Employee Benefit Plans

Stock-based compensation is classified in the consolidated statements of income in the same expense line items as cash compensation. Amounts recorded as expense in the consolidated statements of income are as follows (in thousands):



	Year Ended December 31,
	2014		2015		2016
Cost of revenue	$	2,227	$	3,836	$	6,214
Technology and development	1,209		1,190		2,536
Sales and marketing	2,466		2,724		3,127
General and administrative	8,656		12,856		18,391
Total	14,558		20,606		30,268

(a) Employee Stock Option Plan

On May 26, 2010, the Company adopted the 2010 Equity Incentive Plan (“2010 Plan”). Under the 2010 Plan, the Company can grant share-based awards to all employees, including executive officers, outside consultants and non-employee directors. As of December 31, 2016, the 2010 Plan has a total of 6.2 million common stock shares available for issuance.

The Company’s 2000 Stock Option/Stock Issuance Plan adopted in June 2000, as amended and restated, (“2000 Plan”), provides for the issuance of options and other stock-based awards. As of December 31, 2016, the 2000 Plan has a total of 0.3 million options outstanding. Any forfeitures or shares remaining under the plan are canceled and not available for reissue. No further grants will be made under the 2000 Plan.

Options under the 2000 Plan and the 2010 Plan (“the Plans”) expire 10 years after the date of grant and generally vest over 4 years with 25% vesting after one year and the balance vesting monthly over the remaining period. The Company issues new shares upon the exercise of stock options.

As of December 31, 2016, there was $21.0 million of total unrecognized stock-based compensation expense associated with stock options, adjusted for estimated forfeitures, related to non-vested stock-based awards which will be recognized over a weighted average period of 2.7 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

The following table summarizes the weighted-average fair value of stock options granted:



	Year Ended December 31,
	2014		2015		2016
Stock options granted (in thousands)	1,026		501		825
Weighted-average fair value at date of grant	$	20.06	$	18.89	$	18.38

Stock option activity for the year ended December 31, 2016 is as follows (shares in thousands):



	Shares		Weighted-average exercise price		Remaining contractual term (years)	Aggregate intrinsic value (dollars in thousands)
Outstanding at December 31, 2015	3,037		$	25.18	6.41	$	65,229
Granted	825		48.36
Exercised	(926	)	17.36
Forfeited	(92	)	47.01
Outstanding as of December 31, 2016	2,844		$	33.74	7.00	$	110,256
Vested and expected to vest at December 31, 2016	2,715		$	33.12	6.92	$	106,927
Exercisable at December 31, 2016	1,484		$	21.81	5.45	$	75,213

The total intrinsic value of options exercised during the years ended December 31, 2014, 2015 and 2016, was $28.4 million, $17.1 million and $37.0 million, respectively. Cash received from option exercises under all share-based payment arrangements was $6.7 million, $6.6 million and $16.1 million for the years ended December 31, 2014, 2015 and 2016, respectively. The Company elected to follow the tax law method of determining realization of excess tax benefits for stock-based compensation. There was approximately $10.4 million, $11.2 million and $17.9 million of excess tax benefits related to stock-based compensation that was recorded to stockholders’ equity during the years ended December 31, 2014, 2015 and 2016, respectively.

(b) Valuation Assumptions

The Company calculated the fair value of each option award on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:



	Year Ended December 31,
	2014		2015		2016
Expected volatility	46.90	%	43.48	%	42.63	%
Risk-free interest rate	1.87	%	1.56	%	1.17	%
Expected term (in years)	6.09		4.74		4.87
Dividend yield	—	%	—	%	—	%

Stock-based compensation expense is measured at the grant date based on the fair value of the award. The determination of the fair value of stock-based awards on the date of grant using an option pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. Expected volatility is determined using weighted-average volatility of peer publicly traded companies as well as the Company’s own historical volatility. The Company expects that it will increase weighting of its own historical data in future periods, as that history grows over time. The risk-free interest rate is determined by using published zero coupon rates on treasury notes for each grant date given the expected term on the options. The dividend yield of zero is based on the fact that the Company expects to invest cash in operations and has not paid cash dividends on its common stock. The Company estimates the expected term based on historical experience, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior such as exercises and forfeitures.

Stock-based compensation expense is recognized in the consolidated statements of income based on awards ultimately expected to vest, and is reduced for estimated pre-vest forfeitures. Forfeitures are estimated at the time of grant and are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The estimate of pre-vesting of forfeitures is based on weighted average historical forfeiture rates.

The Company grants restricted stock units ("RSU") to certain employees, officers, and directors under the 2010 Plan. Restricted stock units vest upon either performance-based, market-based or service-based criteria.

Performance-based restricted stock units vest based on the satisfaction of specific performance criteria. At each vesting date, the holder of the award is issued shares of the Company’s common stock. Compensation expense from these awards is equal to the fair market value of the Company’s common stock on the date of grant and is recognized over the remaining service period based on the probable outcome of achievement of the financial metrics used in the specific grant's performance criteria. Management’s estimate of the number of shares expected to vest is based on the anticipated achievement of the specified performance criteria.

