NOTE 11 Stock-Based Compensation

Performance Stock Plan

In 1996, Brown & Brown adopted and the shareholders approved a performance stock plan, under which until the suspension of the plan in 2010, up to 14,400,000 Performance Stock Plan (“PSP”) shares could be granted to key employees contingent on the employees’ future years of service with Brown & Brown and other performance-based criteria established by the Compensation Committee of the Company’s Board of Directors. Before participants may take full title to Performance Stock, two vesting conditions must be met. Of the grants currently outstanding, specified portions will satisfy the first condition for vesting based on 20% incremental increases in the 20-trading-day average stock price of Brown & Brown’s common stock from the price on the business day prior to date of grant. Performance Stock that has satisfied the first vesting condition is considered “awarded shares.” Awarded shares are included as issued and outstanding common stock shares and are included in the calculation of basic and diluted EPS. Dividends are paid on awarded shares and participants may exercise voting privileges on such shares. Awarded shares satisfy the second condition for vesting on the earlier of a participant’s: (i) 15 years of continuous employment with Brown & Brown from the date shares are granted to the participants (or, in the case of the July 2009 grant to Powell Brown, 20 years); (ii) attainment of age 64 (on a prorated basis corresponding to the number of years since the date of grant); or (iii) death or disability. On April 28, 2010, the PSP was suspended and any remaining authorized but unissued shares, as well as any shares forfeited in the future, will be reserved for issuance under the 2010 Stock Incentive Plan (the “SIP”).

At December 31, 2012, 6,750,253 shares had been granted under the PSP at initial stock prices ranging from $4.25 to $25.68. As of December 31, 2012, 1,296,517 shares had not met the first condition for vesting, 2,394,505 shares had met the first condition of vesting and had been awarded, and 3,059,231 shares had satisfied both conditions of vesting and had been distributed to participants.

The Company uses a path-dependent lattice model to estimate the fair value of PSP grants on the grant date.

A summary of PSP activity for the years ended December 31, 2012, 2011 and 2010 is as follows:


	Weighted- Average Grant Date Fair Value		Granted Shares			Awarded Shares			Shares Not Yet Awarded
Outstanding at January 1, 2010	$	7.39		7,758,547			4,423,436			3,335,111

Granted	$	9.67		384,420			—			384,420
Awarded	$	9.49		—			474,113			(474,113	)
Vested	$	2.02		(1,388,789	)		(1,388,789	)		—
Forfeited	$	7.91		(962,324	)		(117,241	)		(845,083	)

Outstanding at December 31, 2010	$	7.32		5,791,854			3,391,519			2,400,335

Granted	$	—		—			—			—
Awarded	$	9.56		—			447,154			(447,154	)
Vested	$	6.01		(106,490	)		(106,490	)		—
Forfeited	$	9.48		(753,552	)		(386,914	)		(366,638	)

Outstanding at December 31, 2011	$	8.08		4,931,812			3,345,269			1,586,543

Granted	$	—		—			—			—
Awarded	$	8.09		—			7,743			(7,743	)
Vested	$	3.29		(877,224	)		(877,224	)		—
Forfeited	$	13.06		(363,566	)		(81,283	)		(282,283	)

Outstanding at December 31, 2012	$	8.72		3,691,022			2,394,505			1,296,517

The weighted average grant-date fair value of PSP grants for years ended December 31, 2012, 2011 and 2010 was $ 0.00, $0.00 and $9.67, respectively. The total fair value of PSP grants that vested during each of the years ended December 31, 2012, 2011 and 2010 was $23,034,000, $2,384,000 and $31,965,000, respectively.

Stock Incentive Plan

On April 28, 2010, the shareholders of Brown & Brown, Inc. approved the Stock Incentive Plan (“SIP”) that provides for the granting of stock options, stock and/or stock appreciation rights to employees and directors contingent on criteria established by the Compensation Committee of the Company’s Board of Directors. The principal purpose of the SIP is to attract, incentivize and retain key employees by offering those persons an opportunity to acquire or increase a direct proprietary interest in the Company’s operations and future success. The SIP includes a sub-plan applicable to Decus Insurance Brokers Limited (“Decus”) which, together with its parent company, Decus Holdings (U.K.) Limited, are the Company’s only foreign subsidiaries. The shares of stock reserved for issuance under the SIP are any shares that are authorized for issuance under the PSP and not already subject to grants under the PSP, and that were outstanding as of April 28, 2010, the date of suspension of the PSP, together with PSP shares and SIP shares forfeited after that date. As of April 28, 2010, 6,046,768 shares were available for issuance under the PSP, which were then transferred to the SIP. To date stock grants to employees under the SIP generally vest in four-to-ten years, subject to the achievement of certain performance criteria by grantees, and the achievement of consolidated EPS growth at certain levels by the Company, over three-to-five-year measurement periods.

