Stock-Based Compensation

KCG Equity Incentive Plan

KCG Holdings, Inc. Amended and Restated Equity Incentive Plan (the "KCG Plan") was initially assumed from Knight in connection with the Mergers, and since the Mergers, has been maintained by the Company for the purpose of granting incentive awards to officers, employees and directors of the Company.

In April 2015, the Company’s Board of Directors approved and adopted an amended and restated version of the KCG Plan, the KCG Holdings, Inc. 2015 Amended and Restated Equity Incentive Plan (“the Amended 2015 Plan”), subject to approval by the KCG stockholders which was obtained on May 12, 2015 at the Company’s annual meeting of stockholders.

The Amended 2015 Plan removed a legacy provision that required, subject to limited exceptions, that awards of restricted stock units ("RSUs") and restricted shares be subject to minimum three year vesting for time-based awards and minimum one year vesting for performance-based awards.

The Company expects that future equity awards granted as a component of annual incentive compensation (the “Annual Equity Awards”) under the Amended 2015 Plan will provide for continued vesting following a grantee’s voluntary resignation of employment, subject to ongoing compliance with non-competition and non-solicitation requirements through the duration of the vesting period. In the second quarter of 2015, the Compensation Committee of the Company’s Board of Directors (the "Compensation Committee") amended the terms of existing RSUs awarded as Annual Equity Awards in respect of the 2012, 2013 and 2014 performance years (the "Outstanding Annual RSUs") to provide for the continued vesting as outlined above (the “Continued Vesting Amendment”).

As of June 30, 2015, there were approximately 28.7 million shares authorized for issuance under the Amended 2015 Plan, of which approximately 15.4 million shares are available for grant (subject to adjustment as provided under the Amended 2015 Plan).

The Amended 2015 Plan is administered by the Compensation Committee, and allows for the grant of stock options, stock appreciation rights ("SARs"), restricted stock and RSUs (collectively, the “awards”), as defined by the Amended 2015 Plan. In addition to overall limitations on the aggregate number of awards that may be granted, the Amended 2015 Plan also limits the number of awards that may be granted to a single individual.

Restricted Shares and Restricted Stock Units

The Company has historically awarded RSUs to eligible officers, employees and directors as a component of annual incentive compensation, and has also made off-cycle grants of RSUs for purposes of one-time, special or retention awards ("Off-Cycle Grants"). The majority of RSUs that have been granted by the Company vest ratably over three years and are subject to accelerated vesting, or continued vesting, following the grantee’s termination of employment, in accordance with the applicable award documents and employment agreements between the Company and the grantee. Officers, employees and directors generally become vested in outstanding RSUs upon a qualifying retirement, and the Amended 2015 Plan otherwise provides the Compensation Committee with the discretion to fully vest participants in outstanding RSUs in certain other circumstances.

As a result of implementing the Continued Vesting Amendment described above, the Outstanding Annual RSUs are no longer considered to have a service condition from an expense perspective. This change resulted in the acceleration of the unrecognized expense associated with such awards and the Company recorded a charge of $28.8 million in Employee compensation and benefits in the Consolidated Statements of Operations for the three and six months ended June 30, 2015. Beginning in the second quarter of 2015, the Company also began to recognize the expense associated with anticipated Annual Equity Awards that are expected to be awarded to employees in early 2016 as part of their annual incentive compensation in respect of the 2015 performance year.

The Company measures compensation expense related to Off-Cycle Grants (and previously for Outstanding Annual RSUs) based on the fair value of KCG Class A Common Stock at the date of grant. For anticipated Annual Equity Awards related to the 2015 performance year which are expected to be granted in early 2016, the Company accrues compensation expense based on the estimated value of such future awards. The amount accrued during the year for Annual Equity Grants is included in Accrued compensation on the Consolidated Statements of Financial Condition.

Compensation expense from continuing operations relating to RSUs, which is primarily recorded in Employee compensation and benefits, and the corresponding income tax benefit, which is recorded in Income tax (benefit) expense on the Consolidated Statements of Operations are presented in the following table (in thousands):



	For the three months ended June 30,				For the six months ended June 30,
	2015		2014		2015		2014
Stock award compensation expense ⁽¹⁾	$	40,041	$	14,937	$	54,296	$	31,175
Income tax benefit	15,216		5,676		20,632		11,846


⁽¹⁾	Included in the 2015 amounts is $28.8 million of accelerated stock compensation expense related to the Outstanding Annual RSUs as a result of implementing the Continued Vesting Amendment.

The following table summarizes restricted awards activity for the six months ended June 30, 2015 (awards in thousands):



	Restricted Stock Units
	Number of Units		Weighted- Average Grant date Fair Value
Outstanding at December 31, 2014	9,147		$	10.77
Granted	2,439		12.25
Vested	(2,209	)	11.07
Forfeited	(595	)	11.36
Outstanding at June 30, 2015	8,782		$	11.06

There is $21.3 million of unamortized compensation related to unvested RSUs outstanding at June 30, 2015 (awards not comprising the Outstanding Annual RSUs). The cost of these unvested RSUs, unless a modification occurs, is expected to be recognized over a weighted average life of 1.08 years.

