NOTE 3: STOCK BASED AWARDS AND OTHER EQUITY INSTRUMENTS

Stock-based compensation expense relates primarily to expense for restricted stock units (“RSUs”) and stock options. Our outstanding RSUs and stock options generally vest over four years.

For the three and nine months ended September 30, 2013, we recognized total stock-based compensation expense of $11.7 million and $35.5 million, respectively. The total income tax benefit related to stock-based compensation expense was $4.4 million and $13.8 million for the three and nine months ended September 30, 2013, respectively. For the three and nine months ended September 30, 2012, we recognized total stock-based compensation expense of $8.5 million and $19.9 million, respectively. The total income tax benefit related to stock-based compensation expense was $3.2 million and $7.2 million for the three and nine months ended September 30, 2012, respectively.

TripAdvisor, Inc. 2011 Stock and Annual Incentive Plan, As Amended

On December 20, 2011, our 2011 Stock and Annual Incentive Plan became effective. At our annual meeting of stockholders held on June 28, 2013 (the “Annual Meeting”), our stockholders approved an amendment to our 2011 Stock and Annual Incentive Plan to, among other things, increase the aggregate number of shares of common stock authorized for issuance thereunder by 15,000,000 shares. We refer to our 2011 Stock and Annual Incentive Plan, as amended by the amendment as the “2011 Incentive Plan.” A summary of the material terms of the 2011 Incentive Plan can be found in “Proposal 3: Approval of the 2011 Stock and Annual Incentive Plan, as amended” in our Proxy Statement for the Annual Meeting. The summary of the material terms of the 2011 Incentive Plan is qualified in its entirety by the full text of the 2011 Incentive Plan previously filed.

2013 Stock Option Activity

The exercise price for all stock options granted by us to date has been equal to the market price of the underlying shares of common stock at the date of grant. In this regard, when making stock option awards, our practice is to determine the applicable grant date and to specify that the exercise price shall be the closing price of our common stock on the date of grant. Stock options granted during the first nine months of 2013 generally have a term of ten years from the date of grant and generally vest over a four-year service period.

During the nine months ended September 30, 2013, we granted 2,776,247 primarily service-based stock options under the 2011 Incentive Plan with a weighted average grant-date fair value per option of $28.11. We will amortize the fair value, net of estimated forfeitures, as stock-based compensation expense over the vesting term of generally four years on a straight-line basis, with the amount of compensation expense recognized at any date at least equaling the portion of the grant-date fair value of the award that is vested at that date. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment in the period of change which also impacts the amount of stock compensation expense to be recognized in future periods.

A summary of the status and activity for stock option awards relating to our common stock for the nine months ended September 30, 2013, is presented below:


	Options Outstanding		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
	(In thousands)				(In years)		(In thousands)
Options outstanding at January 1, 2013		8,654	$	31.41
Granted		2,776		57.66
Exercised (1)		1,273		23.53			$	45,300
Cancelled		481		37.34


Options outstanding at September 30, 2013		9,676	$	39.69		6.1	$	349,716


Exercisable as of September 30, 2013		3,499	$	29.83		3.2	$	160,963


Vested and expected to vest after September 30, 2013		8,813	$	39.46		5.9	$	320,645

(1)

Inclusive of 168,795 options which were not converted into shares due to net share settlement in order to cover the aggregate exercise price and the minimum amount of required employee withholding taxes. Potential shares which had been convertible under stock options that were withheld under net share settlement remain in the authorized but unissued pool under the 2011 Incentive Plan and can be reissued by the Company. We began net-share settling the majority of our stock option exercises during the third quarter of 2013. Total payments for the employees’ tax obligations to the taxing authorities due to net share settlements are reflected as a financing activity within the consolidated statements of cash flows.

Aggregate intrinsic value represents the difference between the closing stock price of our common stock and the exercise price of outstanding, in-the-money options. Our closing stock price as reported on NASDAQ as of September 30, 2013 was $75.84.

The estimated fair value of the options granted under the 2011 Incentive Plan was calculated using a Black-Scholes Merton option-pricing model (“Black-Scholes model”). The Black-Scholes model incorporates assumptions to value stock-based awards, which includes the risk-free rate of return, expected volatility, expected term and expected dividend yield.

Our risk-free interest rate is based on the rates currently available on zero-coupon U.S. Treasury issues, in effect at the time of the grant, whose remaining maturity period most closely approximates the stock option’s expected term assumption. We estimated the volatility of our common stock by using an average of our historical stock price volatility and of publicly traded companies that we consider peers based on daily price observations over a period equivalent to or approximate to the expected term of the stock option grants. The decision to use a weighted average volatility factor of a peer group was based upon the relatively short period of availability of data on our common stock. We estimated our expected term using the simplified method for all stock options as we do not have sufficient historical exercise data on our common stock. Our expected dividend yield is zero, as we have not paid any dividends on our common stock to date and do not expect to pay any cash dividends for the foreseeable future.

The fair value of stock option grants under the 2011 Incentive Plan has been estimated at the date of grant using the Black–Scholes model with the following weighted average assumptions for the periods presented below:


	Three months ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
Risk free interest rate		1.83	%		0.90	%		1.40	%		1.03	%
Expected term (in years)		5.80			6.25			6.05			6.22
Expected volatility		49.62	%		54.78	%		50.81	%		53.54	%
Expected dividend yield		0	%		0	%		0	%		0	%

2013 RSU Activity

During the nine months ended September 30, 2013, we granted 1,083,082 primarily service-based RSUs under the 2011 Incentive Plan for which the fair value was measured based on the quoted price of our common stock at the date of grant. We will amortize the fair value, net of estimated forfeitures, as stock-based compensation expense over the vesting term of generally four years on a straight-line basis, with the amount of compensation expense recognized at any date at least equaling the portion of the grant-date fair value of the award that is vested at that date.

The following table presents a summary of RSU activity on our common stock:


	RSUs Outstanding		Weighted Average Grant- Date Fair Value Per Share		Aggregate Intrinsic Value
	(In thousands)				(In thousands)
Unvested RSUs outstanding as of January 1, 2013		446	$	26.11
Granted		1,083		48.84
Vested and released (1)		333		22.51
Cancelled		76		44.81


Unvested RSUs outstanding as of September 30, 2013		1,120	$	47.27	$	84,989

(1)

Inclusive of 127,199 RSUs withheld to satisfy employee minimum tax withholding requirements due to net share settlement. Potential shares which had been convertible under RSUs that were withheld under net share settlement remain in the authorized but unissued pool under the 2011 Incentive Plan and can be reissued by the Company. Total payments for the employees’ tax obligations to the taxing authorities due to net share settlements are reflected as a financing activity within the consolidated statements of cash flows.

A summary of the unrecognized compensation expense, net of estimated forfeitures, and the weighted average period remaining at September 30, 2013 related to our non-vested stock options and RSU awards is presented below (in thousands, except year information):


	Stock Options		RSUs
Unrecognized compensation expense (net of forfeitures)	$	100,509	$	32,061
Weighted average period remaining (in years)		3.46		3.29

All shares of common stock issued in respect of the exercise of options or other equity awards since Spin-Off have been issued from authorized, but unissued common stock.