In 2010, a grant of 187,040 shares was made under the SIP. This grant was conditioned upon the surrender of 187,040 shares previously granted under the PSP in 2009, which were accordingly treated as forfeited PSP shares. The vesting conditions of this grant were identical to those provided for in connection with the 2009 PSP grant; thus the target stock prices and the periods associated with satisfaction of the first and second conditions of vesting were unchanged. Additionally, grants totaling 5,205 shares were made in 2010 to Decus employees under the SIP sub-plan applicable to Decus.

In 2011, 2,375,892 shares were granted under the SIP. Of this total, 24,670 shares were granted to Decus employees under the SIP sub-plan applicable to Decus. As of December 31, 2012, 37,408 of the granted shares had satisfied the first condition of vesting and had been “awarded”, meaning that dividends are paid on awarded shares and participants may exercise voting privileges on such shares.

In 2012, shares totaling 814,545 were granted under the SIP, primarily related to the Arrowhead acquisition. As of December 31, 2012, no shares had met the first condition for vesting. Additionally, non-employee members of the Board of Directors received shares issued pursuant to the SIP as part of their annual compensation. A total of 36,919 SIP shares were issued to these directors in 2011 and 2012, of which 11,682 were issued in January 2011, 12,627 in January 2012, and 12,610 in December 2012. The shares issued in December 2012 were issued at that earlier time rather than in January 2013 pursuant to action of the Board of Directors.

At December 31, 2012, 4,455,517 shares were available for future grants, of which 2,624,873 are reserved for grants with PSP-type vesting conditions.

The Company uses the closing stock price on the day prior to the grant date to determine the fair value of SIP grants and then applies an estimated forfeiture factor to estimate the annual expense. Additionally, the Company uses the path-dependent lattice model to estimate the fair value of grants with PSP type vesting conditions as of the grant date. SIP shares that satisfied the first vesting condition for PSP-like grants or the established performance criteria are considered awarded shares. Awarded shares are included as issued and outstanding common stock shares and are included in the calculation of basic and diluted EPS.

A summary of SIP activity for the years ended December 31, 2012, 2011 and 2010 is as follows:


	Weighted- Average Grant Date Fair Value		Granted Shares			Awarded Shares			Shares Not Yet Awarded
Outstanding at January 1, 2010	$	—		—			—			—

Granted	$	12.62		192,245			—			192,245
Awarded	$	12.62		—			38,449			(38,449	)
Vested	$	—		—			—			—
Forfeited	$	—		—			—			—

Outstanding at December 31, 2010	$	12.62		192,245			38,449			153,796

Granted	$	23.94		2,375,892			—			2,375,892
Awarded	$	11.41		—			(1,041	)		1,041
Vested	$	—		—			—			—
Forfeited	$	23.94		(90,080	)		—			(90,080	)

Outstanding at December 31, 2011	$	23.06		2,478,057			37,408			2,440,649

Granted	$	22.59		814,545			—			814,545
Awarded	$	—		—			—			—
Vested	$	—		—			—			—
Forfeited	$	23.62		(135,291	)		—			(135,291	)

Outstanding at December 31, 2012	$	22.91		3,157,311			37,408			3,119,903

Employee Stock Purchase Plan

The Company has a shareholder-approved Employee Stock Purchase Plan (“ESPP”) with a total of 12,000,000 authorized shares of which 1,734,510 were available for future subscriptions as of December 31, 2012. Employees of the Company who regularly work more than 20 hours per week are eligible to participate in the ESPP. Participants, through payroll deductions, may allot up to 10% of their compensation, to a maximum of $25,000, to purchase Company stock between August 1^st of each year and the following July 31st (the “Subscription Period”) at a cost of 85% of the lower of the stock price as of the beginning or end of the Subscription Period.

The Company estimates the fair value of an ESPP share option as of the beginning of the Subscription Period as the sum of: (1) 15% of the quoted market price of the Company’s stock on the day prior to the beginning of the Subscription Period, and (2) 85% of the value of a one-year stock option on the Company stock using the Black-Scholes option-pricing model. The estimated fair value of an ESPP share option as of the Subscription Period beginning in August 2012 was $5.84. The fair values of an ESPP share option as of the Subscription Periods beginning in August 2011 and 2010, were $4.27 and $4.01, respectively.

