Quarterly report pursuant to Section 13 or 15(d)

Stock-based Compensation Plans and Awards

v2.4.1.9
Stock-based Compensation Plans and Awards
 3 Months Ended
Mar. 31, 2015
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock-based Compensation Plans and Awards
Stock-based Compensation Plans and Awards
 
Employee Stock Purchase Plan ("ESPP")
 
The Employee Stock Purchase Plan allows eligible employees to purchase shares of our common stock through payroll deductions of up to 15% of their eligible compensation. The ESPP provides for six- month offering periods, commencing in February and August of each year.
 
The per-share fair value of shares to be granted under the ESPP is determined on the first day of the offering period using the Black-Scholes option pricing model using the following assumptions:
Three months ended March 31,
 
2014

2015
Expected life (in years)
0.5

 
0.5

Risk-free interest rate
0.08
%
 
0.05-0.07%

Expected volatility
42
%
 
42
%
Expected dividend yield
0
%
 
0
%

 
During the three months ended March 31, 2014 and 2015, we withheld $0.9 million and $1.6 million in contributions from employees and recognized $0.3 million and $0.6 million of stock-based compensation expense related to the ESPP, respectively. In the three months ended March 31, 2015, 282,966 shares of common stock were issued under the ESPP.
 
Employee Stock-Based Awards
 
Our 2011 Equity Incentive Plan (the “2011 Plan”) provides for the issuance of stock options, restricted stock units and other stock-based awards to our employees. The 2011 Plan is administered by the compensation committee of our board of directors.
 
Stock options
 
We measure stock-based compensation expenses for stock options at the grant date fair value of the award and recognize expenses on a straight-line basis over the requisite service period, which is generally the vesting period. We estimate the fair value of stock options using the Black-Scholes option-pricing model. During the three months ended March 31, 2014 and 2015, we recorded stock-based compensation expense from stock options of approximately $3.5 million and $2.9 million.

There were no options granted in the three months ended March 31, 2015.
 
Restricted stock units ("RSUs")
 
The fair value of the restricted stock units is expensed ratably over the vesting period. RSUs typically have an initial annual cliff vest and then vest quarterly thereafter over the service period, which is generally four years. During the three months ended March 31, 2014 and 2015, we recorded stock-based compensation expense from RSUs of approximately $13.6 million and $19.6 million.
 
Market stock units

We implemented a market stock unit program in March 2015 for certain key executives. Specifically, MSUs measure Pandora’s TSR performance against that of the Russell 2000 Index across three performance periods. Pandora’s relative TSR is calculated using the average adjusted closing stock price of Pandora stock, and the Russell 2000 Index, for ninety calendar days prior to the beginning of each performance period and the last ninety calendar days of the performance period. The target MSUs are divided across three performance periods as follows:

•
One-third of the target MSUs are eligible to be earned for a performance period that is the first calendar year of the MSU grant (the “One-Year Performance Period”);
•
One-third of the target MSUs are eligible to be earned for a performance period that is the first two calendar years of the MSU grant (the “Two-Year Performance Period”); and
•
Any remaining portion of the target MSUs are eligible to be earned for a performance period that is the entire three calendar years of the MSU grant (the “Three-Year Performance Period”).

For each performance period, a “performance multiplier” is calculated by comparing Pandora’s relative TSR for the period to the Russell 2000 Index TSR for the same period. The target number of shares will vest if the Pandora TSR is equal to the Russell 2000 Index TSR for the period. For each percentage point that the Pandora TSR falls below the Russell 2000 Index TSR for the period, the performance multiplier is decreased by three percentage points. The performance multiplier is capped at 100% for the One-Year and Two-Year Performance Periods. However, the full award is eligible for a payout up to 200% of target with all upside tied to the Three-Year Performance Period. For each percentage point that the Pandora TSR exceeds the Russell 2000 Index TSR for the Three-Year Performance Period, the performance multiplier is increased by 2%.

We have determined the grant-date fair value of the MSUs using a Monte Carlo simulation performed by a third-party valuation firm. We recognize stock-based compensation for the MSUs over the requisite service period, which is approximately three years, using the accelerated attribution method. During the three months ended March 31, 2015, we granted 776,000 MSUs at a total grant-date fair value of $4.3 million. During the three months ended March 31, 2015, we recognized $0.1 million in stock-based compensation expense from MSUs.

Stock-based Compensation Expense
 
Stock-based compensation expense related to all employee and non-employee stock-based awards was as follows:
 
 
Three months ended 
 March 31,
 
2014
 
2015
 
(in thousands)
(unaudited)
Stock-based compensation expense
 

 
 

Cost of revenue - Other
$
881

 
$
1,207

Product development
3,461

 
4,605

Sales and marketing
8,311

 
11,344

General and administrative
4,739

 
6,039

Total stock-based compensation expense
$
17,392

 
$
23,195