. Employee Benefits

Equity

Incentive Plans

- In May 2015, our stockholders approved our 2015 Equity Incentive Plan (the “2015 Plan”). Our Board of Directors adopted the 2015 Plan in March 2015. Under our 2015 Plan, all of our employees and any subsidiary employees, as well as all of our non-employee directors, may be granted stock-based awards, including non-statutory stock options and performance unit awards. Stock options expire within 7 or 10 years after the date of grant and the exercise price must be at least the fair market value of our common stock on the date of grant. Stock options issued to employees are generally exercisable beginning one year from the date of grant in cumulative amounts of 20% per year. Performance unit awards are subject to vesting requirements over a five-year period, primarily based on our earnings growth. Options exercised and performance unit award shares issued represent newly issued shares. The maximum number of shares of common stock available for issuance under the 2015 Plan is 800,000 shares. As of December 31, 2015, there were 153,000 shares reserved for issuance under options outstanding and 54,500 shares reserved for issuance under outstanding performance unit awards under the 2015 Plan. The 2015 Plan replaces our 2005 Stock Incentive Plan (the “2005 Plan”), which expired by its terms in May 2015.

Under the 2005 Plan, officers, directors and employees were granted non-statutory stock options and performance unit awards with similar terms to the options and awards under the 2015 Plan. As of December 31, 2015, there were 697,184 shares reserved for issuance under options outstanding and 137,474 shares reserved for issuance under outstanding performance unit awards under the 2005 Plan. No additional options or awards will be granted under the 2005 Plan.

We use the Black-Scholes option pricing model to calculate the grant-date fair value of option awards. The fair value of service-based option awards granted was estimated as of the date of grant using the following weighted average assumptions:

	20 15			2014			2013

Expected option life in years (1)		6.0			6.0			6.1
Expected stock price volatility percentage (2)		25	%		27	%		33	%
Risk-free interest rate percentage (3)		1.8	%		1.9	%		1.5	%
Expected dividend yield (4)		0.44	%		0.46	%		0.51	%
Fair value as of the date of grant	$	5.96		$	6.25		$	5.46

(1)

Expected option life – We use historical employee exercise and option expiration data to estimate the expected life assumption for the Black-Scholes grant-date valuation. We believe that this historical data is currently the best estimate of the expected term of a new option. We use a weighted-average expected life for all awards.

(2)	Expected stock price volatility – We use our stock’s historical volatility for the same period of time as the expected life. We have no reason to believe that its future volatility will differ from the past.

(3)	Risk-free interest rate – The rate is based on the U.S. Treasury yield curve in effect at the time of the grant for the same period of time as the expected life.

(4)	Expected dividend yield – The calculation is based on the total expected annual dividend payout divided by the average stock price.

We use the straight-line attribution method to recognize expense for all service-based option awards with graded vesting. Service-based option awards become immediately exercisable in full in the event of retirement, death or disability and upon a change in control with respect to all options that have been outstanding for at least six months. To be eligible for retirement, an employee must reach age 65.

Compensation costs associated with service-based option awards are recognized, net of an estimated forfeiture rate, over the requisite service period, which is the period between the grant date and the earlier of the award’s stated vesting term or the date the employee is eligible for retirement. We immediately recognize the entire amount of share-based compensation cost for employees that are eligible for retirement at the date of grant. For awards granted to employees approaching retirement eligibility, we recognize compensation cost on a straight-line basis over the period from the grant date through the retirement eligibility date. Share-based compensation expense for employees who are not retirement eligible is recognized on a straight-line basis over the stated vesting period of the award.

In August 2010, we granted 95,100 performance unit awards under our 2005 Stock Incentive Plan to certain employees. This was our first grant of such awards. As of December 31, 2010 and each December 31

thereafter through December 31, 2014, each award vested and became the right to receive a number of shares of common stock equal to a total vesting percentage multiplied by the number of units subject to such award. The total vesting percentage for each of the five years was equal to the sum of a performance vesting percentage, which was the percentage increase, if any, in our diluted net income per share for the year being measured over the prior year, and a service vesting percentage of five percentage points. The goal of the awards was to incentivize the certain employees to increase our earnings an average of fifteen percent per year over five years, which, when combined with the five percent per year service-based component, would result in full vesting over five years. The performance vesting percentage could be achieved earlier than in five years if annual earnings growth exceeded the average of fifteen percent, or not fully achieved if the annual earnings growth averaged less than fifteen percent over the five-year period. All payments were made in shares of our common stock. One half of the vested performance units were paid to the employees immediately upon vesting, with the other half being credited to the employees’ accounts within the Marten Transport, Ltd. Deferred Compensation Plan, which restricts the sale of vested shares to the later of each employee’s termination of employment or attainment of age 62.

In August 2011, we also granted 62,400 performance unit awards with similar terms to the awards granted in 2010, and which vested from December 31, 2011 through December 31, 2015.

In May 2012, we also granted 59,250 performance unit awards with similar terms to the awards granted in 2010 and 2011, and which vest from December 31, 2012 through December 31, 2016.

In May 2013, we also granted 62,550 performance unit awards with similar terms to the awards granted in 2010 through 2012, and which vest from December 31, 2013 through December 31, 2017.

In May 2014, we also granted 36,400 performance unit awards with similar terms to the awards granted in 2010 through 2013, and also granted 11,000 performance unit awards with similar terms to such awards except that all vested performance units will be paid to the employees immediately upon vesting. All awards granted in May 2014 vest from December 31, 2014 through December 31, 2018.

