Equity-Based Compensation

12 Months Ended

Dec. 31, 2020

Share-based Payment Arrangement [Abstract]

Transactions in which the Company receives employee and non-employee services in exchange for the Company’s equity instruments or liabilities that are based on the fair value of the Company’s equity securities or may be settled by the issuance of these securities are accounted for using a fair value method. The Company’s policy is to recognize compensation expense using the straight line method over the relevant vesting period for units that vest based on time.

The Surgery Partners, Inc. 2015 Omnibus Incentive Plan, as amended and restated effective January 1, 2020 ("2015 Omnibus Incentive Plan") from which all equity-based awards will be granted. Under this plan, the Company can grant stock options, stock appreciation rights, restricted stock, unrestricted stock, stock units, performance awards, cash awards and other awards convertible into or otherwise based on shares of its common stock. As of December 31, 2020, 8,315,700 shares were authorized to be granted under the 2015 Omnibus Incentive Plan and 5,285,421 were available for future equity grants.

Restricted and Performance Share-Based Awards

During the years ended December 31, 2020 and 2019, the Company granted 1,077,367 and 556,450 restricted stock awards ("RSAs") to certain officers, employees and non-employee directors in accordance with the 2015 Omnibus Incentive Plan, respectively. Vesting and payment of these RSAs are generally subject to continuing service of the employee or non-employee director over the ratable vesting periods beginning one year from the date of grant to three or five years after the date of grant. The fair values of these RSAs were determined based on the closing price of the Company’s common stock on the trading date immediately prior to the grant date.

During the years ended December 31, 2020 and 2019, the Company granted 854,367 and 389,972 performance-based restricted stock units ("PSUs") subject to the achievement of a combination of performance conditions, respectively. In addition to the achievement of the performance conditions, these PSUs are generally subject to the continuing service of the employee over the ratable vesting period from the earned date continuing for two years. For these PSUs, the number of shares payable at the end of the performance periods ranges from 0% to 150% of the targeted units based on the Company’s actual performance and/or market conditions results as compared to the targets. These PSUs are not considered outstanding until earned. During the years ended December 31, 2020 and 2019, 309,692 and 245,301 of the PSUs previously granted were deemed to have been earned, respectively.

Restricted and Performance Share-Based Activity

A summary of non-vested restricted share-based activity for the years ended December 31, 2020, 2019, and 2018 follows:


	Unvested Shares	Weighted Average Grant Date Fair Value
Outstanding at December 31, 2017	574,456	$	15.95
Granted/Earned	519,605	16.10
Forfeited/Cancelled	(180,719)	15.09
Vested	(210,318)	16.31
Outstanding at December 31, 2018	703,024	$	16.18
Granted/Earned	801,751	12.70
Forfeited/Cancelled	(272,706)	12.97
Vested	(456,183)	16.20
Outstanding at December 31, 2019	775,886	$	13.78
Granted/Earned	1,387,059	6.87
Forfeited/Cancelled	(162,635)	13.77
Vested	(552,943)	12.78
Outstanding at December 31, 2020	1,447,367	$	9.75

Stock Options and Stock Appreciation Rights

The Company granted 2,256,500 and 700,000 stock options during the years ended December 31, 2019 and 2018, respectively. No stock options were granted during the year ended December 31, 2020. Options to purchase shares are granted with an exercise price equal to the fair market value of the Company’s common stock on the day of grant, based on the closing price of the Company’s common stock on the trading date immediately prior to the grant date.

The stock options granted during the year ended December 31, 2019 are subject to the following performance and vesting criteria: (i) one-third (33.3%) of the award will vest in three equal annual installments on each of the first three anniversaries of December 31, 2019, (ii) one-third (33.3%) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $25.00 over a period of thirty (30) consecutive trading days, and (iii) one-third (33.3%) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $35.00 over a period of thirty (30) consecutive trading days, in each case, generally subject to continued employment on each vesting date. Forfeitures are recognized as incurred.

