Equity-Based Compensation

3 Months Ended

Mar. 31, 2016

10. Equity-Based Compensation

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

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


	Three Months Ended
	March 31,
	2016		2015
Cost of revenue	$	1,111	$	713
General and administrative		4,890		1,252
Total equity-based compensation expense	$	6,001	$	1,965

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.

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

A summary of restricted stock activity during the three months ended March 31, 2016, is as follows:


		Weighted
		Average
		Fair Value
		at Grant
	Shares	Date
Nonvested at January 1, 2016	2,255,681	$	25.15
Granted	579,359		26.18
Vested	(95,416)		25.00
Forfeited	(18,156)		25.00
Nonvested at March 31, 2016	2,721,468	$	25.38

During the three months ended March 31, 2016, the Company granted 326,060 shares of restricted stock with four-year service vesting (20% for years 1-2, 30% for years 3-4) and 253,299 shares of restricted stock with three-year performance vesting (cliff).

As of March 31, 2016, there was $53.6 million of unrecognized pre-tax compensation expense related to nonvested restricted stock, which is expected to be recognized over a weighted average period of 2.7 years.

During the three months ended March 31, 2016, the Company purchased $473,000 of unvested equity interests related to awards that were modified at the IPO.

Stock Options

A summary of stock option activity during the three months ended March 31, 2016, is as follows:


		Weighted
		Average
		Exercise
	Options	Price
Outstanding at January 1, 2016	36,304	$	31.74
Granted	778,220		26.18
Exercised	—		—
Forfeited	—		—
Outstanding at March 31, 2016	814,524	$	26.43

Exercisable at March 31, 2016	—	$	—

The Company granted options to purchase 778,220 shares of the Company’s common stock during the three months ended March 31, 2016. 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 three months ended March 31, 2016 is estimated at $10.97 per share on the date of grant using the following weighted average assumptions: risk-free interest rate of 1.4%; an expected term of approximately 6 years; expected volatility of 41.5%; 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 expected volatility was based on 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.

As of March 31, 2016, there was $7.4 million of unrecognized pre-tax compensation expense related to stock options, which is expected to be recognized over a weighted average period of 3.9 years.