10.	Stock-Based Compensation Plans

2013 Omnibus Equity Incentive Plan

In October 2013, the board of directors adopted the 2013 Plan, which became effective upon the Company’s IPO. The 2013 Plan, in general, authorizes for the granting of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards (RSAs), restricted stock units (RSUs), performance units and performance shares to the Company’s and subsidiary corporations’ employees, independent contractors, directors and consultants. Grants are made from time to time by the Company’s board of directors at its discretion.

The following limits apply to any awards granted under the 2013 Plan:

 

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Options and stock appreciation rights – no employee or independent contractor can be granted, within any fiscal year, one or more options or stock appreciation rights, which in the aggregate cover more than 500,000 shares; provided, however, that in connection with an employee or independent contractor’s initial service as an employee or independent contractor, an employee or independent contractor’s aggregate limit may be increased by 1,000,000 shares;

 

•

Restricted stock and restricted stock units – no employee or independent contractor can be granted, within any fiscal year one or more awards of restricted stock or restricted stock units, which in the aggregate cover more than 500,000 shares; provided, however, that in connection with an employee or independent contractor’s initial service as an employee or independent contractor, an employee or independent contractor’s aggregate limit may be increased by 1,000,000 shares; and

 

•

Performance units and performance shares – no employee or independent contractor can receive performance units or performance shares having a grant date value (assuming maximum payout) greater than $2 million dollars or covering more than 500,000 shares, whichever is greater; provided, however, that in connection with an employee or independent contractor’s initial service as an employee or independent contractor, an employee or independent contractor may receive performance units or performance shares having a grant date value (assuming maximum payout) of up to an additional amount equal to $5 million dollars or covering up to 1,000,000 shares, whichever is greater. An individual may only have one award of performance units or performance shares for a performance period.

Upon adoption of the 2013 Plan, 5,500,000 shares of common stock were reserved for the issuance of awards under the 2013 Plan. The number of shares available for issuance under the 2013 Plan increases annually on the first day of each year beginning with the 2015 fiscal year, by an amount equal to the lesser of: (i) 5,500,000 shares of the Company’s common stock; (ii) 3% of the outstanding shares of the Company’s common stock as of the last day of the immediately preceding fiscal year; and (iii) such other amount as the Company’s board of directors may determine. Pursuant to the automatic increase provided for in the 2013 Plan, the board of directors approved a share reserve increase of 1,100,000 shares in 2015. At December 31, 2015, there were 3,477,730 shares available for future grants under the Plan.

Awards Granted in Connection with the IPO

In November 2013, MMI issued the following equity awards under the 2013 Plan: (i) DSUs for an aggregate of 2,192,413 shares granted as replacement awards related to the prior SARs program to the MMREIS managing directors and (ii) DSUs for 83,334 shares to be granted to the Company’s Co-chairman of the board of directors, William A. Millichap. The DSU’s are fully vested and will be issued ratably over 5 years. In addition, 30,000 shares, in the form of RSAs, were granted to the Company’s non-employee directors. The shares vest ratably over 3 years. All the above awards were granted based on the IPO price of $12.00.

Awards Granted and Settled Subsequent to the IPO

Under the 2013 Plan, the Company has issued RSA’s to non-employee directors and RSU’s to employees and independent contractors. All RSAs vest in equal annual installments over a three year period from the date of grant. All RSUs vest in equal annual installments over a five year period from the date of grant. Any unvested awards are canceled upon termination of service. Awards accelerate upon death subject to approval by the compensation committee. As of December 31, 2015, there were no issued or outstanding options, stock appreciation rights, performance units or performance shares awards.

During the year ended December 31, 2015, 455,151 shares of DSUs settled and 17,628 shares of RSAs and 195,830 shares of RSUs vested. During the year ended December 31, 2015, 22,628 shares of common stock were withheld to pay applicable required employee statutory withholding taxes based on the market value of the shares on the vesting date. The amount remitted to the tax authorities for the employees’ tax obligation was reflected in the taxes paid related to net share settlement of stock-based awards caption in the financing section of the consolidated statements of cash flows. The shares withheld for taxes were returned to the share reserve and are available for future issuance in accordance with provisions of the 2013 Plan.

