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, 2016, there were 7,417,846 shares available for granting additional awards.

Equity compensation expense is included in salaries, wages and benefits within the Consolidated Statements of Income. As of September 30, 2016, the total unrecognized compensation cost related to non-vested equity compensation awards was approximately $6.6 million and is expected to be recognized over a weighted average period of 2.3 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,
	2016		2015			2016		2015
Stock options:
Pre-tax compensation expense	$	5	$	17		$	14	$	51
Tax benefit	2		7			6		20
Stock option expense, net of tax	$	3	$	10		$	8	$	31
Restricted awards:
Pre-tax compensation expense	$	813	$	(92	)	$	1,743	$	1,949
Tax benefit	317		(36		)	680		770
Restricted award expense, net of tax	$	496	$	(56	)	$	1,063	$	1,179
Performance awards:
Pre-tax compensation expense	$	517	$	(60	)	$	628	$	1,648
Tax benefit	202		(24		)	245		651
Performance award expense, net of tax	$	315	$	(36	)	$	383	$	997

During the nine-month period ended September 30, 2016, we recorded a $1.8 million reduction in compensation expense and a $0.7 million reduction of tax benefit resulting from a change in forfeiture estimates for certain restricted and performance awards, most of which relate to a previously disclosed executive retirement that occurred in February 2016. During the three-month and nine-month periods ended September 30, 2015, we recorded a $2.0 million reduction of compensation expense and a $0.8 million reduction of tax benefit resulting from our change in forfeiture estimates for certain restricted and performance awards primarily due to a previously disclosed executive resignation.

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 2016.

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, 2016:



	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	192		$	18.29
Granted	—		—
Exercised	(15	)	18.78
Forfeited	(2	)	22.28
Expired	—		—
Outstanding at end of period	175		18.21		2.15	$	884
Exercisable at end of period	166		18.00		1.99	$	876

We did not grant any stock options during the three-month and nine-month periods ended September 30, 2016 and September 30, 2015. The fair value of stock option grants is estimated using a Black-Scholes valuation model. The total intrinsic value of stock options exercised was $95 thousand and $0.7 million for the nine-month periods ended September 30, 2016 and September 30, 2015, 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, 2016:



	Number of Restricted Awards (in thousands)		Weighted Average Grant Date Fair Value ($)
Nonvested at beginning of period	445		$	24.32
Granted	—		—
Vested	(10	)	22.96
Forfeited	(46	)	21.51
Nonvested at end of period	389		24.69

We did not grant any restricted awards during the three-month and nine-month periods ended September 30, 2016 and September 30, 2015. 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 total fair value of previously granted restricted awards vested during the three-month periods ended September 30, 2016 and September 30, 2015 was $0.2 million and for the nine-month periods ended September 30, 2016 and September 30, 2015 was $0.3 million. 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 are recorded as treasury stock.

Performance Awards

Performance awards entitle the recipient to shares of common stock upon attainment of performance objectives as pre-established by the Compensation Committee. If the performance objectives are achieved, 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, 2016:



	Number of Performance Awards (in thousands)		Weighted Average Grant Date Fair Value ($)
Nonvested at beginning of period	258		$	27.23
Granted	110		26.53
Vested	(60	)	27.11
Forfeited	(75	)	27.45
Nonvested at end of period	233		26.86

We did not grant any performance awards during the three-month periods ended September 30, 2016 and September 30, 2015, and granted performance awards (in thousands) totaling 110 shares and 202 shares during the nine-month periods ended September 30, 2016 and September 30, 2015, respectively, including additional shares earned as a result of attaining performance objectives at higher than the target level. 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, as established by the Compensation Committee. The number of shares which are ultimately earned for the 2016 awards will range from 0 percent to 123 percent of the target number based on the level of attainment of the performance objectives and ranged from 0 percent to 132 percent for the 2015 awards. 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 was calculated using the following assumptions:



	Nine Months Ended September 30,
	2016			2015
Dividends per share (quarterly amounts)	$	0.06		$	0.05
Risk-free interest rate	1.5		%	1.6		%

During the nine-month period ended September 30, 2016, the Compensation Committee determined that the 2015 fiscal year performance objectives were achieved at a level above the target level and 165,500 shares of common stock were earned (excluding those shares forfeited prior to the end of the performance period), subject to time-based vesting over a five-year period. The vesting date fair value of performance awards that vested during the nine-month periods ended September 30, 2016 and September 30, 2015 was $1.6 million and $1.1 million, respectively. We withhold 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 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 are recorded as treasury stock.