Stock-Based Compensation | Note 12. Stock-Based Compensation For periods prior to the Spin-off, stock-based compensation expense was allocated to us based on the awards and terms previously granted to our employees and included an allocation of Terminix's corporate and shared functional employee expenses. Adopted at separation, the Omnibus Plan permits the grant to certain employees, consultants or non-employee directors of Frontdoor different forms of awards, including stock options, RSUs, performance shares, RSAs and deferred share equivalents. The Omnibus Plan has 14,500,000 shares reserved for grants, including awards converted at the Spin-off (described below). Our Compensation Committee determines the long-term incentive mix of our employees, including stock options, RSUs and performance shares, and may authorize new grants annually. As of December 31, 2020, 12,155,975 shares remain available for future grants. In accordance with the employee matters agreement between Frontdoor and Terminix, certain of our executives and employees were entitled to receive equity compensation awards of Frontdoor in replacement of previously outstanding awards granted under various Terminix stock incentive plans prior to the separation. In connection with the Spin-off, these awards were converted into new Frontdoor equity awards using a formula designed to preserve the intrinsic value of the awards immediately prior to the Spin-off. At the date of conversion, the total intrinsic value of the converted options was $ 4 million. In addition, Frontdoor and Terminix employees who held Terminix RSUs on the record date had the option to elect to receive both Frontdoor and Terminix RSUs for the number of whole shares, rounded down, of Frontdoor common stock that they would have received as a shareholder of Terminix at the date of separation. The terms and conditions of the Frontdoor awards were replicated and, as necessary, adjusted to ensure the vesting schedule and economic value of the awards was unchanged by the conversion. A summary of the activity related to unvested Frontdoor RSUs held by Frontdoor and Terminix employees as of December 31, 2020 and changes during the year then ended is presented below: Frontdoor Awards Distributed in Spin-Off Frontdoor Employees Terminix Employees Total Unvested RSUs at December 31, 2019 67,363 25,090 92,453 Vested ( 35,972 ) ( 16,768 ) ( 52,740 ) Forfeited ( 910 ) ( 2,447 ) ( 3,357 ) Unvested RSUs at December 31, 2020 30,481 5,875 36,356 Stock Options Stock options are exercisable based on the terms outlined in the applicable award agreement. Stock options generally vest over a period of four years . The fair value related to stock options granted is determined using the Black-Scholes option pricing model with the assumptions noted in the following table. A historical daily measurement of volatility is determined based on our and our peer companies’ average volatility. The risk-free interest rate is determined by reference to the outstanding U.S. Treasury note with a term equal to the expected life of the option granted. The expected life represents the period of time that options are expected to be outstanding and was calculated using the simplified approach due to our lack of historical experience upon which to estimate the expected lives of the options. Year Ended December 31, Assumption 2020 2019 Expected volatility 50.6 % 49.3 % Expected dividend yield 0.0 % 0.0 % Expected life (in years) 6.1 6.1 Risk-free interest rate 0.51 % 2.25 % We granted options to purchase 579,507 and 338,923 shares of our common stock during the years ended December 31, 2020 and 2019, respectively, at weighted-average exercise prices of $ 35.56 per share for 2020 and $ 34.48 per share for 2019. We did no t issue any stock options under the Omnibus Plan during the year ended December 31, 2018 other than the options converted at the Spin-off. The weighted-average grant-date fair values of the options granted during 2020 and 2019 were $ 16.94 and $ 17.05 per share, respectively. During the year ended December 31, 2020, we applied a forfeiture assumption of 10 percent per annum in the recognition of the expense related to these options, with the exception of the options held by our CEO for which we applied a forfeiture rate of zero . The total intrinsic value of options exercised was less than $ 1 million for each of the years ended December 31, 2020 and 2019. A summary of option activity under the Omnibus Plan as of December 31, 2020 and changes during the year then ended is presented below: Weighted Avg. Aggregate Remaining Weighted Avg. Intrinsic Contractual Stock Exercise Value Term Options Price (in millions) (in years) Outstanding at December 31, 2019 685,477 $ 32.48 $ 10 8.15 Granted to employees 579,507 $ 35.56 Exercised ( 19,650 ) $ 23.47 Forfeited ( 37,624 ) $ 34.66 Outstanding at December 31, 2020 1,207,710 $ 34.03 $ 20 8.14 Exercisable at December 31, 2020 372,498 $ 30.90 $ 7 6.70 RSUs RSUs are exercisable based on the terms outlined in the applicable award agreement. The RSUs generally vest over a period of three years . The fair value of RSUs is determined using the closing market price of our common stock on the day prior to the grant date. We granted 507,426 , 260,237 and 29,178 RSUs during the years ended December 31, 2020, 2019 and 2018, respectively, with weighted-average grant date fair values of $ 36.58 per unit for 2020, $ 35.64 per unit for 2019 and $ 29.13 per unit for 2018. During the year ended December 31, 2020, we applied a forfeiture assumption of 10 percent per annum in the recognition of the expense related to these RSUs, with the exception of the awards held by our CEO for which we applied a forfeiture rate of zero . The total fair value of RSUs vested during the years ended December 31, 2020, 2019 and 2018 was $ 5 million, $ 4 million and less than $ 1 million, respectively. A summary of RSU activity under the Omnibus Plan as of December 31, 2020 and changes during the year then ended is presented below: Weighted Avg. Grant Date RSUs Fair Value Outstanding at December 31, 2019 322,994 $ 36.96 Granted to employees 507,426 $ 36.58 Vested ( 125,318 ) $ 37.15 Forfeited ( 43,804 ) $ 38.52 Outstanding at December 31, 2020 661,298 $ 36.54 Performance Shares We granted 149,654 performance shares during the year ended December 31, 2019 with a weighted-average grant date fair value of $ 30.01 per share. We did no t issue any performance shares under the Omnibus Plan during the years ended December 31, 2020 and 2018. In addition to service conditions, the ultimate number of performance shares to be earned depends on the achievement of both performance and market conditions. The performance condition is based on our revenue target. The fair value of performance shares with a performance condition is determined using the closing market price of our common stock on the day prior to the grant date. The market condition is based on our weighted-average market capitalization target. The fair value of performance shares with a market condition is determined on the grant date using a Monte Carlo simulation model. Performance shares granted during 2019 vest approximately five years from the initial grant date. All performance awards are subject to earlier vesting in full under certain conditions. During the year ended December 31, 2020, we applied a forfeiture assumption of 10 percent per annum in the recognition of the expense related to these performance shares, with the exception of the awards held by our CEO for which we applied a forfeiture rate of zero . As of December 31, 2020 and 2019, there were 149,654 performance shares outstanding. RSAs In connection with the acquisition of Streem, we issued 575,370 RSAs to certain employees of Streem that were not part of the Omnibus Plan. These awards are subject to time-vesting, certain performance milestone-vesting restrictions, continued employment and transfer restrictions. At the grant date, 387,463 shares were immediately vested and are subject to transfer restrictions. The remaining unvested RSAs, which were allocated to future services, generally vest over a period of three years . The fair value of RSAs is determined using the closing market price of our common stock on the day prior to the grant date. The fair value of these vested shares has been allocated to the acquisition purchase price. See Note 7 to the accompanying consolidated and combined financial statements for further information on the purchase price allocation. For the year ended December 31, 2020, 17,478 RSAs vested, and no shares were forfeited. At December 31, 2020, 172,039 shares of these RSAs were unvested. ESPP On March 21, 2019, our board of directors approved and recommended for approval by our stockholders the ESPP, which was approved by our stockholders on April 29, 2019 and became effective for offering periods commencing July 1, 2019. The ESPP is intended to qualify for favorable tax treatment under Section 423 of the Code. Under the plan, eligible employees of the Company may purchase common stock, subject to IRS limits, during pre-specified offering periods at a discount established by Frontdoor not to exceed 15 percent of the then current fair market value. A maximum of 1,250,000 shares of our common stock are authorized for sale under the plan. During the years ended December 31, 2020 and 2019, we issued 35,589 and 11,077 shares, respectively, under the ESPP. There were 1,203,334 shares available for issuance under the ESPP as of December 31, 2020. Stock-based compensation expense We recognized stock-based compensation expense of $ 17 million ($ 14 million, net of tax), $ 9 million ($ 7 million, net of tax) and $ 4 million ($ 3 million, net of tax) for the years ended December 31, 2020, 2019 and 2018, respectively. These charges are included in Selling and administrative expenses in the accompanying consolidated and combined statements of operations and comprehensive income. Stock-based compensation expense for stock options, RSUs and RSAs is recognized over the vesting period of the award under a straight-line vesting method, net of estimated forfeitures. In addition, for performance shares with a performance condition, we evaluate the probability of achieving the performance condition at the end of each reporting period and record the related stock-based compensation expense over the service period. For performance shares with a market condition, the related compensation expense is recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided. As of December 31, 2020, there was $ 32 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options, RSUs, performance shares and RSAs. These remaining costs are expected to be recognized over a weighted-average period of 2.32 years. |