NOTE 2 — SHARE-BASED COMPENSATION
Stock Incentive Plan
The 2006 Stock Incentive Plan for Key Employees of HCA Holdings Inc. and its Affiliates, as Amended and Restated (the “Stock Incentive Plan”) is designed to promote the long term financial interests and growth of the Company by attracting and retaining management and other personnel and to motivate them to achieve long range goals and further the alignment of interests of participants with those of our stockholders through opportunities for increased stock, or stock-based, ownership in the Company. Portions of the options, stock appreciation rights (“SARs”) and restricted share units (“RSUs”) granted under the Stock Incentive Plan vest solely based upon continued employment over a specific period of time, and portions of the options, SARs and RSUs vest based both upon continued employment over a specific period of time and upon the achievement of predetermined financial targets over time. We granted 4,864,000 and 6,348,000 SARs and 4,858,800 and 4,647,400 RSUs under the Stock Incentive Plan during 2013 and 2012, respectively. At December 31, 2013, there were 25,088,200 stock options and SARs outstanding and exercisable, and there were 32,269,100 shares available for future grants under the Stock Incentive Plan.
Stock Option, SAR and RSU Activity
The fair value of each stock option and SAR award is estimated on the grant date, using valuation models and the weighted average assumptions indicated in the following table. Awards under the Stock Incentive Plan generally vest based on continued employment (“Time Stock Options and SARs” and “Time RSUs”) and based upon achievement of certain financial targets (“Performance Stock Options and SARs” and “Performance RSUs”). Each grant is valued as a single award with an expected term equal to the average expected term of the component vesting tranches. We use historical exercise behavior data and other factors to estimate the expected term of the options and SARs. The expected term of the share-based award is limited by the contractual term, and employee post-vesting termination behavior is incorporated in the historical exercise behavior data.
Compensation cost is recognized on the straight-line attribution method. The straight-line attribution method requires that total compensation expense recognized must at least equal the vested portion of the grant-date fair value. The expected volatility is derived using historical stock price information for our common stock and that of certain peer group companies. The risk-free interest rate is the approximate yield on United States Treasury Strips having a life equal to the expected share-based award life on the date of grant. The expected life is an estimate of the number of years a share-based award will be held before it is exercised.
| 2013 | 2012 | 2011 | ||||||||||
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Risk-free interest rate |
1.20 | % | 1.18 | % | 0.89 | % | ||||||
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Expected volatility |
45 | % | 50 | % | 41 | % | ||||||
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Expected life, in years |
6.25 | 6.25 | 5.00 | |||||||||
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Expected dividend yield |
— | — | — | |||||||||
Information regarding Time Stock Options and SARs and Performance Stock Options and SARs activity during 2013, 2012 and 2011 is summarized below (share amounts in thousands):
| Time Stock Options and SARs |
Performance Stock Options and SARs |
Total Stock Options and SARs |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic Value (dollars in millions) |
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Options outstanding, December 31, 2010 |
24,517 | 26,009 | 50,526 | $ | 8.58 | |||||||||||||||||||
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Granted |
644 | 644 | 1,288 | 23.35 | ||||||||||||||||||||
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Exercised |
(3,312 | ) | (1,732 | ) | (5,044 | ) | 6.31 | |||||||||||||||||
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Cancelled |
(110 | ) | (348 | ) | (458 | ) | 5.88 | |||||||||||||||||
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Options outstanding, December 31, 2011 |
21,739 | 24,573 | 46,312 | 9.26 | ||||||||||||||||||||
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Granted |
3,174 | 3,174 | 6,348 | 27.03 | ||||||||||||||||||||
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Exercised |
(5,530 | ) | (5,128 | ) | (10,658 | ) | 7.60 | |||||||||||||||||
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Cancelled |
(192 | ) | (568 | ) | (760 | ) | 9.49 | |||||||||||||||||
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Options and SARs outstanding, December 31, 2012 |
19,191 | 22,051 | 41,242 | 11.56 | ||||||||||||||||||||
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Granted |
2,432 | 2,432 | 4,864 | 37.49 | ||||||||||||||||||||
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Exercised |
(4,498 | ) | (5,843 | ) | (10,341 | ) | 8.49 | |||||||||||||||||
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Cancelled |
(316 | ) | (263 | ) | (579 | ) | 25.50 | |||||||||||||||||
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Options and SARs outstanding, December 31, 2013 |
16,809 | 18,377 | 35,186 | 15.82 | 5.4 years | $ | 1,122 | |||||||||||||||||
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Options and SARs exercisable, December 31, 2013 |
11,960 | 13,527 | 25,487 | $ | 10.55 | 4.1 years | $ | 947 | ||||||||||||||||
The weighted average fair values of stock options and SARs granted during 2013, 2012 and 2011 were $16.68, $13.16 and $8.53 per share, respectively. The total intrinsic value of stock options and SARs exercised in the year ended December 31, 2013 was $334 million. As of December 31, 2013, the unrecognized compensation cost related to nonvested stock options and SARs was $104 million.
Information regarding Time RSUs and Performance RSUs activity during 2013, 2012 and 2011 is summarized below (share amounts in thousands):
| Time RSUs | Performance RSUs |
Total RSUs | Weighted Average Grant Date Fair Value |
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RSUs outstanding, December 31, 2010 |
— | — | — | — | ||||||||||||
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Granted |
80 | — | 80 | $ | 30.00 | |||||||||||
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Vested |
— | — | — | — | ||||||||||||
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Cancelled |
— | — | — | — | ||||||||||||
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RSUs outstanding, December 31, 2011 |
80 | — | 80 | 30.00 | ||||||||||||
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Granted |
3,162 | 1,485 | 4,647 | 26.98 | ||||||||||||
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Vested |
(4 | ) | — | (4 | ) | 30.00 | ||||||||||
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Cancelled |
(164 | ) | (75 | ) | (239 | ) | 26.99 | |||||||||
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RSUs outstanding, December 31, 2012 |
3,074 | 1,410 | 4,484 | 27.03 | ||||||||||||
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Granted |
3,305 | 1,554 | 4,859 | 37.43 | ||||||||||||
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Vested |
(831 | ) | (352 | ) | (1,183 | ) | 27.30 | |||||||||
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Cancelled |
(449 | ) | (213 | ) | (662 | ) | 31.91 | |||||||||
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RSUs outstanding, December 31, 2013 |
5,099 | 2,399 | 7,498 | 33.30 | ||||||||||||
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As of December 31, 2013, the unrecognized compensation cost related to RSUs was $185 million.
During 2012, our Board of Directors declared three distributions to the Company’s stockholders and holders of certain vested share-based awards. The distributions totaled $6.50 per share and vested share-based award (subject to limitations for certain awards), or $3.142 billion in the aggregate. Pursuant to the terms of our share-based award plans, the holders of nonvested stock options and SARs received $6.50 per share reductions to the exercise price of the applicable share-based awards (subject to certain limitations for certain share-based awards that resulted in deferred distributions for a portion of the declared distribution, which will be paid upon the vesting of the applicable share-based award). The holders of any nonvested RSUs will be paid the applicable distribution amounts upon the vesting of the applicable RSUs. There were no distributions declared during 2013 and 2011.