STOCK-BASED COMPENSATION

The following costs related to the Company’s stock compensation plans were included in the consolidated statements of income and comprehensive income:



	For the Years Ended December 31,
	2014		2013		2012
Cost of revenues	$	8,648	$	4,823	$	2,809
Selling, general and administrative expenses	15,972		8,327		4,017
Total	$	24,620	$	13,150	$	6,826

Equity Plans

During the second quarter of 2013, the Company finalized the fair values of the net assets acquired from Empathy Lab. As a result, the Company issued an additional 1,483 shares of unvested (“restricted”) common stock to the sellers of Empathy Lab on July 11, 2013 to settle the difference between the initial number of shares issued upon acquisition and the total number of shares due in connection with this transaction. The shares vest 33.33% on each of the first, second and third anniversaries of the closing date. Upon termination of the recipient’s services with the Company with Cause or without Good Reason (in each case, as defined in the escrow agreement), any unvested shares will be forfeited. The fair value of the restricted shares at the time of grant was $42.

2012 Non-Employee Directors Compensation Plan — On January 11, 2012, the Company approved the 2012 Non-Employee Directors Compensation Plan (“2012 Directors Plan”) to be used to issue equity grants to its non-employee directors. The Company authorized 600,000 shares of common stock to be reserved for issuance under the plan. The 2012 Directors Plan will expire after 10 years and is administered by the Company’s Board of Directors.

2012 Long-Term Incentive Plan — On January 11, 2012, the Company approved the 2012 Long-Term Incentive Plan (“2012 Plan”) to be used to issue equity grants to company personnel. As of December 31, 2014, 4,785,761 shares of common stock remained available for issuance under the 2012 Plan. This includes (i) any shares that were available for issuance under the 2006 Plan (as defined below) as of its discontinuance date and that became available for issuance under the 2012 Plan and (ii) any shares that were subject to outstanding awards under the 2006 Plan and have expired or terminated or were cancelled between the discontinuance date of the 2006 Plan and December 31, 2014 and therefore became available for issuance under the 2012 Plan. In addition, up to 1,743,034 shares that are subject to outstanding awards as of December 31, 2014 under the 2006 Plan and that expire or terminate for any reason prior to exercise or that would otherwise have returned to the 2006 Plan’s share reserve under the terms of the 2006 Plan will be available for awards to be granted under the 2012 Plan.

2006 Stock Option Plan — Effective May 31, 2006, the Board of Directors of the Company adopted the 2006 Stock Option Plan (the “2006 Plan”). The 2006 Plan permitted the granting of options to directors, employees, and certain independent contractors. The Compensation Committee of the Board of Directors generally had the authority to select individuals who were to receive options and to specify the terms and conditions of each option so granted, including the number of shares covered by the option, the exercise price, vesting provisions, and the overall option term. In January 2012, the 2006 Plan was discontinued; however, outstanding awards remain subject to the terms of the 2006 Plan and any shares that are subject to an option award that was previously granted under the 2006 Plan and that will expire or terminate for any reason prior to exercise will become again available for issuance under the 2012 Plan. All of the options issued pursuant to the 2006 Plan expire 10 years from the date of grant.

Stock Options

Stock option activity under the Company’s plans is set forth below:



	Number of Options		Weighted Average Exercise Price		Aggregate Intrinsic Value
Options outstanding at January 1, 2012	6,595,136		$	4.65	$	48,447
Options granted	1,443,810		16.80		1,877
Options exercised	(1,552,742	)	3.53		(22,623		)
Options forfeited/cancelled	(189,495	)	11.35		(1,279		)
Options outstanding at December 31, 2012	6,296,709		$	7.51	$	66,682
Options granted	1,987,952		23.60		22,543
Options exercised	(2,156,898	)	4.31		(66,066		)
Options forfeited/cancelled	(304,227	)	11.50		(7,131		)
Options outstanding at December 31, 2013	5,823,536		$	13.99	$	122,003
Options granted	2,400,500		32.51		36,584
Options exercised	(1,171,097	)	9.05		(45,321		)
Options forfeited/cancelled	(214,193	)	25.33		(4,802		)
Options outstanding at December 31, 2014	6,838,746		$	20.98	$	183,073

Options vested and exercisable at December 31, 2014	2,406,016		$	9.83	$	91,236
Options expected to vest	4,074,226		$	26.82	$	85,274

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The Company recognizes the fair value of each option as compensation expense ratably using the straight-line method over the service period (generally the vesting period). The Black-Scholes model incorporates the following assumptions:

a. Expected volatility — the Company estimated the volatility of its common stock at the date of grant using historical volatility of peer public companies for the year ended December 31, 2011. In order to compare volatilities for different interval lengths, the Company expresses volatility in annual terms. The Company applied the same approach regarding the stock options issued in 2014 and 2013 due to insufficiency of historical volatility data of its stock prices at the time of grant. The expected volatility was 46% in the year ended December 31, 2014, 2013 and 2012.

b. Expected term — the Company estimates the expected term of options granted using the simplified method of determining expected term as outlined in SEC Staff Accounting Bulletin 107 as used for grants. The expected term was 6.20 years in 2014, 6.24 years in 2013, and 6.25 years in 2012.

c. Risk-free interest rate — the Company estimates the risk-free interest rate using the U.S. Treasury yield curve for periods equal to the expected term of the options in effect at the time of grant. The risk-free rate was approximately 2.01%, 1.41% and 1.13% in 2014, 2013 and 2012, respectively.

d. Dividends — the Company uses an expected dividend yield of zero since it has never declared or paid any dividends on its common stock. The Company intends to retain any earnings to fund future growth and the operation of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future.

