Employee Benefits and Stock-based Compensation

401(k) Plan

The Company maintains a defined contribution 401(k) plan (the “401(k) Plan”) for substantially all of its U.S. employees. Under the 401(k) Plan, eligible employees may contribute up to 50% of their pre-tax salary, subject to the Internal Revenue Service (“IRS”) annual contribution limits. In 2013, 2012 and 2011, the Company matched 50% of the employee’s contribution up to a total of 6% of the employee’s annual salary. The Company contributed $3.1 million in 2013, $2.8 million in 2012, and $2.9 million in 2011 under the 401(k) Plan. The Company can terminate matching contributions at its discretion at any time.

Stock Option and Restricted Stock Plans

The majority of Verisign’s stock-based compensation relates to RSUs. Stock options granted in prior years were granted only to upper management level employees. As of December 31, 2013, a total of 14.3 million shares of common stock were reserved for issuance upon the exercise of stock options and for the future grant of stock options or awards under Verisign’s stock option and restricted stock plans.

On May 26, 2006, the stockholders of Verisign approved the 2006 Equity Incentive Plan (the “2006 Plan”). The 2006 Plan replaces Verisign’s previous 1998 Directors Plan, 1998 Equity Incentive Plan, and 2001 Stock Incentive Plan. The 2006 Plan authorizes the award of incentive stock options to employees and non-qualified stock options, restricted stock awards, RSUs, stock bonus awards, stock appreciation rights and performance shares to eligible employees, officers, directors, consultants, independent contractors and advisers. The 2006 Plan is administered by the Compensation Committee which may delegate to a committee of one or more members of the Board or Verisign’s officers the ability to grant certain awards and take certain other actions with respect to participants who are not executive officers or non-employee directors. RSUs are awards covering a specified number of shares of Verisign common stock that may be settled by issuance of those shares (which may be restricted shares). RSUs generally vest in four installments with 25% of the shares vesting on each anniversary of the first four anniversaries of the grant date. Certain performance-based RSUs, granted to the Company’s executives, vest over two and three year terms. Additionally, the Company has granted fully vested RSUs to members of its Board of Directors in each of the last two years. The Compensation Committee may authorize grants with a different vesting schedule in the future. A total of 27.0 million common shares were authorized and reserved for issuance under the 2006 Plan. The 2006 Plan was amended by shareholder approval in 2011 to allow for equitable adjustment of stock options outstanding under the plan in the event of any future special dividends paid by the Company. This amendment to the 2006 Plan was approved after the Company declared the May 2011 special dividend. The modification of the plan did not result in any additional stock-based compensation.

2007 Employee Stock Purchase Plan

On August 30, 2007, the Company’s stockholders approved the 2007 Employee Stock Purchase Plan which replaced the previous 1998 Employee Stock Purchase Plan. A total of 6.0 million common shares were authorized and reserved for issuance under the ESPP. Eligible employees may purchase common stock through payroll deductions by electing to have between 2% and 25% of their compensation withheld to cover the purchase price. Each participant is granted an option to purchase common stock on the first day of each 24-month offering period and this option is automatically exercised on the last day of each six-month purchase period during the offering period. The purchase price for the common stock under the ESPP is 85% of the lesser of the fair market value of the common stock on the first day of the applicable offering period or the last day of the applicable purchase period. Offering periods begin on the first business day of February and August of each year. As of December 31, 2013, 2.1 million shares of the Company’s common stock are reserved for issuance under this plan.

Stock-based Compensation

Stock-based compensation is classified in the Consolidated Statements of Comprehensive Income in the same expense line items as cash compensation. The following table presents the classification of stock-based compensation:



	Year Ended December 31,
	2013		2012		2011
	(In thousands)
Stock-based compensation:
Cost of revenues	$	6,156	$	5,754	$	6,655
Sales and marketing	6,252		6,091		6,062
Research and development	7,199		6,023		4,926
General and administrative	17,042		15,494		19,928
Restructuring charges	—		—		5,701
Total stock-based compensation	$	36,649	$	33,362	$	43,272

The following table presents the nature of the Company’s total stock-based compensation:



	Year Ended December 31,
	2013			2012			2011
	(In thousands)
RSUs	$	29,123		$	28,874		$	32,501
Performance-based RSUs	5,033			1,933			804
ESPP	5,307			4,436			3,904
Stock options	179			956			3,528
RSUs/Stock options acceleration	—			—			5,701
Capitalization (Included in Property and equipment, net)	(2,993		)	(2,837		)	(3,166		)
Total stock-based compensation expense	$	36,649		$	33,362		$	43,272

The income tax benefit recognized on stock-based compensation within Income tax expense for 2013, 2012, and 2011 was $11.9 million, $9.4 million, and $13.1 million, respectively.

