Hertz 2012 Annual Report Download - page 159

HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock Options and Stock Appreciation Rights
All stock options and stock appreciation rights granted under the Omnibus Plan will have a per-share
exercise price of not less than the fair market value of one share of Hertz Holdings common stock on the
grant date. Stock options and stock appreciation rights will vest based on a minimum period of service or
the occurrence of events (such as a change in control, as defined in the Omnibus Plan) specified by the
compensation committee of our Board of Directors. No stock options or stock appreciation rights will be
exercisable after ten years from the grant date.
We have accounted for our employee stock-based compensation awards in accordance with ASC 718,
‘‘Compensation—Stock Compensation.’’ The options are being accounted for as equity-classified
awards. We will recognize compensation cost on a straight-line basis over the vesting period. The value
of each option award is estimated on the grant date using a Black-Scholes option valuation model that
incorporates the assumptions noted in the following table. Because the stock of Hertz Holdings became
publicly traded in November 2006 and had a short trading history, it was not practicable for us to
estimate the expected volatility of our share price, or a peer company share price, because there was
insufficient historical information about past volatility prior to 2012. Therefore, prior to 2012 we used the
calculated value method, substituting the historical volatility of an appropriate industry sector index for
the expected volatility of our common stock price as an assumption in the valuation model. We selected
the Dow Jones Specialized Consumer Services sub-sector within the consumer services industry, and
we used the U.S. large capitalization component, which includes the top 70% of the index universe (by
market value).
The calculation of the historical volatility of the index was made using the daily historical closing values of
the index for the preceding 6.25 years, because that is the expected term of the options using the
simplified approach.
For 2012, we have determined that there was sufficient historical information available to estimate the
expected volatility of our share price. Therefore, for 2012 we calculated volatility for our stock price
based on a weighted average combining implied volatility and the average of our peer’s most recent
5.79-year volatility and mean reversion volatility.
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, as of the grant dates. The assumed dividend yield is zero.
Assumption 2012 Grants 2011 Grants 2010 Grants
Expected volatility ......................... 81.5% 36.7% 36.1%
Expected dividend yield .................... — — —
Expected term (years) ...................... 3 6.25 6.25
Risk-free interest rate ....................... 0.4% 2.56% 1.62%-2.96%
Weighted-average grant date fair value .......... $14.62 $5.93 $4.00
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