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,
	2018		2017		2016
Cost of revenues (exclusive of depreciation and amortization)	$	27,245	$	20,868	$	16,619
Selling, general and administrative expenses	31,943		31,539		32,625
Total	$	59,188	$	52,407	$	49,244

Equity Plans

2015 Long-Term Incentive Plan — On June 11, 2015, the Company’s stockholders approved the 2015 Long-Term Incentive Plan (“2015 Plan”) to be used to issue equity awards to company personnel. As of December 31, 2018, 5,332,128 shares of common stock remained available for issuance under the 2015 Plan. All of the awards issued pursuant to the 2015 Plan expire 10 years from the date of grant.

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. As of December 31, 2018, 533,852 shares of common stock remained available for issuance under the 2012 Directors 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. In June 2015, the 2012 Plan was discontinued; however, outstanding awards remain subject to the terms of the 2012 Plan and any shares that are subject to an award that was previously granted under the 2012 Plan and that expire or terminate for any reason prior to exercise will become available for issuance under the 2015 Plan. All of the awards issued pursuant to the 2012 Plan expire 10 years from the date of grant.

2006 Stock Option Plan — Effective May 31, 2006, the Board of Directors of the Company adopted the 2006 Stock Option Plan (the “2006 Plan”) to grant stock options to directors, employees, and certain independent contractors. 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 expire or terminate for any reason prior to exercise will become available for issuance under the 2015 Plan. All of the awards 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		Weighted Average Remaining Contractual Term (in years)
Options outstanding as of January 1, 2016	7,450,914		$	34.07	$	331,938
Options granted	313,088		$	70.27
Options exercised	(895,804	)	$	20.13
Options forfeited/cancelled	(227,759	)	$	47.89
Options expired	(3,200	)	$	1.52
Options outstanding as of December 31, 2016	6,637,239		$	37.20	$	179,936
Options granted	261,373		$	73.40
Options exercised	(1,789,434	)	$	30.23
Options forfeited/cancelled	(200,210	)	$	57.09
Options expired	(7,220	)	$	4.63
Options outstanding as of December 31, 2017	4,901,748		$	40.91	$	326,064
Options granted	160,181		$	112.81
Options exercised	(945,166	)	$	36.69
Options forfeited/cancelled	(32,569	)	$	63.28
Options expired	(1,250	)	$	25.72
Options outstanding as of December 31, 2018	4,082,944		$	44.54	$	291,846	5.5

Options vested and exercisable as of December 31, 2018	3,183,103		$	36.10	$	254,360	4.9
Options expected to vest as of December 31, 2018	867,711		$	73.93	$	36,539	7.3

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The grant-date fair value for stock options granted was determined using a Black-Scholes model incorporating the following average assumptions:



	For the Years Ended December 31,
	2018		2017		2016
Expected volatility	33.8	%	30.5	%	31.9	%
Expected term (in years)	6.25		6.25		6.24
Risk-free interest rate	2.7	%	2.1	%	1.5	%
Expected dividends	—	%	—	%	—	%

Effective January 1, 2018, the Company changed its 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.

The risk-free rate is based on the U.S. Treasury yield curve for periods equal to the expected term of the options in effect at the time of grant. The Company has not declared or paid any dividends on its common stock. The Company intends to retain any earnings to fund operations and future growth of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future.

The weighted-average grant-date fair value of stock options granted during the years ended December 31, 2018, 2017 and 2016 was $43.42, $25.29 and $24.26, respectively. The total intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016 was $83,250, $91,148 and $39,577, respectively.

The Company recognizes the fair value of each option as compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period. The options are typically scheduled to vest over four years from the time of grant, subject to the terms of the applicable plan and stock option agreement. In general, in the event of a participant’s termination of service for any reason, unvested options are forfeited as of the date of such termination without any payment to the participant. The Company records share-based compensation expense only for those awards that are expected to vest and as such, the Company applies an estimated forfeiture rate at the time of grant and adjusts the forfeiture rate to reflect actual forfeitures quarterly.

As of December 31, 2018, $12,553 of total remaining unrecognized compensation cost related to unvested stock options, net of estimated forfeitures, is expected to be recognized over a weighted-average period of 2.1 years. As of December 31, 2018, a total of 50 shares underlying options exercised through December 31, 2018, were in transfer with the Company’s transfer agent.

Restricted Stock and Restricted Stock Units

The Company grants restricted stock units (“RSUs”) to Company personnel and non-employee directors under the Company’s 2015 Plan (and prior to its approval, under the 2012 Plan) and 2012 Directors Plan, respectively. Prior to 2017, awards to non-employee directors were in the form of restricted stock. In addition, the Company has issued in the past, and may issue in the future, its equity securities to compensate employees of acquired businesses for future services. Equity-based awards granted in connection with acquisitions of businesses are generally issued in the form of service-based awards (dependent on continuing employment only) and performance-based awards, which are granted and vest only if certain specified performance and service conditions are met. 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 with typical vesting period of three years and equal or variable vesting percentage of the awards granted depending on the terms.

