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STOCK-BASED COMPENSATION

9 Months Ended

Sep. 30, 2023

STOCK-BASED COMPENSATION

STOCK-BASED COMPENSATION

17. STOCK-BASED COMPENSATION

Stock-based compensation is based on the fair value of the award on the date of grant, which is recognized over the related service period, net of actual forfeitures. The service period is the period over which the related service is performed, which is generally the same as the vesting period. Vesting may be accelerated for certain officers and employees as a result of attaining certain age and service based requirements in the Company’s long-term incentive plan and award agreements.

Stock-based compensation expense relating to employee awards is included in compensation and benefits and acquisition-related costs in the condensed consolidated statements of income. The Company recognized stock-based compensation expense related to employee awards of $1.5 million and $7.0 million for the three months ended September 30, 2023 and 2022, respectively and $28.4 million and $23.1 million for the nine months ended September 30, 2023 and 2022, respectively. Stock-based compensation expense relating to director awards is included in professional fees and outside services in the condensed consolidated statements of income. The Company recognized stock-based compensation expense related to director awards of $0.5 million for each of the three months ended September 30, 2023 and 2022, respectively and $1.4 million for each of the nine months ended September 30, 2023 and 2022, respectively. Stock-based compensation expense relating to awards granted to investor members of Cboe Digital are recorded as contra-revenue in the condensed consolidated statements of income and is outlined further below.

The activity in the Company’s restricted stock, consisting of restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and performance-based restricted stock units (“PSUs”) for the nine months ended September 30, 2023 was as follows:

RSAs and RSUs

The following table summarizes RSA and RSU activity during the nine months ended September 30, 2023:


				Weighted
		Number of		average grant
		Shares		date fair value
Nonvested stock at December 31, 2022		556,062		$	112.07
Granted		338,794			126.50
Vested		(236,487)			108.21
Forfeited		(41,822)			120.51
Nonvested stock at September 30, 2023		616,547		$	120.91

RSUs entitle the holder to one share of common stock upon vesting with the exception of certain jurisdictions where the RSUs are settled in cash, typically vest over a three-year period, and vesting accelerates upon death, disability, or the occurrence of a qualified termination following a change in control. Vesting will also accelerate upon a qualified retirement

where applicable and permitted. Where applicable and permitted, qualified retirement eligibility occurs once achieving 55 years of age and 10 years of service. Unvested RSUs will be forfeited if the officer, or employee leaves the Company prior to the applicable vesting date, except in limited circumstances.

RSUs granted to non-employee members of the Board of Directors have a one-year vesting period and vesting accelerates upon the occurrence of a change in control of the Company. Unvested portions of the RSUs will be forfeited if the director leaves the Board of Directors prior to the applicable vesting date.

The RSUs have no voting rights but entitle the holder to receive dividend equivalents.

There were no remaining nonvested RSAs as of September 30, 2023.

During the nine months ended September 30, 2023, to satisfy employees’ tax obligations upon the vesting of restricted stock, the Company purchased 84,706 shares of common stock totaling $11.1 million as the result of the vesting of 218,699 shares of restricted stock.

PSUs

The following table summarizes restricted stock units contingent upon achievement of performance conditions, also known as PSUs, activity during the nine months ended September 30, 2023:


				Weighted
		Number of		average grant
		Shares		date fair value
Nonvested stock at December 31, 2022		166,702		$	125.08
Granted		86,646			143.75
Vested		(55,399)			130.05
Forfeited		(55,627)			143.52
Nonvested stock at September 30, 2023		142,322		$	127.31

PSUs include awards related to earnings per share during the performance period as well as awards related to total shareholder return during the performance period. The Company used the Monte Carlo valuation model method to estimate the fair value of the total shareholder return PSUs which incorporated the following assumptions for awards granted in February 2023: risk-free interest rate (4.10)%, three-year volatility (33.5)% and three-year correlation with S&P 500 Index (0.53). Each of these performance shares has a performance condition under which the number of units ultimately awarded will vary from 0% to 200% of the original grant, with each unit representing the contingent right to receive one share of the Company’s common stock. The vesting period for the PSUs contingent on the achievement of performance conditions is three years. For each of the performance awards, the PSUs will be settled in shares of the Company’s common stock following vesting of the PSU assuming that the participant has been continuously employed during the vesting period, subject to acceleration upon death, disability, or the occurrence of a qualified termination following a change in control. Participants have no voting rights with respect to the PSUs until the issuance of the shares of common stock. Dividends are accrued by the Company and will be paid once the PSUs, contingent on the achievement of performance conditions, vest.

