Equity Compensation

The Werner Enterprises, Inc. Amended and Restated Equity Plan (the "Equity Plan"), approved by the Company's shareholders, provides for grants to employees and non-employee directors of the Company in the form of nonqualified stock options, restricted stock and units ("restricted awards"), performance stock and units ("performance awards"), and stock appreciation rights. The Board of Directors or the Compensation Committee of our Board of Directors determines the terms of each award, including the type, recipients, number of shares subject to and vesting conditions of each award. No awards of stock appreciation rights have been issued under the Equity Plan to date. The maximum number of shares of common stock that may be awarded under the Equity Plan is 20,000,000 shares. The maximum aggregate number of shares that may be awarded to any one person in any one calendar year under the Equity Plan is 500,000. As of September 30, 2014, there were 7,415,544 shares available for granting additional awards.

We apply the fair value method of accounting for equity compensation awards granted under our Equity Plan. Equity compensation expense is included in salaries, wages and benefits within the Consolidated Statements of Income. For performance awards, we accrue compensation expense for the estimated number of shares expected to be issued using the most current information available at the date of the financial statements. If the performance goals are not met, no compensation expense will be recognized and any previously recognized compensation expense will be reversed. As of September 30, 2014, the total unrecognized compensation cost related to non-vested equity compensation awards was approximately $8.1 million and is expected to be recognized over a weighted average period of 2.4 years.

The following table summarizes the equity compensation expense and related income tax benefit recognized in the Consolidated Statements of Income (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Stock options:
Pre-tax compensation expense	$	30	$	67	$	90	$	198
Tax benefit	12		24		36		76
Stock option expense, net of tax	$	18	$	43	$	54	$	122
Restricted awards:
Pre-tax compensation expense	$	1,022	$	1,173	$	3,097	$	3,631
Tax benefit	393		421		1,228		1,398
Restricted award expense, net of tax	$	629	$	752	$	1,869	$	2,233
Performance awards:
Pre-tax compensation expense	$	468	$	—	$	1,185	$	—
Tax benefit	179		—		468		—
Performance award expense, net of tax	$	289	$	—	$	717	$	—

We do not have a formal policy for issuing shares upon an exercise of stock options or vesting of restricted and performance awards. Such shares are generally issued from treasury stock. From time to time, we repurchase shares of our common stock, the timing and amount of which depends on market and other factors. Historically, the shares acquired from such repurchases have provided us with sufficient quantities of stock to issue for equity compensation. Based on current treasury stock levels, we do not expect to repurchase additional shares specifically for equity compensation during 2014.

Stock Options

Stock options are granted at prices equal to the market value of the common stock on the date the option award is granted. Option awards currently outstanding become exercisable in installments from 24 to 72 months after the date of grant. The options are exercisable over a period not to exceed ten years, one day from the date of grant.

The following table summarizes stock option activity for the nine months ended September 30, 2014:



	Number of Options (in thousands)		Weighted Average Exercise Price ($)		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in thousands)
Outstanding at beginning of period	653		$	17.85
Granted	—		$	—
Exercised	(235	)	$	17.75
Forfeited	(3	)	$	21.15
Expired	—		$	—
Outstanding at end of period	415		$	17.89	3.33	$	3,036
Exercisable at end of period	335		$	17.40	2.76	$	2,611

We did not grant any stock options during the three-month and nine-month periods ended September 30, 2014 and September 30, 2013. The fair value of stock option grants is estimated using a Black-Scholes valuation model. The total intrinsic value of stock options exercised was $6 thousand and $0.1 million for the three-month periods ended September 30, 2014 and September 30, 2013, respectively, and $2.0 million and $0.3 million for the nine-month periods ended September 30, 2014 and September 30, 2013, respectively.

Restricted Awards

Restricted stock entitles the holder to shares of common stock when the award vests. Restricted stock units entitle the holder to a combination of cash or stock equal to the value of common stock when the unit vests. The value of these shares may fluctuate according to market conditions and other factors. Restricted awards currently outstanding vest over periods ranging from 12 to 84 months from the grant date of the award. The restricted awards do not confer any voting or dividend rights to recipients until such shares vest and do not have any post-vesting sales restrictions.

The following table summarizes restricted award activity for the nine months ended September 30, 2014:



	Number of Restricted Awards (in thousands)		Weighted Average Grant Date Fair Value ($)
Nonvested at beginning of period	698		$	21.04
Granted	10		$	25.26
Vested	(12	)	$	23.31
Forfeited	(3	)	$	23.48
Nonvested at end of period	693		$	21.14

We granted 10,000 shares of restricted stock during the nine-month period ended September 30, 2014 and did not grant any shares of restricted stock during the three-month period ended September 30, 2014 and the three-month and nine-month periods ended September 30, 2013. We estimate the fair value of restricted awards based upon the market price of the underlying common stock on the date of grant, reduced by the present value of estimated future dividends because the awards are not entitled to receive dividends prior to vesting. Our estimate of future dividends is based on the most recent quarterly dividend rate at the time of grant, adjusted for any known future changes in the dividend rate. Cash settled restricted stock units are recorded as a liability within the Consolidated Balance Sheets and are adjusted to fair value each reporting period. The present value of estimated future dividends for the 2014 grants was calculated using the following weighted-average assumptions:



Dividends per share (quarterly amounts)	$	0.05
Risk-free interest rate	1.5		%

The total fair value of previously granted restricted awards vested during the three-month and nine-month periods ended September 30, 2014, was $0.2 million and $0.3 million, respectively, and was $1.0 million and $1.5 million for the three-month and nine-month periods ended September 30, 2013, respectively. We withheld shares based on the closing stock price on the vesting date to settle the employees' minimum statutory obligation for the applicable income and other employment taxes. Total cash remitted for the employees' tax obligations to the relevant taxing authorities is reflected as a financing activity within the Consolidated Statements of Cash Flows, and the shares withheld to satisfy the minimum tax withholding obligations were recorded as treasury stock.

Performance Awards

In February 2014, we granted performance awards. Performance awards entitle the recipient to shares of common stock upon attainment of performance criteria as pre-established by the Compensation Committee. Performance awards currently outstanding vest, subject to continued employment, over periods ranging from 12 to 60 months from the grant date of the award. The performance awards do not confer any voting or dividend rights to recipients until such shares vest and do not have any post-vesting sales restrictions.

The following table summarizes performance award activity for the nine months ended September 30, 2014:



	Number of Performance Awards (in thousands)	Weighted Average Grant Date Fair Value ($)
Nonvested at beginning of period	—	$	—
Granted	183	$	25.06
Vested	—	$	—
Forfeited	—	$	—
Nonvested at end of period	183	$	25.06

The 2014 performance awards are earned based upon the level of attainment by the Company of specified performance objectives related to earnings per share for the fiscal year ending December 31, 2014, as established by the Compensation Committee. The number of shares which are ultimately earned will range from 0 percent to 133 percent of the target number based on the level of attainment of the performance objectives. We estimate the fair value of performance awards based upon the market price of the underlying common stock on the date of grant, reduced by the present value of estimated future dividends because the awards are not entitled to receive dividends prior to vesting. Our estimate of future dividends is based on the most recent quarterly dividend rate at the time of grant, adjusted for any known future changes in the dividend rate. The present value of estimated future dividends for the 2014 grant was calculated using the following assumptions:



Dividends per share (quarterly amounts)	$	0.05
Risk-free interest rate	1.5		%