11. STOCK-BASED COMPENSATION

Legg Mason's stock-based compensation includes stock options, an employee stock purchase plan, market-based performance shares payable in common stock, restricted stock awards and units, affiliate management equity plans and deferred compensation payable in stock. Shares available for issuance under the equity incentive stock plan as of March 31, 2017, were 3,659. 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 or five years and expire within eight to 10 years from the date of grant.

As further discussed below, the components of Legg Mason's total stock-based compensation expense for the years ended March 31, 2017, 2016, and 2015, were as follows:



	Years Ended March 31,
	2017		2016		2015
Stock options	$	8,347	$	9,403	$	11,584
Restricted stock and restricted stock units	52,049		52,670		45,975
Employee stock purchase plan	696		729		673
Affiliate management equity plans	26,566		26,184		5,206
Non-employee director awards	1,400		1,150		1,550
Performance share units	3,924		2,766		1,056
Employee stock trust	26		25		201
Total stock-based compensation expense	$	93,008	$	92,927	$	66,245

Stock Options

Stock option transactions under Legg Mason's equity incentive plans during the years ended March 31, 2017, 2016, and 2015, are summarized below:



	Number of Shares		Weighted-Average Exercise Price Per Share
Options outstanding at March 31, 2014	4,801		$	43.02
Granted	918		47.65
Exercised	(694	)	30.75
Canceled/forfeited	(593	)	90.31
Options outstanding at March 31, 2015	4,432		39.58
Granted	876		54.51
Exercised	(349	)	28.35
Canceled/forfeited	(453	)	88.06
Options outstanding at March 31, 2016	4,506		38.48
Granted	753		31.31
Exercised	(313	)	27.66
Canceled/forfeited	(353	)	37.13
Options outstanding at March 31, 2017	4,593		$	38.15

The total intrinsic value of options exercised during the years ended March 31, 2017, 2016, and 2015, was $2,289, $5,811, and $14,351, respectively. At March 31, 2017, the aggregate intrinsic value of options outstanding was $15,135.

The following information summarizes Legg Mason's stock options outstanding at March 31, 2017:



Exercise Price Range	Option Shares Outstanding	Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Life (in years)
$ 14.81 - $ 25.00	473	$	23.68	3.10
25.01 - 35.00	1,990	31.70		4.74
35.01 - 55.18	2,130	47.39		5.28
	4,593

At March 31, 2017, 2016, and 2015, options were exercisable for 2,688, 2,544, and 2,202 shares, respectively, with a weighted-average exercise price of $35.04, $32.22, and $41.50 , respectively. Stock options exercisable at March 31, 2017, have a weighted average remaining contractual life of 3.9 years. At March 31, 2017, the aggregate intrinsic value of exercisable shares was $11,403.

The following summarizes Legg Mason's stock options exercisable at March 31, 2017:



Exercise Price Range	Option Shares Exercisable	Weighted-Average Exercise Price Per Share
$ 14.81 - $ 25.00	473	$	23.68
25.01 - 35.00	1,240	31.94
35.01 - 55.18	975	44.49
	2,688

The following information summarizes unvested stock options under Legg Mason's equity incentive plans for the year ended March 31, 2017:



	Number of Shares		Weighted-Average Grant Date Fair Value
Options unvested at March 31, 2016	1,962		$	11.48
Granted	753		31.31
Vested	(759	)	41.57
Canceled/forfeited	(51	)	47.13
Options unvested at March 31, 2017	1,905		$	42.54

For the years ended March 31, 2017, 2016, and 2015, income tax benefits related to stock options were $3,178, $3,730, and $4,681, respectively. Unamortized compensation cost related to unvested options for 1,905 shares at March 31, 2017, was $11,727, which is expected to be recognized over a weighted-average period of 1.5 years.

Cash received from exercises of stock options under Legg Mason's equity incentive plans was $8,988, $9,516, and $22,069 for the years ended March 31, 2017, 2016, and 2015, respectively. The tax benefit expected to be realized for the tax deductions from these option exercises totaled $725, $1,962, and $4,856 for the years ended March 31, 2017, 2016, and 2015, respectively.

The weighted-average fair value of service-based stock options granted during the years ended March 31, 2017, 2016, and 2015, excluding those granted to our Chief Executive Officer in May 2013 discussed below, using the Black-Scholes option pricing model, was $7.78, $11.26, and $12.03 per share, respectively.

The following weighted-average assumptions were used in the model for grants in fiscal 2017, 2016, and 2015:



	Years Ended March 31,
	2017		2016		2015
Expected dividend yield	1.45	%	1.18	%	1.04	%
Risk-free interest rate	1.25	%	1.44	%	1.51	%
Expected volatility	30.95	%	24.37	%	29.53	%
Expected life (in years)	5.02		4.97		4.94

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

In May 2013, Legg Mason awarded options to purchase 500 shares of Legg Mason, Inc. common stock at an exercise price of $31.46, equal to the then current market value of Legg Mason's common stock, to its Chief Executive Officer, which are included in the outstanding options table above. The award had a grant date fair value of $5,525 and was subject to vesting requirements, all of which had been satisfied by May 2015 when the final 50% of the award vested at the end of the two-year service period.

