Share-Based Payments

12 Months Ended

Dec. 31, 2019

Share-based Payment Arrangement [Abstract]

Share-Based Payments:

The Company has awarded employee stock-based compensation in the form of stock options, SARs, and restricted stock awards (“RSAs”) under the terms of share-based incentive plans designed to align employee and executive interests to those of its stockholders. All employee stock-based compensation awarded during 2019, 2018, and 2017 was issued under the 2016 Omnibus Performance Incentive Plan, a stockholder-approved plan that reserves and provides for the grant of up to 14,000,000 shares of common stock. This plan allows for the grants of nonqualified stock options, incentive stock options, restricted stock, SARs, performance shares, performance share units, dividend equivalents, restricted stock units (“RSUs”), and/or other stock-based awards.

Stock Options—

Under our share-based incentive plans, officers and employees are given the right to purchase shares of Encompass Health common stock at a fixed grant price determined on the day the options are granted. The terms and conditions of the options, including exercise prices and the periods in which options are exercisable, are generally at the discretion of the compensation and human capital committee of our board of directors. However, no options are exercisable beyond ten years from the date of grant. Granted options vest over the awards’ requisite service periods, which are generally three years.

The fair values of the options granted during the years ended December 31, 2019, 2018, and 2017 have been estimated at the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:



	For the Year Ended December 31,
	2019		2018		2017
Expected volatility	25.3	%	29.2	%	30.5	%
Risk-free interest rate	2.7	%	2.7	%	2.1	%
Expected life (years)	7.1		7.1		7.7
Dividend yield	2.1	%	2.2	%	2.2	%

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes option-pricing model requires the input of highly subjective assumptions, including the expected stock price volatility. We estimate our expected term through an analysis of actual, historical post-vesting exercise, cancellation, and expiration behavior by our employees and projected post-vesting activity of outstanding options. We calculate volatility based on the historical volatility of our common stock over the period commensurate with the expected term of the options. The risk-free interest rate is the implied daily yield currently available on U.S. Treasury issues with a remaining term closely approximating the expected term used as the input to the Black-Scholes option-pricing model. We estimated our dividend yield based on our annual dividend rate and our stock price on the dividend payment dates. Under the Black-Scholes option-pricing model, the weighted-average grant date fair value per share of employee stock options granted during the years ended December 31, 2019, 2018, and 2017 was $15.45, $14.57, and $11.55, respectively.

A summary of our stock option activity and related information is as follows:



	Shares (In Thousands)		Weighted- Average Exercise Price per Share		Weighted- Average Remaining Life (Years)	Aggregate Intrinsic Value (In Millions)
Outstanding, December 31, 2018	537		$	35.22
Granted	106		63.77
Exercised	(78	)	17.73
Outstanding, December 31, 2019	565		43.02		6.3	$	14.8
Exercisable, December 31, 2019	364		35.16		5.1	12.4

We recognized approximately $1.4 million, $1.1 million, and $0.8 million of compensation expense related to our stock options for the years ended December 31, 2019, 2018, and 2017, respectively. As of December 31, 2019, there was $1.8 million of unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of 22 months. The total intrinsic value of options exercised during the years ended December 31, 2019, 2018, and 2017 was $3.6 million, $5.2 million, and $29.0 million, respectively.

Stock Appreciation Rights—

In conjunction with the EHHI acquisition, we granted SARs based on Encompass Health Home Health Holdings, Inc. (“Holdings”) common stock to certain members of EHHI management at closing on December 31, 2014. Under a separate plan, we granted 122,976 SARs that vest based on continued employment and an additional maximum number of 129,124 SARs that vest based on continued employment and the extent of the attainment of a specified 2017 performance measure. The maximum number of performance SARs was achieved. Half of the SARs of each type vested on December 31, 2018 with the remainder vested on December 31, 2019. The vested SARs will expire on the tenth anniversary of the grant date or within a specified period following any earlier termination of employment. Upon exercise, each SAR must be settled for cash in the amount by which the per share fair value of Holdings’ common stock on the exercise date exceeds the per share fair value on the grant date. The fair value of Holdings’ common stock is determined using the product of the trailing 12-month specified

performance measure for Holdings and a specified median market price multiple based on a basket of public home health companies and publicly disclosed home health acquisitions with a value of $400 million or more.