During the years ended December 31, 2015 and 2014, respectively, the Company recorded windfall tax benefits resulting from the settlement of stock-based award activity, in the amounts of $6.2 million and $4.3 million, respectfully. Such windfall tax benefits are excluded from the provision for income taxes and included as a component of additional paid-in capital when the awards are settled. During the year ended December 31, 2015, the Company realized an aggregate of $10.5 million of windfall tax benefits from stock-based award activity, which is included in cash flows from financing activities in the accompanying consolidated statement of cash flows.

Outstanding Awards

Activity under the 2013 Plan consisted of the following (dollars in thousands, except per share data):

 

		RSA Grants to Non- employee Directors				RSU Grants to Employees				RSU Grants to Independent Contractors				Total				Weighted- Average Grant Date Fair Value Per Share
Nonvested shares at December 31, 2013			30,000				313,155				570,760				913,915			$	14.46
Granted
February 2014			—				—				38,088				38,088
May 2014			22,884				6,991				31,780				61,655
August 2014			—				6,346				12,474				18,820
November 2014			—				9,584				4,638				14,222
December 2014			—				216,411				—				216,411
Total Granted			22,884				239,332				86,980				349,196				27.46
Vested			(10,002	)			—				—				(10,002	)			12.00
Transferred			—				(8,596	)			8,596				—				14.54
Forfeited/canceled			—				(27,454	)			(18,646	)			(46,100	)			14.65
Nonvested shares at December 31, 2014 (1)			42,882				516,437				647,690				1,207,009			$	18.23
Granted
February 2015			—				15,847				9,720				25,567
May 2015			10,110				8,142				4,212				22,464
August 2015			—				5,607				25,148				30,755
November 2015			—				2,117				7,805				9,922
Total Granted			10,110				31,713				46,885				88,708				42.91
Vested			(17,628	)			(57,711	)			(138,119	)			(213,458	)			14.90
Transferred			—				(8,423	)			8,423				—				17.81
Forfeited/canceled			—				(13,047	)			(43,099	)			(56,146	)			16.29
Nonvested shares at December 31, 2015 (1)			35,364				468,969				521,780				1,026,113			$	21.17
Unrecognized stock-based compensation expense as of December 31, 2015 (2)		$	543			$	8,698			$	11,180			$	20,421
Weighted average remaining vesting period (years) as of December 31, 2015			1.77				3.80				3.20				3.42

 

 

(1)	Nonvested RSU’s will be settled through the issuance of new shares of common stock.

(2)	The total unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately 3.42 years.

 

As of December 31, 2015, 1,365,445 fully vested DSUs s remained outstanding. See “Amendments to Restricted Stock and SARs” section below and Note 13 – “Earnings Per Share” for additional information.

Employee Stock Purchase Plan

In 2013, the Company adopted the 2013 Employee Stock Purchase Plan (“ESPP Plan”). The ESPP Plan qualifies under Section 423 of the IRS Code and provides for consecutive, non-overlapping 6-month offering periods. The offering periods generally start on the first trading day on or after May 15 and November 15 of each year. The first offering period began on May 15, 2014. Qualifying employees may purchase shares of the Company stock at a 10% discount based on the lower of the market price at the beginning or end of the offering period, subject to IRS limitations.

The Company determined that the ESPP Plan was a compensatory plan and is required to expense the fair value of the awards over each 6-month offering period. The Company determines the fair value of ESPP shares to be acquired during each offering period using the Black Scholes option pricing model. The Company calculates the expected volatility based on the historical volatility of the Company’s common stock and the risk-free interest rate based on the U.S. Treasury yield curve in effect at the time of grant both consistent with the term of the offering period. The Company incorporates 0% forfeiture rate and 0% expected dividend yield as the Company expects all awards to be delivered and does not intend to pay regular dividends.