The weighted-average fair value per share for these awards of $11.05 was estimated as of the grant date using a grant price of $31.46, and a Monte Carlo option pricing model with the following assumptions:



Expected dividend yield	1.48	%
Risk-free interest rate	0.86	%
Expected volatility	44.05	%

Restricted Stock

Restricted stock and restricted stock unit transactions during the years ended March 31, 2017, 2016, and 2015, are summarized below:



	Number of Shares		Weighted-Average Grant Date Value
Unvested shares at March 31, 2014	3,334		$	30.77
Granted	1,236		48.03
Vested	(1,330	)	30.92
Canceled/forfeited	(190	)	35.95
Unvested shares at March 31, 2015	3,050		37.38
Granted	1,332		48.95
Vested	(1,261	)	34.91
Canceled/forfeited	(63	)	42.09
Unvested shares at March 31, 2016	3,058		43.34
Granted	1,658		31.26
Vested	(1,267	)	39.15
Canceled/forfeited	(128	)	42.39
Unvested shares at March 31, 2017	3,321		$	38.92

The restricted stock and restricted stock unit transactions reflected in the table above were non-cash transactions. For the years ended March 31, 2017, 2016, and 2015, Legg Mason recognized income tax benefits related to restricted stock and restricted stock unit awards of $21,138, $20,597, and $18,246, respectively. Unamortized compensation cost related to unvested restricted stock and restricted stock unit awards for 3,321 shares not yet recognized at March 31, 2017, was $74,921 and is expected to be recognized over a weighted-average period of 1.6 years.

Affiliate Management Equity Plans

In connection with the acquisition of Clarion Partners in April 2016, as further discussed in Note 2, Legg Mason implemented a management equity plan for the management team of Clarion Partners that entitles certain of its key employees to participate in 15% of the future growth, if any, of the Clarion Partners enterprise value (subject to appropriate discounts) subsequent to the date of the grant. The initial grant under the plan vested immediately and the related grant-date fair value of $15,200, determined by independent valuation, was recognized as Compensation and benefits expense in the Consolidated Statement of Income (Loss) and reflected in the Consolidated Balance Sheet as Redeemable noncontrolling interest. Future grants under the plan will vest 20% annually over five years, and will result in the recognition of additional compensation expense over the related vesting period. Subject to various conditions, including the passage of time, vested plan units can be put to Legg Mason for settlement at fair value. Legg Mason can also call plan units, generally post employment, for settlement at fair value. As of March 31, 2017, the aggregate redemption amount of units under the plan was $18,700.

Effective March 1, 2016, Legg Mason executed agreements with the management of its existing wholly-owned subsidiary, Royce, regarding employment arrangements with Royce management, revised revenue sharing, and the implementation of a management equity plan for its key employees. Under the management equity plan, minority equity interests equivalent to 16.9% in the Royce entity were issued to its management team. On March 31, 2017, additional minority equity interests under this plan equivalent to 2.1% in the Royce entity were issued to its management team, which resulted in Compensation and benefits expense of $4,600. These interests allow the holders to receive quarterly distributions of a portion of Royce's pre-tax income in amounts equal to the percentage of ownership represented by the equity they hold, subject to payment of Legg Mason's revenue share and reasonable expenses. The plan permits additional grants under the plan of up to 3.8 revenue share points. Future grants will vest immediately and, upon issuance, the related grant-date fair value of equity units will be recognized as Compensation and benefits expense in the Consolidated Statements of Income (Loss) and reflected in the Consolidated Balance Sheets as Nonredeemable noncontrolling interest. As of March 31, 2017, the estimated aggregate redemption amount of units under the plan was $27,798.

On March 31, 2014, Legg Mason implemented a management equity plan and granted units to key employees of its subsidiary ClearBridge Investments, LLC ("ClearBridge") that entitle them to participate in 15% of the future growth, if any, of the ClearBridge enterprise value (subject to appropriate discounts) subsequent to the grant date. Independent valuation determined the aggregate cost of the award to be approximately $16,000, which will be recognized as Compensation and benefits expense in the Consolidated Statements of Income (Loss) over the related vesting periods through March 2019. Total compensation expense related to the ClearBridge affiliate management equity plan was $3,285, $3,271, and $3,390 for the years ended March 31, 2017, 2016, and 2015, respectively. This arrangement provides that one-half of the cost will be absorbed by the ClearBridge incentive pool. Once vested, plan units can be put to Legg Mason for settlement at fair value, beginning one year after the holder terminates their employment. Legg Mason can also call plan units, generally post employment, for settlement at fair value. Changes in control of Legg Mason or ClearBridge do not impact vesting, settlement or other provisions of the units. However, upon sale of substantially all ClearBridge assets, the vesting of the units would accelerate and participants would receive a fair value payment in respect of their interests under the plan. Future grants of additional plan units will dilute the participation of existing outstanding units in 15% of the future growth of the respective affiliates' enterprise value, if any, subsequent to the related future grant date, for which additional compensation expense would be incurred. Further, future grants will not entitle the plan participants, collectively, to more than an aggregate 15% of the future growth of the ClearBridge enterprise value. Upon vesting, the grant-date fair value of vested plan units will be reflected in the Consolidated Balance Sheets as Redeemable noncontrolling interests through an adjustment to additional paid-in capital. Thereafter, redeemable noncontrolling interests will continue to be adjusted to the ultimate maximum estimated redemption value over the expected term, through retained earnings adjustments. As of March 31, 2017, the estimated aggregate redemption amount of vested units under the ClearBridge plan, as if they were currently redeemable, was approximately $25,800.

