12. Stock-based Compensation

We account for stock-based payment awards in accordance with ASC 718, Stock Compensation, which requires the measurement and recognition of compensation expense for all equity awards granted to our employees, contractors, and directors, including employee stock options, RSUs, and ESPP purchases related to all stock-based compensation plans based on the fair value of such awards on the date of grant. We amortize stock-based compensation cost on a graded vesting basis over the vesting period, after assessing the probability of achieving the requisite performance criteria with respect to performance-based and market-based awards. Stock-based compensation cost is recognized over the requisite service period for each separately vesting tranche of the award as though the award were, in substance, multiple awards.

Stock-based compensation expense related to stock options, ESPP purchases, and RSUs under ASC 718 for the three and nine months ended September 30, 2015 and 2014 is summarized as follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Stock-based compensation expense by type of award:
Employee stock options	$	329		$	37		$	385		$	191
RSUs		8,209			7,853			24,485			22,784
ESPP		990			1,144			3,217			2,176

Total stock-based compensation expense		9,528			9,034			28,087			25,151
Income tax effect		(2,787	)		(2,553	)		(7,451	)		(6,998	)

Stock-based compensation expense, net of tax	$	6,741		$	6,481		$	20,636		$	18,153

Valuation Assumptions for Stock Options and ESPP Purchases

We use the Black-Scholes-Merton (“BSM”) option pricing model to value stock-based compensation for all equity awards, except market-based awards, which are valued using the Monte Carlo valuation model.

The BSM model determines the fair value of stock-based payment awards based on the stock price on the date of grant and is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, expected term, interest rates, and actual and projected employee stock option exercise behavior. Expected volatility is based on the historical volatility of our stock over a preceding period commensurate with the expected term of the option. The expected term is based upon management’s consideration of the historical life, vesting period, and contractual period of the options granted. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yield was not considered in the option pricing formula since we do not pay dividends and have no current plans to do so in the future.

Stock options were not granted during the three and nine months ended September 30, 2015 and 2014. ESPP purchase rights and the underlying weighted average assumptions for the three and nine months ended September 30, 2015 and 2014 are as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Weighted average fair value per share	$	11.35		$	11.42		$	10.28		$	11.12
Expected volatility		19% - 25	%		25% - 27	%		19% - 28	%		25% - 28	%
Risk-free interest rate		0.1% - 0.7	%		0.1% - 0.5	%		0.1% - 0.7	%		0.1% - 0.5	%
Expected term (in years)		0.5 - 2.0			0.5 - 2.0			0.5 - 2.0			0.5 - 2.0

Stock options outstanding and exercisable, including performance-based and market-based options, as of September 30, 2015 and activity for the nine months ended September 30, 2015 are summarized below (in thousands, except weighted average exercise price and remaining contractual term):


	Shares outstanding			Weighted average exercise price			Weighted average remaining contractual term (years)		Aggregate intrinsic value
Options outstanding at January 1, 2015		567		$	13.67
Options exercised		(116	)		(15.59	)

Options outstanding at September 30, 2015		451		$	13.18			2.35	$	13,584

Options vested and expected to vest at September 30, 2015		450		$	13.18			2.35	$	13,549

Options exercisable at September 30, 2015		417		$	13.12			2.34	$	12,578

Aggregate intrinsic value for stock options represents the difference between the closing price per share of our common stock on the last trading day of the fiscal period and the option exercise price multiplied by the number of in-the-money stock options outstanding, vested and expected to vest, and exercisable at September 30, 2015.

Non-vested RSUs, including performance-based and market-based RSUs, as of September 30, 2015 and activity during the nine months ended September 30, 2015 are summarized below (shares in thousands):


Non-vested shares	Shares			Weighted average grant date fair value
Non-vested at January 1, 2015		2,003		$	35.91
Restricted stock granted		1,034			41.29
Restricted stock vested		(857	)		(32.03	)
Restricted stock forfeited		(357	)		(39.10	)

Non-vested at September 30, 2015		1,823		$	39.73

Vested RSUs

Performance-based RSUs that vested based on annual financial results are included in the period that the performance criteria were met. The grant date fair value of RSUs vested during the nine months ended September 30, 2015 was $27.5 million. The aggregate intrinsic value at September 30, 2015 for RSUs expected to vest was $68.0 million and the remaining weighted average vesting period was 1.3 years. Aggregate intrinsic value for RSUs vested and expected to vest represents the closing price per share of our common stock on the last trading day of the fiscal period, multiplied by the number of RSUs vested and expected to vest as of September 30, 2015.

Performance-based and Market-based RSUs and Stock Options

Performance-based and market-based RSUs and stock options included in the tables above as of September 30, 2015 and activity for the nine months ended September 30, 2015 are summarized below (in thousands):


	Performance-based					Market-based
	RSUs			Stock Options		RSUs
Non-vested at January 1, 2015		852			16		34


Granted		562			—		18
Vested		(284	)		—		—
Forfeited		(214	)		—		(26	)

Non-vested at September 30, 2015		916			16		26

We use the BSM option pricing model to value performance-based awards. We use a Monte Carlo option pricing model to value market-based awards. Performance-based stock options and market-based stock options were not granted during the nine months ended September 30, 2015. The weighted average grant date fair value per share of performance-based and market-based RSUs granted and the assumptions used to estimate grant date fair value for the nine months ended September 30, 2015 are as follows:


	Performance-based				Market-based
	RSUs				RSUs
	Short-term		Long-term
*Nine months ended September 30, 2015 Grants*
Grant date fair value per share	$	38.77	$	42.76	$	33.84
Service period (years)		1.0		2.0 - 3.0
Derived service period (years)						1.60
Implied volatility						30.0	%
Risk-free interest rate						1.7	%

*Nine months ended September 30, 2014 Grants*
Grant date fair value per share	$	40.18	$	41.11	$	32.10
Service period (years)		1.0		3.0 - 4.0
Derived service period (years)						1.53
Implied volatility						35.0	%
Risk-free interest rate						2.3	%

Our performance-based RSUs generally vest when specified performance criteria are met based on revenue, non-GAAP operating income, or other targets during the service period; otherwise, they are forfeited. The performance criteria for long-term incentive plans must be achieved during four consecutive quarters during the service period. Non-GAAP operating income is defined as operating income determined in accordance with GAAP, adjusted to remove the impact of certain expenses. The grant date fair value per share determined in accordance with the BSM valuation model is being amortized over the service period of the awards. The probability of achieving the awards was determined based on review of the actual results achieved thus far by each business unit compared with the operating plan during the pertinent service period as well as the overall strength of the business unit. Stock-based compensation expense was adjusted based on this probability assessment. As actual results are achieved during the service period, the probability assessment is updated and stock-based compensation expense adjusted accordingly.

Market-based awards vest when our average closing stock price exceeds defined multiples of the closing stock price on a specified date for 90 consecutive trading days. If these multiples were not achieved by another specified date, the awards are forfeited. The grant date fair value is being amortized over the average derived service period of the awards. The average derived service period and total fair value were determined using a Monte Carlo valuation model based on our assumptions, which include a risk-free interest rate and implied volatility.