The ESPP Plan had 366,667 shares of common stock reserved and 307,184 and 341,356 shares of common stock available for issuance at December 31, 2015 and 2014, respectively. The ESPP Plan provides for annual increases in the number of shares available for issuance under the ESPP on the first day of each fiscal year beginning with the 2015 fiscal year, equal to the least of (i) 366,667 shares, (ii) 1% of the outstanding shares on such date, or (iii) an amount determined by the board. Pursuant to the provisions of the ESPP Plan, the board of directors determined a share reserve increase was not needed in 2015. At December 31, 2015, total unrecognized compensation cost related to the ESPP Plan was $71,000 and is expected to be recognized over a weighted average period of 0.37 years.

Stock Based Compensation Plans Prior to the IPO

Restricted Common Stock and SARs

MMREIS granted options and SARs under a stock-based compensation award program (“Program”). The granted options were exercisable into shares of unvested restricted pre-IPO common stock. The Program was administered by the board of directors. The board determined the terms of an award, including the amount, number of rights or shares, and vesting period, among others. Options issued generally had terms of one year or less. Restricted pre-IPO common stock issued upon exercise of stock options generally vested over three to five years, and were typically exercised immediately upon grant for a note receivable. The exercise price of the options was based upon a formula equivalent to the net book value of common stock as of the end of the fiscal year immediately preceding the date of issuance.

During the year ended December 31, 2013, employees of MMREIS exercised stock options through the issuance of notes receivable. Cash payments on notes receivable were presented as an increase in consolidated stockholders’ equity. Such notes bore interest at a rate of 5% or 6% per annum and were due in defined installments on various remaining dates through April 15, 2016, which was consistent with the vesting periods of the restricted common stock.

 

There were no redemptions or cancelations of stock options during the year ended December 31, 2013.

MMREIS’s stock option activity consisted of the following:

 

		Year Ended December 31, 2013
		Shares Under Options				Weighted- Average Exercise Price
Options outstanding at beginning of year:			750			$	28.86
Granted			—				—
Exercised			(750	)			28.86
Options outstanding at end of year			—			$	—

MMREIS’s restricted common stock activity consisted of the following:

 

		Year Ended December 31, 2013
		Restricted Stock				Weighted Average Grant Date Fair Value
Restricted common stock outstanding at beginning of year:			27,999			$	23.67
Issued upon exercise of stock options			750				28.86
Exchange of common stock (1)			(28,749	)			—
Restricted common stock outstanding at end of year			—			$	—
Restricted common stock vested at end of year			—
Restricted common stock unvested at end of year			—

 

(1)	Exchanged for new Marcus & Millichap stock prior to the IPO. Refer to Note 9 – “Stockholders’ Equity” for additional information on the exchange of common stock.

MMREIS’s SARs activity consisted of the following:

 

		Year Ended December 31, 2013
SARs outstanding at beginning of period:			28,733
Granted			—
Settled (1)			(28,733	)
SARs outstanding at end of period			—
SARs vested at end of period			—

 

(1)	Prior to the IPO, outstanding SAR’s were settled by exchanging the SAR’s for DSU’s for 2,192,413 shares of the new Marcus & Millichap common stock and a fixed SAR’s liability amount. See Amendments to Restricted Stock and SARs below.

