Cracker Barrel 2011 Annual Report Download - page 27

Share-Based Compensation
Share-based compensation expense is measured at the grant
date based on the fair value of the award and is recognized as
expense over the requisite service period or the date on which
retirement is achieved, if shorter. If a share-based compensa-
tion award is modified aer the grant date, incremental
compensation expense is recognized in an amount equal to the
excess of the fair value of the modified award over the fair
value of the original award immediately before the modification.
Incremental compensation expense for vested awards is
recognized immediately. For unvested awards, the sum of the
incremental compensation expense and the remaining
unrecognized compensation expense for the original award
on the modification date is recognized over the modified
service period. Our policy is to recognize compensation
expense for awards with only service conditions and a graded
vesting schedule on a straight-line basis over the requisite
service period for the entire award. Additionally, our policy is
to issue new shares of common stock to satisfy exercises of
share-based compensation awards.
e fair value of each option award granted was estimated
on the date of grant using a binomial laice-based option
valuation model. is model incorporates the following ranges
of assumptions:
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on market-traded options on our stock and historical
volatility of our stock over the contractual life of the options.
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employee termination behavior within the valuation model;
separate groups of employees that have similar historical
exercise behavior are considered separately for valuation
purposes. e expected life of options granted is derived from
the output of the option valuation model and represents the
period of time the options are expected to be outstanding.
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curve in effect at the time of grant for periods within the
contractual life of the option.
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dividend yield as the best estimate of projected dividend
yield for periods within the contractual life of the option.
e expected volatility, option exercise and termination
assumptions involve management’s best estimates at that
time, all of which affect the fair value of the option calculated
by the binomial laice-based option valuation model and,
ultimately, the expense that will be recognized over the life of
the option. We update the historical and implied components
of the expected volatility assumption when new grants are
made. We update option exercise and termination assump-
tions annually. e expected life is a by-product of the laice
model and is updated when new grants are made.
Compensation expense is recognized for only the portion
of options that are expected to vest. erefore, an estimated
forfeiture rate derived from historical employee termination
behavior, grouped by job classification, is applied against
share-based compensation expense. e forfeiture rate is applied
on a straight-line basis over the service (vesting) period
for each separately vesting portion of the award as if the award
were, in-substance, multiple awards. We update the
estimated forfeiture rate to actual at each reporting period
and adjust compensation expense accordingly so that the
amount of compensation expense recognized at any date is at
least equal to the portion of the grant-date value of the
award that is vested at that date.
Generally, the fair value of each nonvested stock grant is
equal to the market price of our stock at the date of grant
reduced by the present value of expected dividends to be paid
prior to the vesting period, discounted using an appropriate
risk-free interest rate.
All of our nonvested stock grants are time vested except the
nonvested stock grants of one executive that are based
upon the achievement of strategic goals. Compensation expense
for performance-based awards is recognized when it is
probable that the performance criteria will be met. At each
reporting period, we reassess the probability of achieving the
performance targets and the performance period required
to meet those targets. Determining whether the performance
targets will be achieved involves judgment and the estimate
of expense may be revised periodically based on the probability
of achieving the performance targets. Revisions are
reflected in the period in which the estimate is changed. If
any performance goals are not met, no compensation
expense is ultimately recognized and, to the extent previously
recognized, compensation expense is reversed.
In 2011, we replaced certain stock option grants with
performance-based stock units (“PBSUs”) for our executives.
Subject to the respective executive’s continued employment,
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