Health Net 2011 Annual Report Download - page 137

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Plans permit the grant of stock options and other equity awards, including but not limited to restricted
stock, restricted stock units (RSUs) and performance share units (PSUs) to certain employees, officers and
non-employee directors. The grant of a single RSU or PSU under our 2006 Long-Term Incentive Plan reduces
the number of shares of common stock available for issuance under that plan by 1.75 shares of common stock.
RSUs and PSUs granted under that plan prior to May 21, 2009 reduce the number of shares of common stock
available for issuance under the 2006 Long-Term Incentive Plan by two shares of common stock for each award.
The grant of an option under the 2006 Long-Term Incentive plan reduces the number of shares of common stock
available for issuance under that plan by one share of common stock.
Stock options are granted with an exercise price at or above the fair market value of the Company’s
common stock on the date of grant. Effective May 21, 2009, stock option grants carry a maximum term of seven
years, and, in general, stock options and other equity awards vest based on one to four years of continuous
service. Stock option grants made prior to May 21, 2009 carry a maximum term of ten years. As of
December 31, 2011, there were no outstanding options or awards that had market or performance condition
accelerated vesting provisions. Certain stock options and other equity awards also provide for accelerated vesting
under the circumstances set forth in the Plans and equity award agreements upon the occurrence of a change in
control (as defined in the Plans). At the end of the maximum term, unexercised stock options are set to expire.
Performance share awards were granted in 2009 with 100% cliff vesting at the end of a three-year
performance period and provide for vesting at 0% to 200% of shares granted. Shares delivered pursuant to each
performance share award will take into account the Company’s attainment of specific performance conditions as
outlined in each performance share award agreement.
As of December 31, 2011, we have reserved up to an aggregate of 13.8 million shares of our common stock
for issuance under the Plans.
The fair value of each option award is estimated on the date of grant using a closed-form option valuation
model (Black-Scholes) based on the assumptions noted in the following table. Expected volatilities are based on
implied volatilities from traded options on our stock and historical volatility of our stock. We estimated the
expected term of options by using historical data to estimate option exercise and employee termination within a
lattice-based valuation model; separate groups of employees that have similar historical exercise behavior are
considered separately for valuation purposes. The expected term of options granted is derived from a lattice-
based option valuation model and represents the period of time that options granted are expected to be
outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury
Strip yields in effect at the time of grant with maturity dates approximately equal to the expected life of the
option at the grant date.
The following table provides the weighted-average values of assumptions used in the calculation of grant-
date fair values, the weighted-average grant-date fair values for options, and the total intrinsic value of options
exercised during the years ended December 31:
2011 2010 2009
Risk-free interest rate ........................................ 2.36% 2.65% 2.76%
Expected option lives (in years) ................................ 5.1 5.4 5.3
Expected volatility for options ................................. 35.6% 43.5% 39.2%
Expected dividend yield ...................................... None None None
Weighted-average grant-date fair value of options .................. $ 10.88 $ 10.01 $ 6.73
Total intrinsic value of options exercised ......................... $7,934,673 $1,449,985 $1,144,925
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