 

Amendments to Restricted Stock and SARs

The SARs were frozen at the liability amount, calculated as of March 31, 2013, which will be paid out to each participant in installments upon retirement or departure under the terms of the revised SARs agreements. See Note 4 – “Selected Balance Sheet Data” for additional information. To replace beneficial ownership in the SARs, the difference between the book value liability and the fair value of the awards was granted to plan participants in the form of DSUs, which were fully vested upon receipt and will be settled in stock of MMI at a rate of 20% per year if the participant remains employed by the Company during that period (otherwise all unsettled shares of stock upon termination of employment will be settled five years from the termination date). For restricted stock held by the plan participants, the formula settlement value of all outstanding shares was removed, and all such shares of stock are subject to sales restrictions that lapse at a rate of 20% per year for five years if the participant remains employed by the Company. Additionally, in the event of death or termination of employment after reaching the age of 67, 100% of the DSUs will be settled and 100% of the shares of stock will be released from the resale restriction. Further, 100% of the shares of stock will be released from the resale restriction upon the consummation of a change of control of the Company.

The modification was accounted for as a probable-to-probable modification in accordance with ASC 718. Total compensation cost recognized at the time of the modification was equal to (i) the unrecognized portion of compensation cost associated with the original awards, and (ii) the incremental cost resulting from the modification. The incremental compensation cost from the modification was the excess of (a) the fair value of the modified awards based upon the initial public offering price of the stock, and (b) the calculated value of the awards prior to the modification based upon the formula settlement value. The fair value of the DSUs was based upon the Company’s IPO price, discounted for the sales restrictions in accordance with ASC 718. The value of the discount was determined using an independent third-party valuation. In addition, as a result of the removal of the formula settlement value, the modification of the unvested restricted stock resulted in the awards being classified as equity awards. The modification, grant of replacement awards and acceleration of vesting of restricted stock and SARs and grants of other stock-based compensation awards in conjunction with the IPO pursuant to the 2013 Plan, resulted in non-cash stock-based compensation charges of $30.9 million during the three months ended December 31, 2013, which are included in stock-based and other compensation in connection with the IPO on the consolidated statements of net and comprehensive income.

Deemed Capital Contribution (Distribution) From MMC

MMC had assumed MMREIS’s obligation with respect to any appreciation in the value of the underlying vested awards and SARs in excess of the employees’ exercise price. MMC was deemed to make a capital contribution to MMREIS’s additional paid-in capital equal to the amount of compensation expense recorded, net of the applicable taxes. Based on the tax-sharing agreement between MMREIS and MMC, the tax deduction on the compensation expense recorded by MMREIS was allocated to MMC. MMC recorded the liability related to the appreciation in the value of the underlying stock and SARs in its consolidated financial statements. To the extent of any depreciation in the value of the underlying vested awards and SARs (limited to the amount of any appreciation previously recorded from the employees’ original exercise price), compensation expense was reduced and MMC was deemed to receive a capital distribution.

The total compensation cost related to unvested stock and SARs was generally recognized over approximately four years. Restricted common stock issued upon exercise of stock options was generally vested over three to five years and stock options typically were exercised immediately for a note receivable.

In conjunction with the IPO, the vesting of all unvested restricted stock and all unvested SARs was accelerated.

 

Summary of Stock-Based Compensation

Components of stock-based compensation included in selling, general and administrative expense in the consolidated statements of net and comprehensive income consisted of the following (in thousands, except common stock price):

 

		Year Ended December 31,
		2015				2014				2013
Restricted stock and SARs (prior to IPO)		$	—			$	—			$	4,679
Stock based compensation in connection with IPO			—				—				30,886
Employee stock purchase plan			285				128				—
RSAs – non-employee directors			319				197				20
RSUs – employees			2,351				817				88
RSUs – independent contractors (1)			4,159				3,892				168
		$	7,114			$	5,034			$	35,841
Common stock price at beginning of period		$	33.25			$	14.90			$	—
Common stock price at end of period		$	29.14			$	33.25			$	14.90
(Decrease) increase in stock price		$	(4.11	)		$	18.35			$	n/a

 

 

(1)

The Company grants RSUs to independent contractors (i.e. investment sales and financing professionals), who are considered non-employees under ASC 718. Accordingly, such awards are required to be measured at fair value at the end of each reporting period until settlement. Stock-based compensation expense is therefore impacted by the changes in the Company’s common stock price during each reporting period.