11. Stock-Based Compensation

As of December 31, 2013, we had awards outstanding under two Long-Term Incentive Plans, the Fortune Brands Home & Security, Inc. 2013 Long-Term Incentive Plan (the “Plan”) and the 2011 Long-Term Incentive Plan (the “2011 Plan”, and together with the Plan the “Plans”). During 2013, our stockholders approved the Plan, which provides for the granting of stock options, performance share awards, restricted stock units, and other equity-based awards, to employees, directors and consultants. As of December 31, 2013, 8.7 million shares of common stock were authorized for issuance under the Plan. In addition, shares of common stock may be automatically added to the number of shares of common stock that may be issued as awards expire, are terminated, cancelled or forfeited, or are used to satisfy withholding taxes with respect to existing awards under the 2011 Plan. No new stock-based awards can be made under the 2011 Plan, but there are outstanding awards under the 2011 Plan that continue to vest and/or be exercisable. Upon the exercise or payment of stock-based awards, shares of common stock are issued from authorized common shares. Prior to the Separation, employees of Home & Security participated in our Former Parent’s stock-based compensation plans.

At the time of the Separation, certain outstanding equity awards granted by our Former Parent and held by Home & Security employees were converted into Home & Security equity awards. The manner of conversion for each employee was determined based on the type of award, vesting status of the award and the employment status of the employee at the Separation date of October 3, 2011.

Pre-tax stock-based compensation expense was as follows:



(In millions)	2013		2012		2011
Stock option awards	$	8.3	$	12.5	$	14.1
Restricted stock units		10.8		10.0		1.6
Performance awards		6.7		3.3		—
Director awards		0.9		1.1		—
Total pre-tax expense		26.7		26.9		15.7
Tax benefit		9.7		9.7		5.3
Total after tax expense	$	17.0	$	17.2	$	10.4

Compensation costs that were capitalized in inventory were not material.

Restricted Stock Units

Restricted stock units have been granted to officers and select employees of the Company and represent the right to receive unrestricted shares of common stock subject to continued employment. Certain restricted stock units are also subject to attaining specific performance criteria. Compensation cost is recognized over the service period. We calculate the fair value of each restricted stock unit granted by using to the average of the high and low share price on the date of grant. Restricted stock units generally vest ratably over a three-year period.

A summary of activity with respect to restricted stock units outstanding under the Plans related to Home & Security and our Former Parent employees for the year ended December 31, 2013 was as follows:



	Number of Restricted Stock Units			Weighted-Average Grant-Date Fair Value
Non-vested at December 31, 2012		1,767,268		$	14.49
Granted		389,350			34.83
Vested		(730,421	)		13.85
Cancelled		(128,901	)		17.24
Non-vested at December 31, 2013		1,297,296		$	20.68

The remaining unrecognized pre-tax compensation cost related to restricted stock units at December 31, 2013 was approximately $14.2 million, and the weighted-average period of time over which this cost will be recognized is 1.9 years. The fair value of restricted stock units that vested during 2013 and 2012 was $26.9 million and $18.5 million, respectively. There were no restricted stock units that vested during 2011.

Stock Option Awards

The conversion of stock options constituted a modification of those stock option awards in accordance with ASC requirements for Compensation — Stock Compensation because certain awards did not have antidilution provisions. Stock-based compensation relating to the incremental fair value between Former Parent awards held prior to the Separation and Home & Security awards subsequent to the modification resulted in additional pre-tax stock-based compensation charges in 2011 of $2.4 million related to previously vested options, which was recorded in business separation costs in the statement of income.

All stock-based compensation to employees is required to be measured at fair value and expensed over the requisite service period. We recognize compensation expense on awards on a straight-line basis over the requisite service period for the entire award. Stock options granted under the Plans generally vest over a three-year period and have a maturity of ten years from the grant date. Home & Security stock options converted from awards granted by our Former Parent prior to the Separation retained the vesting schedule and expiration date of the original terms and conditions of the stock option awards.

The fair value of Home & Security options granted subsequent to the Separation and our Former Parent’s stock options granted to Home & Security employees prior to the Separation was estimated at the date of grant using a Black-Scholes option pricing model with the assumptions shown in the following table:



	Home & Security Grants						Former Parent Grants

	2013		2012		2011		2011
Current expected dividend yield		1.5%		1.5%		1.5%		2.0%
Expected volatility		32.0%		35.0%		39.0%		33.2%
Risk-free interest rate		1.1%		1.2%		1.2%		2.3%
Expected term		6.0 years		6.0 years		6.5 years		5.5 years

For periods presented prior to the Separation date of October 3, 2011, all stock-based compensation awards were made by our Former Parent and used our Former Parent assumptions for volatility, dividend yield and term. The weighted-average grant date fair value of stock options granted by our Former Parent during the year ended December 31, 2011 was $16.98.

