. 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, performance unit awards and shares of common stock, of which

304,251

shares have been awarded as of

December

31,

2016.

Stock options expire within

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,

2016,

there were

192,000

shares reserved for issuance under options outstanding and

94,671

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,

2016,

there were

361,750

shares reserved for issuance under options outstanding and

84,889

shares reserved for issuance under outstanding performance unit awards under the

2005

Plan, which will continue according to their terms. No additional 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 16			2015			2014

Expected option life in years (1)		6.0			6.0			6.0
Expected stock price volatility percentage (2)		25	%		25	%		27	%
Risk-free interest rate percentage (3)		1.4	%		1.8	%		1.9	%
Expected dividend yield (4)		0.50	%		0.44	%		0.46	%
Fair value as of the date of grant	$	5.28		$	5.96		$	6.25

(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.

Compensation costs associated with service-based option awards with graded vesting are recognized, net of an estimated forfeiture rate, on a straight-line basis over the requisite service period, which is the period between the grant date and the award’s stated vesting term. Service-based option awards become immediately exercisable in full in the event of death or disability and upon a change in control with respect to all options that have been outstanding for at least

six

months.

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

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.

August

2011,

we granted

62,400

performance unit awards with similar terms to the awards granted in

2010,

and which vested from

December

31,

2011

through

2015.

May

2012,

we granted

59,250

performance unit awards with similar terms to the awards previously granted, and which vested from

December

31,

2012

through

2016.

May

2013,

we granted

62,550

performance unit awards with similar terms to the awards previously granted, and which vest from

December

31,

2013

through

2017.

May

2014,

we granted

36,400

performance unit awards with similar terms to the awards previously granted, 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

2014

vest from

December

31,

2014

through

2018.

May

2015,

we granted

35,000

performance unit awards under our

2015

Equity Incentive Plan with similar terms to the awards previously granted, 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

2015

vest from

December

31,

2015

through

2019.

May

2016,

we granted

34,600

performance unit awards under our

2015

Equity Incentive Plan with similar terms to the awards previously granted, except that the calculation of vesting shares is based on our increase in net income instead of our increase in diluted net income per share. We also granted

13,000

performance unit awards in

May

2016

and

1,000

awards in

August

2016

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

2016

vest from

December

31,

2016

through

2020.

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

2016

was

$883,000

($547,000

net of income tax benefit,

$0.02

of earnings per basic and diluted share), in

2015

was

$1.4

million

($870,000

net of income tax benefit,

$0.03

of earnings per basic and diluted share) and in

2014

was

$921,000

($571,000

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

2016,

2015

and

2014,

there was

$235,000,

$432,000

and

$115,000,

respectively, of excess tax benefits recognized resulting from exercises of options.

As of

December

31,

2016,

there was a total of

$1.3

million of unrecognized compensation expense related to unvested service-based option awards, which is expected to be recognized over a weighted-average period of

3.0

years, and

$2.6

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

2020.

Option activity in

2016

was as follows:

	Shares			Weighted Average Exercise Price
Outstanding at December 31, 2015		850,184		$	16.67
Granted		43,000			20.44
Exercised		(307,984	)		14.35
Forfeited		(31,450	)		17.68
Outstanding at December 31, 2016		553,750		$	18.24
Exercisable at December 31, 2016		287,100		$	16.03

The

553,750

options outstanding as of

December

31,

2016

have a weighted average remaining contractual life of

4.1

years and an aggregate intrinsic value based on our closing stock price on

December

31,

2016

for in-the-money options of

$2.8

million. The

287,100

options exercisable as of the same date have a weighted average remaining contractual life of

3.4

years and an aggregate intrinsic value similarly calculated of

$2.1

million.

The fair value of options granted in

2016,

2015

and

2014

was

$227,000,

$918,000

and

$475,000,

respectively, for service-based options. The total intrinsic value of options exercised in

2016,

2015

and

2014

was

$1.9

million,

$2.4

million and

$761,000,

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

2016,

2015

and

2014

were

$4.4

million,

$3.5

million and

$1.2

million, respectively.

`Nonvested service-based option awards as of

December

31,

2016

and changes during

2016

were as follows:

	Shares			Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Life (in Years)
Nonvested at December 31, 2015		337,550		$	5.77		5.4
Granted		43,000			5.28		6.6
Vested		(94,650	)		5.64		4.0
Forfeited		(19,250	)		5.38		3.9
Nonvested at December 31, 2016		266,650		$	5.76		5.0

The total fair value of options which vested during

2016,

2015

and

2014

was

$534,000,

$502,000

and

$541,000,

respectively.

The following table summarizes our nonvested performance unit award activity in

2016:

	Shares				Weighted Average Grant Date Fair Value
Nonvested at December 31, 2015		141,445			$	18.76
Granted		48,600				18.73
Vested		(13,656	)	(1)		18.11
Forfeited		(24,578	)			14.83
Nonvested at December 31, 2016		151,811			$	19.44

(1)

This number of performance unit award shares vested based on our financial performance in

2016

and was distributed or credited to the Marten Transport, Ltd. Deferred Compensation Plan in

March

2017.

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

2016

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 in

2016

from

2015.

The fair value of unit award shares that vested in

2016

was

$247,000.

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

2016

was

$18,000

for participants less than age

and

$24,000

for participants age

and above. We contribute

35%

of each participant’s contribution, up to a total of

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.

elective contributions were made in

2016,

2015

2014.

Total expense recorded for the plan was

$2.1

million in

2016,

$1.9

million in

2015

and

$1.5

million in

2014.

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.