10. Share-Based Compensation

We have a share-based compensation program that provides our board of directors broad discretion in creating employee equity incentives. Share-based awards, or equity awards, granted under this program include stock options, restricted stock (consisting of restricted stock units), and performance share units, or PSUs. Grants of equity awards are designed to reward employees for their long-term contributions and provide incentives for them to remain with us. For accounting purposes, we consider PSUs to be a form of restricted stock.

Restricted stock is generally time-based and vests over three- to five-year periods beginning on the date of the grant. Stock options are also generally time-based and expire ten years from the grant date. Stock option and restricted stock awards granted prior to 2014 generally included performance-based accelerated vesting features based on achievement of specific levels of corporate performance. If NASDAQ OMX exceeded the applicable performance parameters, the grants vest on the third anniversary of the grant date, if NASDAQ OMX meets the applicable performance parameters, the grants vest on the fourth anniversary of the grant date, and if NASDAQ OMX does not meet the applicable performance parameters, the grants vest on the fifth anniversary of the grant date. Beginning in 2014, restricted stock awards granted will vest 25% on the second anniversary of the grant date, 25% on the third anniversary of the grant date, and 50% on the fourth anniversary of the grant date.

PSUs are based on performance measures that impact the amount of shares that each recipient will receive upon vesting. PSUs are granted at the fair market value of our stock on the grant date and compensation cost is recognized over the performance period and, in certain cases, an additional vesting period. For each grant of PSUs, an employee may receive from 0% to 150% of the target amount granted, depending on the achievement of performance measures. We report the target number of PSUs granted, unless we have determined that it is more likely than not, based on the actual achievement of performance measures, that an employee will receive a different amount of shares underlying the PSUs, in which case we report the amount of shares the employee is likely to receive.

We also have a performance-based long-term incentive program for our chief executive officer, executive vice presidents and senior vice presidents that focuses on total shareholder return, or TSR. This program represents 100% of our chief executive officer’s and executive vice presidents’ long-term stock-based compensation and 50% of our senior vice presidents’ long-term stock-based compensation. Under the program, each individual receives PSUs with a three-year cumulative performance period and vest at the end of the performance period. Performance will be determined by comparing NASDAQ OMX’s TSR to two peer groups, each weighted 50%. The first peer group consists of exchange companies, and the second peer group consists of all companies in the Standard & Poor’s 500 Index. NASDAQ OMX’s relative performance ranking against each of these groups will determine the final number of shares delivered to each individual under the program. The payout under this program will be between 0% and 200% of the number of PSUs granted and will be determined by NASDAQ OMX’s overall performance against both peer groups. However, if NASDAQ OMX’s TSR is negative for the three-year performance period, regardless of TSR ranking, the payout will not exceed 100% of the number of PSUs granted. We estimate the fair value of PSU’s granted under the TSR program using the Monte Carlo simulation model, as these awards contain a market condition. The following weighted-average assumptions were used to determine the weighted-average fair values of the PSU awards granted under the TSR program for the three months ended March 31, 2014:



	Three Months Ended March 31,
	2014


Weighted-average risk free interest rate		0.79%
Expected volatility(1)		29.1%
Weighted-average fair value at grant date	$	43.13

(1) We use historic volatility for PSU awards issued under the TSR program, as implied volatility cannot be used when simulating multivariate prices for companies in the S&P 500.

Summary of 2014 Equity Awards

In March 2014, we granted restricted stock to most active employees. Also in March 2014, certain officers received grants of 723,576 PSUs. Of these PSUs granted, 467,091 units are subject to the performance measures and vesting schedules of the TSR program as discussed above, and the remaining 256,485 units are subject to a one-year performance period and generally vest ratably on an annual basis from December 31, 2015 through December 31, 2017. See “Summary of Restricted Stock and PSU Activity” below for further discussion.

During 2013, certain grants of PSUs with a one-year performance period exceeded the applicable performance parameters. As a result, an additional 64,330 units were considered granted in the first quarter of 2014.

Common Shares Available Under Our Equity Plan

As of March 31, 2014, we had approximately 1.3 million shares of common stock authorized for future issuance pursuant to NASDAQ OMX’s Equity Incentive Plan.

Summary of Share-Based Compensation Expense

The following table shows the total share-based compensation expense resulting from equity awards and the 15.0% discount for the ESPP for the three months ended March 31, 2014 and 2013 in the Condensed Consolidated Statements of Income:



	Three Months Ended March 31,
	2014		2013

	(in millions)
Share-based compensation expense before income taxes	$	14	$	9
Income tax benefit		(6)		(4)
Share-based compensation expense after income taxes	$	8	$	5

We estimated the fair value of stock option awards using the Black-Scholes valuation model. No stock option awards were granted during the three months ended March 31, 2014 or 2013.

Summary of Stock Option Activity

A summary of stock option activity for the three months ended March 31, 2014 is as follows:



	Number of Stock Options(1)		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value

					(in years)		(in millions)
Outstanding at January 1, 2014		4,926,522	$	25.21		4.97	$	73
Exercised		(367,115)		19.39
Forfeited or expired		(27,401)		22.67
Outstanding at March 31, 2014		4,532,006	$	25.70		4.76	$	52
Exercisable at March 31, 2014		4,472,845	$	25.72		4.73	$	51

(1) No stock option awards were granted during the three months ended March 31, 2014.

We received net cash proceeds of $7 million from the exercise of 367,115 stock options for the three months ended March 31, 2014 and received net cash proceeds of $6 million from the exercise of 377,425 stock options for the three months ended March 31, 2013. We present excess tax benefits from the exercise of stock options, if any, as financing cash flows.

The aggregate intrinsic value in the above table represents the total pre-tax intrinsic value (i.e., the difference between our closing stock price on March 31, 2014 of $36.94 and the exercise price, times the number of shares) based on stock options with an exercise price less than NASDAQ OMX’s closing price of $36.94 as of March 31, 2014, which would have been received by the option holders had the option holders exercised their stock options on that date. This amount can change based on the fair market value of our common stock. The total number of in-the-money stock options exercisable as of March 31, 2014 was 4.3 million.

As of March 31, 2013, 4.9 million outstanding stock options were exercisable and the weighted-average exercise price was $20.93.

Total fair value of stock options vested was $11 million for the three months ended March 31, 2014 and immaterial for the three months ended March 31, 2013. The total pre-tax intrinsic value of stock options exercised was $7 million for the three months ended March 31, 2014, and $6 million for the three months ended March 31, 2013.

At March 31, 2014, total unrecognized compensation cost related to stock options is immaterial.

Summary of Restricted Stock and PSU Activity

The following table summarizes our restricted stock and PSU activity for the three months ended March 31, 2014:



	Restricted Stock					PSUs
	Number of Awards			Weighted-Average Grant Date Fair Value		Number of Awards			Weighted-Average Grant Date Fair Value
Unvested balances at January 1, 2014		3,826,470		$	25.96		1,915,601		$	30.03
Granted		953,178	(1)		36.94		787,906	(2)		40.31
Vested		(1,337,866)			22.60		(56,659)			25.28
Forfeited		(72,342)			27.38		(77,344)			27.16
Unvested balances at March 31, 2014		3,369,440		$	30.35		2,569,504		$	33.37

(1) Primarily reflects our company-wide equity grant issued in March 2014, as discussed above.

(2) PSUs granted in 2014 reflect awards issued to certain officers, as described above.

At March 31, 2014, $119 million of total unrecognized compensation cost related to restricted stock and PSUs is expected to be recognized over a weighted-average period of 1.9 years.