Stock-Based Compensation Plans

12 Months Ended

Sep. 30, 2021

Share-based Payment Arrangement [Abstract]

Warner Music Group Corp. 2020 Omnibus Incentive Plan

In connection with the IPO, the Company’s board of directors and stockholders approved the Warner Music Group Corp. 2020 Omnibus Incentive Plan, or the “Omnibus Incentive Plan.” The Omnibus Incentive Plan provides for the grant of incentive stock options, restricted stock, restricted stock units (“RSUs”), performance awards and stock appreciation rights to employees, consultants and directors. The aggregate number of shares of common stock authorized for issuance under the Omnibus Incentive Plan is 31,169,099 shares of Class A Common Stock over the 10-year period from the date of adoption, including up to 1,000,000 shares of our Class A Common Stock in connection with the IPO.

To date, the Company has issued both RSUs and restricted stock under the Omnibus Incentive Plan. The RSUs were granted to eligible employees and executives, and the restricted stock was granted to members of the Company’s Board of Directors. Except in the case of certain awards issued in connection with the IPO, holders of RSUs and restricted stock are entitled to dividends during the vesting period.

As of September 30, 2021, there have been 64,567 shares of Class A Common Stock issued, which includes 64,424 shares of restricted stock issued under the Omnibus Incentive Plan. As of September 30, 2021, there were 31,104,532 shares of Class A Common Stock available to be issued.

Warner Music Group Corp. Senior Management Free Cash Flow Plan

Effective January 1, 2013, eligible individuals were invited to participate in the Plan. Eligible individuals include any employee, consultant or officer of the Company or any of its affiliates, who is selected by the Company’s Compensation Committee to participate in the Plan. In 2017, the Company’s Compensation Committee invited two additional employees to participate in the Plan. Under the Plan, participants are allocated a specific portion of the Company’s free cash flow to use to purchase the equivalent of Company stock through the acquisition of deferred equity units. Participants also receive a grant of profit interests in a purposely established LLC holding company (the “LLC”) that represent an economic entitlement to future appreciation over an equivalent number of shares of Company stock (“matching units”). The Company’s board of directors authorized the issuance of up to 39,255,429.54 shares of the Company’s common stock pursuant to the Plan, 19,612,714.77 in respect of deferred equity units and 19,612,714.77 in respect of matching units, as adjusted in accordance with the Plan. The LLC currently owns 4,406,819 shares of Class B Common Stock. Each deferred equity unit is equivalent to a share of Company stock. The Company credits units to active participants each Plan year at the time that annual free cash flow bonuses for such Plan year are determined (although certain participants have already received their complete allocations) and may grant unallocated units under the Plan to certain members of current or future management. At the time that annual free cash flow bonuses for such Plan year are determined, a participant is credited a number of deferred equity units based on their respective allocation divided by the grant date intrinsic value and an equal number of the related matching units is vested. The redemption price of the deferred equity units equals the fair market value of a share of the Company’s stock on the date of the settlement and the redemption price for the matching units equals the excess, if any, of the then fair market value of one Company fractional share over the grant date intrinsic value of one share. Dividend distributions, if any, are also paid out on vested deferred equity units and are calculated on the same basis as the Company’s common shares. The Company has applied a graded (tranche-by-tranche) attribution method and expenses stock-based compensation on an accelerated basis over the vesting period of the share award.

The Company accounts for stock-based payments as required by ASC 718. ASC 718 requires all stock-based payments to employees to be recognized as compensation expense. Under the recognition provision of ASC 718, liability-classified stock-based compensation costs are measured each reporting date until settlement. The Plan was liability-classified from inception through June 3, 2020, upon completion of the IPO, further discussed herein.

For accounting purposes, the grant date was established at the point the Company and the participant reached a mutual understanding of the key terms and conditions, in this case the date at which the participant accepted the invitation to participate in the Plan. For accounting purposes, deferred equity units are deemed to generally vest between one and seven years and matching equity units granted under the Plan are deemed to vest two years after the allocation to the participant’s account. The deferred and matching equity units have cash settlement dates that began in December 2018. Upon the scheduled settlement dates in December 2019 and December 2018, the Company settled 314,631.58 deferred equity units, including special deferred equity units, in cash totaling approximately $2 million, 8,359,629.35 in Company shares (which were contributed to the LLC in exchange for Class A units of the LLC) with an estimated value of $58 million and 217,312.53 matching equity units in cash totaling approximately $1 million.

Upon completion of the IPO in June 2020, the Plan was amended to remove the cash-settlement feature on all future redemptions. As a result, all awards previously issued under the Plan required settlement in equity. The participants in such plan were also allowed to sell a pro rata portion, consistent with Access’s percentage reduction in shares of Class B Common Stock as a result of the IPO, of their vested profits interests and acquired units of the LLC holding company, WMG Management Holdings, LLC (“Management LLC”), in the IPO through a “tag-along right.”

