STOCK-BASED COMPENSATION

The AutoNation, Inc. 2008 Equity and Incentive Plan (“2008 Plan”) provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock-based and cash-based awards to employees. A maximum of 12.0 million shares may be issued under the 2008 Plan, provided that no more than 2.0 million shares may be issued pursuant to the grant of awards, other than options or stock appreciation rights, that are settled in shares. The exercise price of all stock options granted in 2013 under the 2008 Plan, is equal to the closing price of our common stock on the date such awards were granted.

The AutoNation, Inc. 2007 Non-Employee Director Stock Option Plan (as amended, the “2007 Plan”) provides for the grant of stock options to our non-employee directors. A maximum of 2.0 million shares may be issued under the 2007 Plan. The exercise price of all stock options granted in 2013 under the 2007 Plan is equal to the closing price of our common stock on the date such awards were granted.

Stock Options

In 2013, the Executive Compensation Subcommittee of the Compensation Committee of our Board of Directors approved an annual grant of 0.8 million employee stock options for 2013. One-fourth of each employee stock option award that was approved in 2013 was granted on each of March 1, June 3, September 3, and December 2, 2013. Additionally, each of our non-employee directors received an automatic grant of an option to purchase 5,000 shares of our common stock on each of March 1, June 3, September 3, and December 2, 2013. The options granted in 2013 have an exercise price equal to the closing price per share on the grant date ($43.45 on March 1, $46.22 on June 3, $47.25 on September 3, and $48.80 on December 2, 2013).

Stock options granted under all plans are non-qualified. Upon exercise, shares of common stock are issued from our treasury stock. Employee stock options have a term of 10 years from the first date of grant (i.e., all employee stock options granted in 2013 will expire on March 1, 2023) and vest in equal installments over four years commencing on June 1 of the year following the grant date (e.g., 25% of each option grant made in 2013 will vest on June 1, 2014).

Stock option awards granted to non-employee directors have a term of 10 years from the first date of grant and vest in 25% annual increments on each June 1 of the four years following the grant date, or in full upon termination of Board membership if prior to June 1 of the fourth year following the grant date.

We use the Black-Scholes valuation model to determine compensation expense and amortize compensation expense over the requisite service period of the grants on a straight-line basis. Certain of our equity-based compensation plans contain provisions that provide for vesting of awards upon retirement. Accordingly, compensation cost is recognized over the shorter of the stated vesting period or the period until employees become retirement-eligible.

The following table summarizes the assumptions used relating to the valuation of our stock options during 2013, 2012, and 2011:



	Grant Year
	2013	2012	2011
Risk-free interest rate	0.58% - 2.24%	0.49% - 1.40%	0.62% - 2.81%
Expected dividend yield	—	—	—
Expected term	4 - 7 years	4 - 7 years	4 - 7 years
Expected volatility	29% - 44%	39% - 48%	39% - 50%

The risk-free interest rate is based on the U.S. Treasury yield curve at the time of the grant with a remaining term equal to the expected term used for stock options granted. The expected term of stock options granted is derived from historical data and represents the period of time that stock options are expected to be outstanding. The expected volatility is based on historical volatility, implied volatility, and other factors.

The following table summarizes stock option activity during 2013:



	Stock Options
	Shares (in millions)		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Options outstanding at January 1	6.2		$	24.29
Granted ⁽¹⁾	1.0		$	46.43
Exercised	(1.1	)	$	20.31
Forfeited	(0.1	)	$	35.40
Expired	—		$	—
Options outstanding as of December 31	6.0		$	28.48	6.58	$	127.4
Options exercisable at December 31	3.5		$	21.23	5.48	$	100.7
Options exercisable at December 31 and expected to vest thereafter	6.0		$	28.35	6.56	$	127.1
Options available for future grants at December 31	6.0


⁽¹⁾	The options granted during 2013, are related to our employee and non-employee director quarterly stock option award grants in March, June, September, and December 2013.

The weighted average grant-date fair value of stock options granted and total intrinsic value of stock options exercised are summarized in the following table:



	2013		2012		2011
Weighted average grant-date fair value of stock options granted	$	17.93	$	15.25	$	15.69
Total intrinsic value of stock options exercised (in millions)	$	31.3	$	36.2	$	81.0

Restricted Stock

In 2013, the Executive Compensation Subcommittee of the Compensation Committee of our Board of Directors approved a total of 0.1 million shares of restricted stock, all of which were granted to restricted stock-eligible employees on March 1, 2013.

Restricted stock awards are considered nonvested share awards as defined under generally accepted accounting principles and are issued from our treasury stock. Restricted stock awards vest in equal installments over four years commencing on June 1 of the year following the grant date. Compensation cost for restricted stock awards is based on the closing price of our common stock on the date of grant and is recognized over the shorter of the stated vesting period or the period until employees become retirement-eligible.

The following table summarizes information about vested and unvested restricted stock for 2013:



	Restricted Stock
	Shares (in millions)		Weighted-Average Grant Date Fair Value
Nonvested at January 1	0.3		$	27.81
Granted ⁽¹⁾	0.1		$	43.45
Vested	(0.1	)	$	24.33
Forfeited	—		$	—
Nonvested at December 31	0.3		$	35.76


⁽¹⁾	The restricted stock awards granted during 2013 are related to our employee annual restricted stock award grant in March 2013.

The weighted average grant-date fair value of restricted stock awards granted and total fair value of restricted stock awards vested are summarized in the following table:



	2013		2012		2011
Weighted average grant-date fair value of restricted stock awards granted	$	43.45	$	34.31	$	32.50
Total fair value of restricted stock awards vested (in millions)	$	6.8	$	5.8	$	5.5

Compensation Expense

The following table summarizes the total stock-based compensation expense recognized in Selling, General, and Administrative Expenses in the Consolidated Statements of Income and the total recognized tax benefit related thereto:



	2013		2012		2011
Stock options	$	16.6	$	14.8	$	15.2
Restricted stock	4.7		3.8		3.2
Total stock-based compensation expense	$	21.3	$	18.6	$	18.4

Tax benefit related to stock-based compensation expense	$	8.1	$	7.1	$	7.0

As of December 31, 2013, there was $20.1 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements, of which $13.5 million relates to stock options and $6.6 million relates to restricted stock. These amounts are expected to be recognized over a weighted average period of 1.6 years.

We realized tax benefits related to stock options exercised and/or vesting of restricted stock of $14.3 million in 2013, $15.9 million in 2012, and $32.8 million in 2011.