Quarterly report pursuant to Section 13 or 15(d)

Stock-based Compensation Plans and Awards

v3.3.0.814
Stock-based Compensation Plans and Awards
 9 Months Ended
Sep. 30, 2015
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock-based Compensation Plans and Awards
Stock-based Compensation Plans and Awards
 
ESPP
 
The ESPP 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 September 30,
 
Nine months ended September 30,
 
2014

2015
 
2014
 
2015
Expected life (in years)
0.5

 
0.5

 
0.5

 
0.5

Risk-free interest rate
0.05 - 0.08%

 
0.07 - 0.24%

 
0.05 - 0.08%

 
0.05 - 0.24%

Expected volatility
42
%
 
29 - 42%

 
42
%
 
29 - 42%

Expected dividend yield
0
%
 
0
%
 
0
%
 
0
%

 
During the three months ended September 30, 2014 and 2015, we withheld $1.9 million and $1.8 million in contributions from employees and recognized $0.6 million and $0.6 million of stock-based compensation expense related to the ESPP, respectively. During the nine months ended September 30, 2014 and 2015, we withheld $4.4 million and $5.1 million in contributions from employees and recognized $1.5 million and $1.9 million of stock-based compensation expense related to the ESPP, respectively. In the three months ended September 30, 2014 and 2015, 149,378 and 255,432 shares of common stock were issued under the ESPP. In the nine months ended September 30, 2014 and 2015, 149,378 and 538,398 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 September 30, 2014 and 2015, we recorded stock-based compensation expense from stock options of approximately $4.0 million and $2.3 million. During the nine months ended September 30, 2014 and 2015, we recorded stock-based compensation expense from stock options of approximately $11.2 million and $7.5 million.

The per-share fair value of each stock option was determined on the grant date using the Black-Scholes option pricing model using the following assumptions.

 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2015
 
2014
 
2015
Expected life (in years)
6.08

 
6.08

 
6.08

 
6.08

Risk-free interest rate
1.93
%
 
1.92
%
 
1.71 - 1.93%

 
1.92
%
Expected volatility
58
%
 
49
%
 
58 - 59%

 
49
%
Expected dividend yield
0
%
 
0
%
 
0
%
 
0
%


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 September 30, 2014 and 2015, we recorded stock-based compensation expense from RSUs of approximately $17.5 million and $25.4 million. During the nine months ended September 30, 2014 and 2015, we recorded stock-based compensation expense from RSUs of approximately $47.4 million and $69.1 million.
 
MSUs

We implemented a market stock unit program in March 2015 for certain key executives. MSUs are earned as a function of Pandora’s TSR performance measured against that of the Russell 2000 Index across three performance periods:

•
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 TSR for the period to the Russell 2000 Index TSR for the same period, using the average adjusted closing stock price of Pandora stock, and the Russell 2000 Index, for ninety calendar days prior to the beginning of the performance period and the last ninety calendar days of the performance period. In each period, the target number of shares will vest if the Pandora TSR is equal to the Russell 2000 Index TSR. 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, less any shares earned in prior periods, in the Three-Year Performance Period. Specifically, 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%. As such, the ability to exceed the target number of shares is determined exclusively with respect to Pandora's three-year TSR during the term of the award.

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 and nine months ended September 30, 2015, we granted 776,000 MSUs at a total grant-date fair value of $4.3 million. During the three and nine months ended September 30, 2015, we recorded stock-based compensation expense from MSUs of approximately $0.5 million and $1.0 million.

Stock-based Compensation Expense
 
Stock-based compensation expense related to all employee and non-employee stock-based awards was as follows:
 
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2014
 
2015
 
2014
 
2015
 
(in thousands)
 
(in thousands)
Stock-based compensation expense
 

 
 

 
 
 
 
Cost of revenue - Other
$
1,063

 
$
1,427

 
$
2,976

 
$
4,040

Product development
4,402

 
6,189

 
12,289

 
16,148

Sales and marketing
10,442

 
13,732

 
28,675

 
38,403

General and administrative
6,204

 
7,446

 
16,176

 
20,882

Total stock-based compensation expense
$
22,111

 
$
28,794

 
$
60,116

 
$
79,473