For the ESPP plan years ended July 31, 2012, 2011 and 2010, the Company issued 562,748, 488,052 and 500,334 shares of common stock, respectively. These shares were issued at an aggregate purchase price of $9,302,000, or $16.53 per share, in 2012, $8,048,000, or $16.49 per share, in 2011, and $8,326,000, or $16.64 per share, in 2010.

For the five months ended December 31, 2012, 2011 and 2010 (portions of the 2012-2013, 2011-2012 and 2010-2011 plan years), 246,164, 230,481, and 206,201 shares of common stock (from authorized but unissued shares), respectively, were subscribed to by ESPP participants for proceeds of approximately $5,278,000, $3,810,000 and $3,400,000, respectively.

Incentive Stock Option Plan

On April 21, 2000, Brown & Brown adopted, and the shareholders approved, a qualified incentive stock option plan (the “ISOP”) that provides for the granting of stock options to certain key employees for up to 4,800,000 shares of common stock. On December 31, 2008, the ISOP expired. The objective of the ISOP was to provide additional performance incentives to grow Brown & Brown’s pre-tax income in excess of 15% annually. The options were granted at the most recent trading day’s closing market price and vest over a one-to-10-year period, with a potential acceleration of the vesting period to three-to-six years based upon achievement of certain performance goals. All of the options expire 10 years after the grant date.

The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options on the grant date. The risk-free interest rate is based upon the U.S. Treasury yield curve on the date of grant with a remaining term approximating the expected term of the option granted. The expected term of the options granted is derived from historical data; grantees are divided into two groups based upon expected exercise behavior and are considered separately for valuation purposes. The expected volatility is based upon the historical volatility of the Company’s common stock over the period of time equivalent to the expected term of the options granted. The dividend yield is based upon the Company’s best estimate of future dividend yield.

A summary of stock option activity for the years ended December 31, 2012, 2011 and 2010 is as follows:


Stock Options	Shares Under Option			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term *(in years)*		Aggregate Intrinsic Value *(in thousands)*
Outstanding at January 1, 2010		2,388,684		$	17.03		6.1	$	21,629

Granted		—		$	—
Exercised		(313,514	)	$	13.13
Forfeited		(200,000	)	$	18.48
Expired		—		$	—

Outstanding at December 31, 2010		1,875,170		$	17.53		5.4	$	17,147

Granted		—		$	—
Exercised		(52,589	)	$	18.48
Forfeited		(438,044	)	$	17.28
Expired		—		$	—

Outstanding at December 31, 2011		1,384,537		$	17.58		4.4	$	14,587

Granted		—		$	—
Exercised		(645,745	)	$	16.64
Forfeited		—		$	—
Expired		—		$	—

Outstanding at December 31, 2012		738,792		$	18.39		4.9	$	8,891

Ending vested and expected to vest at December 31, 2012		738,792		$	18.39		4.9	$	8,891
Exercisable at December 31, 2012		162,792		$	17.82		4.0	$	1,243
Exercisable at December 31, 2011		396,985		$	18.16		5.4	$	1,774
Exercisable at December 31, 2010		257,040		$	17.92		6.0	$	1,546

The following table summarizes information about stock options outstanding at December 31, 2012:


Options Outstanding							Options Exercisable
Exercise Price	Number Outstanding		Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$15.78		39,614		0.2	$	15.78		39,614	$	15.78
$22.06		12,000		2.0	$	22.06		—	$	22.06
$18.48		687,178		5.2	$	18.48		123,178	$	18.48

Totals		738,792		4.9	$	18.39		162,792	$	17.82

The total intrinsic value of options exercised, determined as of the date of exercise, during the years ended December 31, 2012, 2011 and 2010 was $5,780,000, $333,000 and $2,344,000, respectively. The total intrinsic value is calculated as the difference between the exercise price of all underlying awards and the quoted market price of the Company’s stock for all in-the-money stock options at December 31, 2012, 2011 and 2010, respectively.

There are no option shares available for future grant under the ISOP since this plan expired as of December 31, 2008.

Summary of Non-Cash Stock-Based Compensation Expense

The non-cash stock-based compensation expense for the years ended December 31 is as follows:


(in thousands)	2012		2011		2010
Stock Incentive Plan	$	9,288	$	5,320	$	60
Employee Stock Purchase Plan		2,856		2,126		2,511
Performance Stock Plan		2,612		2,661		2,836
Incentive Stock Option Plan		1,109		1,087		1,438

Total	$	15,865	$	11,194	$	6,845

Summary of Unrecognized Compensation Expense

As of December 31, 2012, there was approximately $68.0 million of unrecognized compensation expense related to all non-vested share-based compensation arrangements granted under the Company’s stock-based compensation plans. That expense is expected to be recognized over a weighted-average period of 7.8 years.