated as of the grant date using a Monte Carlo pricing model with the following assumptions:



	2016		2015
Expected dividend yield	2.87	%	1.46	%
Risk-free interest rate	0.89	%	0.86	%
Expected volatility	26.01	%	22.63	%

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 was 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.