Stock-Based Compensation

Prior to the Spin-Off, certain of the Company's employees participated in stock-based compensation plans sponsored by Hertz Holdings. Stock-based compensation awards are measured on their grant date using a fair value method and are recognized in the statement of operations over the requisite service period. The stock-based compensation plan provides for grants of both equity and cash awards, including non-qualified stock options, incentive stock options, stock appreciation rights, performance awards (shares and units), restricted awards (shares and units) and deferred stock units to key executives, employees and non-management directors.

In connection with the Spin-Off, Herc Holdings inherited the Hertz Global Holdings, Inc. 2008 Omnibus Incentive Plan, which was renamed the Herc Holdings Inc. 2008 Omnibus Incentive Plan (the “Omnibus Plan”). Outstanding equity awards at the time of the Spin-Off were adjusted and converted in accordance with a formula designed to preserve the intrinsic economic value of the original equity awards after taking into account the Spin-Off and the reverse stock split. Adjusted awards for active and former Herc employees were denominated in the common stock of Herc Holdings after the Spin-Off. Generally, the adjusted awards were subject to the same terms and vesting conditions as the original Hertz Holdings awards. The adjusted awards for performance stock units included adjusted performance metrics to reflect the separation of the vehicle rental and equipment rental businesses, and the adjusted awards contained such additional or adjusted provisions as were required.

The total number of common shares authorized for issuance under the Omnibus Plan after the reverse stock split is approximately 2,200,000, of which 551,000 remains available as of December 31, 2017 for future incentive awards. The share and per share data presented in this note have been retroactively adjusted to reflect the impact of the separation and conversion, including the reverse stock split.

The Company's stock-based compensation expense is included in “Selling, general and administrative” expense in the Company's consolidated statements of operations. The following table summarizes the expenses and associated income tax benefits recognized (in millions):



	Years Ended December 31,
	2017			2016			2015
Compensation expense	$	10.1		$	5.5		$	2.7
Income tax benefit	(2.5		)	(2.1		)	(1.1		)
Total	$	7.6		$	3.4		$	1.6

Stock-based compensation expense includes expense attributable to the Company based on the terms of the awards granted under the Omnibus Plan to the participants in the Omnibus Plan. Additionally, during the years ended December 31, 2016 and 2015, stock-based compensation expense includes an allocation of THC's corporate and shared functional employee expenses of $2.0 million and $1.8 million, respectively, on a pre-tax basis. The expenses are for the employees of THC and its non-Herc Holdings subsidiaries whose costs of services were allocated to the Company for the applicable periods presented. For additional information related to costs allocated to the Company by THC, see Note 20, "Related Party Transactions."

As of December 31, 2017, there was $17.2 million of total unrecognized compensation cost related to non-vested stock options, restricted stock units ("RSUs") and performance stock units ("PSUs") granted under the Omnibus Plan. The total unrecognized compensation cost is expected to be recognized over the remaining 1.8 years, on a weighted average basis, of the requisite service period that began on the grant dates.

Stock Options

All stock options granted under the Omnibus Plan had a per-share exercise price of not less than the fair market value of one share of common stock on the grant date. Stock options vest based on a minimum period of service or the occurrence of events (such as a change in control, as defined in the Omnibus Plan). No stock options are exercisable after ten years from the grant date.

The Company’s practice is to grant stock options at fair market value. Options vest over four years with terms of five to 10 years, assuming continued employment with certain exceptions. Vesting of the option awards is contingent upon meeting certain service conditions. The fair value of option grants is estimated using the Black-Scholes option pricing model. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. For stock option grants during 2016, expected volatility was calculated based on a blended volatility of peer group volatility and implied volatility as the Company does not have sufficient stock price data to calculate historical volatility. The Company used the simplified method under Staff Accounting Bulletin Topic 14, Share-Based Payment as the basis for estimating the expected life of an option because the exercise data for participants who held options as employees of a subsidiary of our former parent is not necessarily indicative of future exercise patterns. The risk-free interest rate was based on U.S. Treasury zero-coupon issues with a remaining term which approximates the expected life assumed at the date of grant. The compensation expense recognized for all stock-based awards is net of estimated forfeitures. Forfeitures were estimated based on an analysis of actual option forfeitures.

The weighted average assumptions used in the Black-Scholes option pricing model are as follows:



	Years Ended December 31,
	2017	2016	2015
Expected volatility	N/A	50%	39.0%
Expected dividend yield	N/A	—%	—%
Expected term (years)	N/A	4.8	5.0
Risk-free interest rate	N/A	1.09%	1.22%

The weighted average per share grant date fair values of options granted during 2016 and 2015 were $14.28 and $18.06, respectively. There were no options granted during 2017.

A summary of option activity under the Omnibus Plan is presented below.