Under the provision of ASC 718, the Company determined the Plan was modified as of June 3, 2020, and as such, converted the awards from liability-classified to equity-classified. Prior to conversion, the Company performed a final measurement of its stock-based compensation liability under the fair value method. Subsequent to the amendment, the awards issued under the Plan will no longer be adjusted for changes in the value of the Company’s common stock. Upon modification of the Plan, the Company reclassified a $769 million stock-based compensation liability to additional paid-in capital, which included $57 million associated with the awards settled through the IPO tag-along right on June 5, 2020. The Company will continue to incur non-cash stock-based compensation expense for awards that were unvested as of the modification date of the Plan.

In December 2020, all of the outstanding equity interests held by certain participants in the Plan were settled or redeemed in accordance with the terms of the Plan. The Class A and Class B equity units held by certain participants in Management LLC were redeemed in exchange for 18,265,183 shares of Class B Common Stock. These shares of Class B Common Stock converted to shares of Class A Common Stock upon exchange. The Company also issued a total of 4,321,259 additional shares of Class A Common Stock to settle the participants’ remaining deferred equity units previously issued under the Plan. In March 2021, the Compensation Committee of the Board of Directors of the Company approved an amendment to the Plan that allowed certain remaining Plan participants to redeem a portion of their vested Class B equity units of Management LLC. These Class B equity units were redeemed in exchange for a total of 968,920 shares of Class B Common Stock, which shares of Class B Common Stock converted to shares of Class A Common Stock upon the exchange.

The following table summarizes the activity for the Company’s unvested share awards under the Plan:


	Deferred Equity Units	Matching Equity Units	Deferred Equity Units Weighted-Average Intrinsic Value		Matching Equity Units Weighted-Average Intrinsic Value		Deferred Equity Units Weighted-Average Grant-Date Intrinsic Value		Matching Equity Units Weighted-Average Grant-Date Intrinsic Value
Unvested units at September 30, 2019	1,900,747	6,681,397	$	7.71	$	4.60	$	3.13	$	—
Granted	—	—	—		—		—		—
Vested	(1,351,293)	(2,369,536)	27.01		24.04		23.91		—
Forfeited	—	—	—		—		—		—
Unvested units at September 30, 2020	549,454	4,311,861	$	27.01	$	23.82	$	23.82	$	—
Granted	—	—	—		—		—		—
Vested	(549,454)	(2,303,578)	44.21		41.02		41.02		—
Forfeited	—	—	—		—		—		—
Unvested units at September 30, 2021	—	2,008,283	$	—	$	41.02	$	—	$	—

As of September 30, 2021, there were no remaining unvested deferred equity unit awards outstanding. The weighted-average grant date intrinsic value of deferred equity unit awards for the fiscal year ended September 30, 2020 was $23.82. The fair value of these deferred equity units at September 30, 2020 was $27.01. The weighted-average grant date intrinsic value of deferred equity unit awards for the fiscal year ended September 30, 2019 was $3.13. The fair value of these deferred equity units at September 30, 2019 was $7.71.

As September 30, 2021, 2020 and 2019, the Company had approximately $4 million, $14 million and $16 million, respectively, of unrecognized compensation costs related to its unvested share awards. As of September 30, 2021, the remaining weighted-average period over which total compensation related to unvested awards is expected to be recognized is less than 1 year.

Restricted Stock Units

The following table summarizes the activity for the Company’s unvested RSUs:


	Number of Share Units	Weighted-Average Grant Date Fair Value		Aggregate Intrinsic Value (in thousands)
Unvested and outstanding balance as of September 30, 2020	—	$	—	$	—
Granted	1,604,922	32.23
Vested	(217)	36.87
Forfeited/canceled	(69,338)	30.83
Unvested and outstanding balance as of September 30, 2021	1,535,367	$	32.29	$	67,879

As of September 30, 2021, total unrecognized compensation cost related to unvested RSUs was approximately $26 million, which is expected to be recognized over a weighted-average period of approximately 2.9 years. The Company expects to satisfy the vesting of RSUs by issuing new shares of its Class A Common Stock.

Stock-Based Compensation Expense

Stock-based compensation expense is included in the consolidated statements of operations as selling, general and administrative expenses. The Company recognized non-cash stock-based compensation expense of $45 million and free cash flow compensation expense of $5 million for the fiscal year ended September 30, 2021. The Company recognized non-cash stock-based compensation expense of $608 million, free cash flow compensation expense of $16 million and dividend expense related to the equity units of $1 million for the fiscal year ended September 30, 2020. The Company recognized non-cash stock-based compensation expense of $50 million, free cash flow compensation expense of $15 million and dividend expense related to the equity units of $7 million for the fiscal year ended September 30, 2019.