Note 4 — Stock-Based Compensation

The Company grants stock-based compensation awards as an incentive for employees and directors to contribute to the Company’s long-term success. The Company currently awards stock-settled stock appreciation rights, service- and performance-based restricted stock units, and common stock equivalents. At June 30, 2011, the Company had approximately 6.4 million shares of its common stock, par value $.0005 per share (the “Common Stock”) available for awards of stock-based compensation under its 2003 Long-Term Incentive Plan.

The Company accounts for stock-based compensation in accordance with FASB ASC Topics 505 and 718, as interpreted by SEC Staff Accounting Bulletins No. 107 (“SAB No. 107”) and No. 110 (“SAB No. 110”). Stock-based compensation expense is based on the fair value of the award on the date of grant, which is recognized over the related service period, net of estimated forfeitures. The service period is the period over which the related service is performed, which is generally the same as the vesting period. At the present time, the Company issues treasury shares upon the exercise, release or settlement of stock-based compensation awards.

Determining the appropriate fair value model and calculating the fair value of stock compensation awards requires the input of certain complex and subjective assumptions, including the expected life of the stock compensation awards and the Common Stock price volatility. In addition, determining the appropriate amount of associated periodic expense requires management to estimate the amount of employee forfeitures and the likelihood of the achievement of certain performance targets. The assumptions used in calculating the fair value of stock compensation awards and the associated periodic expense represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change and the Company deems it necessary in the future to modify the assumptions it made or to use different assumptions, or if the quantity and nature of the Company’s stock-based compensation awards changes, then the amount of expense may need to be adjusted and future stock compensation expense could be materially different from what has been recorded in the current period.

Stock-Based Compensation Expense

The Company recognized the following amounts of stock-based compensation expense by award type in the periods indicated (in millions):


	Three Months Ended June 30,				Six Months Ended June 30,

Award type:	2011		2010		2011		2010

Stock appreciation rights (SARs)	$	0.9	$	1.1	$	2.4	$	2.8
Common stock equivalents (CSEs)		0.1		0.1		0.3		0.2
Restricted stock units (RSUs)		6.8		5.6		14.3		13.0

Total	$	7.8	$	6.8	$	17.0	$	16.0

Stock-based compensation expense was recognized in the Consolidated Statements of Operations as follows (in millions):


	Three Months Ended June 30,				Six Months Ended June 30,

Amount recorded in:	2011		2010		2011		2010

Cost of services and product development	$	3.4	$	3.1	$	7.9	$	7.8
Selling, general and administrative		4.4		3.7		9.1		8.2

Total stock-based compensation expense	$	7.8	$	6.8	$	17.0	$	16.0

As of June 30, 2011, the Company had $57.5 million of total unrecognized stock-based compensation cost, which is expected to be expensed over the remaining weighted-average service period of approximately 2.4 years.

Stock-Based Compensation Awards

The following disclosures provide information regarding the Company’s stock-based compensation awards, all of which are classified as equity awards in accordance with FASB ASC Topic 505:

Stock Appreciation Rights

Stock-settled stock appreciation rights (SARs) are settled in common shares and are similar to stock options as they permit the holder to participate in the appreciation of the Common Stock. SARs may be settled in shares of Common Stock by the employee once the applicable vesting criteria have been met. SARs vest ratably over a four-year service period and expire seven years from the grant date. The fair value of SARs awards is recognized as compensation expense on a straight-line basis over four years. Presently, SARs are awarded only to the Company’s executive officers.

When SARs are exercised, the number of shares of Common Stock issued is calculated as follows: (1) the total proceeds from the SARs exercise (calculated as the closing price of the Common Stock on the date of exercise less the exercise price of the SARs, multiplied by the number of SARs exercised) is divided by (2) the closing price of the Common Stock on the exercise date. The Company withholds a portion of the shares of Common Stock issued upon exercise to satisfy minimum statutory tax withholding requirements. SARs recipients do not have any stockholder rights until after actual shares of Common Stock are issued in respect of the award, which is subject to the prior satisfaction of the vesting and other criteria relating to such grants.

A summary of the changes in SARs outstanding for the six months ended June 30, 2011, follows:


	SARs in millions			Per Share Weighted- Average Exercise Price		Per Share Weighted- Average Grant Date Fair Value		Weighted Average Remaining Contractual Term

Outstanding at December 31, 2010		2.5		$	17.22	$	6.62		4.55 years
Granted		0.4			38.05		13.58		6.65 years
Forfeited		—			—		—		na
Exercised		(0.3	)		16.96		6.62		na

Outstanding at June 30, 2011 (1), (2)		2.6		$	20.13	$	7.58		4.50 years

Vested and exercisable at June 30, 2011 (1)		1.2		$	17.71	$	6.67		3.54 years

na=not applicable



(1)	Total SARs outstanding had an intrinsic value of $52.0 million. SARs vested and exercisable had an intrinsic value of $27.1 million.

(2)	Approximately 1.4 million of these outstanding SARs were unvested. The Company expects that substantially all of these unvested awards will vest in future periods.

The fair value of the SARs was estimated on the date of grant using the Black-Scholes-Merton valuation model with the following weighted-average assumptions:


	Six Months Ended June 30, (1)

	2011			2010

Expected dividend yield (2)		0	%		0	%
Expected stock price volatility (3)		38	%		40	%
Risk-free interest rate (4)		2.2	%		2.4	%
Expected life in years (5)		4.8			4.8



(1)	The Company did not make any SARs grants during the three months ended June 30, 2011 or June 30, 2010.

