(

)

Share-Based Compensation

The Company measures and recognizes compensation expense for all share-based payments based on the grant-date fair value of those awards. All of the Company

’s existing stock option awards and non-vested stock awards have been determined to be equity-classified awards.

The

National Research Corporation

2001

Equity Incentive Plan (

“2001

Equity Incentive Plan”) provided for the granting of stock options, stock appreciation rights, restricted stock, performance shares and other share-based awards and benefits up to an aggregate of

1,800,000

shares of class A common stock and

300,000

shares of class B common stock. Stock options granted could have been either nonqualified or incentive stock options. Stock options vest over

one

five

years following the date of grant and option terms are generally

five

ten

years following the date of grant. Due to the expiration of the

2001

Equity Incentive Plan, at

December 31, 2015,

there were

shares of stock available for future grants. The Company has accounted for grants of

1,683,309

class A and

280,552

class B options and restricted stock under the

2001

Equity Incentive Plan using the date of grant as the measurement date for financial accounting purposes.

The Company

’s

2004

Non-Employee Director Stock Plan, as amended (the

“2004

Director Plan”), is a nonqualified plan that provides for the granting of options with respect to

3,000,000

shares of class A common stock and

500,000

shares of class B common stock. The

2004

Director Plan provides for grants of nonqualified stock options to each director of the Company who is

not

employed by the Company. On the date of each annual meeting of shareholders of the Company, options to purchase

36,000

shares of class A common stock and

6,000

shares of class B common stock are granted to directors that are elected or retained as a director at such meeting. Stock options vest

one

year following the date of grant and option terms are generally

ten

years following the date of grant, or

three

years in the case of termination of the outside director’s service. At

December 31, 2017,

there were

921,000

shares of class A common stock and

153,500

shares of class B common stock available for issuance pursuant to future grants under the

2004

Director Plan. The Company has accounted for grants of

2,079,000

class A and

346,500

class B options under the

2004

Director Plan using the date of grant as the measurement date for financial accounting purposes.

he National Research Corporation

2006

Equity Incentive Plan (the

“2006

Equity Incentive Plan”) provides for the granting of stock options, stock appreciation rights, restricted stock, performance shares and other share-based awards and benefits up to an aggregate of

1,800,000

shares of class A common stock and

300,000

shares of class B common stock. Stock options granted

may

be either incentive stock options or nonqualified stock options. Vesting terms vary with each grant and option terms are generally

five

ten

years following the date of grant. At

December 31, 2017,

there were

865,465

shares of class A common stock and

145,189

shares of class B common stock available for issuance pursuant to future grants under the

2006

Equity Incentive Plan. The Company has accounted for grants of

934,535

class A and

154,811

class B options and restricted stock under the

2006

Equity Incentive Plan using the date of grant as the measurement date for financial accounting purposes.

The

Company granted options to purchase

299,917

shares of class A common stock and

49,986

shares of class B common stock during

2017.

During

2016,

the Company granted options to purchase

315,620

shares of class A common stock and

52,603

shares of class B common stock, and during

2015

granted options to purchase

261,306

shares of class A common stock and

43,551

shares of class B common stock. Options to purchase shares of common stock are typically granted with exercise prices equal to the fair value of the common stock on the date of grant. The Company does, in certain limited situations, grant options with exercise prices that exceed the fair value of the common shares on the date of grant. The fair value of stock options granted was estimated using a Black-Scholes valuation model with the following weighted average assumptions:

	2 017						2016						2015
	Class A			Class B			Class A			Class B			Class A			Class B
Expected dividend yield at date of grant		2.62	%		8.06	%		2.99	%		7.29	%		2.22	%		5.48	%
Expected stock price volatility		32.45	%		26.75	%		32.74	%		29.41	%		31.97	%		31.17	%
Risk-free interest rate		2.18	%		2.18	%		1.69	%		1.69	%		1.58	%		1.60	%
Expected life of options (in years)		6.80			6.80			6.86			6.86			5.49			5.62

The risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of the grant. The expected volatility was based on historical monthly price changes of the Company

’s stock based on the expected life of the options at the date of grant. The expected life of options is the average number of years the Company estimates that options will be outstanding. The Company considers groups of associates that have similar historical exercise behavior separately for valuation purposes.