Stock Options and Stock Appreciation Rights

The Company’s policy is to grant options for the purchase of shares of KCG Class A Common Stock and SARs to purchase or receive the cash value of shares of KCG Class A Common Stock. The stock options and SARs outstanding as of the date hereof have each been granted with an exercise price not less than the market value of KCG Class A Common Stock on the grant date and generally vest ratably over a three year period and expire on the fifth or tenth anniversary of the grant date, pursuant to the terms of the applicable award agreement. Like RSUs, stock options and SARs are subject to accelerated vesting, or continued vesting following certain termination circumstances, in accordance with the applicable award agreements and employment agreements between the Company and the participant. The Company issues new shares upon stock option exercises by its employees and directors, and may either issue new shares or provide a cash payment upon SARs exercises by its employees.

The Company estimates the fair value of each stock option and SAR granted as of its respective grant date using the Black-Scholes option-pricing model. The principal assumptions utilized in valuing stock options and SARs and the methodology for estimating the inputs to such model include: 1) risk-free interest rate, the estimate of which is based on the yield of U.S. zero coupon securities with a maturity equal to the expected life of the stock option or SAR; 2) expected volatility, the estimate of which is based on several factors including implied volatility of market-traded stock options on the Company’s common stock on the grant date and the volatility of the Company’s common stock; and 3) expected option or SAR life, the estimate of which is based on internal studies of historical experience and projected exercise behavior based on different employee groups and specific stock option and SAR characteristics, including the effect of employee terminations. There were no stock options or SARs granted during the six months ended June 30, 2015 or 2014.

Compensation expense from continuing operations relating to stock options and SARs, all of which was recorded in Employee compensation and benefits, as well as the corresponding income tax benefit, which is recorded in Income tax (benefit) expense on the Consolidated Statements of Operations are as follows (in thousands):



	For the three months ended June 30,				For the six months ended June 30,
	2015		2014		2015		2014
Stock option and SAR compensation expense	$	928	$	958	$	1,941	$	1,920
Income tax benefit	353		364		738		730

The following table summarizes stock option and SAR activity and stock options exercisable for the six months ended June 30, 2015 (awards in thousands):



	Number of Stock Awards		Weighted- Average Exercise Price		Aggregate Intrinsic Value		Weighted- Average Remaining Life (years)
Outstanding at December 31, 2014 ⁽¹⁾	4,691		$	17.41
Granted at market value	—		—
Exercised	(118	)	8.24
Forfeited or expired	(62	)	29.12
Outstanding at June 30, 2015 ⁽¹⁾	4,511		$	17.49	$	4,524	2.91
Exercisable at June 30, 2015	1,685		$	21.11	$	1,418	2.79
Available for future grants at June 30, 2015 ⁽²⁾	15,370


⁽¹⁾	Includes 1.7 million SARs.


⁽²⁾	Represents options, SARs and awards available for grant under the Amended 2015 Plan.

The aggregate intrinsic value is the amount by which the closing price of KCG Class A Common Stock exceeds the exercise price of the stock options multiplied by the number of shares. The total intrinsic value and cash received from options exercised during the six months ended June 30, 2015 is $0.6 million and $1.0 million, respectively. There were no stock options or SARs exercised during the six months ended June 30, 2014.

There is $1.4 million of unamortized compensation related to unvested stock options and SARs outstanding at June 30, 2015. The cost of these unvested awards is expected to be recognized over a weighted average life of 0.4 years.

Incentive units

Prior to the Mergers, GETCO awarded deferred compensation to its employees in the form of incentive units that generally vested over time. The value of these incentive units was determined at the date of grant based on the estimated enterprise value of GETCO and the amount expensed was determined based on this valuation multiplied by the percent vested. In connection with the Mergers, all outstanding unvested incentive units vested and were converted into units based on the applicable exchange ratio of GETCO units to KCG Class A Common Stock. The units are marked to the current stock price of KCG Class A Common Stock at the end of each period with the resulting change in the liability reflected as either an expense or gain included in Employee compensation and benefits on the Consolidated Statements of Operations. Given that the units vested in connection with the Mergers, the Company fully amortized the costs associated with these units as of June 30, 2013. Deferred compensation payable at both June 30, 2015 and December 31, 2014 related to incentive units was $2.9 million and is included in Accrued compensation expense on the Consolidated Statements of Financial Condition.

The following is a summary of the changes in the incentive units for the six months ended June 30, 2015 (units in thousands):



	Vested
Incentive units at December 31, 2014	38
Issued	—
Vested	—
Exercised	(3	)
Canceled	—
Incentive units at June 30, 2015	36

Totals may not add due to rounding.

Compensation expense (benefit) related to the Incentive units which are recorded within Employee compensation and benefits on the Consolidated Statements of Operations are as follows (in thousands):



	For the three months ended June 30,					For the six months ended June 30,
	2015		2014			2015	2014
Incentive units	$	33	$	(14	)	185	(188	)