Stock-Based Compensation and 401(k) Retirement Savings Plan

Effective June 3, 2010, the stockholders of the Company approved the adoption of the On Assignment, Inc. 2010 Incentive Award Plan, (the “2010 Plan”), which replaced the Company’s Restated 1987 Stock Option Plan. The 2010 Plan permits the grant of stock options, including incentive stock options, nonqualified stock options, restricted stock awards, dividend equivalent rights, stock payments, deferred stock, restricted stock units (“RSUs”), performance shares and other incentive awards, stock appreciation rights and cash awards to its employees, directors and consultants. As of December 31, 2016, there were 2,503,110 shares available for issuance under the 2010 Plan.

Effective May 15, 2012, the Board of Directors adopted the 2012 Employment Inducement Incentive Award Plan, (the “2012 Plan”). The 2012 Plan allows for grants of stock to employees as employment inducement awards pursuant to New York Stock Exchange rules. The terms of 2012 Plan are similar to the 2010 Plan. As of December 31, 2016, there were 174,975 shares available for issuance under the 2012 Plan.

The Company believes that stock-based compensation aligns the interests of its employees and directors with those of its stockholders. Stock-based compensation provides incentives to retain and motivate executive officers and key employees responsible for driving Company performance and maintaining important relationships that contribute to the growth of the Company.

Stock-based compensation expense is included in SG&A expenses in the accompanying consolidated statements of operations and comprehensive income and was classified as follows (in thousands):



	Year Ended December 31,
	2016		2015		2014
Continuing operations	$	27,024	$	22,018	$	15,623
Discontinued operations	—		—		576
Total	$	27,024	$	22,018	$	16,199

The Company recognized an income tax benefit for stock-based compensation arrangements of $2.7 million, $6.6 million and $4.7 million in 2016, 2015 and 2014, respectively.

Restricted Stock Units

The fair value of each RSU is based on the fair market value of the awards on the grant date and the Company records compensation expense based on this value, net of a forfeiture rate. The forfeiture rate estimates the number of awards that will eventually vest and is based on historical vesting patterns for RSUs.

A summary of the status of the Company’s unvested RSUs as of December 31, 2016 and changes during the year then ended are presented below:



	Service Conditions		Performance and Service Conditions		Total		Weighted Average Grant-Date Fair Value Per Unit
Unvested RSUs outstanding at December 31, 2015	465,369		881,251		1,346,620			$	36.31
Granted⁽¹⁾	134,897		357,350		492,247			$	36.07
Vested	(310,000	)	(284,739	)	(594,739	)		$	31.28
Forfeited	(11,004	)	(37,269	)	(48,273	)		$	38.42
Unvested RSUs outstanding at December 31, 2016	279,262		916,593		1,195,855			$	38.78
Unvested and expected to vest RSUs outstanding at December 31, 2016	259,412		865,621		1,125,033			$	38.68

____

⁽¹⁾ Granted RSUs with Performance and Service Conditions include 10,720 RSUs for one grant classified as a liability award as of December 31, 2016, for which $0.5 million expense was recognized in 2016 and has a service period of approximately one year.

The total number of shares vested in the table above includes 197,557 shares surrendered by the employees to the Company for payment of income taxes. The surrendered shares are available for issuance under the Plan.

The weighted-average grant-date fair value of RSUs granted during 2016, 2015 and 2014 was $36.07, $40.49 and $33.66 per award, respectively. The fair value of RSUs that vested during 2016, 2015 and 2014, was $21.7 million, $24.3 million and $21.3 million, respectively.

As of December 31, 2016, there was unrecognized compensation expense of $22.7 million related to unvested RSUs based on awards that are expected to vest. The unrecognized compensation expense is expected to be recognized over a weighted-average period of two years.

Liability Awards

Liability awards have a performance component and vest over one to three years. The performance goals are approved by the Compensation Committee of the Company’s Board of Directors. The Company classifies these awards as liabilities until the number of shares is determined, in accordance with the grant. The number of shares is determined by dividing the final award liability balance by the Company’s closing stock price on the settlement dates. This liability is included in other accrued expenses in the accompanying Consolidated Balance Sheets.

