9. STOCK-BASED COMPENSATION AND STOCK COMPENSATION PLANS

Incentive Compensation Plan

The Company maintains the Hudson Highland Group, Inc. 2009 Incentive Stock and Awards Plan (the “ISAP”) pursuant to which it can issue equity-based compensation incentives to eligible participants. The ISAP permits the granting of stock options and restricted stock as well as other types of equity-based awards. The Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) will establish such conditions as it deems appropriate on the granting or vesting of stock options or restricted stock. While the Company historically granted both stock options and restricted stock to its employees, since 2008 the Company has granted primarily restricted stock to its employees.

The ISAP provides that an aggregate of 1,600,000 shares of the Company’s common stock are reserved for issuance to participants. On December 31, 2011, there were 426,425 shares of the Company’s common stock available for future issuance. The Compensation Committee administers the ISAP and may designate any of the following as a participant under the ISAP: any officer or other employee of the Company or its affiliates or individuals engaged to become an officer or employee, consultants or other independent contractors who provide services to the Company or its affiliates and non-employee directors of the Company. On February 24, 2012, the Company’s Board of Directors amended the IASP to increase Company’s common stock that are reserved for issuance to participants by 2,500,000 shares, which is subject to approval by the Company’s stockholders at the Company’s annual meeting to be held on April 26, 2012.

The Company also maintains the Director Deferred Share Plan (the “Director Plan”) pursuant to which it can issue restricted stock units to its non-employee directors. A restricted stock unit is equivalent to one share of the Company’s common stock and is payable only in common stock issued under the ISAP upon a director ceasing service as a member of the Board of Directors of the Company.

Stock-based Compensation

The Company recognized expenses of $3,221, $1,724 and $999 in the years ended December 31, 2011, 2010, and 2009 respectively, for stock options, restricted stock and restricted stock unit awards. These expenses are included under the caption “Salaries and related” in the accompanying Consolidated Statements of Operations. In accordance with ASC 718, the Company reflects the tax savings resulting from tax deductions in excess of income tax benefits as a financing cash flow in its Consolidated Statement of Cash Flows rather than as an operating cash flow as in prior periods. The Company recognized a current tax benefit for the years ended December 31, 2011, 2010, and 2009, of $285, $132 and $100, respectively, in certain foreign jurisdictions where the Company has taxable income. As of December 31, 2011, unrecognized compensation expense related to the unvested portion of the Company’s stock options and restricted stock, and restricted stock unit awards, based on the Company’s historical valuation treatment, was $3,851, $2,426 and $387, respectively, and was expected to be recognized over a weighted average period of 1.7 years, 1.5 years and 2.2 years, respectively. All share issuances related to stock compensation plans are issued from unissued shares of stockholder approved compensation plans.

Stock Options

The fair value of stock options granted is estimated on the date of grant using the Black-Scholes option pricing model. Expected volatilities are calculated based on the historical volatility of the Company’s common stock. Management monitors stock option exercise and employee termination patterns to estimate forfeiture rates. The Company analyzed its historical forfeiture rate, the remaining lives of unvested options and the amount of vested options as a percentage of total options outstanding. If the Company’s actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what was recorded in the current periods. The risk-free interest rate is based on the U.S. Treasury, the term of which is consistent with the expected term of the option. Volatility is determined using historical prices to estimate the expected future fluctuations in the Company’s share price. The dividend rate is assumed to be zero as the Company has never paid dividends on its common stock and does not anticipate paying dividends in the foreseeable future. For awards with graded vesting conditions, the values of the awards are determined by valuing each tranche separately and expensing each tranche over the required service period.

In December 2007, the SEC staff issued SAB 110, which allows companies to continue to use the simplified method, as defined in SAB 107, to estimate the expected term of stock options under certain circumstances. The simplified method for estimating expected term uses the mid-point between the vesting term and the contractual term of the stock option. The Company has analyzed the circumstances in which the use of the simplified method is allowed. The Company has opted to use the simplified method for stock options the Company granted in 2011 because management believes that the Company does not have sufficient historical exercise data to provide a reasonable basis for a better estimate of the expected term of stock options. There was only one stock option award in 2011 and there were no stock options granted in 2010 or 2009.

The following were the weighted average assumptions used to determine the fair value of stock options granted by the Company and the details of option activity as of and for the respective periods:


	For the years ended December 31,
	2011			2010		2009
Risk free interest rate		2.3	%		^(a)		^(a)
Volatility		75.1	%		^(a)		^(a)
Expected life (years)		6.25			^(a)		^(a)
Dividends		0.0	%		^(a)		^(a)
Weighted average fair value of options granted during the period	$	3.5	%	$	^(a)	$	^(a)

(a)

Stock option assumptions are not provided above because there were no options granted during the years ended December 31, 2010 and 2009.

During the year ended December 31, 2011, the Company granted to its Chairman and Chief Executive Officer 400,000 stock options with service-based vesting conditions that will vest (i) 50% on the second anniversary of the date of grant, and (ii) 50% on the third anniversary of the date of grant. The stock options were granted outside of the Company’s ISAP in connection with the Chairman and Chief Executive Officer’s commencement of employment with the Company in May 2011.

