Stock-Based Compensation

9 Months Ended

Sep. 30, 2011

Stock-Based Compensation

Stock-Based Compensation

Note 7. Stock-Based Compensation

The Company recorded $2.9 million and $8.8 million of employee stock-based compensation expense for the three and nine months ended September 30, 2011, respectively, and $2.7 million and $8.0 million of employee stock-based compensation expense for the three and nine months ended September 30, 2010, respectively, including expense for stock option grants and restricted stock awards. Employee stock-based compensation expense was calculated based on options and awards ultimately expected to vest and has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Employee stock-based compensation expense includes expense related to awards to outside directors of the Company.

Restricted Stock

During the three and nine months ended September 30, 2011, the Company awarded 16,920 and 328,468 restricted stock units to employees with a grant-date fair value equal to $466,000 and $7.7 million, respectively. Each restricted stock unit entitles the recipient to receive one share of the Company’s common stock upon vesting. Restricted stock units awarded to employees generally vest as to one-third of the total number of shares awarded annually over a three-year period. During the three and nine months ended September 30, 2011, the Company awarded 1,432 and 3,462 shares of restricted stock with a grant date fair value equal to $40,000 and $93,000, respectively, to outside directors serving on the Company’s board of directors. Restricted stock awards to directors were in lieu of fees paid for director service and vested immediately on the award date. The Company did not award any restricted stock to employees or outside directors during the three and nine months ended September 30, 2010.

Stock Option Grants

The Company granted options to purchase 12,000 and 560,900 shares of common stock to employees and outside directors during the three and nine months ended September 30, 2011, respectively. The Company granted options to purchase 51,300 and 1.2 million shares of common stock to employees during the three and nine months ended September 30, 2010, respectively. The Company values its stock option grants using the Black-Scholes option valuation model. Option valuation models require the input of highly subjective assumptions that can vary over time. The Company’s assumptions regarding expected volatility are based on the historical volatility of the Company’s common stock. The expected life of options granted is estimated based on historical option exercise data and assumptions related to unsettled options. The risk-free interest rate is estimated using published rates for U.S. Treasury securities with a remaining term approximating the expected life of the options granted. The Company uses a dividend yield of zero as it has never paid cash dividends and does not anticipate paying cash dividends in the foreseeable future. The weighted-average fair values and assumptions used in calculating such values during each fiscal year are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Expected volatility	46		%	48		%	47		%	53		%
Risk-free interest rate	1.44		%	1.53		%	2.28		%	2.52		%
Expected life of options in years	5.41			5.09			6.18			5.78
Weighted-average fair value	$	11.56		$	6.43		$	11.19		$	8.66

For the three and nine months ended September 30, 2011, the Company issued 89,273 and 514,819 shares of common stock in connection with the exercise of stock options with a weighted-average exercise price of $12.60 and $12.88 per share, respectively. For the three and nine months ended September 30, 2010, the Company issued 38,537 and 171,156 shares of common stock in connection with the exercise of stock options with a weighted-average exercise price of $5.04 and $6.60 per share, respectively.

Employee Stock Purchase Plan

At the annual meeting of stockholders held on June 9, 2011, the Company’s stockholders approved the Genomic Health, Inc. Employee Stock Purchase Plan (“ESPP”), as adopted by the Company’s board of directors. The ESPP provides eligible employees with an opportunity to purchase common stock from the Company and to pay for their purchases through payroll deductions. A total of 1,250,000 shares of common stock has been reserved for issuance under the ESPP. The ESPP is expected to be implemented through a series of offerings of purchase rights to eligible employees beginning December 1, 2011. Under the ESPP, the Compensation Committee of the Company’s board of directors may specify offerings with a duration of not more than 27 months, and may specify shorter purchase periods within each offering. During each purchase period, payroll deductions will accumulate, without interest. On the last day of the purchase period, accumulated payroll deductions will be used to purchase common stock for employees participating in the offering. The purchase price will be specified pursuant to the offering, but cannot, under the terms of the ESPP, be less than 85% of the fair market value per share of the Company’s common stock on either the last trading day preceding the offering date or on the purchase date, whichever is less.

The Company’s board of directors has determined that the purchase periods initially shall have a duration of six months and that the purchase price will be 85% of the fair market value per share of the Company’s common stock on either the last trading day preceding the offering date or the purchase date, whichever is less. The length of the purchase period applicable to U.S. employees and the purchase price may not be changed without the approval of the independent members of the Company’s board of directors.