Market-based performance restricted stock units are granted such that they vest upon the achievement of certain per share price targets of the Company’s common stock during a specified performance period. The fair market values of market-based performance restricted stock units are determined using the Monte Carlo simulation method. The Monte Carlo simulation method is subject to variability as several factors utilized must be estimated including the future daily stock price of the Company’s common stock over the specified performance period, the Company’s stock price volatility and risk-free interest rate. The amount of compensation expense is equal to the per share fair value calculated under the Monte Carlo simulation multiplied by the number of market-based performance restricted stock units granted, recognized over the specified performance period.

Generally, service-based restricted stock units vest over a four year period in equal annual installments commencing upon the first anniversary date of the grant date.

In the first quarter of 2014, 2015, and 2016, the Company granted a total of 106,500, 140,000, and 263,000, respectively, of performance-based restricted stock units to certain executive officers. Performance-based restricted stock units are typically granted such that they vest upon the achievement of certain revenue growth rates, and other financial metrics, during a specified three year performance period for which participants have the ability to receive up to a maximum of 150%, for 2014 and 2015 grants, or 200%, for 2016 grants, of the target number of shares originally granted.

In the second quarter of 2014, the Company granted a total of 199,000 market-based performance restricted stock units to certain executive officers. The number of shares to be vested is subject to change based on certain market conditions. In the third quarter of 2014, one of the executives resigned and 33,000 market-based performance restricted stock units were forfeited and canceled.

The market-based performance restricted stock units will be eligible to vest based on the Company’s achievement of certain per share price of its common stock as reported on the New York Stock Exchange (“NYSE”), for any 20 consecutive trading day period during the specified performance period.

Stock-based compensation expense related to restricted stock units was $6.0 million, $13.0 million and $19.9 million in 2014, 2015 and 2016, respectively. Total unrecorded stock-based compensation expense at December 31, 2016 associated with restricted stock units was $29.3 million, which is expected to be recognized over a weighted-average period of 1.54 years.

The following table summarizes information about restricted stock units issued to officers, directors, and employees under the 2010 Plan:



						Weighted-average grant date fair value
	Service-based RSUs		Performance-based RSUs		Market-based RSUs	Service-based RSUs		Performance-based RSUs		Market-based RSUs
	(shares in thousands)
Unvested at December 31, 2015	193		404		166	$	41.89	$	44.36	$	49.38
Granted ⁽¹⁾	171		351		—	54.88		38.88		—
Vested ⁽²⁾	(84	)	(264	)	—	39.62		24.68		—
Forfeitures	(23	)	—		—	50.76		—		—
Unvested at December 31, 2016	257		491		166	$	50.49	$	51.03	$	49.38

(1)

Includes additional shares issued as specified financial metrics for the performance-based restricted stock units, granted to certain executives in 2013, during the performance period of January 1, 2013 through December 31, 2015 were met, resulting in actual shares vesting at 150% of the target number of shares originally granted. The weighted average grant date fair value of these additional shares was $24.68.


(2)	Includes 264,000 shares vested from performance-based restricted stock units granted to certain executives in 2013 representing 150% of the target number of shares originally granted.

(d) Employee Stock Purchase Plan

In May 2012, the Company established the 2012 Employee Stock Purchase Plan (“ESPP”) which is intended to qualify under Section 423 of the Internal Revenue Code of 1986. The Company issued 52,727 common stock shares for which it received $2.2 million from employee contributions during 2016. At December 31, 2016, a total of 1,534,692 shares of the Company’s common stock are available for sale under the ESPP. In addition, the ESPP provides for annual increases in the number of shares available for issuance under the ESPP on the first day of each fiscal year, equal to the least of:


•	500,000 shares of common stock;


•	1% of the outstanding shares of the Company’s common stock as of the last day of its immediately preceding fiscal year; or


•	such other amount as may be determined by the board of directors.

Under the ESPP, employees are eligible to purchase common stock through payroll deductions of up to 25% of their eligible compensation, subject to any plan limitations. The ESPP has four consecutive offering periods of approximately three months in length during the year and the purchase price of the shares is 85% of the lower of the fair value of the Company’s common stock on the first trading day of the offering period or on the last day of the offering period.

(e) 401(k) Plan

The Company participates in the WageWorks 401(k) Plan (“401(k) Plan”), a tax-deferred savings plan covering all of its employees working more than 1,000 hours per year. Employees become participants in the 401(k) Plan on the first day of any month following the first day of employment. Eligible employees may contribute up to 85% of their compensation to the 401(k) Plan, limited to the maximum allowed under the Internal Revenue Code. The Company, at its discretion, may match up to 40% of the first 6% of employees’ contributions and may make additional contributions to the 401(k) Plan. The Company contributed approximately $1.0 million, $1.3 million, and $1.8 million for each 2014, 2015, and 2016, respectively.