STOCK-BASED COMPENSATION

The following table summarizes the components of stock-based compensation expense recognized in the Company’s condensed consolidated statements of income and comprehensive income for the periods indicated:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Cost of revenues (exclusive of depreciation and amortization)	$	7,492	$	4,913	$	22,835	$	14,452
Selling, general and administrative expenses	7,838		6,304		23,901		25,468
Total	$	15,330	$	11,217	$	46,736	$	39,920

Stock Options

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



	Number of Options		Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Term (in years)
Options outstanding at January 1, 2018	4,901,748		$	40.91
Options granted	157,133		$	112.91
Options exercised	(863,365	)	$	36.90
Options forfeited/cancelled	(30,819	)	$	63.39
Options expired	(250	)	$	61.38
Options outstanding at September 30, 2018	4,164,447		$	44.29	$	388,977	5.7

Options vested and exercisable at September 30, 2018	3,251,127		$	35.94	$	330,834	5.2
Options expected to vest at September 30, 2018	870,538		$	73.59	$	55,810	7.5

As of September 30, 2018, $16,124 of total remaining unrecognized stock-based compensation cost related to unvested stock options, net of estimated forfeitures, is expected to be recognized over the weighted-average remaining requisite service period of 2.0 years.

As of September 30, 2018, a total of 1,000 shares underlying options exercised through September 30, 2018, were in transit with the Company’s transfer agent.

Effective January 1, 2018, the Company changed the methodology for estimating volatility used in the Black-Scholes option valuation model. Prior to January 1, 2018, the Company estimated the volatility of its common stock by using the historical volatility of peer public companies including the Company’s historical volatility. In the first quarter of 2018, the Company began exclusively using its own historical volatility as it believes this is a more accurate estimate of future volatility of the price of the Company’s common stock. The Company did not change the methodology for estimating any other Black-Scholes option valuation model assumptions as disclosed in Note 13 “Stock-Based Compensation” to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

Restricted Stock and Restricted Stock Units

Service-Based Awards

The table below summarizes activity related to the Company’s equity-classified and liability-classified service-based awards for the nine months ended September 30, 2018.



	Equity-Classified Restricted Stock				Equity-Classified Equity-Settled Restricted Stock Units				Liability-Classified Cash-Settled Restricted Stock Units
	Number of Shares		Weighted Average Grant Date Fair Value Per Share		Number of Shares		Weighted Average Grant Date Fair Value Per Share		Number of Shares		Weighted Average Grant Date Fair Value Per Share
Unvested service-based awards outstanding at January 1, 2018	1,840		$	54.37	688,012		$	71.60	314,829		$	72.50
Awards granted	—		$	—	332,683		$	114.35	85,380		$	112.65
Awards modified	—		$	—	(2,299	)	$	72.80	2,299		$	116.63
Awards vested	(1,047	)	$	47.76	(215,263	)	$	70.09	(91,052	)	$	72.42
Awards forfeited/cancelled	—		$	—	(39,644	)	$	82.59	(6,998	)	$	79.19
Unvested service-based awards outstanding at September 30, 2018	793		$	63.10	763,489		$	90.08	304,458		$	83.96

As of September 30, 2018, $44 of total remaining unrecognized stock-based compensation cost related to service-based restricted stock is expected to be recognized over the weighted-average remaining requisite service period of 1.8 years.

As of September 30, 2018, $51,937 of total remaining unrecognized stock-based compensation cost related to service-based equity-classified restricted stock units (“RSUs”), net of estimated forfeitures, is expected to be recognized over the weighted-average remaining requisite service period of 2.7 years. As of September 30, 2018, there were 3,894 restricted share units vested for which the holders elected to defer delivery of EPAM Systems, Inc. ordinary shares. During the first quarter of 2018, 44,228 RSUs were granted in connection with the acquisition of Continuum.

As of September 30, 2018, $29,486 of total remaining unrecognized stock-based compensation cost related to service-based liability-classified RSUs, net of estimated forfeitures, is expected to be recognized over the weighted-average remaining requisite service period of 2.5 years.

The liability associated with the service-based liability-classified RSUs as of September 30, 2018 and December 31, 2017, was $9,174 and $5,964, respectively, and was classified as Deferred compensation due to employees in the condensed consolidated balance sheets.

Performance-Based Awards

The table below summarizes activity related to the Company’s equity-classified performance-based awards for the nine months ended September 30, 2018.



	Equity-Classified Equity-Settled Restricted Stock Units
	Number of Shares	Weighted Average Grant Date Fair Value Per Share
Unvested performance-based awards outstanding at January 1, 2018	—	$	—
Awards granted	45,375	$	121.75
Awards vested	—	$	—
Awards forfeited/cancelled	—	$	—
Unvested performance-based awards outstanding at September 30, 2018	45,375	$	121.75

As of September 30, 2018, $4,514 of total remaining unrecognized stock-based compensation cost related to performance-based equity-classified restricted stock units is expected to be recognized over the weighted-average remaining requisite service period of 2.1 years.

Performance-based equity-classified RSUs were granted during the period in connection with the acquisition of Continuum and have a variable vesting period, subject to satisfaction of the applicable performance conditions with each vesting portion having its own service inception date. Compensation is recognized over the vesting period and adjusted for the probability of achievement of the performance criteria for each vesting portion separately. As of September 30, 2018, the Company reduced the expected likelihood of achieving the performance conditions underlying these unvested and outstanding performance-based equity-classified RSUs based on performance to date and expectations for future performance and therefore reduced the compensation cost recognized by $183 associated with these RSUs. The Company will continue to reassess the probability of achievement of the performance criteria and adjust the amount of compensation expense accordingly.