8. SHARE-BASED COMPENSATION EXPENSE

Summary

On May 22, 2012, our shareholders approved the Navigant Consulting, Inc. 2012 Long-Term Incentive Plan (2012 Plan). The purposes of the 2012 Plan are: (i) to align the interests of our shareholders and recipients of awards under the 2012 Plan by increasing the proprietary interest of such recipients in our growth and success; (ii) to attract and retain officers, other employees, non-employee directors, consultants, independent contractors and agents; and (iii) to motivate such persons to act in the long-term best interests of our shareholders. The 2012 Plan allows for awards of stock options, stock appreciation rights, restricted stock and restricted stock units, and performance awards.

The maximum number of shares of our common stock available for awards under the 2012 Plan is 6.2 million, reduced by the number of shares of our common stock subject to awards granted under 2005 Long-Term Incentive Plan, as amended on or after January 1, 2012.

As of December 31, 2012 there were 5.4 million shares available for future issuance grant under the 2012 Plan.

We record share-based compensation expense for restricted stock, restricted stock units, stock options and the discount given on employee stock purchase plan transactions. Our long-term incentive program for our senior level consultants currently provides for either an award of restricted stock units or deferred cash at the recipient’s election. The value of the awards granted to eligible recipients is determined based on our financial performance for the prior fiscal year. Based on our historical experience for the program in place for 2012, we assumed that 65% of the awards expected to be granted in 2013 (based on our 2012 financial performance) would be made in the form of restricted stock units. In 2012, we recorded $2.0 million in other compensation expense. The share-based expense attributable to this program has not been included in the table below as the final form of the grant has not yet been determined. These awards have a three year cliff vesting schedule from grant date.

Total share-based compensation expense consisted of the following (shown in thousands)



	For the Year Ended
	December 31,
	2012		2011		2010

Amortization of restricted stock and restricted stock unit awards	$	8,564	$	7,564	$	5,634
Amortization of stock option awards		1,216		1,034		989
Fair value adjustment for variable stock option accounting awards		-		-		(29)
Discount given on employee stock purchase transactions through our Employee Stock Purchase Plan		247		194		161
Total share-based compensation expense	$	10,027	$	8,792	$	6,755

Share-based compensation expense attributable to consultants was included in cost of services before reimbursable expenses. Share-based compensation expense attributable to corporate management and support personnel was included in general and administrative expenses.

The following table shows the amounts attributable to each category (shown in thousands):



	For the Year Ended
	December 31,
	2012		2011		2010

Cost of services before reimbursable expenses	$	5,697	$	5,214	$	3,885
General and administrative expenses		4,330		3,578		2,870
Total share-based compensation expense	$	10,027	$	8,792	$	6,755

Income tax benefits recorded in the accompanying consolidated statements of comprehensive income related to share-based compensation expense for the years ended December 31, 2012 and 2011 were $4.3 million and $3.7 million, respectively, using an effective income tax rate of 42 percent for the years ended December 31, 2012 and 2011.

During March 2010, we modified the terms of the restricted stock granted on March 13, 2007 and April 30, 2007 to provide for four year annual vesting starting March 13, 2011 and April 30, 2011, respectively. These awards originally vested seven years from the grant date, with the vesting accelerating based upon the achievement of certain operating performance targets. We modified the vesting terms of the restricted stock in order to improve the visibility of the value the awards provide for certain key senior consultants and senior management. This modification resulted in a one-time cumulative credit of $0.4 million to share-based compensation expense during the year ended December 31, 2010 to align the expense recognition with the amended vesting terms.

At December 31, 2012, we had $12.5 million of total compensation costs related to unvested stock-based awards that have not been recognized as share-based compensation expense. The compensation costs will be recognized as an expense over the remaining vesting periods. The weighted average remaining vesting period is approximately two years.

Restricted Stock and Restricted Stock Units Outstanding

The measurement price of our restricted stock and restricted stock units is the market price of our common stock at the date of grant of the awards.

At December 31, 2012, we had $11.4 million of total compensation costs related to our unvested restricted stock and restricted stock units that have not been recognized as share-based compensation expense. Those compensation costs will be recognized as an expense over the remaining vesting periods. The weighted average remaining vesting period is approximately two years.

The following table summarizes information regarding restricted stock outstanding as of December 31, 2012:



		Weighted
	Outstanding	Average
	Shares	Measurement
Range of Measurement Date Prices	(000s)	Date Price
$0.00 — $9.99	89	$	9.45
$10.00 — $14.99	197		11.86
$15.00 — $19.99	284		18.65
$20.00 and above	20		20.21

Total restricted stock outstanding	590	$	15.05

The median measurement price of the restricted stock outstanding at December 31, 2012 was $12.85.

The following table summarizes restricted stock activity for the year ended December 31, 2012:


	Number of	Weighted Average
	Shares	Measurement Date
	(000s)	Price
Restricted stock outstanding at January 1, 2012	1,052	$	15.00
Granted	-		-
Vested	(433)		15.30
Forfeited	(29)		11.60
Restricted stock outstanding at December 31, 2012	590	$	15.05

The following table summarizes information regarding restricted stock units outstanding as of December 31, 2012:


			Weighted
	Outstanding		Average
	Shares		Measurement
Range of Measurement Date Prices	(000s)		Date Price
$0.00 — $9.99	547	$		9.82
$10.00 — $14.99	649			12.92
$15.00 — $19.99	12			16.45
Total restricted stock units outstanding	1,208	$		11.56

The median measurement price of outstanding restricted stock units at December 31, 2012 was $13.75.