On June 28, 2013, Legg Mason implemented a similar management equity plan with key employees of Permal. Independent valuation determined the aggregate cost of the awards to be approximately $9,000, which was being recognized as Compensation and benefits expense in the Consolidated Statements of Income (Loss) over the related vesting period through December 2017. In April 2016, in conjunction with the Permal restructuring in preparation for the combination with EnTrust, the Permal management equity plan was liquidated with a payment of $7,150 to its participants, and the remaining $3,481 unamortized cost was expensed during the year ended March 31, 2017. Compensation expense related to the Permal affiliate management equity plan was $1,513 and $1,816 for the years ended March 31, 2016 and 2015, respectively.

Other

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 15% contribution towards purchases, which is charged to earnings. During the years ended March 31, 2017, 2016, and 2015, approximately 164, 134, and 107 shares, respectively, have been purchased in the open market on behalf of participating employees.

Legg Mason also has an equity plan for non-employee directors. Under the current 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, which were 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. Shares, options, and restricted stock units issuable under this equity plan are limited to 625 in aggregate, of which 427 and 384 shares were issued as of March 31, 2017 and 2016, respectively. During the year ended March 31, 2015, there were 32 stock options canceled or forfeited from the current equity plan for non-employee directors, which were the last outstanding options under the plan. As of March 31, 2017, 2016, and 2015, non-employee directors held 66, 53, and 45 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, 2017, 2016, and 2015, non-employee directors were granted 11, nine, and eight restricted stock units, respectively. During the years ended March 31, 2017, 2016, and 2015, non-employee directors were granted 30, 16, and 23 shares of common stock, respectively. During the years ended March 31, 2017 and 2016, there were no restricted stock units distributed and during the year ended March 31, 2015, there were 27 restricted stock units distributed.

As discussed in Note 2, upon the acquisition of Clarion Partners in April 2016, Legg Mason granted certain key employees of Clarion Partners a total of 716 performance-based Legg Mason restricted share units, which are not included in the unvested shares of restricted stock and restricted stock units in the table above, with an aggregate fair value of $11,121, which was included in the purchase price, that vest upon Clarion Partners achieving a certain level of EBITDA, as defined in the purchase agreement, within a designated period after the closing of the acquisition.

In May 2016, 2015 and 2014, Legg Mason granted certain executive officers a total of 182, 107, and 78 performance share units, respectively, as part of their fiscal 2016, 2015, and 2014 incentive award with an aggregate value of $3,528, $4,312, and $3,457, respectively. The vesting of performance share units granted in May 2016, 2015, and 2014, and the number of shares payable at vesting are determined based on Legg Mason’s relative total stockholder return over a three-year period ending March 31, 2019, 2018, and 2017, respectively. The May 2014 grant performance period ended March 31, 2017, and resulted in no payment. The grant date fair value per unit for the May 2016, 2015, and 2014 performance share units of $19.36, $40.29, and $44.11, respectively, was estimated as of the grant date using a Monte Carlo pricing model with the following assumptions:



	2017		2016		2015
Expected dividend yield	2.87	%	1.46	%	1.33	%
Risk-free interest rate	0.89	%	0.86	%	0.75	%
Expected volatility	25.99	%	22.63	%	30.81	%

During fiscal 2012, Legg Mason established a long-term incentive plan (the "LTIP") under its equity incentive plan, which provided an additional element of compensation that was based on performance, determined as the achievement of a pre-defined amount of Legg Mason’s cumulative adjusted earnings per share over a three year performance period. Under the LTIP, executive officers were granted cash value performance units in the quarter ended September 2012 for a total targeted amount of $1,850. The September 2012 grant performance period ended March 31, 2015, and resulted in a payment amount of $1,000 that was settled in cash on May 31, 2015.

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. Since January 1, 2015, there are no additional contributions to the plan, with the remaining 254 shares reserved for future dividend distributions. During fiscal 2017, 2016, and 2015, Legg Mason issued 17, 12, and 44 shares, respectively, under the plan with a weighted-average fair value per share at the grant date of $29.60, $41.82, and $45.83, respectively. The undistributed shares issued under this plan are held in a rabbi trust. Assets of the rabbi trust are consolidated with those of the employer, and the value of the employer's stock held in the rabbi trust is classified in stockholders' equity and accounted for in a manner similar to treasury stock. Therefore, the shares Legg Mason has issued to the rabbi trust and the corresponding liability related to the deferred compensation plan are presented as components of stockholders' equity as Employee stock trust and Deferred compensation employee stock trust, respectively. Shares held by the trust at March 31, 2017, 2016, and 2015, were 540, 583, and 660, respectively.