6. Stock Based Compensation

The Company issues shares pursuant to the Amended and Restated Chipotle Mexican Grill, Inc. 2011 Stock Incentive Plan (the “2011 Incentive Plan”), approved at the annual shareholders’ meeting on May 13, 2015. Shares issued pursuant to awards granted prior to the 2011 Incentive Plan were issued subject to previous stock plans that were also approved by shareholders. 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, count as two shares used, whereas each share underlying a stock appreciation right or stock option count as one share used. Under the 2011 Incentive Plan, 5,560 shares of common stock have been authorized and reserved for issuance to eligible participants, of which 2,165 represent shares that were authorized for issuance but not issued or subject to outstanding awards at December 31, 2016. 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 or to delegate its authority under the plan to make grants (subject to certain legal and regulatory restrictions), 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.

Stock only stock appreciation rights (“SOSARs”) generally 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. The Company has also granted SOSARs and stock awards with performance vesting conditions and/or market vesting conditions. Compensation expense on SOSARs subject to performance conditions is recognized over the longer of the estimated performance goal attainment period or time vesting period. Compensation expense on stock awards subject to performance conditions, 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. Compensation expense is recognized ratably for awards subject to market conditions regardless of whether the market condition is satisfied, provided that the requisite service has been provided. Some stock-based compensation awards are made to employees involved in the Company’s new restaurant development activities, and expense for these awards is recognized as capitalized development and included in leasehold improvements, property and equipment in the consolidated balance sheet.

The following table sets forth stock-based compensation expense, including SOSARs and stock awards:



	Year ended December 31,
	2016		2015		2014
Stock-based compensation expense	$	65,112	$	59,465	$	97,618
Stock-based compensation expense, net of tax		35,974		36,666		60,084
Stock-based compensation expense recognized as capitalized development		946		1,554		1,178

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



	2016			2015			2014
	Shares	Weighted-Average Exercise Price Per Share		Shares	Weighted-Average Exercise Price Per Share		Shares	Weighted-Average Exercise Price Per Share
Outstanding, beginning of year	1,694	$	490.70	2,087	$	395.46	1,690	$	312.44
Granted	460	$	457.77	379	$	659.12	764	$	545.66
Exercised	(124)	$	315.87	(716)	$	297.25	(315)	$	310.32
Forfeited or cancelled	(113)	$	559.25	(56)	$	554.73	(52)	$	419.74
Outstanding, end of year	1,917	$	490.06	1,694	$	490.70	2,087	$	395.46



	Shares	Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Years of Contractual Life	Aggregate Intrinsic Value
Outstanding as of December 31, 2016	1,917	$	490.06	4.4	$	22,040
Vested and expected to vest as of December 31, 2016	1,851	$	489.18	4.3	$	22,040
Exercisable as of December 31, 2016	846	$	422.32	3.3	$	22,040

During the year ended December 31, 2014 the Company granted 220 SOSARs that include performance conditions. No SOSARs that include performance conditions were granted during 2015 or 2016. As of December 31, 2016, 388 SOSARs that include performance conditions were outstanding, of which 278 awards had met the performance conditions. In addition to time vesting described above, the shares vest upon achieving a targeted cumulative cash flow from operations. The total intrinsic value of options and SOSARs exercised during the years ended December 31, 2016, 2015 and 2014 was $15,946, $260,466 and $88,245. Unearned compensation as of December 31, 2016 was $34,862 for SOSAR awards, and is expected to be recognized over a weighted average period of 1.5 years.

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



	2016			2015			2014
Risk-free interest rate		1.0	%		1.1	%		0.8	%
Expected life (years)		3.5			3.4			3.4
Expected dividend yield		0.0	%		0.0	%		0.0	%
Volatility		32.2	%		30.8	%		33.3	%
Weighted-average Black-Scholes fair value per share at date of grant	$	117.48		$	156.32		$	136.18

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

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



	2016			2015			2014
	Shares	Grant Date Fair Value Per Share		Shares	Grant Date Fair Value Per Share		Shares	Grant Date Fair Value Per Share
Outstanding, beginning of year	116	$	511.88	70	$	525.60	71	$	520.27
Granted	90	$	509.05	47	$	785.32	2	$	495.92
Vested	(7)	$	605.83	(1)	$	413.07	(2)	$	284.11
Forfeited or cancelled	(74)	$	529.54	-	$	534.55	(1)	$	410.55
Outstanding, end of year	125	$	606.24	116	$	511.88	70	$	525.60

At December 31, 2016, 116 of the outstanding non-vested stock awards were subject to performance and/or market conditions, in addition to service vesting conditions. During the first quarter of 2016, the Company awarded 73 shares, net of cancellations, that are subject to both service and market vesting conditions. The quantity of shares that will vest may range from 0% to 400% of a targeted number of shares, and will be determined based on the price of the Company’s common stock reaching certain targets for a consecutive number of days during the three year period starting on the grant date. If the minimum defined stock price target is not met, then no shares will vest.

During the year ended December 31, 2015, the Company awarded 40 performance shares that were subject to service, performance, and market vesting conditions (“the 2015 stock awards”). The quantity of shares that will ultimately vest is determined based on the Company’s relative performance versus a restaurant industry peer group in the annual average of: revenue growth, net income growth, and total shareholder return. The quantity of shares awarded ranges from 0% to 200% based on the level of achievement of the performance and market conditions. If minimum targets are not met, then no shares will vest. Each performance and market measure will be weighted equally, and performance is calculated over a three year period beginning January 1, 2015 through December 31, 2017.

During the year ended December 31, 2013, the Company granted 66 stock awards that were subject to both service and performance vesting conditions (“the 2013 stock awards”). The performance conditions for the grant required achievement of specific targets for cumulative cash flow from operations during a three year period. Targets were not met and none of the stock awards vested.

During the year ended December 31, 2016, the Company adjusted its estimate of 2015 stock awards expected to vest as well as reduced its expense for the 2013 stock awards that did not vest. The impact of these changes resulted in a cumulative reduction to expense of $6,031 ($3,332 net of tax as well as $0.11 to basic and diluted earnings per share) in the year ended December 31, 2016.

The Company’s measurement of the grant date fair value of the 2015 and 2016 stock awards included using a Monte Carlo simulation model, which incorporates into the fair-value determination the possibility that the market condition may not be satisfied, using the following assumptions:



	2016			2015
Risk-free interest rate		0.9	%		1.0	%
Expected life (years)		3.0			2.9
Expected dividend yield		0.0	%		0.0	%
Volatility		31.4	%		33.7	%

The assumptions are based on the same factors as those described for SOSARs, except that the expected life is based on the contractual performance period for stock awards.

Unearned compensation as of December 31, 2016 was $39,758 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 1.7 years. The fair value of shares earned as of the vesting date during the year ended December 31, 2016, 2015, and 2014 was $2,787, $634, and $783, respectively.