The following table summarizes restricted stock unit activity for the year ended December 31, 2012:



	Number of	Weighted Average
	Shares	Measurement Date
	(000s)	Price
Restricted stock units outstanding at January 1, 2012	702	$	10.16
Granted	619		13.12
Vested	(45)		11.74
Forfeited	(68)		11.38
Restricted stock units outstanding at December 31, 2012	1,208	$	11.56

During the year ended December 31, 2012, we granted 618,991 restricted stock units. At the time of grant, the awards had a fair value of $8.1 million. Of the restricted stock units granted, 175,973 shares vest based upon the achievement of certain performance criteria or market conditions. The fair value of these awards at the time of grant was estimated to be $2.2 million.

Stock Options Outstanding

At December 31, 2012, the intrinsic value of the stock options outstanding and stock options exercisable was $0.2 million and $0.1 million, respectively, based on a market price of $11.16 per share for our common stock at December 31, 2012.

The following table summarizes stock option activity for the year ended December 31, 2012:



	Number of	Weighted Average
	Shares	Exercise
	(000s)	Price
Options outstanding at January 1, 2012	1,035	$	11.97
Granted	144		13.35
Exercised	(234)		6.15
Forfeited	(81)		19.41
Options outstanding at December 31, 2012	864	$	13.08
Options exercisable at December 31, 2012	511	$	13.79

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


	Outstanding	Average				Remaining
	Options	Measurement				Exercise
Range of Measurement Date Prices	(000s)	Date Price				Period (years)
$0.00 — $9.99	108		$	9.54	4.3
$10.00 — $14.99	619			12.40	3.3
$15.00 — $19.99	128			18.81	0.5
$20.00 and above	9			20.56	1.2
Total	864		$	13.08	3.0

The following table summarizes information regarding stock options exercisable at December 31, 2012:


	Outstanding	Weighted Average			Remaining
	Shares	Exercise			Exercise
Range of Exercise Prices	(000s)	Price			Period (years)
$0.00 — $9.99	32		$	9.55		4.3
$10.00 — $14.99	342			12.13		2.7
$15.00 — $19.99	128			18.81		0.5
$20.00 and above	9			20.56		1.2
Total	511		$	13.79		2.2

The following table summarizes the information regarding stock options outstanding under each plan at December 31, 2012:



				Shares
				Remaining
			Weighted	Available
	Outstanding		Average	for Future
	Shares		Exercise	Issuances
Plan Category	(000s)		Price	(000s)
Long-Term Incentive Plan	851	$	12.98	5,381
Supplemental Equity Incentive Plan	13		19.46	-
Total	864	$	13.08	5,381

Shares of our common stock issued in connection with either the vesting of restricted stock units, or the exercise of stock options, granted under the 2005 or 2012 Long-Term Incentive Plan are new issuances, and shares of our common stock issued in connection with the exercise of stock options granted under our Supplemental Equity Incentive Plan are issued from treasury.

Stock Option Grants

The fair value of each option grant is estimated at the grant date using the Black-Scholes-Merton option-pricing model. The weighted average fair value of options granted and the assumptions used in the Black-Scholes-Merton option-pricing model were as follows:



	2012	2011	2010
Fair value of options granted..................................................................................................................	$ 6.14	$ 4.63	$ 6.03
Expected volatility.......................................................................................................................................	56%	57%	58%
Risk free interest rate................................................................................................................................	1.0%	2.1%	2.6%
Forfeiture rate................................................................................................................................................	0%	0%	0%
Dividend yield................................................................................................................................................	0%	0%	0%
Contractual or expected lives (years)................................................................................................	4.5	4.5	4.5

We estimated a zero forfeiture rate for these stock option grants as the awards have short vesting terms or have a low probability of forfeiture based on the recipients of the stock options.

Employee Stock Purchase Plan

On May 3, 2006, our shareholders approved a new employee stock purchase plan that became effective on January 1, 2007. The employee stock purchase plan permits employees to purchase shares of our common stock each quarter at 90 percent of the market value. The market value of shares purchased for this purpose is determined to be the closing market price on the last day of each calendar quarter. The plan is considered compensatory and, as such, the purchase discount from market price purchased by employees is recorded as compensation expense. During each of the years ended December 31, 2012, 2011 and 2010, we recorded $0.2 million of compensation expense, respectively, related to the discount given on employee stock purchases through our employee stock purchase plan. During the years ended December 31, 2012, 2011 and 2010, we issued 198,956, 189,813 and 146,876 shares, respectively, of our common stock related to this plan.

The maximum number of shares of our common stock remaining at December 31, 2012 that can be issued under the employee stock purchase plan was 1.0 million shares, subject to certain adjustments. The employee stock purchase plan will expire on the date that all of the shares available under it are purchased by or issued to employees.

During the years ended December 31, 2012, 2011, and 2010, we received $3.3 million, $2.3 million, and $3.5 million, respectively, of cash from employee stock option exercises and employee stock purchases. Additionally, during the years ended December 31, 2012, 2011, and 2010, we generated excess tax benefits of $0.2 million, $0.3 million, and $1.2 million, respectively, related to employee stock option exercises.