Hertz 2009 Annual Report Download - page 83

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
required to provide service in exchange for the award. We estimated the fair value of options issued at
the date of grant using a Black-Scholes option-pricing model, which includes assumptions related to
volatility, expected term, dividend yield, risk-free interest rate and forfeiture rate. These factors combined
with the stock price on the date of grant result in a fixed expense which is recorded on a straight-line
basis over the vesting period. The key factors used in the valuation process, other than the forfeiture rate,
remained unchanged from the date of grant. Because the stock of Hertz Holdings became publicly
traded in November 2006 and has a short trading history, it is not practicable for us to estimate the
expected volatility of our share price, or a peer company share price, because there is not sufficient
historical information about past volatility. Therefore, we use the calculated value method to estimate the
expected volatility, based on the Dow Jones Specialized Consumer Services sub-sector within the
consumer services industry, and we use the U.S. large capitalization component, which includes the top
70% of the index universe (by market value). We use the simplified method for estimating the expected
term. We believe it is appropriate to continue to use this simplified method because we do not have
sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected
term due to the limited period of time our common stock has been publicly traded. The assumed
dividend yield is zero. The risk-free interest rate is the implied zero-coupon yield for U.S. Treasury
securities having a maturity approximately equal to the expected term of the options, as of the grant
dates. We assume that in each year, 1% of the options that are outstanding but not vested will be
forfeited, based on our U.S. pension plan withdrawal rate assumptions. Considering our brief history of
issuing stock options and higher than average recent employee turnover, especially among option
holders, we will assess next year if a change in this assumption is warranted. The non-cash stock-based
compensation expense associated with the Hertz Global Holdings, Inc. Stock Incentive Plan, or the
‘‘Stock Incentive Plan,’’ the Hertz Global Holdings, Inc. Director Stock Incentive Plan, or the ‘‘Director
Plan,’’ and the Hertz Global Holdings, Inc. 2008 Omnibus Incentive Plan, or the ‘‘Omnibus Plan,’’ are
pushed down from Hertz Holdings and recorded on the books at the Hertz level. See Note 5 to the Notes
to our consolidated financial statements included in this Annual Report under the caption ‘‘Item 8—
Financial Statements and Supplementary Data.’’
Results of Operations
In the following discussion, comparisons are made between the years ended December 31, 2009, 2008
and 2007. The following table sets forth for each of the periods indicated, the percentage of total
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