Hertz 2012 Annual Report Download - page 86

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
and volatility, remained unchanged from the date of grant. 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 not
sufficient 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.
Beginning in 2012, we have determined that there is now sufficient historical information available to
estimate the expected volatility of our stock price. Therefore for equity awards made in 2012 the
assumed volatility for our stock price is 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 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 7 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.’’
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