The fair value of the SARs granted in conjunction with the EHHI acquisition has been estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:



	As of December 31,
	2019		2018
Expected volatility	38.6	%	27.1	%
Risk-free interest rate	1.5	%	2.6	%
Expected life (years)	0.3		1.3
Dividend yield	—	%	—	%

We did not include a dividend payment as part of our pricing model because Holdings currently does not pay dividends on its common stock. Under the Black-Scholes option-pricing model, the weighted-average fair value per share of SARs granted in conjunction with the EHHI acquisition was $870.28 and $419.28 as of December 31, 2019 and 2018, respectively. In February 2019, members of the management team exercised a portion of their vested SARs for approximately $13 million in cash. In July 2019, members of the management team exercised the remainder of the vested SARs for approximately $55 million in cash. As of December 31, 2019, the fair value of the remaining 115,545 SARs is approximately $101 million, all of which is included in Other current liabilities. In January 2020, members of the management team exercised the remaining SARs, and in February 2020, we settled those awards upon payment of approximately $101 million in cash.

We recognized approximately $81.9 million, $56.2 million, and $26.0 million of compensation expense related to our SARs for the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, there was no unrecognized compensation cost related to unvested SARs.

Restricted Stock—

The RSAs granted in 2019, 2018, and 2017 included service-based awards and performance-based awards (that also included a service requirement). These awards generally vest over a three-year requisite service period. For RSAs with a service and/or performance requirement, the fair value of the RSA is determined by the closing price of our common stock on the grant date.

A summary of our issued restricted stock awards is as follows (share information in thousands):



	Shares		Weighted-Average Grant Date Fair Value
Nonvested shares at December 31, 2018	907		$	37.61
Granted	660		49.84
Vested	(718	)	34.84
Forfeited	(31	)	48.65
Nonvested shares at December 31, 2019	818		49.49

The weighted-average grant-date fair value of restricted stock granted during the years ended December 31, 2018 and 2017 was $37.61 and $42.85 per share, respectively. We recognized approximately $29.5 million, $27.1 million, and $19.6 million of compensation expense related to our restricted stock awards for the years ended December 31, 2019, 2018, and 2017, respectively. As of December 31, 2019, there was $32.3 million of unrecognized compensation expense related to unvested restricted stock. This cost is expected to be recognized over a weighted-average period of 21 months. The remaining unrecognized compensation expense for the performance-based awards may vary each reporting period based on changes in the expected achievement of performance measures. The total fair value of shares vested during the years ended December 31,

2019, 2018, and 2017 was $45.2 million, $22.1 million, and $17.7 million, respectively. We accrue dividends on outstanding RSAs, which are paid upon vesting.

Nonemployee Stock-Based Compensation Plans—

During the years ended December 31, 2019, 2018, and 2017, we provided incentives to our nonemployee members of our board of directors through the issuance of RSUs out of our share-based incentive plans. RSUs are fully vested when awarded and receive dividend equivalents in the form of additional RSUs upon the payment of a cash dividend on our common stock. During the years ended December 31, 2019, 2018, and 2017, we issued 23,270, 24,771, and 27,594 RSUs, respectively, with a fair value of $64.48, $62.88, and $47.30, respectively, per unit. We recognized approximately $1.5 million, $1.6 million, and $1.3 million, respectively, of compensation expense upon their issuance in 2019, 2018, and 2017. There was no unrecognized compensation related to unvested shares as of December 31, 2019. During the years ended 2019, 2018, and 2017, we issued an additional 8,876, 8,045, and 9,968, respectively, of RSUs as dividend equivalents. As of December 31, 2019, 536,658 RSUs were outstanding.