11. Equity-Based Compensation

The Company measures its equity-based compensation costs based on the grant date fair value of the awards and recognizes these costs in the consolidated financial statements over the requisite service or performance vesting period.

Total equity-based compensation expense recorded in the consolidated statements of operations for the periods indicated is as follows:


	December 31,
	2015		2014		2013
Cost of revenue	$	13,342	$	2,506	$	2,704
General and administrative		73,403		5,528		7,083
Total equity-based compensation expense	$	86,745	$	8,034	$	9,787

Parent Equity-Based Compensation Plan

The Company’s former parent company, PG Holdco, LLC, had adopted an equity-based compensation plan (the “Parent Plan”), which authorized the granting of various equity awards of the Parent’s Preferred units, Class A common units, Class B common units, and Class C common units to employees and directors of the Company. The awards of the Parent were recorded as compensation expense in the accounts of the Company because the recipients are employees and directors of the Company.

In connection with the closing of the IPO, the Parent was liquidated and its sole asset, shares of the Company’s common stock, were distributed to its equity holders based on their relative rights under its limited liability agreement. The equity holders of the Parent received the number of shares of the Company’s common stock in the liquidation of the Parent that they would have held in the Company’s common stock directly immediately before the distribution, with no issuance of additional shares by the Company. Vested units of the Parent converted to shares of the Company’s common stock in the distribution. Unvested common units of the Parent that were subject to time-vesting conditions were converted to 1,028,122 unvested restricted shares of the Company’s common stock in the distribution and will continue to vest based on the amended vesting schedule of the respective unit class.

The liquidation and distribution of the Parent resulted in $70.4 million of equity-based compensation expense for the year ended December 31, 2015 due to the following outstanding award modifications:

Performance-based Class A and Class C common units of the Parent – vesting of $40.4 million triggered by achievement of performance threshold as a result of the IPO;

Class A common units of the Parent – modification of $19.4 million due to change from cliff-vesting awards to quarterly-vesting awards with resulting change from liability treatment to equity treatment;

Preferred, Class A and Class B common units purchased with loans – modification of $9.1 million due to repayment of the loan, which was a cancellation of option treatment and replacement with new awards with resulting change from liability treatment to equity treatment; and

Loan forgiveness – modification of $1.5 million due to forgiveness of loans used to purchase units with resulting change from liability treatment to equity treatment.

The total liability outstanding associated with the Parent Plan equity-based compensation awards not classified in equity but as liabilities was $0 and $19.4 million at December 31, 2015 and 2014, respectively.

2015 Incentive Award Plan

The Company’s 2015 Incentive Award Plan (the “2015 Plan”) provides for the grant of stock options, restricted stock, dividend equivalents, stock payments, restricted stock units, stock appreciation rights, and other stock or cash based awards. The 2015 Plan authorized 7,120,000 shares of common stock for issuance pursuant to awards under the plan.

Restricted Stock

On May 21, 2015, the Company granted shares of restricted stock with vesting terms summarized as follows:


4-year service vesting (20% for years 1-2, 30% for years 3-4)		807,000
3-year performance vesting (cliff)		807,000
2-year service vesting (quarterly)		120,000
1-year service vesting		20,000
		1,754,000

During the year ended December 31, 2015, the Company granted the following restricted stock with various performance and time vesting conditions:


		Weighted
		Average
		Fair Value
		at Grant
	Shares	Date
Nonvested at January 1, 2015	—	$	—
Converted from liquidation of Parent	1,028,122		25.00
Granted	1,820,114		25.19
Vested	(328,429)		25.00
Forfeited	(264,126)		25.00
Nonvested at December 31, 2015	2,255,681	$	25.15

As of December 31, 2015, $46.4 million of total unrecognized compensation costs related to outstanding nonvested restricted stock was expected to be recognized over a weighted average period of 2.7 years.

Stock Options

The Company granted options to purchase 36,304 shares of the Company’s common stock during the year ended December 31, 2015. Options to purchase shares of common stock were granted with exercise prices equal to the fair value of the common stock on the date of grant. The fair value of the stock options granted was estimated using a Black-Scholes valuation model. The weighted average fair value of the options granted during the year ended December 31, 2015 is estimated at $12.79 per share on the date of grant using the following weighted average assumptions: risk-free interest rate of 1.5%; an expected term of approximately 5 years; expected volatility of 35.15%; and dividend yield of 0.0% over the expected life of the option. The risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of grant. The weighted average volatility was developed using the historical volatility of several peer companies to Press Ganey Holdings, Inc. for periods equal to the expected life of the options at the date of grant. The expected life of options is the average number of years the Company estimates that options will be outstanding.