	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions of dollars) (a)
Outstanding at December 31, 2016	529,675		$	37.90
Granted	—		—
Exercised	(18,940	)	37.50
Forfeited or expired	(70,093	)	41.91
Outstanding at December 31, 2017	440,642		$	37.25
Vested and Unvested Expected to Vest at December 31, 2017	292,051		$	36.31	5.3	7.7
Exercisable at December 31, 2017	127,891		$	39.91	4.6	3.0

(a) Market price per share on December 29, 2017, the last trading day of the year, was $62.61. The intrinsic value is zero for options with exercise prices above market value.

Stock options as of December 31, 2017:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Number Outstanding	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)
$20.00-30.00	6,383	$	27.58	1.3	6,383	$	27.58	1.3
30.01-40.00	360,895	33.19		5.6	85,957	33.19		5.6
40.01-50.00	5,997	42.59		4.8	3,360	43.14		3.9
50.01-60.00	50,428	55.86		2.5	23,407	56.12		2.5
60.01-70.00	—	—		—	—	—		—
70.01-80.00	16,939	70.14		2.1	8,784	70.14		2.1
	440,642	$	37.25		127,891	$	39.91

Additional information pertaining to stock option activity under the Omnibus Plan is as follows (in millions):



	Year Ended December 31,
	2017		2016		2015
Aggregate intrinsic value of stock options exercised ^(a)	$	0.3	$	0.1	$	—
Cash received from the exercise of stock options ^(b)	0.7		0.4		—
Tax benefit realized on exercise of stock options	0.1		—		—


(a)	The intrinsic value is the difference between the market value of the shares on the exercise date and the exercise price of the option.


(b)	In addition to the cash received in the table above, cash received from exercise of stock options by Hertz Holdings employees prior to the Spin-Off for 2016 and 2015 was $9.6 million and $5.1 million, respectively, as reflected in the accompanying consolidated statements of cash flows.

Performance Stock Units

PSUs granted under the Omnibus Plan will vest based on the achievement of pre-determined performance goals over performance periods determined by the Company's Compensation Committee. Each of the units granted under the Omnibus Plan represent the right to receive one share of the Company's common stock on a specified future date. Compensation expense for PSUs is based on the grant date fair value, and is recognized ratably over the three-year vesting period. In addition to the service vesting condition, the PSUs have an additional vesting condition which calls for the number of units to be awarded being based on the achievement of certain performance measures over the applicable measurement period. In the event of an employee's death or disability, a pro rata portion of the employee's PSUs will vest to the extent performance goals are achieved at the end of the performance period.

A summary of the PSU activity under the Omnibus Plan is presented below.



	Units		Weighted Average Grant Date Fair Value
Nonvested at December 31, 2016	144,964		$	36.02
Granted	122,428		47.88
Vested	—		—
Forfeited	(20,215	)	38.79
Nonvested at December 31, 2017	247,177		$	41.67

The weighted average per share grant-date fair values of PSUs granted during 2017, 2016 and 2015 were $47.88, $29.77 and $59.50, respectively. The total fair value of PSUs that vested during 2015 was $0.6 million. There were no PSUs that vested during 2017 or 2016.

PSUs granted in 2017 include vesting conditions based on the achievement of the Company's return on invested capital performance measure over a three-year period from 2017 to 2019. PSUs granted in 2016 include vesting conditions based on the achievement of the Company's corporate EBITDA performance measure over a three-year period from 2016 to 2018. PSUs granted in 2015 include vesting conditions based on the achievement of certain performance measures over a three-year period from 2015 to 2017. For 2015, the performance measure was based on Hertz Holdings' corporate EBITDA performance measure which was not achieved and, therefore, the PSUs for the 2015 performance period were forfeited. In connection with the Spin-Off, the awards' vesting condition for the 2016 and 2017 performance periods was changed by Hertz Holdings to a Herc stand-alone EBITDA performance measure. The change in the performance measure was treated as a modification of the awards and did not have a significant impact on the Company's results of operations.

Restricted Stock Units

RSUs granted under the Omnibus Plan will vest based on a minimum period of service or the occurrence of events (such as a change in control, as defined in the Omnibus Plan) specified by the Compensation Committee. Compensation expense for RSUs is based on the grant date fair value, and is recognized ratably over the vesting period which generally ranges from one to three years.

A summary of the RSU activity under the Omnibus Plan is presented below.



	Units		Weighted Average Grant Date Fair Value
Nonvested at December 31, 2016	297,898		$	32.63
Granted	194,598		45.61
Vested	(42,920	)	37.44
Forfeited	(46,399	)	37.39
Nonvested at December 31, 2017	403,177		$	38.33

The weighted average per share grant date fair values of RSUs granted during 2017, 2016 and 2015 were $45.61, $32.36 and $56.13, respectively. The total fair value of RSUs that vested during 2017, 2016 and 2015 was $1.6 million, $0.3 million and $0.6 million, respectively.