Home & Security assumptions were utilized for grants made on or after October 4, 2011. The determination of expected volatility is based on a blended peer group volatility for companies in similar industries, at a similar stage of life and with similar market capitalization because there is not sufficient historical volatility data for Home & Security common stock over the period commensurate with the expected term of stock options, as well as other relevant factors. The risk-free interest rate is based on U.S. government issues with a remaining term equal to the expected life of the stock options. The expected term is the period over which our employees are expected to hold their options. It is based on the simplified method from the Securities and Exchange Commission’s safe harbor guidelines. The dividend yield is based on the Company’s estimated dividend over the expected term. The weighted-average grant date fair value of stock options granted under the Plans during the years ended December 31, 2013, 2012 and 2011 was $9.02, $5.80 and $4.20, respectively.

A summary of Home & Security stock option activity related to Home & Security and our Former Parent employees for the year ended December 31, 2013 was as follows:



	Options			Weighted- Average Exercise Price
Outstanding at December 31, 2012		13,070,134		$	13.14
Granted		727,200			33.25
Exercised		(3,770,311	)		13.48
Expired/forfeited		(377,463	)		16.60
Outstanding at December 31, 2013		9,649,560		$	14.39

Options outstanding and exercisable at December 31, 2013 were as follows:



	Options Outstanding^(a)						Options Exercisable^(b)

Range Of Exercise Prices	Options Outstanding		Weighted- Average Remaining Contractual Life		Weighted- Average Exercise Price		Options Exercisable		Weighted- Average Exercise Price
$9.00 to $11.99		2,788,572		3.0	$	9.71		2,788,572	$	9.71
12.00 to 14.00		4,590,316		6.9		13.07		2,557,659		13.21
14.01 to 40.96		2,270,672		6.5		22.82		968,430		17.69
		9,649,560		5.8	$	14.39		6,314,661	$	12.35

^(a)	At December 31, 2013, the aggregate intrinsic value of options outstanding was $302.1 million.

^(b)	At December 31, 2013, the weighted-average remaining contractual life of options exercisable was 4.5 years and the aggregate intrinsic value of options exercisable was $210.6 million.

The remaining unrecognized compensation cost related to unvested awards at December 31, 2013 was approximately $9.4 million, and the weighted-average period of time over which this cost will be recognized is 1.7 years. The fair value of options that vested during the years ended December 31, 2013, 2012 and 2011 was $12.4 million, $10.8 million and $10.0 million, respectively. The intrinsic value of Home & Security stock options exercised in the years ended December 31, 2013, 2012 and 2011 was $97.1 million, $70.2 million and $10.0 million, respectively.

Performance Awards

Performance share awards were granted to certain employees of the Company under the Plans and represent the right to earn shares of Company common stock based on the achievement of various segment or company-wide performance conditions, including diluted cumulative earnings per share, average return on invested capital, average return on net tangible assets and cumulative operating income during the three-year performance period. Compensation cost is amortized into expense over the performance period, which is generally three years, and is based on the probability of meeting performance targets. The fair value of each performance share award is based on the average of the high and low stock price on the date of grant.

The following table summarizes information about performance share awards as of December 31, 2013, as well as activity during the year then ended, based on the target award amounts in the performance share award agreements:



	Number of Performance Share Awards			Weighted-Average Grant-Date Fair Value
Non-vested at December 31, 2012		328,100		$	19.47
Granted		210,500			34.40
Cancelled		(39,100	)		24.38
Non-vested at December 31, 2013		499,500		$	25.38

No awards were made prior to 2012. The remaining unrecognized pre-tax compensation cost related to performance share awards at December 31, 2013 was approximately $11.0 million, and the weighted-average period of time over which this cost will be recognized is 1.7 years.

Director Awards

Starting in 2012, stock awards compensate outside directors under the Plan. Awards are issued annually in the second quarter as part of the compensation to outside directors. In addition, outside directors can elect to have director fees paid in stock or can elect to defer payment of stock. Compensation cost is expensed at the time of an award based on the fair value of a share at the date of the award. In 2013 and 2012, we awarded 24,672 and 52,208 shares of common stock to outside directors with a weighted average fair value on the date of the award of $36.47 and $20.46, respectively.