Hertz 2010 Annual Report Download - page 77

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Stock-Based Compensation
The cost of employee services received in exchange for an award of equity instruments is based on the
grant-date fair value of the award. That cost is recognized over the period during which the employee is
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. 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 6 to the Notes to our consolidated financial statements included in this
Annual Report under the caption ‘‘Item 8—Financial Statements and Supplementary Data.’’
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 2 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, 2010, 2009
and 2008. The following table sets forth for each of the periods indicated, the percentage of total
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