Changes in the Company’s stock options for the fiscal year ended December 31, 2011 were as follows:


	Number of Options Outstanding			Weighted Average Exercise Price per Share
Options outstanding at January 1, 2011		1,548,300		$	12.64
Granted		400,000			5.18
Expired		(551,950	)		10.47
Options outstanding at December 31, 2011		1,396,350			11.36
Options exercisable at December 31, 2011		983,850		$	13.96

The weighted average remaining contractual term and the aggregated intrinsic value for stock options outstanding as of December 31, 2011 was approximately 5.1 years and $0, respectively. The weighted average remaining contractual term and the aggregated intrinsic value for options exercisable as of December 31, 2011 was 3.4 years and $0, respectively. The total intrinsic value for stock options exercised, based on the closing price of the Company’s common stock during the years ended December 31, 2011, 2010, and 2009 was $0, $0, and $0, respectively.

There were no cash proceeds from the exercise of stock options for the year ended December 31, 2011, and there were no associated income tax benefits. The total fair value of stock options vested during the years ended December 31, 2011, 2010, and 2009, was $411, $862, and $3,793, respectively.

Restricted Stock

During the year ended December 31, 2011, the Company granted 743,625 shares of restricted stock to various employees. Shares of restricted stock with only service-based vesting conditions and shares of restricted stock with performance-based vesting conditions are valued at the closing market value of the Company’s common stock on the date of grant. The Company recognizes compensation cost for the awards with performance conditions if and when the Company concludes that it is probable that the performance conditions will be achieved. Of the 743,625 shares granted, (i) 14,000 shares vested immediately, (ii) 381,625 shares vest ratably over a three year period from the date of grant, (iii) 3,000 shares vest ratably over a four year period from the date of grant (iv) 316,000 shares vest ratably over a three year period from the date of grant based on the Company’s gross margin and earnings before interest, income taxes, depreciation and amortization (“EBITDA”) for the year ending December 31, 2011, (v) 15,000 shares vest one-third on December 1 in each of 2011, 2012 and 2013, (vi) 10,000 shares vest one-third on February 16 in each of 2012, 2013 and 2014, and (vii) 4,000 shares vest one-fourth on April 1 in each of 2012, 2013, 2014 and 2015.

The Company treated its restricted stock awards to employees as having been issued and measured at the fair market value on the date of grant. The Company may grant restricted stock to employees under the ISAP. These shares are provided at no cost to the employee.

Changes in the Company’s restricted stock for the year ended December 31, 2011 were as follows:


	Number of Shares of Restricted Stock			Weighted Average Grant Date Fair Value
Non-vested restricted stock at January 1, 2011		953,037		$	3.64
Granted		743,625			6.22
Vested		(295,065	)		4.09
Forfeited		(235,515	)		3.86
Non-vested restricted stock at December 31, 2011		1,166,082		$	5.12

The total fair value of restricted shares vested during the years ended December 31, 2011, 2010, and 2009, was $1,207, $481 and $1,496, respectively.

Restricted Stock Units

During the year ended December 31, 2011, the Company granted 27,376 restricted stock units to its non-employee directors pursuant to the Director Plan. The restricted stock units vest immediately upon grant and are credited to each of the non-employee director’s retirement accounts under the Director Plan.

In addition, during the year ended December 31, 2011, the Company granted 100,000 restricted stock units to its Chairman and Chief Executive Officer. The restricted stock units will vest (i) 50% on the second anniversary of the date of grant, (ii) 25% on the third anniversary of the date of grant, and (iii) 25% on the fourth anniversary of the date of grant. Restricted stock units are valued at the closing market value of the Company’s common stock on the date of grant. The 100,000 restricted stock units were granted outside of the ISAP in connection with the Chairman and Chief Executive Officer’s commencement of employment with the Company in May 2011.


	Number of Shares of Restricted Stock Unit			Weighted Average Grant-Date Fair Value
Non-vested restricted stock units, beginning of year		—		$	—
Granted		127,376			5.37
Vested		(27,376	)		6.05
Non-vested restricted stock units at December 31, 2011		100,000		$	5.18

The total fair value of restricted stock units vested during the years ended December 31, 2011, 2010, and 2009, was $166, $147 and $92, respectively.

Defined Contribution Plans

The Company maintains the Hudson Highland Group, Inc. 401(k) Savings Plan (the “401(k) plan”). The 401(k) plan allows eligible employees to contribute up to 15% of their earnings to the 401(k) plan subject to the limitations of the Employee Retirement Income Security Act of 1974. The Company matches employees’ contributions up to 3% through a contribution of the Company’s common stock. Vesting of the Company’s contribution occurs over a five-year period. Expense for this plan for the years ended December 31, 2011, 2010 and 2009 was $686, $610, and $622, respectively. In March 2011, the Company issued 91,944 shares of its common stock with a value of $602 to satisfy the 2010 contribution liability to the 401(k) plan. In March 2010, the Company issued 121,016 shares of its common stock with a value of $541 plus cash of $111 to satisfy the 2009 contribution liability to the 401(k) plan. In March 2009, the Company issued 1,318,161 shares of its common stock with a value of $1,226 to satisfy the 2008 contribution liability to the 401(k) plan.