The following table summarizes stock option activity

under the

2001

and

2006

Equity Incentive Plans and the

2004

Director Plan for the year ended

December

31,

2017:

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Terms (Years)		Aggregate Intrinsic Value (In thousands)
Class A
Outstanding at December 31, 201 6		1,705,483		$	12.31
Granted		299,917		$	22.13
Exercised		(197,784	)	$	10.55			$	2,681
Forfeited		(60,982	)	$	21.35
Outstanding at December 31, 2017		1,746,634		$	13.88		5.39	$	40,901
Exercisable at December 31, 2017		1,274,361		$	12.14		4.32	$	32,060

Class B
Outstanding at December 31, 201 6		250,493		$	29.70
Granted		49,986		$	42.90
Exercised		(13,600	)	$	27.04			$	202
Forfeited		(10,163	)	$	41.53
Outstanding at December 31, 2017		276,716		$	31.78		5.52	$	6,719
Exercisable at December 31, 2017		198,950		$	29.16		4.44	$	5,353

The following table summarizes information related to stock options for the years ended

December 31, 2017,

2016

and

2015:

	2 017				2016				2015
	Class A		Class B		Class A		Class B		Class A		Class B
Weighted average grant date fair value of stock options granted	$	5.83	$	3.66	$	3.62	$	3.90	$	3.49	$	5.45
Intrinsic value of stock options exercised (in thousands)		2,681		202		459		632		350		151
Intrinsic value of stock options vested (in thousands)		5,258		787		1,627		535		1,351		415

As of

December 31, 2017,

the total unrecognized compensation cost related to non-vested stock option awards was approximately

$1.2

million and

$152,000

for class A and class B common stock shares, respectively, which was expected to be recognized over a weighted average period of

2.53

years and

2.57

years for class A and class B common stock shares, respectively.

Cash received from stock options exercised for the

years ended

December

31,

2016

was

$548,000.

There was

cash received from stock options exercised for the year ended

December 31, 2017

2015.

The Company recognized

$1.2

million,

$964,000

and

$828,000

of non-cash compensation for the years ended

December 31, 2017,

2016,

and

2015,

respectively, related to options, which is included in selling, general and administrative expenses.

The actual tax benefit realized for the tax deduction from stock options exercised was

$1.1

million,

$398,000

and

$183,000

for the years ended

December 31, 2017,

2016

and

2015,

respectively. The Company prospectively elected ASU

2016

09,

Compensation – Stock Compensation (Topic

718

) Improvements to Employee Share-Based Payment Accounting

(“ASU

2016

09”

) in

2016.

As a result, the excess tax benefit from stock options exercised was recognized as a reduction to our provision for income taxes for the years ended

December 31, 2017

and

2016

rather than as an increase to additional paid-in capital for the years ended

December 31, 2015

prior to adoption.

During

2016

and

2015,

the Company granted

20,578

and

89,416

non-vested shares of class A and

3,430

and

14,902

non-vested shares of class B common stock, respectively, under the

2006

Equity Incentive Plan.

shares were granted during the year ended

December 31, 2017.

As of

December 31, 2017,

the Company had

81,677

and

13,611

non-vested shares of class A and class B common stock, respectively, outstanding under the

2006

Equity Incentive Plan. These shares vest over

five

years following the date of grant and holders thereof are entitled to receive dividends from the date of grant, whether or

not

vested. The fair value of the awards is calculated as the fair market value of the shares on the date of grant. The Company recognized

$629,000,

$966,000

and

$555,000

of non-cash compensation for the years ended

December 31, 2017,

2016,

and

2015,

respectively, related to this non-vested stock, which is included in selling, general and administrative expenses. The actual tax benefit realized for the tax deduction from vesting of restricted stock was

$1.3

million and

$161,000

for the years ended

December 31, 2017

and

2016,

respectively. There were

shares that vested in the year ended

December 31, 2015.

The following

table summarizes information regarding non-vested stock granted to associates under the

2006

Equity Incentive Plans for the year ended

December

31,

2017:

	Class A Shares Outstanding			Class A Weighted Average Grant Date Fair Value Per Share		Class B Shares Outstanding			Class B Weighted Average Grant Date Fair Value Per Share
Outstanding at December 31, 201 6		174,487		$	13.93		29,081		$	37.21
Granted		--		$	--		--		$	--
Vested		(73,506	)	$	13.99		(12,251	)	$	38.50
Forfeited		(19,314	)	$	14.27		(3,219	)	$	34.69
Outstanding at December 31, 2017		81,677		$	13.80		13,611		$	36.65

As of

December 31, 2017,

the total unrecognized compensation cost related to non-vested stock awards was approximately

$806,000

and is expected to be recognized over a weighted average period of

2.54

years.