El Pollo Loco 2015 Annual Report Download - page 53

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Table of Contents
Stock
-Based Compensation
We measure and recognize compensation expense for the estimated fair value of stock options for employees and non-employee directors and
similar awards based on the grant-date fair value of the award. For options that are based on a service requirement, the cost is recognized on a
straight-line basis over the requisite service period, usually the vesting period. The options granted in fiscal 2012 had a three-year vesting period
(with 25% of the options vesting immediately), while the options granted in fiscal 2013 and 2014 had a four-
year vesting period. For options that
are based on performance requirements, costs are recognized over the periods to which the performance criteria relate.
In order to calculate our stock options’ fair values and the associated compensation costs for share-based awards, we utilize the Black–Scholes
option pricing model, and we have developed estimates of various inputs including forfeiture rate, expected term, expected volatility, and risk-
free interest rate. These assumptions generally require significant judgment. The forfeiture rate is based on historical rates and reduces the
compensation expense recognized. The expected term for options granted is derived using the “simplified” method, in accordance with SEC
guidance. Expected volatility is estimated using four publicly-traded peer companies in our market category. These are selected based on
similarities of size and other financial and operational characteristics. Volatility is calculated with reference to the historical daily closing equity
prices of our peer companies, prior to the grant date, over a period equal to the expected term. We calculate the risk-free interest rate using the
implied yield for a U.S. Treasury security with constant maturity and a remaining term equal to the expected term of our employee stock options.
We do not anticipate paying any cash dividends for the foreseeable future and therefore use an expected dividend yield of zero for option
valuation purposes.
The following table summarizes the assumptions relating to our stock options for fiscal 2014, 2013, and 2012.
If in the future we determine that another method is more reasonable, or if another method for calculating these input assumptions is prescribed
by authoritative guidance, and, therefore, should be used to estimate volatility or expected life, the fair value calculated for our stock options
could change significantly. Higher volatility and longer expected lives result in an increase to stock-based compensation expense determined at
the date of grant. Stock-based compensation expense affects our general and administrative expense.
We estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the appropriateness of the forfeiture
rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. Changes in the estimated forfeiture rate can
have a significant effect on reported stock-based compensation expense, as the cumulative effect of adjusting the rate for all expense
amortization is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously-estimated
forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in the financial
statements. If a revised forfeiture rate is lower than the previously-estimated forfeiture rate, an adjustment is made that will result in an increase
to the stock-based compensation expense recognized in the financial statements. The effect of forfeiture adjustments was insignificant in fiscal
2014, 2013, and 2012. We will continue to use significant judgment in evaluating the expected term, volatility, and forfeiture rate related to our
stock-based compensation.
49
Fiscal Year
2014
2013
2012
Risk-free interest rates
1.70% to 1.72%
1.15% to 1.99%
1.02%
Expected term
5.75 years
6.25 years
5.75 years
Expected dividend yield
0%
0%
0%
Volatility
32.4% to 41.0%
40.6%
39.0%