Share-Based Payments

12 Months Ended

Dec. 31, 2023

Share-Based Payment Arrangement [Abstract]

Share-Based Payments:

The Company has awarded employee stock-based compensation in the form of stock options 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 2023, 2022, and 2021 was issued under the 2016 Omnibus Performance Incentive Plan, a stockholder-approved plan that reserves and provides for the grant of up to 16,860,765 shares of common stock after adjustment for the effect of the Spin Off. This plan allows for the grants of nonqualified stock options, incentive stock options, restricted stock, stock appreciate rights, performance shares, performance share units, dividend equivalents, restricted stock units (“RSUs”), and/or other stock-based awards. Stock-based compensation expense recognized in continuing operations was $50.6 million, $29.2 million, and $29.1 million during 2023, 2022, and 2021, respectively. Stock-based compensation expense classified as discontinued operations was $2.5 million and $3.6 million during 2022 and 2021, respectively.

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, 2023, 2022, and 2021 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,
	2023		2022		2021
Expected volatility	28.5	%	28.3	%	28.4	%
Risk-free interest rate	4.2	%	1.7	%	1.1	%
Expected life (years)	6.9		7.8		7.1
Dividend yield	1.1	%	1.9	%	1.9	%

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 officers and 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, 2023, 2022, and 2021 was $19.23, $17.29, and $19.21, 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, 2022	836	$	47.12
Granted	77	56.21
Exercised	(60)	24.61


Outstanding, December 31, 2023	853	49.52		5.4	$	14.7
Exercisable, December 31, 2023	667	47.25		4.5	13.0

We recognized approximately $2.5 million, $1.2 million, and $2.2 million of compensation expense related to our stock options for the years ended December 31, 2023, 2022, and 2021, respectively. As of December 31, 2023, there was $0.5 million of unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of 15 months. The total intrinsic value of options exercised during the years ended December 31, 2023, 2022, and 2021 was $2.5 million, $1.8 million, and $0.1 million, respectively.

Restricted Stock—

The RSAs granted in 2023, 2022, and 2021 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 portion of the RSAs granted in 2023 also includes a market condition for certain members of management. For awards with a market condition, the fair value of the market condition component of the RSAs is determined using a lattice model. Inputs into the model include the historical price volatility of our common stock, the historical volatility of the common stock of the companies in the defined peer group, and the risk-free interest rate. Utilizing these inputs and potential future changes in stock prices, multiple trials are run to determine the fair value.

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, 2022	526	$	63.35
Granted	582	65.20
Vested	(367)	65.75
Forfeited	(35)	62.69
Nonvested shares at December 31, 2023	706	63.60

The weighted-average grant-date fair value of restricted stock granted during the years ended December 31, 2022 and 2021 was $74.08 and $73.89 per share, respectively. We recognized approximately $46.6 million, $26.4 million, and $24.9 million of compensation expense related to our restricted stock awards for the years ended December 31, 2023, 2022, and 2021, respectively. As of December 31, 2023, there was $38.3 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, 2023, 2022, and 2021 was $24.3 million, $20.0 million, and $32.6 million, respectively. We accrue dividends on outstanding RSAs, which are paid upon vesting.

Nonemployee Stock-Based Compensation Plans—

During the years ended December 31, 2023, 2022, and 2021, 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, 2023, 2022, and 2021, we issued 32,365, 22,469, and 24,043 RSUs, respectively, with a fair value of $63.00, $67.42, and $84.83, respectively, per unit. We recognized approximately $1.5 million, $1.5 million, and $2.0 million, respectively, of compensation expense upon their issuance in 2023, 2022, and 2021. There was no unrecognized compensation related to unvested shares as of December 31, 2023. During the years ended 2023, 2022, and 2021, we issued an additional 7,518, 11,976, and 8,577, respectively, of RSUs as dividend equivalents. As of December 31, 2023, 807,677 RSUs were outstanding. In addition to the above, we issued 130,406 additional RSUs in 2022 to current and former members of our board of directors in connection with the Spin Off. Such adjusted awards preserved the same intrinsic value and general terms and conditions (including vesting) as were in place immediately prior to the adjustments.