5. Stock Based Compensation

The Company issues shares pursuant to the Chipotle Mexican Grill, Inc. 2011 Stock Incentive Plan (the “2011 Incentive Plan”). Shares issued prior to the 2011 Incentive Plan were issued subject to previous stock plans. For purposes of counting the shares remaining available under the 2011 Incentive Plan, each share issuable pursuant to outstanding full value awards, such as restricted stock units and performance shares, will count as two shares used, whereas each share underlying a stock appreciation right or stock option will count as one share used. Under the 2011 Incentive Plan, 3,360 shares of common stock have been authorized and reserved for issuances to eligible employees, of which 2,760 represent shares that were authorized for issuance but not issued at December 31, 2012. The 2011 Incentive Plan is administered by the Compensation Committee of the Board of Directors, which has the authority to select the individuals to whom awards will be granted, to determine the type of awards and when the awards are to be granted, the number of shares to be covered by each award, the vesting schedule and all other terms and conditions of the awards. The exercise price for stock awards granted under the 2011 Incentive Plan cannot be less than fair market value at the date of grant.

The Company granted stock options prior to 2008, and has granted stock only stock appreciation rights (“SOSARs”) since that time. SOSARs vest equally over two and three years and expire after seven years. Stock-based compensation expense is generally recognized on a straight-line basis for each separate vesting portion. Compensation expense related to employees eligible to retire and retain full rights to the awards is recognized over six months which coincides with the notice period. Compensation expense on performance shares, which is based on the quantity of awards the Company has determined are probable of vesting, is recognized over the longer of the estimated performance goal attainment period or time vesting period. Stock-based compensation expense, including options, SOSARs and stock awards, was $66,274 ($40,361 net of tax) in 2012, $42,965 ($26,166 net of tax) in 2011 and $22,280 ($13,713 net of tax) in 2010. During the first quarter of 2012, the Company increased its estimate of the number of non-vested stock awards subject to performance conditions that are probable of vesting, which resulted in a cumulative adjustment to expense of $5,578 ($3,397 net of tax and $0.11 impact to basic and diluted earnings per share for 2012). For the years ended December 31, 2012, 2011 and 2010, $1,998, $1,583 and $899, respectively, of stock-based compensation expense was recognized as capitalized development and is included in leasehold improvements, property and equipment in the consolidated balance sheet.

The tables below summarize the option and SOSAR activity under the stock incentive plans (in thousands, except years and per share data):



	2012			2011			2010
	Shares	Weighted-Average Exercise Price		Shares	Weighted-Average Exercise Price		Shares	Weighted-Average Exercise Price
Outstanding, beginning of year	1,486	$	157.07	1,451	$	82.56	1,245	$	66.08
Granted	617	$	371.70	587	$	268.73	561	$	104.23
Exercised	(592)	$	80.31	(536)	$	76.78	(325)	$	56.95
Forfeited	(62)	$	274.25	(16)	$	173.05	(28)	$	84.60
Expired	—	$	—	—	$	—	(2)	$	22.00
Outstanding, end of year	1,449	$	274.92	1,486	$	157.07	1,451	$	82.56



	Shares	Weighted-Average Exercise Price		Weighted-Average Remaining Years of Contractual Life	Aggregate Intrinsic Value
Outstanding as of December 31, 2012	1,449	$	274.92	5.3	$	76,791
Vested and expected to vest as of December 31, 2012	1,422	$	273.70	5.3	$	76,444
Exercisable as of December 31, 2012	68	$	139.05	3.9	$	11,754

The SOSARs granted during 2012 include 191 SOSARs that contain performance conditions. The total intrinsic value of options and SOSARs exercised during the years ended December 31, 2012, 2011 and 2010 was $183,097, $113,752 and $32,957. Unearned compensation as of December 31, 2012 was $40,752 for options and SOSAR awards, and is expected to be recognized over a weighted average period of 1.4 years.

A summary of non-vested stock award activity under the stock incentive plans is as follows (in thousands, except per share data):



	2012			2011			2010
	Shares	Grant Date Fair Value		Shares	Grant Date Fair Value		Shares	Grant Date Fair Value
Outstanding, beginning of year	207	$	153.40	205	$	148.22	257	$	71.03
Granted	1	$	401.56	6	$	272.28	118	$	215.76
Vested	(83)	$	55.92	(3)	$	87.36	(166)	$	78.85
Forfeited	(5)	$	267.23	(1)	$	53.36	(4)	$	53.36
Outstanding, end of year	120	$	218.34	207	$	153.40	205	$	148.22

At December 31, 2012, 111 of the outstanding non-vested stock awards were subject to both service and performance vesting conditions. The quantity of shares that ultimately vest is determined based on the cumulative cash flow from operations reached during the three year period ending on September 30, 2013. If the cumulative cash flow from operations during the three year period does not reach a specified level, no shares will vest. Unearned compensation as of December 31, 2012 was $6,671 for non-vested stock awards the Company has determined are probable of vesting, and is expected to be recognized over a weighted average period of 0.7 years. The fair value of shares earned as of the vesting date during the year ended December 31, 2012, 2011, and 2010 was $31,309, $961, and $25,369, respectively.

The following table reflects the average assumptions utilized in the Black-Scholes option-pricing model to value SOSAR awards granted for each year:



	2012			2011			2010
Risk-free interest rate		0.4	%		1.6	%		1.5	%
Expected life (years)		3.4			3.4			3.4
Expected dividend yield		0.0	%		0.0	%		0.0	%
Volatility		39.1	%		51.0	%		51.1	%
Weighted-average Black-Scholes fair value per share at date of grant	$	104.97		$	101.91		$	39.52

The Company has not paid dividends to date and does not plan to pay dividends in the near future. The risk-free interest rate is based upon U.S. Treasury rates for instruments with similar terms. The volatility assumption was based on our historical data and implied volatility, and the expected life assumptions were based on our historical data.