STOCK-BASED COMPENSATION

The Company grants stock-based compensation awards as an incentive for employees and directors to contribute to the Company’s long-term success. The Company currently awards stock-settled stock appreciation rights, service-based and performance-based restricted stock units, and common stock equivalents. At December 31, 2016, the Company had 6.2 million shares of its Common Stock, par value $.0005 per share available for stock-based compensation awards under its 2014 Long-Term Incentive Plan.

The Company accounts for stock-based compensation awards in accordance with FASB ASC Topics No. 505 and 718, as interpreted by SEC Staff Accounting Bulletins No. 107 (“SAB No. 107”) and No. 110 (“SAB No. 110”). Stock-based compensation expense is based on the fair value of the award on the date of grant, which is then recognized as expense over the related service period. The service period is the period over which the related service is performed, which is generally the same as the vesting period. Currently, the Company issues treasury shares upon the exercise, release or settlement of stock-based compensation awards.

Determining the appropriate fair value model and calculating the fair value of stock-based compensation awards requires the input of certain complex and subjective assumptions, including the expected life of the stock-based compensation awards and the Common Stock price volatility. In addition, determining the appropriate amount of associated periodic expense requires management to estimate the likelihood of the achievement of certain performance targets. The assumptions used in calculating the fair value of stock-based compensation awards and the associated periodic expense represent management’s best estimates, which involve inherent uncertainties and the application of judgment. As a result, if factors change and the Company deems it necessary in the future to modify the assumptions it made or to use different assumptions, or if the quantity and nature of the Company’s stock-based compensation awards changes, then the amount of expense may need to be adjusted and future stock-based compensation expense could be materially different from what has been recorded in the current period.

Adoption of ASU No. 2016-09

The Company early adopted FASB ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting," in the third quarter of 2016. ASU No. 2016-09 requires certain changes in accounting for stock compensation under FASB ASC Topic No. 718. Among the changes required by ASU No. 2016-09 is that excess tax benefits or deficiencies resulting from stock-based compensation awards must be recognized in income tax expense in the Consolidated Statements of Operations. Prior to ASU No. 2016-09, excess tax benefits or deficiencies were recorded in additional paid-in capital in Stockholders' Equity (Deficit) in the Consolidated Balance Sheets. ASU No. 2016-09 also requires that excess tax benefits related to stock-based compensation awards be reported as cash flows from operating activities on the Consolidated Statements of Cash Flows; previously these excess tax benefits were reported as cash flows from financing activities. ASU No. 2016-09 allows companies to elect either a prospective or retrospective application for the cash flow classification change, for which the Company has elected to apply this classification amendment prospectively, effective January 1, 2016. ASU No. 2016-09 also permits companies to make an entity-wide accounting policy election to recognize forfeitures of stock-based compensation awards as they occur or make an estimate by applying a forfeiture rate each quarter. The Company previously estimated forfeitures but optionally selected to change its accounting policy and account for forfeitures as they occur, the impact of which was not material. The adoption of ASU No. 2016-09 increased the Company's diluted net income per share for 2016 by $0.12 per share. In addition, ASU No. 2016-09 increased the Company's operating cash flow in 2016 by $10.0 million with a corresponding decrease in financing activities cash flow. The Company's financial results for periods prior to 2016 were not impacted.

Stock-Based Compensation Expense

The Company recognized the following amounts of stock-based compensation expense by award type for the years ended December 31 (in millions):



Award type:	2016		2015		2014
Stock appreciation rights	$	5.6	$	5.7	$	5.0
Common stock equivalents	0.7		0.6		0.6
Restricted stock units	40.4		39.8		33.2
Total (1)	$	46.7	$	46.1	$	38.8

Stock-based compensation expense was recognized by line item in the Consolidated Statements of Operations for the years ended December 31 as follows (in millions):



Amount recorded in:	2016		2015		2014
Costs of services and product development	$	21.9	$	20.6	$	17.6
Selling, general, and administrative	24.8		25.5		21.2
Total (1)	$	46.7	$	46.1	$	38.8


(1)	Includes charges of $19.4 million, $20.1 million, and $14.8 million in 2016, 2015 and 2014, respectively, for awards to retirement-eligible employees. These awards vest on an accelerated basis.

As of December 31, 2016, the Company had $49.4 million of total unrecognized stock-based compensation cost, which is expected to be recognized as stock-based compensation expense over the remaining weighted-average service period of approximately 2.3 years.

Stock-Based Compensation Awards

The following disclosures provide information regarding the Company’s stock-based compensation awards, all of which are classified as equity awards in accordance with FASB ASC Topic No. 505:

Stock Appreciation Rights

Stock-settled stock appreciation rights (SARs) permit the holder to participate in the appreciation of the Common Stock. SARs are settled in shares of Common Stock by the employee once the applicable vesting criteria have been met. SARs vest ratably over a four-year service period and expire seven years from the grant date. The fair value of SARs awards is recognized as compensation expense on a straight-line basis over four years. SARs have only been awarded to the Company’s executive officers.

When SARs are exercised, the number of shares of Common Stock issued is calculated as follows: (1) the total proceeds from the SARs exercise (calculated as the closing price of the Common Stock on the date of exercise less the exercise price of the SARs, multiplied by the number of SARs exercised) is divided by (2) the closing price of the Common Stock as reported on the New York Stock Exchange on the exercise date. The Company withholds a portion of the shares of Common Stock issued upon exercise to satisfy statutory tax withholding requirements. SARs recipients do not have any stockholder rights until after actual shares of Common Stock are issued in respect of the award, which is subject to the prior satisfaction of the vesting and other criteria relating to such grants.