Additionally, the Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. It uses a combination of historical data and other factors to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest.

Aggregate grant-date fair value of stock options issued under the 2012 Plan during the year ended December 31, 2014 was $33,004. The options typically vest over four years from the time of grant.

As of December 31, 2014, a total of 1,554 shares underlying options exercised through December 31, 2014, were in transfer with the Company’s transfer agent.

As of December 31, 2014, total remaining unrecognized compensation cost related to unvested stock options, net of forfeitures, was approximately $41,669, and is expected to be recognized over a weighted-average period of 1.9 years. The weighted average remaining contractual term of the outstanding options as of December 31, 2014 was 5.1 years for fully vested and exercisable options and 8.6 years for options expected to vest, respectively.

Other Awards

Other awards include awards of restricted stock and restricted stock units (“RSUs”) under the Company’s 2012 Directors Plan and 2012 Plan, as well as certain other individual awards. In addition, the Company has in the past, and may in the future, issue its equity securities to compensate employees of acquired businesses for future services, upon such terms and at such prices as it deems appropriate. Equity-based awards granted in connection with acquisitions of businesses are generally issued in the form of service-based awards and performance-based awards. The awards issued in connection with acquisitions of businesses are subject to the terms and conditions contained in the applicable award agreement and acquisition documents. Summarized activity related to the Company’s service-based awards for the years ended December 31, 2014, 2013 and 2012 was as follows:



	Number of Shares		Weighted Average Grant Date Fair Value Per Share
Unvested service-based awards outstanding at January 1, 2012	—		$	—
Awards granted	757,272		17.15
Awards vested	(97,400	)	12.00
Unvested service-based awards outstanding at December 31, 2012	659,872		$	17.92
Awards granted	15,524		23.69
Awards vested	(330,468	)	17.33
Unvested service-based awards outstanding at December 31, 2013	344,928		$	18.74
Awards granted	523,220		40.41
Awards vested	(217,668	)	17.84
Awards forfeited/cancelled	(17,038	)	21.14
Unvested service-based awards outstanding at December 31, 2014	633,442		$	36.88

For the year ended December 31, 2014, the Company issued a total of 7,738 shares of unvested (“restricted”) common stock under its 2012 Non-Employee Directors Compensation Plan with an aggregate grant date fair value of $325. As of December 31, 2014, aggregate unrecognized compensation expense was $282. This cost is expected to be recognized over the next 1.6 years using the weighted average method.

For the year ended December 31, 2014, the Company issued a total of 70,500 RSUs to certain key management personnel under the 2012 Plan. The fair value of the RSUs at the time of the grants was $2,295. As of December 31, 2014, the aggregate unrecognized compensation expense for these RSUs was $1,643. This cost is expected to be recognized over the next 2.2 years using the weighted average method.

For the year ended December 31, 2014, the Company granted a total of 444,982 service-based awards in connection with the acquisitions of businesses completed during that period. The aggregate grant date fair value of the awards was $18,471. As of December 31, 2014, a total of 545,379 shares underlying service-based awards with an aggregate fair value of $20,544 were unvested and outstanding in connection with the Company’s acquisitions activity. This cost is expected to be recognized over the next 1.7 years using the weighted average method.

During the year ended December 31, 2014, the Company initiated granting performance-based awards in connection with the acquisitions completed during that period. Total number of the awards varies based on attainment of certain performance targets pursuant to provisions of the relevant purchase agreements. Typically, the performance period is three years, with one third of the awards granted, vesting on the first anniversary of the grant. The remaining awards vest in equal installments on the second and third anniversaries of the grant. If an eligible employee leaves the Company prior to a vesting date, the unvested portion of the award will be forfeited, generally. The Company periodically evaluates the achievement of the related performance conditions during requisite service period and the number of shares expected to be delivered, and resulting compensation expense is adjusted accordingly.

Summarized activity related to the Company’s performance-based awards for the years ended December 31, 2014, was as follows:



	Number of Shares		Weighted Average Grant Date Fair Value Per Share
Unvested performance-based awards outstanding at December 31, 2013	—		$	—
Awards granted	387,058		38.18
Awards vested	—		—
Awards forfeited/cancelled	(2,550	)	36.57
Changes in the number of awards expected to be delivered	(12,998	)	5.47
Unvested performance-based awards outstanding at December 31, 2014	371,510		$	39.34

As of December 31, 2014, total unrecognized compensation cost related to unvested performance-based awards was $13,953. That cost is expected to be recognized over the next 1.8 years using the weighted average method.