14.

INCENTIVE PLANS

Share-Based Incentive Plan Awards

A description of Lazard Ltd’s 2005 Plan and 2008 Plan and activity with respect thereto during the years ended December 31, 2012, 2011 and 2010, is presented below.

Shares Available Under the 2005 Plan and 2008 Plan

The 2005 Plan authorizes the issuance of up to 25,000,000 shares of Class A common stock pursuant to the grant or exercise of stock options, stock appreciation rights, restricted stock units and other equity-based awards. Each stock unit or similar award granted under the 2005 Plan represents a contingent right to receive one share of Class A common stock, at no cost to the recipient. The fair value of such awards is generally determined based on the closing market price of Class A common stock at the date of grant.

In addition to the shares available under the 2005 Plan, additional shares of Class A common stock are available under the 2008 Plan. The maximum number of shares available under the 2008 Plan is based on a formula that limits the aggregate number of shares that may, at any time, be subject to awards that are considered “outstanding” under the 2008 Plan to 30% of the then-outstanding shares of Class A common stock (treating, for this purpose, the then-outstanding exchangeable interests of LAZ-MD Holdings on a “fully-exchanged” basis as described in the 2008 Plan).

The following reflects the amortization expense recorded with respect to share-based incentive plans within “compensation and benefits” expense (with respect to RSUs and restricted stock awards) and “professional services” expense (with respect to DSUs) within the Company’s accompanying consolidated statements of operations:


	Year Ended December 31,
	2012		2011		2010
Share-based incentive awards:
RSUs (a)	$	298,809	$	264,110	$	303,094
Restricted Stock (b)		10,003		9,767		979
DSUs		1,536		1,265		1,230

Total	$	310,348	$	275,142	$	305,303

(a)

Includes, during the year ended December 31, 2010, $24,860 relating to the amendment of the Company’s retirement policy (described below) and $46,880 relating to the 2010 Restructuring Plan, and, during the year ended December 31, 2012, an aggregate of $26,158 relating to staff reductions and the Cost Saving Initiatives (see Note 16 of Notes to Consolidated Financial Statements) recorded in the first and fourth quarters of 2012, respectively).

(b)	Includes, during the year ended December 31, 2012, $713 relating to the Cost Savings Initiatives recorded in the fourth quarter of 2012.

The Company’s incentive plans are described below.

Restricted and Deferred Stock Units

RSUs generally require future service as a condition for the delivery of the underlying shares of Class A common stock (unless the recipient is then eligible for retirement under the Company’s retirement policy) and convert into Class A common stock on a one-for-one basis after the stipulated vesting periods. The grant date fair value of the RSUs, net of an estimated forfeiture rate, is amortized over the vesting periods or requisite service periods and is adjusted for actual forfeitures over such period, and, for purposes of calculating diluted net income per share, RSUs are included in the diluted weighted average shares of Class A common stock outstanding using the “treasury stock” method.

RSUs issued subsequent to December 31, 2005 generally include a dividend participation right that provides that during vesting periods each RSU is attributed additional RSUs (or fractions thereof) equivalent to any ordinary quarterly dividends paid on Class A common stock during such period. During the years ended December 31, 2012, 2011 and 2010, issuances of RSUs pertaining to such dividend participation rights and respective charges to “retained earnings”, net of estimated forfeitures, (with corresponding credits to “additional paid-in-capital”) consisted of the following:


	Year Ended December 31,
	2012		2011		2010
Number of RSUs issued		920,791		389,846		318,025
Charges to retained earnings, net of estimated forfeitures	$	24,990	$	11,120	$	9,522

In January 2010, the Company amended its retirement policy with respect to RSU awards. Such amendment served to modify the retirement eligibility vesting requirements of existing and future RSU awards, and, as noted above, we accelerated the recognition of compensation expense for the affected RSU awards. Accordingly, the Company recorded a non-cash charge to “compensation and benefits” expense of $24,860 in the first quarter of 2010 relating to prior years’ awards.

Non-executive members of the Board of Directors receive approximately 55% of their annual compensation for service on the Board of Directors and its committees in the form of DSUs, which resulted in 53,239, 26,859 and 31,588 DSUs granted during the years ended December 31, 2012, 2011 and 2010, respectively. Their remaining compensation is payable in cash, which they may elect to receive in the form of additional DSUs under the Directors’ Fee Deferral Unit Plan described below. DSUs are convertible into Class A common stock at the time of cessation of service to the Board and, for purposes of calculating diluted net income per share, are included in the diluted weighted average shares of Class A common stock outstanding using the “treasury stock” method. DSUs include a cash dividend participation right equivalent to any ordinary quarterly dividends paid on Class A common stock, and resulted in nominal cash payments for the years ended December 31, 2012, 2011 and 2010.