The following table sets forth the weighted-average assumptions used to estimate the fair value of ESPP awards:



	Year Ended December 31,
	2013		2012		2011
Volatility	26	%	26	%	26	%
Risk-free interest rate	0.14	%	0.16	%	0.30	%
Expected term	1.25 years		1.25 years		1.25 years
Dividend yield	Zero		Zero		Zero

The Company’s expected volatility is based on the average of the historical volatility over the period commensurate with the expected term of the options and the mean historical implied volatility of traded options. The risk-free interest rates are derived from the average U.S. Treasury constant maturity rates during the respective periods commensurate with the expected term. The expected terms are based on an analysis of the observed and expected time to post-vesting exercise and/or cancellation of options. On the ESPP offering dates, the Company did not anticipate paying any cash dividends and therefore used an expected dividend yield of zero. The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting forfeitures and records stock-based compensation only for those awards that are expected to vest.

RSUs Information

The following table summarizes unvested RSUs activity:



	Year Ended December 31,
	2013				2012				2011
	Shares		Weighted-Average Grant-Date Fair Value		Shares		Weighted-Average Grant-Date Fair Value		Shares		Weighted-Average Grant-Date Fair Value
	(Shares in thousands)
Unvested at beginning of period	2,478		$	32.07	2,345		$	27.33	2,719		$	23.50
Granted	1,132		45.08		1,341		38.20		1,860		34.29
Vested and settled	(900	)	30.73		(881	)	27.57		(1,411	)	27.00
Forfeited	(268	)	36.09		(327	)	32.34		(1,025	)	24.94
Dividend equivalents	—		—		—		—		202		—
	2,442		$	38.00	2,478		$	32.07	2,345		$	27.33

The RSUs in the table above include certain RSUs granted to the Company’s executives that are subject to performance conditions, and in some cases, market conditions. The unvested RSUs as of December 31, 2013 include approximately 0.2 million RSUs subject to performance and/or market conditions. The number of RSUs that ultimately vest may range from zero to a maximum of 0.4 million RSUs depending on the level of performance achieved and whether any market conditions are satisfied.

All RSU agreements have anti-dilution provisions, in the event a dividend is declared, that require the Company to issue additional dividend equivalent RSUs (“dividend equivalents”) calculated based on the number of unvested RSUs, the per share dividend declared, and the stock price on the dividend payment date. The dividend equivalents are subject to the same vesting requirements as applicable to unvested RSUs in respect of which such additional dividend equivalents are issued.

At the time the May 2011 special dividend was declared, the 2006 Plan did not have the same anti-dilution provisions for outstanding stock options. Because the option holders did not participate in the special dividends, the Company granted option holders additional RSUs equivalent to the amount of the dividend. The RSUs granted were either fully vested or on a two year cliff vesting, depending on whether the corresponding stock options were vested or unvested. The Company recognized $9.2 million of stock-based compensation expense related to the fully vested RSUs granted in 2011.

The closing price of Verisign’s stock was $59.78 on December 31, 2013. As of December 31, 2013, the aggregate intrinsic value of unvested RSUs was $145.9 million. The fair values of RSUs that vested during 2013, 2012, and 2011 were $41.5 million, $31.7 million, and $44.2 million, respectively. As of December 31, 2013, total unrecognized compensation cost related to unvested RSUs was $56.9 million which is expected to be recognized over a weighted-average period of 2.3 years.

Stock Options Information

The Company has not granted any stock options in each of the last three years. The number of remaining options outstanding is not material. As of December 31, 2013, all of the compensation cost related to the Company’s stock options has been recognized.

Modifications

In 2011, the Company modified certain stock-based awards held by employees affected by divestitures and workforce reductions to accelerate the vesting of twenty-five percent (25%) of each such individual’s unvested “in-the-money” stock options and 25% of each such individual’s unvested RSUs on the termination dates of such individual’s employment. The Company remeasured the fair value of these modified awards and recorded the charges over the requisite future service periods, if any. The modification charges are included as restructuring costs for continuing operations as well as for discontinued operations. 217 employees were affected by these modifications and the Company recognized $5.7 million of acceleration cost in Restructuring charges during 2011.

Under the ESPP, if the market price of the stock at the end of any six-month purchase period is lower than the stock price at the offering date, the plan is immediately cancelled after that purchase date and a new two-year plan is established using the then-current stock price as the base purchase price. The Company also allows its employees to increase their payroll withholdings during the offering period. The Company accounts for these increases in employee payroll withholdings and the plan rollover as modifications. Modification expenses for the ESPP were not material in any period presented.