The following table summarizes the balance of liability awards and expense during the years presented (in thousands):



	2016		2015			2014
Balances of liability awards at beginning of year	$	—	$	1,453		$	2,500
Expense for grants	465		—			500
Settled	—		(1,453		)	(1,497		)
Canceled	—		—			(50		)
Balance of liability awards at end of year	$	465	$	—		$	1,453

There was no significant unrecognized compensation expense for liability awards as of December 31, 2016.

Stock Options

Subsequent to 2012 the Company has not granted any stock options. The fair value of stock option grants was estimated on the grant date using the Black-Scholes option pricing model. The Company records compensation expense based on this value. The following summarizes pricing and term information for options outstanding as of December 31, 2016:



					Options Outstanding					Options Exercisable
					Number Outstanding at	Weighted Average Remaining Contractual Life (years)	Weighted Average Exercise Price			Number Exercisable at	Weighted Average Exercise Price
Range of Exercise Prices					December 31, 2016	Weighted Average Remaining Contractual Life (years)	Weighted Average Exercise Price			December 31, 2016	Weighted Average Exercise Price
$	4.44	-	$	7.31	34,149	2.4		$	6.17	34,149		$	6.17
$	7.39	-	$	10.46	49,020	4.1		$	9.18	49,020		$	9.18
$	13.31	-	$	13.31	10,250	0.1		$	13.31	10,250		$	13.31
$	13.58	-	$	13.58	1,500	5.2		$	13.58	1,500		$	13.58
$	16.51	-	$	16.51	75,000	5.7		$	16.51	75,000		$	16.51
$	4.44	-	$	16.51	169,919	4.3		$	12.10	169,919		$	12.10

The following table is a summary of stock option activity during 2016:



	Non- Qualified Stock Options		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2015	356,386		$	12.11		3.5	$	11,705,000
Exercised	(185,484	)	$	12.14
Canceled	(983	)	$	8.10
Outstanding at December 31, 2016	169,919		$	12.10		4.3	$	5,448,000
Vested and Expected to Vest at December 31, 2016	169,919		$	12.10		4.3	$	5,448,000
Exercisable at December 31, 2016	169,919		$	12.10		4.3	$	5,448,000

There were no incentive stock options outstanding as of December 31, 2016 and none were granted during 2016. The total intrinsic value of options exercised during 2016, 2015 and 2014 was $4.7 million, $10.9 million and $3.9 million, respectively.

Employee Stock Purchase Plan

Effective June 3, 2010, the stockholders of the Company approved the On Assignment 2010 Employee Stock Purchase Plan (the “ESPP”) for issuance of up to 3,500,000 shares of common stock. The ESPP allows eligible employees to purchase common stock of the Company, through payroll deductions, at a 15 percent discount of the lower of the market price on the first day or the last day of the semi-annual purchase periods. The ESPP is intended to qualify as an employee stock purchase plan under the Internal Revenue Service (“IRS”) Code Section 423. Eligible employees may contribute up to a certain percentage set by the plan administrator of their eligible earnings toward the purchase of the stock (subject to certain IRS limitations). As of December 31, 2016, there were 2,300,321 shares available for issuance under the ESPP.

Shares of common stock are transferred to participating employees at the conclusion of each six-month offering period, which ends on the last business day of the month in March and September each year. Compensation expense is measured using a Black-Scholes option-pricing model. The table below presents the average fair value per share of shares purchased and the compensation expense under the ESPP (dollars in thousands, except per share amounts):



Year Ended December 31,	Average fair value per share	Shares	Expense
2016	$9.05	242,303	$	2,497
2015	$7.77	204,401	$	1,586
2014	$8.35	207,805	$	1,756

401(k) Retirement Savings Plan

The Company maintains various 401(k) retirement savings plans for the benefit of eligible employees. Under terms of these plans, eligible employees are able to make contributions to these plans on a tax-deferred basis. The Company makes matching contributions, some of which are discretionary. The Company made contributions to the 401(k) plans of $5.6 million, $7.6 million and $7.5 million for the years ended December 31, 2016, 2015 and 2014, respectively.