The stock options granted during the year ended December 31, 2018 are subject to the following performance and vesting criteria: (i) fifty percent (50%) of the stock option awards will vest in five equal annual installments on each of the first five anniversaries of the date of grant, (ii) twenty-five percent (25%) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $25.00 over a period of sixty (60) consecutive trading days, and (iii) twenty-five percent (25%) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $35.00 over a period of sixty (60) consecutive trading days, in each case, generally subject to continued employment on each vesting date. Forfeitures are recognized as incurred.

On December 16, 2018, the Company cancelled 200,000 stock options and replaced them with 200,000 stock-settled stock appreciation right awards (the "SAR Awards"). These were the only SAR Awards granted as of December 31, 2020. The SAR Awards had a base price equal to the exercise price of the cancelled stock options. Fifty percent (50%) of the SAR Awards will vest in five equal annual installments on each of the first five anniversaries of the date of grant, generally subject to continued employment on each vesting date. Twenty-five percent (25%) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $25.00 over a period of sixty (60) consecutive trading days, and twenty-five percent (25%) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $35.00 over a period of sixty (60) consecutive trading days, in each case, generally subject to continued employment on each vesting date. Forfeitures are recognized as incurred.

Option/SAR Valuation

In applying the Monte Carlo simulation model to value both the stock options and SAR Awards, the Company used the following assumptions:

▪ Risk-free interest rate. The risk-free interest rate is used as a component of the fair value of stock options to take into account the time value of money. For the risk-free interest rate, the Company uses the implied yield on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life, in years, of the options granted.

▪ Expected volatility. Volatility, for the purpose of share-based compensation, is a measurement of the amount that a share price has fluctuated. Expected volatility involves reviewing historical volatility and determining what, if any, change the share price will have in the future. The Company used historical stock price information of certain peer group companies for a period of time equal to the expected option life period to determine estimated volatility.

▪ Expected life, in years. A clear distinction is made between the expected life of an option and the contractual term of the option. The expected life of an option is considered the amount of time, in years, that an option is expected to be outstanding before it is exercised. Whereas, the contractual term of the stock option is the term an option is valid before it expires.

▪ Expected dividend yield. Since issuing dividends will affect the fair value of a stock option, GAAP requires companies to estimate future dividend yields or payments. The Company has not historically issued dividends and does not intend to issue dividends in the future. As a result, the Company does not apply a dividend yield component to its valuation.

The following table sets forth the assumptions used by the Company to estimate the fair value of stock options and SAR Awards granted during the years ended December 31, 2019 and 2018. No stock options or SAR Awards were granted during the year ended December 31, 2020.


	2019		2018

Expected volatility	60	%	60% - 65%
Risk-free interest rate	2.30% - 2.40%		2.50% - 2.90%
Expected dividends	—		—
Average expected term (years)	4		10
Fair value of stock options granted	$4.83 - $6.41		$8.48 - $9.44

The estimated fair value of options is amortized to expense on a straight-line basis over the options’ vesting period.

Stock Option and Stock Appreciation Rights Activity

A summary of stock option and SAR Award activity for the years ended December 31, 2020, 2019, and 2018 follows:


	Options/SARs	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)
Outstanding at December 31, 2017	12,687	$	20.10	1.2
Granted	700,000	12.90		10.0
Exercised	—
Forfeited/Cancelled	(200,000)	12.90		10.0
Outstanding at December 31, 2018	512,687	$	13.03	9.8
Granted	2,256,500	13.00		9.2
Exercised	—
Forfeited/Cancelled	—
Outstanding at December 31, 2019	2,769,187	$	13.02	9.0
Granted	—
Exercised	(4,199)	20.24		5.8
Forfeited/Cancelled	(4,473)	19.00		4.8
Outstanding at December 31, 2020 (1)	2,760,515	$	12.88	8.0

(1) Of the outstanding stock options, 585,119 were exercisable as of December 31, 2020.

Other information pertaining to equity-based compensation

At December 31, 2020, unrecognized compensation cost related to unvested shares was approximately $20.2 million. Unrecognized compensation cost will be expensed annually based on the number of shares that vest during the year.

The Company records equity-based compensation expense to recognize the fair value of the restricted shares that vest and stock options granted. The Company recorded equity-based compensation expense of $13.2 million, $10.2 million and $9.3 million for the years ended December 31, 2020, 2019, and 2018, respectively.