In May 2015, we also granted 35,000 performance unit awards under our 2015 Equity Incentive Plan with similar terms to the awards granted in 2010 through 2014, and also granted 19,500 performance unit awards with similar terms to such awards except that all vested performance units will be paid to the employees immediately upon vesting. All awards granted in May 2015 vest from December 31, 2015 through December 31, 2019.

The fair value of each performance unit is based on the closing market price on the date of grant. We recognize compensation expense for these awards based on the estimated number of units probable of achieving the vesting requirements of the awards, net of an estimated forfeiture rate.

The amount of share-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We currently expect, based on an analysis of our historical forfeitures and known forfeitures on existing awards, that approximately 1.25% of unvested outstanding awards will be forfeited each year. This analysis will be re-evaluated quarterly and the forfeiture rate will be adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only be for those shares that vest.

Total share-based compensation expense recorded in 2015 was $1.4 million ($870,000 net of income tax benefit, $0.03 of earnings per basic and diluted share), in 2014 was $921,000 ($571,000 net of income tax benefit, $0.02 of earnings per basic and diluted share) and in 2013 was $1.1 million ($672,000 net of income tax benefit, $0.02 of earnings per basic and diluted share). All share-based compensation expense was recorded in salaries, wages and benefits expense.

The benefits of tax deductions in excess of recognized compensation costs (excess tax benefits) are recorded as a financing cash inflow rather than a deduction of taxes paid in operating cash flows. In 2015, 2014 and 2013, there was $432,000, $115,000 and $165,000, respectively, of excess tax benefits recognized resulting from exercises of options.

As of December 31, 2015, there was a total of $1.7 million of unrecognized compensation expense related to unvested service-based option awards, which is expected to be recognized over a weighted-average period of 3.4 years, and $2.4 million of unrecognized compensation expense related to unvested performance unit awards, which will be recorded based on the estimated number of units probable of achieving the vesting requirements of the awards through 2019.

Option activity in 2015 was as follows:

	Shares			Weighted Average Exercise Price
Outstanding at December 31, 2014		977,867		$	14.74
Granted		154,000			22.37
Exercised		(270,283	)		12.91
Forfeited		(11,400	)		17.70
Outstanding at December 31, 2015		850,184		$	16.67
Exercisable at December 31, 2015		512,634		$	14.50

The 850,184 options outstanding as of December 31, 2015 have a weighted average remaining contractual life of 3.6 years and an aggregate intrinsic value based on our closing stock price on December 31, 2015 for in-the-money options of $2.0 million. The 512,634 options exercisable as of the same date have a weighted average remaining contractual life of 2.5 years and an aggregate intrinsic value similarly calculated of $1.7 million.

The fair value of options granted in 2015, 2014 and 2013 was $918,000, $475,000 and $953,000, respectively, for service-based options. The total intrinsic value of options exercised in 2015, 2014 and 2013 was $2.4 million, $761,000 and $915,000, respectively. Intrinsic value is the difference between the fair value of the acquired shares at the date of exercise and the exercise price, multiplied by the number of options exercised. Proceeds received from option exercises in 2015, 2014 and 2013 were $3.5 million, $1.2 million and $1.1 million, respectively.

Nonvested service-based option awards as of December 31, 2015 and changes during 2015 were as follows:

	Shares			Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Life (in Years)
Nonvested at December 31, 2014		282,550		$	5.60		5.3
Granted		154,000			5.96		6.4
Vested		(89,300	)		5.62		3.6
Forfeited		(9,700	)		5.40		4.7
Nonvested at December 31, 2015		337,550		$	5.77		5.4

The total fair value of options which vested during 2015, 2014 and 2013 was $502,000, $541,000 and $636,000, respectively.

The following table summarizes our nonvested performance unit award activity in 2015:

	Shares			Weighted Average Grant Date Fair Value
Nonvested at December 31, 2014		150,517		$	16.37
Granted		54,500			21.80
Vested		(43,620	) (1)		16.90
Forfeited		(19,952	)		13.12
Nonvested at December 31, 2015		141,445		$	18.76

(1)

This number of performance unit award shares vested based on our financial performance in 2015 and was distributed or credited to the Marten Transport, Ltd. Deferred Compensation Plan in March 2016. As permitted in the performance unit award agreements, the Compensation Committee of our Board of Directors adjusted the calculation of the performance vesting component for 2015 to be based on our increase in net income instead of our increase in diluted net income per share. Additionally, the after-tax value of the gain on disposition of facilities in 2015 was excluded from the calculation of the increase in net income. The fair value of unit award shares that vested in 2015 was $737,000.

Retirement Savings Plan

- We sponsor a defined contribution retirement savings plan under Section 401(k) of the Internal Revenue Code. Employees are eligible for the plan after three months of service. Participants are able to contribute up to the limit set by law, which in 2015 was $18,000 for participants less than age 50 and $24,000 for participants age 50 and above. We contribute 35% of each participant’s contribution, up to a total of 6% contributed. Our contribution vests at the rate of 20% per year for the first through fifth years of service. In addition, we may make elective contributions as determined by the Board of Directors. No elective contributions were made in 2015, 2014 or 2013. Total expense recorded for the plan was $1.9 million in 2015, $1.5 million in 2014 and $1.4 million in 2013.

Stock Purchase Plans

- An Employee Stock Purchase Plan and an Independent Contractor Stock Purchase Plan are sponsored to encourage employee and independent contractor ownership of our common stock. Eligible participants specify the amount of regular payroll or contract payment deductions and voluntary cash contributions that are used to purchase shares of our common stock. The purchases are made at the market price on the open market. We pay the broker’s commissions and administrative charges for purchases of common stock under the plans.