Earnings per Share

Basic earnings per share is computed by dividing the Company’s net income attributable to its common stockholders by the weighted average number of shares outstanding during the reporting period.

Under the two-class method of computing basic earnings per share, basic earnings per share is calculated by dividing net income for basic earnings per share by the weighted average number of common shares outstanding during the period. The two-class method includes an earnings allocation formula that determines earnings per share for each participating security according to dividends declared and undistributed earnings for the period. The Company’s net income for basic earnings per share is reduced by the amount allocated to participating restricted shares of Class A common stock which participate for purposes of calculating earnings per share.

For the three months ended March 31, 2018 and 2017, the Company’s basic earnings per share was determined as follows:



	For the Three Months Ended March 31,
	2018		2017
	(in thousands, except share and per share amounts)
Net Income for Basic Earnings per Share Allocated to:
Class A Common Stock	$	3,523	$	2,334
Participating Shares of Restricted Class A Common Stock	—		2
Total Net Income for Basic Earnings per Share	$	3,523	$	2,336
Basic Weighted-Average Shares Outstanding	18,015,368		17,350,367
Add: Participating Shares of Restricted Class A Common Stock¹	—		10,786
Total Basic Weighted-Average Shares Outstanding	18,015,368		17,361,153
Basic Earnings per Share	$	0.20	$	0.13


1	Certain unvested shares of Class A common stock granted to employees have nonforfeitable rights to dividends and therefore participate fully in the results of the Company from the date they are granted. They are included in the computation of basic earnings per share using the two-class method for participating securities.

Diluted earnings per share adjusts this calculation to reflect the impact of all outstanding membership units of the operating company, phantom Class B units, phantom Delayed Exchange Class B units, phantom Class A common stock, outstanding options to purchase Class B units, options to purchase Delayed Exchange Class B units, options to purchase Class A common stock, and restricted Class A common stock, to the extent they would have a dilutive effect on net income per share for the reporting period. Net income for diluted earnings per share assumes that all outstanding operating company membership units are converted into Company stock at the beginning of the reporting period and the resulting change to the Company's net income associated with its increased interest in the operating company is taxed at the Company’s effective tax rate, exclusive of one-time charges and adjustments associated with both the valuation allowance and the liability to selling and converting shareholders and other one-time charges.

For the three months ended March 31, 2018 and 2017, the Company’s diluted net income was determined as follows:



	For the Three Months Ended March 31,
	2018		2017
	(in thousands)
Net Income Attributable to Non-Controlling Interests of Pzena Investment Management, LLC	$	14,113	$	10,120
Less: Assumed Corporate Income Taxes	3,410		3,752
Assumed After-Tax Income of Pzena Investment Management, LLC	10,703		6,368
Net Income of Pzena Investment Management, Inc.	3,523		2,336
Diluted Net Income	$	14,226	$	8,704

Under the two-class method of computing diluted earnings per share, diluted earnings per share is calculated by dividing net income for diluted earnings per share by the weighted average number of common shares outstanding during the period, plus the dilutive effect of any potential common shares outstanding during the period using the more dilutive of the treasury method or two-class method. The two-class method includes an earnings allocation formula that determines earnings per share for each participating security according to dividends declared and undistributed earnings for the period. The Company’s net income for diluted earnings per share is reduced by the amount allocated to participating restricted Class B units for purposes of calculating earnings per share. Dividend equivalent distributions paid per share on the operating company’s unvested restricted Class B units are equal to the dividends paid per Company Class A common stock.

For the three months ended March 31, 2018 and 2017, the Company’s diluted earnings per share were determined as follows:



	For the Three Months Ended March 31,
	2018		2017
	(in thousands, except share and per share amounts)
Diluted Net Income Allocated to:
Class A Common Stock	$	14,216	$	8,694
Participating Shares of Restricted Class A Common Stock	—		2
Participating Class B Units	10		8
Total Diluted Net Income Attributable to Shareholders	$	14,226	$	8,704

Total Basic Weighted-Average Shares Outstanding	18,015,368		17,361,153
Dilutive Effect of Class B Units	51,032,975		51,097,254
Dilutive Effect of Options ¹	1,603,865		508,963
Dilutive Effect of Phantom Class B Units & Phantom Shares of Class A Common Stock	1,517,654		1,791,662
Dilutive Effect of Restricted Shares of Class A Common Stock ²	67,500		70,780
Dilutive Weighted-Average Shares Outstanding	72,237,362		70,829,812
Add: Participating Class B Units³	48,600		64,886
Total Dilutive Weighted-Average Shares Outstanding	72,285,962		70,894,698
Diluted Earnings per Share	$	0.20	$	0.12


1	Represents the dilutive effect of options to purchase operating company Class B units, Delayed Exchange Class B units, and Class A common stock.


2	Certain restricted shares of Class A common stock granted to employees are not entitled to dividend or dividend equivalent payments until they are vested and are therefore non-participating securities and are not included in the computation of basic earnings per share. They are included in the computation of diluted earnings per share when the effect is dilutive using the treasury stock method.


3	Unvested Class B Units granted to employees have nonforfeitable rights to dividend equivalent distributions and therefore participate fully in the results of the operating company's operations from the date they are granted. They are included in the computation of diluted earnings per share using the two-class method for participating securities.

Approximately 0.3 million options to purchase Class B units, 0.1 million options to purchase shares of Class A common stock, and 2.0 million contingent options to purchase shares of Class A common stock were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2018, as their inclusion would have had an antidilutive effect based on current market prices or because the option had contingent vesting requirements that were not met. Approximately 0.7 million options to purchase Class B units, 0.1 million options to purchase shares of Class A common stock, and 3.0 million contingent options to purchase shares of Class A common stock were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2017, as their inclusion would have had an antidilutive effect based on current market prices or because the option had contingent vesting requirements that were not met.