In the nine months ended September 30, 2023, to satisfy employees’ tax obligations upon the vesting of performance stock, the Company purchased 21,459 shares of common stock totaling $2.7 million as the result of the vesting of 55,399 shares of performance stock.

As of September 30, 2023, there were $50.4 million in total unrecognized compensation costs related to restricted stock, restricted stock units, and performance stock units. These costs are expected to be recognized over a weighted average period of 1.9 years. Forfeited PSUs include certain awards forfeited by Edward T. Tilly, former Chief Executive Officer of the Company, who resigned and voluntarily terminated his employment with the Company on September 18, 2023.

Employee Stock Purchase Plan

In May 2018, the Company’s stockholders approved an Employee Stock Purchase Plan, (“ESPP”), under which a total of 750,000 shares of the Company’s common stock will be made available for purchase to employees. The ESPP is

a broad-based plan that permits employees to contribute up to 10% of wages and base salary to purchase shares of the Company’s common stock at a discount, subject to applicable annual Internal Revenue Service limitations. Under the ESPP, a participant may not purchase more than a maximum of 312 shares of the Company’s common stock during any single offering period. No participant may accrue options to purchase shares of the Company’s common stock at a rate that exceeds $25,000 in fair market value of the Company’s common stock (determined at the time such options are granted) for each calendar year in which such rights are outstanding at any time. The exercise price per share of common stock shall be 85% (for eligible U.S. and international employees) of the lesser of the fair value of the stock on the first day of the applicable offering period or the applicable exercise date.

The Company records compensation expense over the offering period related to the discount that is given to employees, which totaled $0.9 million and $0.2 million for the three months ended September 30, 2023 and 2022, respectively, and $1.8 million and $0.4 million for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, 552,734 shares were reserved for future issuance under the ESPP.

Cboe Digital Restricted Common Units

On November 18, 2022, Cboe Digital Holdings entered into minority interest purchase agreements with certain digital asset industry participants, pursuant to which Cboe Digital Holdings agreed to issue 185 Restricted Common Units in Cboe Digital. In addition, certain investor members and their affiliates are our customers, including trading permit holders, trading privilege holders, participants, and members. Certain Cboe Digital investor members paid for the Restricted Common Units through the issuance of promissory notes, which are nonrecourse in nature. The issuances of Restricted Common Units for nonrecourse promissory notes are accounted for as in-substance stock options. The promissory notes generally bear interest at a rate of 5% per annum and mature upon the earlier of the sale of vested Restricted Common Units, or either November 18, 2032 or November 18, 2037. One Cboe Digital investor member paid for the Restricted Common Units in exchange for cash.

The following table summarizes the option activity during the nine months ended September 30, 2023 (in millions, except number of units and contractual term):


				Weighted						Weighted
		Number of		average exercise			Aggregate			average remaining
		Units		price			intrinsic value			contractual term
Nonvested units at December 31, 2022		185		$	0.3		$	—		6 years
Granted		—			—			—
Vested		—			—			—
Outstanding at September 30, 2023		185		$	0.3		$	—		5 years

Vesting of Restricted Common Units is based on certain conditions relating to the participation and performance of the Cboe Digital investor members on the Cboe Digital platforms, generally over a five-year period. Performance is generally measured based on participation on the Cboe Digital platforms and the investor members maintaining certain average daily volumes on the platforms. Due to the existence of an option for investor members to sell their shares immediately after vesting, the options are liability classified. The options expire upon the maturity of the promissory notes, which is either November 18, 2032 or November 18, 2037, unless the options are exercised.

