Stock-Based Compensation

KCG Equity Incentive Plan

The KCG Holdings, Inc. 2015 Amended and Restated Equity Incentive Plan (the "Amended 2015 Plan") is maintained by the Company for the purpose of granting incentive awards to officers, employees and directors of the Company. As of March 31, 2017, there were approximately 23.2 million shares authorized for issuance under the Amended 2015 Plan, of which approximately 13.6 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 of the Company's Board of Directors, and allows for the grant of stock options, stock appreciation rights ("SARs"), restricted stock, RSUs and cash-based awards (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 ("Annual Equity Awards"), 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.

RSUs granted as Annual Equity Awards provide for the continued vesting of such RSUs following a voluntary resignation of employment, subject to the grantee's ongoing compliance with non-competition and non-solicitation requirements through the duration of the vesting period. As such, the Annual Equity Awards are considered not to have a service condition from an expense perspective. The Company recognizes the expense associated with the RSUs expected to be granted by the Company early in the following year for the current year's annual incentive compensation in the current year.

The Company measures compensation expense related to Off-Cycle Grants based on the fair value of KCG Class A Common Stock at the date of grant. When accruing compensation expense over the duration of a performance year prior to the grant of Annual Equity Awards for that year, the Company accrues compensation expense based on the estimated value of such future awards. For example, prior to granting the RSUs that are expected to be awarded by the Company in early 2018 as a component of annual incentive compensation for the 2017 performance year, the Company will accrue compensation expense for such awards over the year ended December 31, 2017, based on the estimated value of such awards. The amount accrued during the year for Annual Equity Awards is included in Accrued compensation expense on the Consolidated Statements of Financial Condition.

Compensation expense 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 March 31,
	2017		2016
Stock award compensation expense	$	2,438	$	17,053
Income tax benefit	926		6,480

The following table summarizes restricted awards activity for the three months ended March 31, 2017 (awards in thousands):



	Restricted Stock Units
	Number of Units		Weighted- Average Grant date Fair Value
Outstanding at December 31, 2016	5,563		$	11.25
Granted	800		14.27
Vested	(2,634	)	11.19
Forfeited	(72	)	12.10
Outstanding at March 31, 2017	3,657		$	11.93

There was $5.6 million of unamortized compensation related to unvested RSUs at March 31, 2017 that are related to Off-Cycle Grants. The cost of these unvested RSUs is expected to be recognized over a weighted average life of 1.6 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 grantee. 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 three months ended March 31, 2017 or 2016.

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



	For the three months ended March 31,
	2017		2016
Stock option and SAR compensation expense	$	122	$	134
Income tax benefit	46		51

The following table summarizes stock option and SAR activity and stock options exercisable for the three months ended March 31, 2017 (awards in thousands):



	Number of Stock Awards		Weighted- Average Exercise Price		Aggregate Intrinsic Value		Weighted- Average Remaining Life (years)
Outstanding at December 31, 2016 ⁽¹⁾	6,298		$	18.88
Granted	—		—
Exercised	(337	)	8.24
Forfeited or expired	(94	)	53.56
Outstanding at March 31, 2017 ⁽¹⁾	5,867		$	19.03	$	14,269	2.23
Exercisable at March 31, 2017	4,492		$	17.75	$	14,269	1.69
Available for future grants at March 31, 2017 ⁽²⁾	13,630


⁽¹⁾	Includes 1.7 million SARs.


⁽²⁾	Represents shares available for grant of options, SARs, RSUs and other awards 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 or SARs, as applicable, multiplied by the number of shares underlying such award. The total intrinsic value and cash received from stock options exercised during the three months ended March 31, 2017 is $2.2 million and $2.8 million, respectively. There were no stock options or SARs exercised during the three months ended March 31, 2016.

There is $0.5 million of unamortized compensation related to unvested stock options at March 31, 2017. The cost of these unvested awards is expected to be recognized over a weighted average life of 1.25 years.

Incentive units

Prior to the 2013 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 2013 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 benefit included in Employee compensation and benefits on the Consolidated Statements of Operations. Given that the units vested in connection with the 2013 Mergers, the Company fully amortized the costs associated with these units as of June 30, 2013. Deferred compensation payable at March 31, 2017 and December 31, 2016 related to incentive units were $2.7 million and $2.3 million, respectively, 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 three months ended March 31, 2017 (units in thousands):



	Vested
Incentive units at December 31, 2016	16
Issued	—
Vested	(1	)
Exercised	—
Canceled	—
Incentive units at March 31, 2017	15

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 March 31,
	2017		2016
Incentive units	$	437	$	(77	)