7. Stock-Based Compensation

Legg Mason's stock-based compensation includes stock options, employee stock purchase plans, restricted stock awards and units, performance shares payable in common stock, and deferred compensation payable in stock. Shares available for issuance under the active equity incentive stock plan as of December 31, 2012, were 10,876. Options under Legg Mason’s employee stock plans have been granted at prices not less than 100% of the fair market value. Options are generally exercisable in equal increments over four to five years and expire within eight to ten years from the date of grant.

Compensation expense relating to stock options for the three months ended December 31, 2012 and 2011, was $2,504 and $3,511, respectively, and for the nine months ended December 31, 2012 and 2011, was $8,407 and $11,192, respectively.

Stock option transactions during the nine months ended December 31, 2012, and 2011, respectively, are summarized below:



	Nine Months Ended December 31,
	2012				2011
	Number of shares		Weighted-average exercise price per share		Number of shares		Weighted-average exercise price per share
Options outstanding at March 31	5,624		$	57.78	5,419		$	59.82
Granted	966		23.72		810		33.99
Exercised	(11	)	15.48		(14	)	26.41
Canceled/forfeited	(808	)	48.94		(375	)	48.84
Options outstanding at December 31	5,771		$	53.39	5,840		$	57.03

At December 31, 2012, options were exercisable on 3,572 shares, with a weighted-average exercise price of $68.69 and a weighted-average remaining contractual life of 2.8 years. Unamortized compensation cost related to unvested options (2,199 shares) at December 31, 2012, was $20,309 and is expected to be recognized over a weighted-average period of 1.7 years.

The weighted-average fair value of stock option grants during the nine months ended December 31, 2012 and 2011, using the Black-Scholes option pricing model, was $9.47 and $13.13 per share, respectively.

The following weighted-average assumptions were used in the model for grants in fiscal 2013 and 2012:



	Nine Months Ended December 31,
	2012		2011
Expected dividend yield	1.44	%	1.39	%
Risk-free interest rate	0.81	%	1.95	%
Expected volatility	51.80	%	47.16	%
Expected life (in years)	5.02		5.12

Compensation expense relating to restricted stock and restricted stock units for the three months ended December 31, 2012 and 2011, was $10,730 and $8,876, respectively, and for the nine months ended December 31, 2012 and 2011, was $31,753 and $25,484, respectively.

Compensation expense for the nine months ended December 31, 2012 includes approximately $1,800 of accelerated stock-based net compensation costs associated with Legg Mason's Chief Executive Officer stepping down in September 2012.

Restricted stock and restricted stock unit transactions during the nine months ended December 31, 2012 and 2011, respectively, are summarized below:



	Nine Months Ended December 31,
	2012				2011
	Number of shares		Weighted-average grant date value		Number of shares		Weighted-average grant date value
Unvested shares at March 31	2,873		$	33.83	2,637		$	33.01
Granted	2,185		24.04		1,315		33.79
Vested	(935	)	32.12		(806	)	32.44
Canceled/forfeited	(143	)	58.59		(55	)	32.85
Unvested shares at December 31	3,980		$	27.97	3,091		$	33.49

Unamortized compensation cost related to unvested restricted stock and restricted stock unit awards at December 31, 2012 of $81,294 is expected to be recognized over a weighted-average period of 1.7 years. In connection with the change in Legg Mason's Chief Executive Officer, in September 2012, 325 shares of restricted stock were granted to certain executives and key employees, with an aggregate value of $8,400. These shares vest on March 31, 2014, and are intended to retain and motivate these employees.

Compensation expense relating to the stock purchase plan and deferred compensation payable in stock for the three months ended December 31, 2012 and 2011, was $89 and $101, respectively, and for the nine months ended December 31, 2012 and 2011, was $325 and $385, respectively.

During the nine months ended December 31, 2012 and 2011, non-employee directors were granted 17 and 12 restricted stock units and 35 and 31 shares of common stock at a fair value of $1,250 and $1,375, respectively. As of December 31, 2012 and 2011, non-employee directors held 112 and 193 stock options, respectively, which are included in the outstanding options presented in the table above. As of December 31, 2012 and 2011, non-employee directors held 91 and 75 restricted stock units, respectively, which vest on the grant date and are, therefore, not included in the unvested shares of restricted stock and restricted stock units in the table above. During the nine months ended December 31, 2012 and 2011, non-employee directors did not exercise any stock options and no restricted stock units were distributed. During the nine months ended December 31, 2012 and 2011, there were 72 and 27 non-employee director stock options canceled or forfeited, respectively.

During fiscal 2012, Legg Mason established a long-term incentive plan (the "LTIP") under its equity incentive plan, which provides an additional element of compensation that is based on performance. Under the LTIP, executive officers were granted cash value performance units in the June 2011 quarter and the September 2012 quarter that will vest at the end of their respective three year periods based upon Legg Mason's cumulative adjusted earnings per share over the respective periods. Awards granted under the LTIP may be settled in cash and/or shares of Legg Mason common stock, at the discretion of Legg Mason. The estimated payout amounts of the awards, if any, are expensed over the future vesting periods based on a probability assessment of the expected outcome under the LTIP provisions.

As part of the Company's streamlining initiative, as further discussed in Note 11, the employment of certain recipients of stock option and restricted stock awards has been terminated. The termination benefits extended to these employees included accelerated vesting of their unvested equity incentive awards to January 1, 2012, which precedes dates under the original terms of the awards. The portion of the awards subject to accelerated vesting was revalued and expensed over the new vesting period, the impact of which is included above in fiscal year 2012.