11. STOCK-BASED COMPENSATION

Legg Mason's stock-based compensation includes stock options, employee stock purchase plans, restricted stock awards and units, market-based performance shares payable in common stock, and deferred compensation payable in stock. Effective July 26, 2011, the number of shares authorized to be issued under Legg Mason's active equity incentive stock plan was increased by 6,500 to 41,500. Shares available for issuance under the active equity incentive stock plan as of March 31, 2013, were 11,273. 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 years ended March 31, 2013, 2012, and 2011 was $10,979, $14,076, and $19,926, respectively. The related income tax benefit for the years ended March 31, 2013, 2012, and 2011 was $4,293, $5,539, and $7,718, respectively.

Stock option transactions under Legg Mason's equity incentive plans during the years ended March 31, 2013, 2012 and 2011, respectively, are summarized below:



	Number of Shares		Weighted-Average Exercise Price Per Share
Options outstanding at March 31, 2010	6,054		$	57.75
Granted	729		33.12
Exercised	(634	)	21.85
Canceled/forfeited	(730	)	48.94
Options outstanding at March 31, 2011	5,419		59.82
Granted	810		33.99
Exercised	(117	)	25.32
Canceled/forfeited	(488	)	48.80
Options outstanding at March 31, 2012	5,624		57.78
Granted	966		23.72
Exercised	(25	)	21.80
Canceled/forfeited	(1,204	)	51.87
Options outstanding at March 31, 2013	5,361		$	53.13

The total intrinsic value of options exercised during the years ended March 31, 2013, 2012 and 2011, was $168, $398, and $6,977, respectively. At March 31, 2013, the aggregate intrinsic value of options outstanding was $12,649.

The following information summarizes Legg Mason's stock options outstanding at March 31, 2013:



Exercise Price Range	Option Shares Outstanding	Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Life (in years)
$ 12.65 - $ 25.00	971	$	23.03	6.8
25.01 - 35.00	2,649	31.86		4.7
35.01 - 94.00	84	61.02		0.3
94.01 - 100.00	462	95.14		1.3
100.01 - 134.97	1,195	107.98		1.1
	5,361

At March 31, 2013, 2012 and 2011, options were exercisable on 3,254, 3,334, and 2,860 shares, respectively, and the weighted-average exercise prices were $69.07, $73.60, and $77.20, respectively. Stock options exercisable at March 31, 2013, have a weighted-average remaining contractual life of 2.6 years. At March 31, 2013, the aggregate intrinsic value of options exercisable was $3,555.

The following information summarizes Legg Mason's stock options exercisable at March 31, 2013:



Exercise Price Range	Option Shares Exercisable	Weighted-Average Exercise Price Per Share
$ 12.65 - $ 25.00	81	$	17.32
25.01 - 35.00	1,432	31.59
35.01 - 94.00	84	61.02
94.01 - 100.00	462	95.14
100.01 - 134.97	1,195	107.98
	3,254

The following information summarizes unvested stock options under Legg Mason's equity incentive plans for the year ended March 31, 2013:



	Number of Shares		Weighted-Average Grant Date Fair Value
Shares unvested at March 31, 2012	2,290		$	14.00
Granted	966		9.47
Vested	(874	)	15.17
Canceled/forfeited	(275	)	12.35
Shares unvested at March 31, 2013	2,107		$	11.65

Unamortized compensation cost related to unvested options at March 31, 2013, was $17,167 and is expected to be recognized over a weighted-average period of 1.6 years.

Cash received from exercises of stock options under Legg Mason's equity incentive plans was $660, $2,851, and $12,094 for the years ended March 31, 2013, 2012 and 2011, respectively. The tax benefit expected to be realized for the tax deductions from these option exercises totaled $45, $47, and $2,645 for the years ended March 31, 2013, 2012 and 2011, respectively.

The weighted-average fair value of stock option grants during the years ended March 31, 2013, 2012 and 2011, using the Black-Scholes option pricing model, was $9.47 and $13.13, and $14.32 per share, respectively.

The following weighted-average assumptions were used in the model for grants in fiscal 2013, 2012, and 2011:



	2013		2012		2011
Expected dividend yield	1.44	%	1.39	%	1.39	%
Risk-free interest rate	0.81	%	1.95	%	2.37	%
Expected volatility	51.80	%	47.16	%	52.64	%
Expected life (in years)	5.02		5.12		5.18

Legg Mason uses an equally weighted combination of both implied and historical volatility to measure expected volatility for calculating Black-Scholes option values.

Legg Mason has a qualified Employee Stock Purchase Plan covering substantially all U.S. employees. Shares of common stock are purchased in the open market on behalf of participating employees, subject to a 4,500 total share limit under the plan. Purchases are made through payroll deductions and Legg Mason provides a 10% contribution towards purchases, which is charged to earnings. During the fiscal years ended March 31, 2013, 2012 and 2011, approximately 107, 107, and 102 shares, respectively, were purchased in the open market on behalf of participating employees. In fiscal 2013, 2012 and 2011, Legg Mason recognized $238, $267, and $286, respectively, in compensation expense related to the stock purchase plan.

On January 28, 2008, the Legg Mason Compensation Committee approved grants to senior officers of 120 market-based performance shares. During fiscal 2013 the remaining 100 shares from this award were forfeited resulting in no outstanding balance as of March 31, 2013.