On May 9, 2006, the Board of Directors adopted the Directors’ Fee Deferral Unit Plan, which allows the Company’s Non-Executive Directors to elect to receive additional DSUs pursuant to the 2005 Plan in lieu of some or all of their cash fees. The number of DSUs that shall be granted to a Non-Executive Director pursuant to this election will equal the value of cash fees that the applicable Non-Executive Director has elected to forego pursuant to such election, divided by the market value of a share of Class A common stock on the date on which the foregone cash fees would otherwise have been paid. During the years ended December 31, 2012, 2011 and 2010, 10,597, 8,184 and 7,438 DSUs, respectively, had been granted pursuant to such Plan.

DSU awards are expensed at their fair value on their date of grant, inclusive of amounts related to the Directors’ Fee Deferral Unit Plan.

The following is a summary of activity relating to RSUs and DSUs during the three-year period ended December 31, 2012:


	RSUs					DSUs
	Units			Weighted Average Grant Date Fair Value		Units			Weighted Average Grant Date Fair Value
Balance, January 1, 2010		23,367,813		$	37.01		103,146		$	35.75
Granted (including 318,025 RSUs relating to dividend participation)		7,890,127		$	35.69		39,026		$	31.51
Forfeited		(859,756)		$	36.13		–			–
Vested/Exchanged		(8,289,549)		$	39.42		(20,435	)	$	35.38

Balance, December 31, 2010		22,108,635		$	35.67		121,737		$	34.46
Granted (including 389,846 RSUs relating to dividend participation)		7,002,736		$	43.21		35,043		$	36.09
Forfeited		(305,155	)	$	37.83		–			–
Vested		(8,054,387	)	$	39.13		(16,120	)	$	34.76

Balance, December 31, 2011		20,751,829		$	36.84		140,660		$	34.83
Granted (including 920,791 RSUs relating to dividend participation)		8,594,744		$	27.68		63,836		$	24.06
Forfeited		(581,411	)	$	35.59		–			–
Vested/Exchanged		(7,284,031	)	$	34.71		–		$	–

Balance, December 31, 2012		21,481,131		$	33.92		204,496		$	31.47

During the years ended December 31, 2012, 2011 and 2010, 7,284,031 RSUs, 8,054,387 RSUs and 8,248,654 RSUs vested or were exchanged, respectively, (including in 2012, 1,523,642 RSUs that were exchanged for shares of restricted Class A common stock and 958,213 RSUs that were modified through forward purchase agreements into a liability award of $28,612) and, in 2010, 40,895 RSUs that were exchanged for 40,895 shares of restricted Class A common stock. As of the modification date in 2012, the Company recorded a liability in “accrued compensation and benefits” of $26,922 related to such liability award and an offsetting reduction to “additional paid-in-capital”. As of December 31, 2012, unrecognized compensation expense related to such liability award was $1,690 and will be amortized over the two-month period ending February 28, 2013. No additional compensation expense was recorded as a result of the modification. In connection with the vested RSUs, the Company satisfied its minimum statutory tax withholding requirements in lieu of issuing 1,471,814, 2,353,561 and 1,674,261 shares of Class A common stock in the years ended December 31, 2012, 2011 and 2010, respectively. Accordingly, 3,330,362, 5,700,826 and 6,574,393 shares of Class A common stock held by the Company were delivered during the years ended December 31, 2012, 2011 and 2010, respectively.

As of December 31, 2012, unrecognized RSU compensation expense, adjusted for estimated forfeitures, was approximately $194,000, with such unrecognized compensation expense expected to be recognized over a weighted average period of approximately 1.1 years subsequent to December 31, 2012. The ultimate amount of such expense is dependent upon the actual number of RSUs that vest. The Company periodically assesses the forfeiture rates used for such estimates. A change in estimated forfeiture rates would cause the aggregate amount of compensation expense recognized in future periods to differ from the estimated unrecognized compensation expense described herein.

Restricted Stock

The following is a summary of activity related to shares of restricted Class A common stock associated with compensation arrangements during the three-year period ended December 31, 2012:


	Restricted Shares			Weighted Average Grant Date Fair Value
Balance, January 1, 2010		–			–
Granted/Exchanged (a)		95,332		$	37.63

Balance, December 31, 2010		95,332		$	37.63
Granted		327,238		$	43.70
Vested		(327,238	)	$	43.70

Balance, December 31, 2011		95,332		$	37.63
Granted/Exchanged (a)		2,100,965		$	34.34
Forfeited		(21,178	)	$	29.51
Vested		(202,510	)	$	31.43

Balance, December 31, 2012		1,972,609		$	34.85

(a)

Includes during the years ended December 31, 2012 and 2010, as described above, 1,523,642 and 40,895 shares of restricted Class A common stock, respectively, issued in exchange for 1,523,642 and 40,895 previously granted RSUs, respectively, at grant date fair values of $35.95 and $36.10 per share, respectively. The vesting terms of such restricted Class A common stock issued are substantially the same as those of the original awards exchanged. There was no incremental compensation cost incurred as a result of the exchanges.

