Quarterly report pursuant to Section 13 or 15(d)

Stock-based Compensation Plans and Awards

v3.5.0.2
Stock-based Compensation Plans and Awards
 9 Months Ended
Sep. 30, 2016
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.

We estimate the fair value of shares to be issued under the ESPP on the first day of the offering period using the Black-Scholes valuation model. The determination of the fair value is affected by our stock price on the first date of the offering period, as well as other assumptions including the risk-free interest rate, the estimated volatility of our stock price over the term of the offering period, the expected term of the offering period and the expected dividend rate. Stock-based compensation expense related to the ESPP is recognized on a straight-line basis over the offering period, net of estimated forfeitures.
 
The following assumptions for the Black-Scholes option pricing model were used to determine the per-share fair value of shares to be granted under the ESPP:
Three months ended September 30,
 
Nine months ended September 30,
 
2015

2016
 
2015
 
2016
Expected life (in years)
0.5

 
0.5

 
0.5

 
0.5

Risk-free interest rate
0.07 - 0.24%

 
0.41 - 0.44%

 
0.05 - 0.24%

 
0.24 - 0.44%

Expected volatility
29 - 42%

 
41 - 52%

 
29 - 42%

 
41 - 52%

Expected dividend yield
0
%
 
0
%
 
0
%
 
0
%

 
During the three months ended September 30, 2015 and 2016, we withheld $1.8 million and $2.6 million in contributions from employees and recognized $0.6 million and $0.9 million of stock-based compensation expense related to the ESPP, respectively. During the nine months ended September 30, 2015 and 2016, we withheld $5.1 million and $6.4 million in contributions from employees and recognized $1.9 million and $2.3 million of stock-based compensation expense related to the ESPP, respectively. In the three months ended September 30, 2015 and 2016, 255,432 and 643,562 shares of common stock
were issued under the ESPP. In the nine months ended September 30, 2015 and 2016, 538,398 and 1,254,910 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 expense for stock options at the grant date fair value of the award and recognize expense 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, 2015 and 2016, we recorded stock-based compensation expense from stock options of approximately $2.3 million and $2.2 million. During the nine months ended September 30, 2015 and 2016, we recorded stock-based compensation expense from stock options of approximately $7.5 million and $11.3 million.

There were no options granted in the three and nine months ended September 30, 2016.

Restricted stock units ("RSUs")
 
The fair value of RSUs 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, 2015 and 2016, we recorded stock-based compensation expense from RSUs of approximately $25.4 million and $28.2 million. During the nine months ended September 30, 2015 and 2016, we recorded stock-based compensation expense from RSUs of approximately $69.1 million and $87.2 million.
 
MSUs

In March 2015, the compensation committee of the board of directors granted performance awards consisting of market stock units to certain key executives under our 2011 Plan.

MSUs granted in March 2015 are earned as a function of Pandora’s total stock return ("TSR") 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 total potential 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 nine months ended September 30, 2015 we granted 776,000 MSUs at a total grant-date fair value of $4.3 million. There were no MSUs granted in the three or nine months ended September 30, 2016. During the three months ended September 30, 2015 and 2016, we recorded stock-based compensation expense from MSUs of approximately $0.5 million and $0.2 million. During the nine months ended September 30, 2015 and 2016, we recorded stock-based compensation expense from MSUs of approximately $1.0 million and $0.6 million.

In February 2016, the compensation committee of the board of directors certified the results of the One-Year Performance Period of the 2015 MSU grant, which concluded December 31, 2015. During the One-Year Performance Period, our relative TSR declined 26 percentage points relative to the Russell 2000 Index TSR for the period, which resulted in the vesting of the One-Year Performance Period at 22% of the one-third vesting opportunity for the period.

PSUs

In April 2016, the compensation committee of the board of directors granted 2016 Performance Awards consisting of stock-settled performance-based RSUs to certain key executives under our 2011 Plan.

PSUs granted in April 2016 have a vesting period that includes a four year service period, during which one fourth of the awards will vest after one year and the remainder will vest quarterly thereafter. The PSUs are earned when our trailing average ninety-day stock price is equal to or greater than $20.00. If the trailing average ninety-day stock price does not equal or exceed $20.00 on the applicable vesting date, then the portion of the award that was scheduled to vest on such vesting date shall not vest but shall vest on the next vesting date on which the trailing average ninety-day stock price equals or exceeds $20.00. Any portion of the award that remains unvested as of the final vesting date shall be canceled and forfeited.

We have determined the grant-date fair value of the PSUs granted in April 2016 using a Monte Carlo simulation performed by a third-party valuation firm. We recognize stock-based compensation for the PSUs over the requisite service period, which is approximately four years, using the accelerated attribution method.

During the nine months ended September 30, 2016 we granted 1,725,000 PSUs at a total grant-date fair value of $8.7 million. There were no PSUs granted in the three or nine months ended September 30, 2015. During the three and nine months ended September 30, 2016, we recorded stock-based compensation expense from PSUs of approximately $1.3 million and $2.4 million. There was no stock-based compensation expense from PSUs in the three or nine months ended September 30, 2015.

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,
 
2015
 
2016
 
2015
 
2016
 
(in thousands)
 
(in thousands)
Stock-based compensation expense
 

 
 

 
 
 
 
Cost of revenue - Other
$
1,427

 
$
1,538

 
$
4,040

 
$
4,559

Cost of revenue - Ticketing service
—

 
27

 
—

 
154

Product development
6,189

 
7,347

 
16,148

 
23,091

Sales and marketing
13,732

 
14,932

 
38,403

 
43,673

General and administrative
7,446

 
8,910

 
20,882

 
32,364

Total stock-based compensation expense
$
28,794

 
$
32,754

 
$
79,473

 
$
103,841



In the nine months ended September 30, 2016, we recorded stock-based compensation expense of $6.8 million related to accelerated awards in connection with executive severance. This amount is included in the general and administrative line item of our condensed consolidated statements of operations.