(2)	The dividend yield assumption is based on the history and expectation of the Company’s dividend payouts. Historically, Gartner has not paid cash dividends on its Common Stock.

(3)	The determination of expected stock price volatility was based on both historical Company Common Stock prices and implied volatility from publicly traded options in the Common Stock.

(4)	The risk-free interest rate is based on the yield of a U.S. Treasury security with a maturity similar to the expected life of the award.

(5)	The expected life represents a weighted-average estimate of the period of time the SARs are expected to be outstanding (that is, the period between the service inception date and the expected exercise date). The expected life in years is based on the “simplified” calculation permitted by SEC SAB No. 107. Under the simplified method, the expected life is calculated by taking the average of the vesting period plus the original contractual term and dividing by two.

Restricted Stock Units

Restricted stock units (RSUs) give the awardee the right to receive shares of Common Stock when the vesting conditions are met and the restrictions lapse, and each RSU that vests entitles the awardee to one common share. RSU awardees do not have any stockholder rights until after the common shares are released. The fair value of RSUs is determined on the date of grant based on the closing price of the Common Stock as reported by the New York Stock Exchange on that date. Service-based RSUs vest ratably over four years and are expensed on a straight-line basis over four years. Performance-based RSUs are subject to both performance and service conditions, vest ratably over four years, and are expensed on an accelerated basis.

A summary of the changes in RSUs during the six months ended June 30, 2011 follows:


	Restricted Stock Units (RSUs)			Per Share Weighted Average Grant Date Fair Value

Outstanding at December 31, 2010		3,868,271		$	16.52
Granted (1)		668,458			38.07
Vested		(1,390,310	)		17.17
Forfeited		(84,126	)		20.20

Outstanding at June 30, 2011 (2), (3)		3,062,293		$	21.48



(1)	The 0.7 million RSUs granted in 2011 consisted of 0.3 million performance-based RSUs awarded to executives and 0.4 million service-based RSUs awarded to non-executive employees and certain board members. The 0.3 million performance-based RSUs represents the target amount of the award. The actual number of performance-based RSUs that will ultimately be granted will be between 0% and 200% of the target amount, depending on the performance metric achieved. For 2011, the performance metric is the dollar level of the Company’s subscription-based contract value at December 31, 2011. If the specified minimum level of achievement is not met, the performance-based RSUs will be forfeited in their entirety, and any compensation expense already recorded will be reversed.

(2)	The Company expects that substantially all of the outstanding awards will vest in future periods.

(3)	The weighted-average remaining contractual term of the outstanding RSUs is approximately 1.5 years.

Common Stock Equivalents

Common stock equivalents (CSEs) are convertible into Common Stock and each CSE entitles the holder to one common share. Members of our Board of Directors receive directors’ fees payable in CSEs unless they opt to receive up to 50% of the fees in cash. Generally, the CSEs have no defined term and are converted into common shares when service as a director terminates unless the director has elected an accelerated release. The fair value of the CSEs is determined on the date of grant based on the closing price of the Common Stock as reported by the New York Stock Exchange on that date. CSEs vest immediately and as a result are recorded as expense on the date of grant.

A summary of changes in CSEs during the six months ended June 30, 2011, follows:


	Common Stock Equivalents (RSUs)			Per Share Weighted Average Grant Date Fair Value

Outstanding at December 31, 2010		117,208		$	na
Granted		6,057			41.30
Converted to common shares		(2,834	)		na
Forfeited		—			na

Outstanding at June 30, 2011		120,431		$	na


na=not available

Stock Options

Historically, the Company granted stock options to employees that allowed them to purchase shares of the Common Stock at a certain price. The Company has not made any stock option grants since 2006. All outstanding options are fully vested and there is no remaining unamortized cost. The Company received $14.6 million and $9.5 million in cash from option exercises in the six months ended June 30, 2011 and 2010, respectively.

A summary of the changes in stock options outstanding in the six months ended June 30, 2011 follows:


	Options in millions			Per Share Weighted- Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value (in millions)

Vested and outstanding at December 31, 2010		2.6		$	11.13		2.59 years	$	58.2
Expired		—			—		na		na
Exercised (1)		(1.3	)		11.50		na		na

Vested and outstanding at June 30, 2011		1.3		$	10.79		1.80 years	$	40.5


na=not applicable


(1)	Options exercised during the six months ended June 30, 2011 had an intrinsic value of $34.0 million.

Employee Stock Purchase Plan

The Company has an employee stock purchase plan (the “ESPP Plan”) under which eligible employees are permitted to purchase Common Stock through payroll deductions, which may not exceed 10% of an employee’s compensation (or $23,750 in any calendar year), at a price equal to 95% of the closing price of the Common Stock as reported by the New York Stock Exchange at the end of each offering period.

At June 30, 2011, the Company had approximately 1.4 million shares available for purchase under the ESPP Plan. The ESPP Plan is considered non-compensatory under FASB ASC Topic 718, and as a result the Company does not record compensation expense for employee share purchases. The Company received $1.8 million and $1.5 million in cash from share purchases under the ESPP Plan in the six months ended June 30, 2011 and 2010, respectively.

The Company’s Board of Directors and Stockholders have approved a new Employee Stock Purchase Plan that will be effective September 1, 2011. The shares remaining available under the current ESPP Plan on August 31, 2011 will be transferred to the new plan, and no additional shares will be reserved for issuance under the new plan.