The following table summarizes changes in SARs outstanding for the year ended December 31, 2016:



	Stock Appreciation Rights (SARs) (in millions)		Per Share Weighted- Average Exercise Price		Per Share Weighted- Average Grant Date Fair Value		Weighted-Average Remaining Contractual Term (in years)
Outstanding at December 31, 2015	1.3		$	56.47	$	14.92	4.46 years
Granted	0.4		80.06		16.50		6.11 years
Forfeited	—		—		—		—
Exercised	(0.4	)	40.65		13.03		na
Outstanding at December 31, 2016 (1), (2)	1.3		$	66.22	$	15.77	4.40 years
Vested and exercisable at December 31, 2016 (2)	0.5		$	55.15	$	14.91	3.25 years

na = not applicable


(1)	At December 31, 2016, 0.8 million of these SARs were unvested. The Company expects that substantially all of these unvested awards will vest in future periods.


(2)	At December 31, 2016, SARs outstanding had an intrinsic value of $46.8 million. SARs vested and exercisable had an intrinsic value of $25.1 million.

The fair value of the SARs is determined on the date of grant using the Black-Scholes-Merton valuation model with the following weighted-average assumptions for the years ended December 31:



	2016		2015		2014
Expected dividend yield (1)	—	%	—	%	—	%
Expected stock price volatility (2)	22	%	24	%	25	%
Risk-free interest rate (3)	1.1	%	1.5	%	1.3	%
Expected life in years (4)	4.39		4.41		4.43


(1)	The dividend yield assumption is based on both the history and expectation of the Company’s dividend payouts. Historically the Company has not paid cash dividends on its Common Stock.


(2)	The determination of expected stock price volatility was based on both historical Common Stock prices and the implied volatility from publicly traded options in Common Stock.


(3)	The risk-free interest rate is based on the yield of a U.S. Treasury security with a maturity similar to the expected life of the award.


(4)	The expected life represents the Company’s weighted-average estimate of the period of time the SARs are expected to be outstanding (that is, the period between the service inception date and the expected exercise date).

Restricted Stock Units

Restricted stock units (RSUs) give the awardee the right to receive shares of Common Stock when the vesting conditions are met and the restrictions lapse, and each RSU that vests entitles the awardee to one common share. RSU awardees do not have any of the rights of a Gartner stockholder, including voting rights and the right to receive dividends and distributions, until the shares are released. The fair value of RSUs is determined on the date of grant based on the closing price of the Common Stock as reported by the New York Stock Exchange on that date. Service-based RSUs vest ratably over four years and are expensed on a straight-line basis over four years. Performance-based RSUs are subject to the satisfaction of both performance and service conditions, vest ratably over four years, and are expensed on an accelerated basis.

The following table summarizes the changes in RSUs outstanding during the year ended December 31, 2016:



	Restricted Stock Units (RSUs) (in millions)		Per Share Weighted Average Grant Date Fair Value
Outstanding at December 31, 2015	1.4		$	62.80
Granted (1)	0.6		81.41
Vested and released	(0.6	)	58.15
Forfeited	(0.1	)	69.40
Outstanding at December 31, 2016 (2), (3)	1.3		$	73.19

(1)

The 0.6 million RSUs granted in 2016 consisted of 0.3 million performance-based RSUs awarded to executives and 0.3 million service-based RSUs awarded to non-executive employees and non-management board members. The 0.3 million of performance-based RSUs was determined based on the achievement of an increase in the Company's total contract value in 2016. Total contract value represents the value attributable to all of our subscription-related contracts.


(2)	The Company expects that substantially all of the outstanding awards at December 31, 2016 will vest in future periods.


(3)	The weighted-average remaining contractual term of the outstanding RSUs is approximately 1.1 years.

Common Stock Equivalents

Common stock equivalents (CSEs) are convertible into Common Stock and each CSE entitles the holder to one common share. Members of our Board of Directors receive directors’ fees payable in CSEs unless they opt to receive up to 50% of the fees in cash. Generally, the CSEs have no defined term and are converted into common shares when service as the director terminates unless the director has elected an accelerated release. The fair value of the CSEs is determined on the date of grant based on the closing price of the Common Stock as reported by the New York Stock Exchange on that date. CSEs vest immediately and as a result are recorded as expense on the date of grant.

The following table summarizes the changes in CSEs outstanding for the year ended December 31, 2016:



	Common Stock Equivalents (CSEs)		Per Share Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2015	105,664		$	19.57
Granted	7,069		93.90
Converted to common stock	(5,395	)	93.90
Outstanding at December 31, 2016	107,338		$	20.74

Employee Stock Purchase Plan

The Company has an employee stock purchase plan (the “ESP Plan”) under which eligible employees are permitted to purchase Common Stock through payroll deductions, which may not exceed 10% of an employee’s compensation (or $23,750 in any calendar year), at a price equal to 95% of the closing price of the Common Stock as reported by the New York Stock Exchange at the end of each offering period. At December 31, 2016, the Company had approximately 0.9 million shares available for purchase under the ESP Plan. The ESP Plan is considered non-compensatory under FASB ASC Topic No. 718, and as a result the Company does not record stock-based compensation expense for employee share purchases. The Company received $9.3 million, $7.5 million, and $7.8 million in cash from share purchases under the ESP Plan during 2016, 2015, and 2014, respectively.