As mentioned above, during 2012, the Company exchanged 1,523,642 RSUs for shares of restricted Class A common stock.

In connection with shares of restricted Class A common stock that vested during the years ended December 31, 2012 and 2011, the Company satisfied its minimum statutory tax withholding requirements in lieu of delivering 28,129 and 68,866 shares of Class A common stock during such respective years. Accordingly, 174,381 and 258,372 shares of Class A common stock held by the Company were delivered during the years ended December 31, 2012 and 2011, respectively.

The awards include a cash dividend participation right equivalent to any ordinary quarterly dividends paid on Class A common stock during the period, which will vest concurrently with the underlying restricted stock award. At December 31, 2012, unrecognized restricted stock expense was approximately $10,000, with such expense to be recognized over a weighted average period of approximately 0.4 years subsequent to December 31, 2012.

For purposes of calculating diluted net income per share, such awards are included in the diluted weighted average shares of Class A common stock outstanding using the “treasury stock” method.

Lazard Fund Interests and Other Similar Deferred Compensation Arrangements

Commencing in February 2011, the Company granted to eligible employees Lazard Fund Interests. In connection with the Lazard Fund Interests and other similar deferred compensation arrangements, which generally require future service as a condition for vesting, the Company recorded a prepaid compensation asset and a corresponding compensation liability on the grant date based upon the fair value of the award. The prepaid asset is amortized on a straight-line basis over the applicable vesting periods or requisite service periods, and is charged to “compensation and benefits” expense within the Company’s consolidated statement of operations. Lazard Fund Interests and similar deferred compensation arrangements that do not require future service are expensed immediately. The related compensation liability is accounted for at fair value as a derivative liability, which contemplates the impact of estimated forfeitures, and is adjusted for changes in fair value primarily related to changes in value of the underlying investments.

The following is a summary of activity relating to Lazard Fund Interests and other similar deferred compensation arrangements during the year ended December 31, 2012:


	Prepaid Compensation			Compensation Liability
Balance, January 1, 2012	$	17,783		$	29,900
Granted		64,679			64,679
Settled		–			(10,646	)
Forfeited		(1,603	)		(1,711	)
Amortization		(33,476	)		–
Increase in fair value related to:
Change in fair value of underlying investments		–			7,557
Adjustment for estimated forfeitures		–			7,841
Other		62			(27)

Balance, December 31, 2012	$	47,445		$	97,593

The amortization of the prepaid compensation asset will generally be recognized over a weighted average period of approximately 1.6 years subsequent to December 31, 2012.

The following is a summary of the impact of Lazard Fund Interests and other similar deferred compensation arrangements on “compensation and benefits” expense within the accompanying consolidated statements of operations for the years ended December 31, 2012 and 2011:


	Year Ended December 31,
	2012		2011
Amortization, net of forfeitures (a)	$	41,209	$	14,551
Change in the fair value of underlying investments		7,557		(3,024	)

Total	$	48,766	$	11,527

(a)	Includes, during the year ended December 31, 2012, $3,495 relating to the Cost Savings Initiatives recorded in the fourth quarter of 2012.

Incentive Awards Granted In February 2013

In February 2013, the Company granted approximately $272,000 of deferred incentive awards to eligible employees. These grants included approximately 4.3 million RSUs or shares of restricted Class A common stock that, in accordance with U.S. GAAP, were measured at the grant date fair value of $37.45 per RSU or share of restricted Class A common stock, or an aggregate of approximately $161,000. In addition, eligible employees will have the choice of receiving a portion of their deferred incentive awards in a combination of (i) Lazard Fund Interests, and (ii) additional shares of restricted Class A common stock, with the aggregate fair value on the date of grant of these awards being approximately $99,000. The remaining deferred incentive awards include deferred cash awards and a portion of fund managers’ year-end incentive compensation that is reinvested in certain asset management funds, with such aggregate fair value on the date of grant of these awards being approximately $12,000.

The RSUs, restricted Class A stock and Lazard Fund Interests granted each provide for one-third vesting on March 2, 2015 and the remaining two-thirds vesting on March 1, 2016. Compensation expense with respect to such incentive awards will generally be recognized over the vesting period, with such compensation expense to be recognized over a weighted average period of approximately 2.7 years.