Service-Based Awards

The table below summarizes activity related to the Company’s equity-classified and liability-classified service-based awards for the years ended December 31, 2018, 2017 and 2016:



	Equity-Classified Equity-Settled 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 as of January 1, 2016	306,839		$	41.14	149,272		$	57.55	—		$	—
Awards granted	6,510		$	73.00	408,629		$	70.39	207,586		$	70.53
Awards vested	(156,535	)	$	42.64	(41,015	)	$	55.60	—		$	—
Awards forfeited/cancelled	(2,689	)	$	45.32	(31,698	)	$	70.44	(3,085	)	$	70.52
Unvested service-based awards outstanding as of December 31, 2016	154,125		$	40.89	485,188		$	67.69	204,501		$	70.53
Awards granted	—		$	—	424,623		$	73.89	170,295		$	74.21
Awards modified	—		$	—	(2,570	)	$	26.85	2,570		$	73.27
Awards vested	(152,285	)	$	43.39	(140,043	)	$	66.54	(52,004	)	$	70.56
Awards forfeited/cancelled	—		$	—	(79,186	)	$	70.30	(10,533	)	$	71.72
Unvested service-based awards outstanding as of December 31, 2017	1,840		$	54.37	688,012		$	71.60	314,829		$	72.50
Awards granted	—		$	—	380,864		$	115.84	85,380		$	112.65
Awards modified	—		$	—	(3,110	)	$	80.27	3,110		$	120.18
Awards vested	(1,047	)	$	47.76	(217,800	)	$	70.10	(91,684	)	$	72.69
Awards forfeited/cancelled	—		$	—	(50,063	)	$	86.97	(8,668	)	$	81.40
Unvested service-based awards outstanding as of December 31, 2018	793		$	63.10	797,903		$	92.13	302,967		$	83.99

The fair value of vested service-based awards (measured at the vesting date) for the years ended December 31, 2018, 2017 and 2016 was as follows:



	For the Years Ended December 31,
	2018		2017		2016
Equity-classified equity-settled
Restricted stock	$	142	$	12,607	$	11,431
Restricted stock units	24,987		10,620		2,932
Liability-classified cash-settled
Restricted stock units	10,349		3,811		—
Total fair value of vested service-based awards	$	35,478	$	27,038	$	14,363

As of December 31, 2018, $38 of total remaining unrecognized stock-based compensation costs related to service-based equity-classified restricted stock is expected to be recognized over the weighted-average remaining requisite service period of 1.5 years.

As of December 31, 2018, $51,655 of total remaining unrecognized stock-based compensation costs related to service-based equity-classified RSUs, net of estimated forfeitures, is expected to be recognized over the weighted-average remaining requisite service period of 2.6 years. As of December 31, 2018, there were 3,894 restricted stock 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. During the fourth quarter of 2018, 44,350 RSUs were granted in connection with the acquisition of Think.

As of December 31, 2018, $23,251 of total remaining unrecognized stock-based compensation costs 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 2.3 years.

The liability associated with our service-based liability-classified RSUs as of December 31, 2018 and 2017 was $9,920 and $5,964, respectively, and was classified as Deferred compensation due to employees in the consolidated balance sheets.

Performance -Based Awards

The table below summarizes activity related to the Company’s performance-based awards for the years ended December 31, 2018, 2017 and 2016:



	Equity-Classified Equity-Settled Restricted Stock				Liability-Classified Equity-Settled Restricted Stock				Equity-Classified Equity-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 performance-based awards outstanding as of January 1, 2016	22,090		$	37.52	211,206		$	39.65	14,000		$	70.22
Awards granted	—		$	—	—		$	—	—		$	—
Awards vested	(9,978	)	$	40.15	(105,604	)	$	40.44	(4,666	)	$	70.22
Awards forfeited/cancelled	(6,539	)	$	36.97	—		$	—	(4,667	)	$	70.22
Unvested performance-based awards outstanding as of December 31, 2016	5,573		$	33.47	105,602		$	38.86	4,667		$	70.22
Awards granted	—		$	—	—		$	—	—		$	—
Awards vested	(5,573	)	$	33.47	(105,602	)	$	38.86	—		$	—
Awards forfeited/cancelled	—		$	—	—		$	—	(4,667	)	$	70.22
Unvested performance-based awards outstanding as of December 31, 2017	—		$	—	—		$	—	—		$	—
Awards granted	—		$	—	—		$	—	45,375		$	121.75
Awards vested	—		$	—	—		$	—	(8,769	)	$	121.75
Awards forfeited/cancelled	—		$	—	—		$	—	(7,014	)	$	121.75
Unvested performance-based awards outstanding as of December 31, 2018	—		$	—	—		$	—	29,592		$	121.75

As of December 31, 2018, $2,779 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 1.9 years.

Performance-based equity-classified RSUs were granted during the year ended December 31, 2018 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 each period for the probability of achievement of the performance criteria for each vesting portion separately. During the fourth quarter of 2018, the Company accelerated the recognition of $835 of expense due to vesting of performance-based equity-classified RSUs in accordance with the terms of the award agreement.

The fair value of vested performance-based awards (measured at the vesting date) for the years ended December 31, 2018, 2017 and 2016 was as follows:



	For the Years Ended December 31,
	2018		2017		2016
Equity-classified equity-settled
Restricted stock	$	—	$	452	$	690
Restricted stock units	1,046		—		348
Liability-classified equity-settled
Restricted stock	—		8,633		7,955
Total fair value of vested performance-based awards	$	1,046	$	9,085	$	8,993