8. Stock-Based Compensation

See Note 1 regarding updated stock-based compensation accounting guidance effective April 1, 2017.

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. Effective August 1, 2017, Legg Mason's stockholders approved a new equity incentive plan, under which a total of 6,500 shares, plus any shares remaining under the prior plan, are available for issuance. Shares available for issuance under the equity incentive stock plan as of September 30, 2017, were 8,269. 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 10 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, 2017 and 2016, were as follows:



	Three Months Ended September 30,				Six Months Ended September 30,
	2017		2016		2017		2016
Stock options	$	1,921	$	2,042	$	4,146	$	4,284
Restricted stock and restricted stock units	13,509		12,741		30,088		27,314
Employee stock purchase plan	96		116		393		417
Affiliate management equity plans	776		435		1,552		19,934
Non-employee director awards	1,075		1,150		1,075		1,150
Performance share units	1,078		1,019		2,263		1,869
Employee stock trust	8		7		14		13
Total stock-based compensation expense	$	18,463	$	17,510	$	39,531	$	54,981

Stock Options

Stock option transactions under Legg Mason's equity incentive plans during the six months ended September 30, 2017 and 2016, are summarized below:



	Six Months Ended September 30,
	2017				2016
	Number of Shares		Weighted-Average Exercise Price Per Share		Number of Shares		Weighted-Average Exercise Price Per Share
Options outstanding at March 31	4,593		$	38.15	4,506		$	38.48
Granted	421		37.64		753		31.31
Exercised	(326	)	29.04		(109	)	28.31
Canceled/forfeited	(70	)	46.08		(319	)	36.42
Options outstanding at September 30	4,618		$	38.63	4,831		$	37.73

At September 30, 2017, options were exercisable for 3,056 shares with a weighted-average exercise price of $37.45 and a weighted average remaining contractual life of 4.0 years. Unamortized compensation cost related to unvested options for 1,562 shares at September 30, 2017, was $10,742, which is expected to be recognized over a weighted-average period of 1.5 years.

The weighted-average fair value of service-based stock options granted during the six months ended September 30, 2017 and 2016, using the Black-Scholes option pricing model was $8.33 and $7.78, per share, respectively.

The following weighted-average assumptions were used in the model for grants in the six months ended September 30, 2017 and 2016:



	Six Months Ended September 30,
	2017		2016
Expected dividend yield	1.70	%	1.45	%
Risk-free interest rate	1.89	%	1.25	%
Expected volatility	26.79	%	30.95	%
Expected life (in years)	5.09		5.02

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

Restricted Stock

Restricted stock and restricted stock unit transactions during the six months ended September 30, 2017 and 2016, are summarized below:



	Six Months Ended September 30,
	2017				2016
	Number of Shares		Weighted-Average Grant Date Value		Number of Shares		Weighted-Average Grant Date Value
Unvested shares at March 31	3,321		$	38.92	3,058		$	43.34
Granted	1,456		37.66		1,653		31.26
Vested	(1,322	)	39.46		(1,186	)	38.95
Canceled/forfeited	(60	)	38.15		(95	)	43.12
Unvested shares at September 30	3,395		$	38.18	3,430		$	39.01

Unamortized compensation cost related to unvested restricted stock and restricted stock unit awards at September 30, 2017, of $96,833 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 2, 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 during the three months ended June 30, 2016. As of September 30, 2017, the estimated aggregate redemption amount of units under the plan, as if they were currently redeemable, was $16,200.

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 Royce's key employees. Under the management equity plan, minority equity interests equivalent to 19% in the Royce entity have been 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. As of September 30, 2017, the estimated aggregate redemption amount of units under the plan, as if they were currently redeemable, was $28,026.

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 $776 and $817 for the three months ended September 30, 2017 and 2016, respectively, and $1,552 and $1,635 for the six months ended September 30, 2017 and 2016, respectively. This arrangement provides that one-half of the cost will be absorbed by the ClearBridge incentive pool. As of September 30, 2017, the estimated aggregate redemption amount of vested units under the ClearBridge plan, as if they were currently redeemable, was approximately $25,800.

On June 28, 2013, Legg Mason implemented a 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.

Other

As of September 30, 2017 and 2016, non-employee directors held 76 and 65 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.

As 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 2017 and 2016, Legg Mason granted certain executive officers a total of 111 and 182 performance share units, respectively, as part of their fiscal 2017 and 2016 incentive awards with an aggregate value of $3,503 and $3,528, respectively. The vesting of performance share units granted in May 2017 and 2016, 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, 2020 and 2019, respectively. The grant date fair value per unit for the May 2017 and 2016 performance share units of $31.42 and $19.36, respectively, was estimated as of the grant date using a Monte Carlo pricing model with the following assumptions:



	2017		2016
Expected dividend yield	2.96	%	2.87	%
Risk-free interest rate	1.47	%	0.89	%
Expected volatility	27.73	%	26.01	%