10. LONG-TERM INCENTIVE COMPENSATION

Restricted Stock Awards

We have issued restricted shares to our employees and non-employee directors. The Third Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan, as amended (the “Plan”) reserves shares of Westwood common stock for issuance to eligible employees, directors and consultants of Westwood or its subsidiaries in the form of restricted stock. The total number of shares issuable under the Plan (including predecessor plans to the Plan) may not exceed 3,898,100 shares. At September 30, 2014, approximately 505,000 shares remain available for issuance under the Plan.

Under the Plan, we have granted to employees and non-employee directors restricted stock subject to service conditions and to certain key employees restricted stock subject to both service and performance conditions. As of September 30, 2014, there was approximately $18.8 million of unrecognized compensation expense for restricted stock grants under the Plan that is expected to be recognized over a remaining weighted-average period of 2 years. Our two types of restricted stock grants under the Plan are discussed below.

The following table presents the total stock based compensation expense recorded for stock based compensation arrangements for the periods indicated (in thousands):

	Nine months ended
	September 30,
	2014		2013
Service condition stock based compensation expense	$	5,612	$	5,687
Performance condition stock based compensation expense		4,202		2,653
Stock based compensation expense under the Plan		9,814		8,340
Canada EB Plan stock based compensation expense		289		172
Total stock based compensation expense	$	10,103	$	8,512

Restricted Stock Subject Only to a Service Condition

We calculate compensation cost for restricted stock grants by using the fair market value of our common stock at the date of grant, the number of shares issued, an adjustment for restrictions on dividends and an estimate of shares that will not vest due to forfeitures. This compensation cost is amortized on a straight-line basis over the applicable vesting period.

				Weighted Average
				Grant Date Fair
Restricted shares subject only to a service condition:	Shares			Value

Non-vested, January 1, 2014		511,060		$	40.49
Granted		182,990			58.78
Vested		(186,680	)		38.76
Forfeited		(31,291	)		47.87
Non-vested, September 30, 2014		476,079			47.72

Restricted Stock Subject to Service and Performance Conditions

Under the Plan, certain key employees were provided agreements for grants of restricted shares that vest over a five year period provided that annual performance goals established by the Compensation Committee of Westwood’s board of directors are met. Each year the Compensation Committee establishes a specific goal for that year’s vesting of the restricted shares, which historically has been based upon Westwood’s adjusted pre-tax income, as defined. The date that the Compensation Committee establishes the annual goal is considered to be the grant date and the fair value measurement date to determine expense on the shares that are likely to vest. The vesting period ends when the Compensation Committee formally approves the performance-based restricted stock vesting based on the final calculation of adjusted pre-tax income, which is derived from the Company’s audited financial statements. If a portion of the performance-based restricted shares does not vest, no compensation expense is recognized for that portion and any previously recognized compensation expense related to shares that do not vest is reversed. In February 2014, the Compensation Committee established the 2014 goal as adjusted pre-tax income of at least $34.0 million, representing a five-year compound annual growth rate in excess of 10% over annual adjusted pre-tax income recorded in 2009. Our adjusted pre-tax income is determined based on our audited financial statements and is equal to income before income taxes increased by expenses incurred for the year for (i) incentive compensation for all officers and employees and (ii) performance-based restricted stock awards, excluding start up, non-recurring and similar expense items. In the first quarter of 2014, we concluded that it was probable that we would meet the performance goals required to vest the applicable performance based restricted shares this year and began recording expense related to those shares. If a portion of the performance-based restricted shares does not vest, no compensation expense is recognized for that portion and any previously recognized compensation expense related to shares that do not vest is reversed.

				Weighted Average
				Grant Date Fair
Restricted shares subject to service and performance conditions:	Shares			Value

Non-vested, January 1, 2014		93,000		$	44.55
Granted		101,313			58.59
Vested		(93,000	)		44.55
Forfeited		—			—
Non-vested, September 30, 2014		101,313			58.59

The above amounts as of September 30, 2014 do not include 185,252 non-vested restricted shares that potentially vest over performance years subsequent to 2014 in as much as the annual performance goals for those years have not been set by the Compensation Committee and therefore no grant date has been established.

Canadian Plan

We have compensation arrangements with certain employees of Westwood International pursuant to which these employees can earn cash awards based on the performance of certain investment products. A portion of such awards may be paid in shares of our stock that vest over a multi-year period. We accrue a liability for these awards over both the annual period in which we determine it is probable that the award will be earned and, for the portion to be settled in shares, over the following three-year vesting period. Cash awards expected to be settled in shares are funded into a trust pursuant to The Share Award Plan of Westwood Holdings Group, Inc. for Service provided in Canada to its Subsidiaries (the “Canadian Plan”). Generally, the Canadian trust subsequently acquires Westwood common shares in market transactions and holds such shares until the shares are vested and distributed, or until forfeited. Shares held in the trust are shown on our condensed consolidated balance sheets as treasury shares. During the first quarter of 2014 and the second quarter of 2013, the trust purchased in the open market 11,476 and 20,251 Westwood common shares for approximately $670,000 and $880,000, respectively. Until shares are acquired by the trust, we measure the liability as a cash-based award included in “Compensation and benefits payable” on our condensed consolidated balance sheets. When the number of shares related to an award is determinable, the award becomes an equity award accounted for similarly to restricted stock. The trust formed pursuant to the Canadian Plan holds 31,727 shares of Westwood common stock. Under the Canadian Plan, no more than $10 million CAD (or USD $8.9 million using an exchange rate on September 30, 2014) may be funded to the Plan Trustee to fund purchases of common stock with respect to awards granted under the Canadian Plan. At September 30, 2014, the remaining amount available to be paid to the trustee of the Canadian Plan to fund purchases of Westwood common stock was approximately $7.5 million.

Mutual Fund Share Incentive Awards

We grant annually to certain employees mutual fund incentive awards, which are bonus awards based on our mutual funds achieving certain performance goals. Awards granted are notionally credited to a participant account maintained by us that contains a number of mutual fund shares equal to the award amount divided by the net closing value of a fund share on the date the amount is credited to the account.

These awards vest after approximately one year of service following the year in which the participant earns the award. We begin accruing a liability for mutual fund incentive awards when we believe it is probable that the award will be earned and record expense for these awards over the service period of the award, which is approximately two years. During the year in which the amount of the award is determined, we record expense based on the expected value of the award. After the award is earned, we record expense based on the value of the shares awarded and the percentage of the vesting period that has transpired. Our liability under these awards may increase or decrease based on changes in the value of the mutual fund shares awarded, including reinvested income from the mutual funds during the vesting period. Upon vesting, participants receive the value of the mutual fund share awards adjusted for earnings or losses attributable to the underlying mutual funds. For the nine months ended September 30, 2014 and 2013, we recorded expense of $0.7 million and $1.8 million, respectively, related to mutual fund share incentive awards. As of September 30, 2014 and December 31, 2013, we had an accrued liability of $0.6 million and $1.9 million, respectively, related to mutual fund incentive awards.