12. Stock-based Compensation

We account for stock-based payment awards in accordance with ASC 718, Stock Compensation, which requires the measurement and recognition of compensation expense for all equity awards granted to our employees and directors, including employee stock options, RSUs, and ESPP purchase rights related to all stock-based compensation plans based on the fair value of such awards on the date of grant. We amortize stock-based compensation cost on a graded vesting basis over the vesting period, after assessing estimated forfeitures and the probability of achieving the requisite performance criteria with respect to performance-based awards. Stock-based compensation cost is recognized over the requisite service period for each separately vesting tranche of the award as though the award were, in substance, multiple awards.

Stock-based compensation expense related to stock options, ESPP purchase rights, and RSUs for the three months ended March 31, 2016 and 2015 is summarized as follows (in thousands):


	Three months ended March 31,
	2016			2015
Employee stock options	$	(45	)	$	34
RSUs		10,836			7,679
ESPP		766			1,179

Total stock-based compensation		11,557			8,892
Income tax benefit		(2,659	)		(1,979	)

Stock-based compensation expense, net of tax	$	8,898		$	6,913

Valuation Assumptions for Stock Options and ESPP Purchases

We use the Black-Scholes-Merton (“BSM”) option pricing model to value stock-based compensation for all equity awards, except market-based awards, which are valued using the Monte Carlo valuation model.

The BSM model determines the fair value of stock-based payment awards based on the stock price on the date of grant and is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, expected term, interest rates, and actual and projected employee stock option exercise behavior. Expected volatility is based on the historical volatility of our stock over a preceding period commensurate with the expected term of the option. The expected term is based upon management’s consideration of the historical life, vesting period, and contractual period of the options granted. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yield was not considered in the option pricing formula since we do not pay dividends and have no current plans to do so in the future.

Stock options were not granted during the three months ended March 31, 2016 and 2015. The estimated weighted average fair value per share of ESPP purchase rights issued and the underlying weighted average assumptions for the three months ended March 31, 2016 and 2015 are as follows:


	Three months ended March 31,
	2016			2015
Weighted average fair value per share	$	10.39		$	10.17
Expected volatility		22% - 25	%		26% - 28	%
Risk-free interest rate		0.5% - 0.8	%		0.1% - 0.5	%
Expected term (in years)		0.5 - 2.0			0.5 - 2.0

Stock options outstanding and exercisable, including performance-based and market-based options, as of March 31, 2016 and activity for the three months ended March 31, 2016 are summarized below (in thousands, except weighted average exercise price and remaining contractual term):


	Shares outstanding			Weighted average exercise price		Weighted average remaining contractual term (years)		Aggregate intrinsic value
Options outstanding at January 1, 2016		443		$	13.20
Options forfeited and expired		(12	)		10.77
Options exercised		(1	)		16.57

Options outstanding at March 31, 2016		430		$	13.25		1.89	$	12,518

Options vested and expected to vest at March 31, 2016		430		$	13.25		1.89	$	12,518

Options exercisable at March 31, 2016		430		$	13.25		1.89	$	12,518

Aggregate intrinsic value for stock options represents the difference between the closing price per share of our common stock on the last trading day of the fiscal period and the option exercise price multiplied by the number of in-the-money stock options outstanding, vested and expected to vest, and exercisable at March 31, 2016.

Non-vested RSUs, including performance-based and market-based RSUs, as of March 31, 2016 and activity during the three months ended March 31, 2016 are summarized below (shares in thousands):


	Shares			Weighted average grant date fair value
Non-vested at January 1, 2016		1,814		$	40.53
Restricted stock granted		412			38.96
Restricted stock vested		(251	)		37.00
Restricted stock forfeited		(217	)		38.85

Non-vested at March 31, 2016		1,758		$	40.87

Vested RSUs

Performance-based RSUs that vested based on annual financial results are included in the period that the performance and related service criteria were met. The grant date fair value of RSUs vested during the three months ended March 31, 2016 was $9.3 million. The aggregate intrinsic value at March 31, 2016 for RSUs expected to vest was $66.4 million and the remaining weighted average vesting period was 1.1 years. Aggregate intrinsic value for RSUs vested and expected to vest represents the closing price per share of our common stock on the last trading day of the fiscal period, multiplied by the number of RSUs vested and expected to vest as of March 31, 2016.

Performance-based and Market-based RSUs and Stock Options

Performance-based and market-based RSUs and stock options included in the tables above as of March 31, 2016 and activity for the three months ended March 31, 2016 are summarized below (in thousands):


	Performance-based						Market-based
	RSUs			Stock Options			RSUs
Non-vested at December 31, 2015		920			16			23


Granted		343			—			—
Vested		(211	)		(4	)		—
Forfeited		(195	)		(12	)		—

Non-vested at March 31, 2016		857			—			23

Performance -based and market-based stock options were not granted during the three months ended March 31, 2016. We use the BSM option pricing model to value performance-based RSUs. The weighted average grant date fair value per share of performance-based RSUs granted and the assumptions used to estimate grant date fair value for the three months ended March 31, 2016 and 2015 are as follows:


	Performance-based
	RSUs
	Short-term		Long-term
*Three months ended March 31, 2015 Grants*
Grant date fair value per share	$	39.47	$	36.78
Service period (years)		1.0		3.0

*Three months ended March 31, 2015 Grants*
Grant date fair value per share	$	37.00	$	38.64
Service period (years)		1.0		2.0

Our performance-based RSUs generally vest when specified performance criteria are met based on bookings, revenue, cash provided by operating activities, non-GAAP operating income, non-GAAP earnings per share, or other targets during the service period; otherwise, they are forfeited. Non-GAAP operating income is defined as operating income determined in accordance with GAAP, adjusted to remove the impact of certain expenses. Non-GAAP earnings per share is defined as net income determined in accordance with GAAP, adjusted to remove the impact of certain expenses, divided by the weighted average number of common shares and dilutive potential common shares outstanding during the period as more fully defined in Note 2—Earnings Per Share of the Notes to Consolidated Financial Statements.

The grant date fair value per share determined in accordance with the BSM valuation model is being amortized over the service period of the performance-based awards. The probability of achieving the awards was determined based on review of the actual results achieved thus far by each business unit compared with the operating plan during the pertinent service period as well as the overall strength of the business unit. Stock-based compensation expense was adjusted based on this probability assessment. As actual results are achieved during the service period, the probability assessment is updated and stock-based compensation expense adjusted accordingly.