Restricted stock and restricted stock unit transactions during the years ended March 31, 2013, 2012 and 2011, respectively, are summarized below:



	Number of Shares		Weighted-Average Grant Date Value
Unvested shares at March 31, 2010	1,605		$	34.80
Granted	1,867		33.02
Vested	(617	)	38.62
Canceled/forfeited	(218	)	30.42
Unvested shares at March 31, 2011	2,637		33.01
Granted	1,370		33.48
Vested	(1,075	)	31.49
Canceled/forfeited	(59	)	32.68
Unvested shares at March 31, 2012	2,873		33.83
Granted	2,185		24.04
Vested	(1,177	)	31.22
Canceled/forfeited	(143	)	58.30
Unvested shares at March 31, 2013	3,738		$	27.99

The restricted stock and restricted stock unit awards were non-cash transactions. In fiscal 2013, 2012 and 2011, Legg Mason recognized $46,351, $32,826, and $35,770, respectively, in compensation expense and related tax benefits of $17,697, $12,705, and $13,854, respectively, for restricted stock and restricted stock unit awards. Unamortized compensation cost related to unvested restricted stock and restricted stock unit awards for 3,738 shares not yet recognized at March 31, 2013, was $66,854 and is expected to be recognized over a weighted-average period of 1.6 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. In March 2013, the vesting of 85 of these shares was accelerated. The remaining shares vest on March 31, 2014. Compensation expense for the year ended March 31, 2013 includes approximately $6,400 of accelerated stock-based net compensation costs associated with the departure of three Legg Mason executive officers during fiscal 2013, of which $1,400 relates to the accelerated vesting of shares in March 2013.

Legg Mason also has an equity plan for non-employee directors. Under the equity plan, directors may elect to receive shares of stock or restricted stock units. Prior to a July 19, 2007 amendment to the Plan, directors could also elect to receive stock options. Options granted under the old plan are immediately exercisable at a price equal to the market value of the shares on the date of grant and have a term of not more than ten years. In fiscal 2013, 2012 and 2011, Legg Mason recognized expense of $1,250, $1,375, and $1,425, respectively, for awards under this plan. Shares, options, and restricted stock units issuable under the equity plan are limited to 625 shares in aggregate, of which 328 shares were issued under the plan as of March 31, 2013. As of March 31, 2013, 2012 and 2011 non-employee directors held 112, 184 and 220, stock options, respectively, which are included in the outstanding options presented in the table above. As of March 31, 2013, 2012 and 2011 non-employee directors held 91, 74 and 62 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 years ended March 31, 2013 and 2012, non-employee directors did not exercise any stock options and no restricted stock units were distributed. During the year ended March 31, 2011, non-employee directors exercised 9 stock options. In the fiscal year ended March 31, 2011, 7 restricted stock units were distributed for non-employee directors. During the years ended March 31, 2013, 2012 and 2011 non-employee directors were granted 17, 12 and 17 restricted stock units and 35, 31 and 31 shares of common stock, respectively. In the fiscal years ended March 31, 2013, 2012 and 2011, there were 72, 36 and 59 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 performance periods on March 31, 2014 and March 31, 2015, respectively, 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.

Deferred compensation payable in shares of Legg Mason common stock has been granted to certain employees in an elective plan. The vesting in the plan is immediate and the plan provides for discounts of up to 10% on contributions and dividends. There are 378 additional shares reserved for future issuance under the plan. In fiscal 2013, 2012 and 2011, Legg Mason recognized $165, $191, and $263, respectively, in compensation expense related to this plan. During fiscal 2013, 2012 and 2011, Legg Mason issued 71, 68, and 77 shares, respectively, under the plan with a weighted-average fair value per share at the grant date of $23.07, $27.05, and $28.38, respectively.

Legg Mason has issued shares in connection with certain deferred compensation plans that are held in rabbi trusts. Assets of rabbi trusts are consolidated with those of the employer, and the value of the employer's stock held in the rabbi trusts is classified in stockholders' equity and accounted for in a manner similar to treasury stock. Therefore, the shares Legg Mason has issued to its rabbi trusts and the corresponding liability related to the deferred compensation plans are presented as components of stockholders' equity as Employee stock trust and Deferred compensation employee stock trust, respectively. Shares held by the trusts at March 31, 2013, 2012 and 2011, were 726, 690 and 706, respectively.

As part of the Company's streamlining initiative, as further discussed in Note 15, 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 any portion of their equity incentive awards that would not have vested by January 1, 2012, under the original terms of the awards. During fiscal 2011, the portion of the awards subject to accelerated vesting was revalued and was expensed over the new vesting period, the impact of which is included above. Also in connection with the restructuring initiative, the departure of an executive officer in December 2010 resulted in the accelerated vesting of a portion of certain equity incentive awards, the impact of which is also included above.

In May 2013, Legg Mason awarded options to purchase 500 shares of Legg Mason, Inc. common stock at an exercise price of $31.46 to its President and Chief Executive Officer. The award had a grant date fair value of $5,525 and is subject to vesting requirements, the majority of which contain market-based hurdles, as well as a requirement that certain shares received upon exercise are retained for a two year period.