The cost associated with the options will be recognized as contra-revenue, net of actual forfeitures and based on the continued probability of the satisfaction of performance conditions ratably over the vesting period. At December 31, 2022, $14.0 million of contra-revenue related to the options grants was included in other assets, net within the condensed consolidated balance sheets. At March 31, 2023 the contra-revenue balance included in other assets, net within the condensed consolidated balance sheet included a $0.1 million adjustment to the Restricted Common Units contra-revenue asset as a result of the finalization of the initial grant date fair value calculation. For the three and nine months ended September 30, 2023, $0.7 million and $2.3 million of contra-revenue related to the options grants was recognized, respectively. As of September 30, 2023, $11.8 million of contra-revenue related to the options grants was included in other assets, net on the condensed consolidated balance sheet, and is expected to be recognized as contra-revenue in the condensed consolidated statements of income over the remaining contractual term.

Changes in the fair value of the options, subsequent to the grant date, is recognized in other income (expense), net in the condensed consolidated statements of income in the period in which the fair value of the options changes. The Company uses a Black Scholes pricing model to estimate the fair value of the in-substance stock options which incorporated the following assumptions as of June 30, 2023: risk-free interest rate range (3.67 to 3.78)%, expected

dividend rate (0)%, expected volatility (60-65)%, and expected term of 4.5 to 6.5 years. For the nine months ended September 30, 2023, there was no change in the fair value of the options grants since the grant date.

Certain Cboe Digital investor members can earn additional Incentive Program Units. The Incentive Program Units are subject to the same terms and conditions as the other Restricted Common Units and are similarly liability-classified awards. Cboe Digital authorized a maximum of 20 Common Units to be distributed over the two-year life of the incentive program. For the three and nine months ended September 30, 2023, $0.5 million of contra-revenue related to the Incentive Program Units was recognized. As of September 30, 2023, $2.6 million of contra-revenue related to the Incentive Program Units is included in other assets, net within the condensed consolidated balance sheet and is expected to be recognized as contra-revenue in the condensed consolidated statements of income over the remaining service period associated with the Incentive Program Units.

Cboe Digital Warrants

On November 18, 2022, Cboe Digital Holdings entered into a Warrant Agreement with an investor member to acquire up to 80 Common Units of Cboe Digital, subject to certain vesting events. The investor member is a customer of Cboe Digital. The vesting of the Warrant is based upon the achievement of certain conditions relating to the service provided by the investor member over a two-year period, of which some conditions represent conditions that are not service, performance, or market conditions and, therefore, the Warrant is liability classified. As of September 30, 2023, no portion of the Warrant has vested.

The cost associated with the Warrant will be recognized as contra-revenue ratably throughout the expected life of the Warrant before exercise. For the three and nine months ended September 30, 2023, $0.3 million and $0.9 million of contra-revenue related to the Warrant was recognized, respectively. As of September 30, 2023, $5.0 million of contra-revenue related to the Warrant is included in other assets, net within the condensed consolidated balance sheet and is expected to be recognized as contra-revenue in the condensed consolidated statements of income over the remaining life of the Warrant.

The following table summarizes the Warrant activity during the nine months ended September 30, 2023 (in millions, except number of units):


				Weighted
		Number of		average exercise
		Units		price
Nonvested units at December 31, 2022		80		$	0.2
Granted		—			—
Vested		—			—
Outstanding at September 30, 2023		80		$	0.2

Changes in the fair value of the Warrant, subsequent to the grant date, is recognized in other income (expense), net in the condensed consolidated statements of income in the period in which the fair value of the Warrant changes. The Company uses a Black Scholes pricing model to estimate the fair value of the Warrant which incorporated the following assumptions as of June 30, 2023: risk-free interest rate (3.77)%, expected dividend rate (0)%, expected volatility (65)%, and expected term of 4.6 years. For the nine months ended September 30, 2023, there was no change in the fair value of the Warrant since the grant date.