NOTE 16. Compensation Plans

Stock Based Compensation

On May 11, 2006, the Company’s stockholders approved the 2006 Performance Incentive Plan, which was amended and restated in 2009 (“the 2006 Plan”). On May 1, 2014, the Company’s stockholders approved the 2014 Performance Incentive Plan (“the 2014 Plan”). Following the adoption of the 2014 Plan, no new awards will be issued under the 2006 Plan. Similar to the 2006 Plan, the 2014 Plan provides for the granting of stock-based compensation, including stock options, restricted stock and restricted stock units to officers, employees and directors in connection with their employment with or services provided to the Company. The maximum number of shares reserved for awards under the 2014 Plan is 33 million shares; as of December 31, 2014, substantially all of the reserved shares of the 2014 Plan are available for future awards and approximately 22 million shares may be issued as restricted stock and restricted stock units.

Stock Options

Stock options are granted with an exercise price per share equal to the closing market price of the Company’s common stock on the grant date. Stock options generally vest ratably over a three- to five-year period and have a 10-year contractual term. Vesting of certain options may accelerate, as provided in the 2006 or 2014 Plans or in the applicable award agreement, upon retirement, a change in control or other specified events. Upon the exercise of options, the participant is required to pay the exercise price of the options being exercised and the related tax withholding obligation.

A summary of the stock option activity in 2014 is presented in the following table (dollars and shares in thousands, except per share amounts):


				Weighted
		Weighted		Average
		Average		Remaining	Aggregate
	Shares	Exercise		Contractual	Intrinsic
	Under Options	Price		Term (Years)	Value
Outstanding as of January 1, 2014	2,222	$	35.77	5.0	$	8,870
Granted	534		38.83
Exercised	(169)		26.57
Outstanding as of December 31, 2014	2,587		37.00	5.0		19,581
Exercisable as of December 31, 2014	1,681		35.58	3.4		15,062

The following table summarizes additional information concerning outstanding and exercisable stock options at December 31, 2014 (shares in thousands):


					Currently Exercisable
				Weighted
		Weighted		Average		Weighted
		Average		Remaining		Average
Range of	Shares Under	Exercise		Contractual	Shares Under	Exercise
Exercise Price	Options	Price		Term (Years)	Options	Price
$23.34 - $25.52	352	$	23.34	2.9	352	$	23.34
27.11 - 28.35	306		28.35	3.6	217		28.35
31.95 - 46.92	1,929		40.86	5.6	1,112		40.86
	2,587		37.00		1,681		35.58

The following table summarizes additional information concerning unvested stock options at December 31, 2014 (shares in thousands):


		Weighted
	Shares	Average
	Under	Grant Date Fair
	Options	Value
Unvested at January 1, 2014	941	$	5.09
Granted	534		3.80
Vested	(569)		4.25
Unvested at December 31, 2014	906		4.85

The weighted average fair value per share at the date of grant for options awarded during the years ended December 31, 2014, 2013 and 2012 was $3.80, $5.89 and $6.34, respectively. The total vesting date intrinsic value (at vesting) of shares under options vested during the years ended December 31, 2014, 2013 and 2012 was $7 million, $12 million and $18 million, respectively. The total intrinsic value of vested shares under options at December 31, 2014 was $15 million.

Proceeds received from options exercised under the 2006 Plan for the years ended December 31, 2014, 2013 and 2012 were $5 million, $18 million and $52 million, respectively. The total intrinsic value (at exercise) of options exercised during the years ended December 31, 2014, 2013 and 2012 was $3 million, $25 million and $51 million, respectively.

The fair value of the stock options granted during the years ended December 31, 2014, 2013 and 2012 was estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions described below. The risk-free rate is based on the U.S. Treasury yield curve in effect at the grant date. The expected life (estimated period of time outstanding) of the stock options granted was estimated using the historical exercise behavior of employees and turnover rates. For stock options granted in 2014, 2013 and 2012, the expected volatility was based on the average of the Company’s: (i) historical volatility of the adjusted closing prices of its common stock for a period equal to the stock option’s expected life, ending on the grant date, calculated on a weekly basis and (ii) the implied volatility of traded options on its common stock for a period equal to 30 days ending on the grant date. The following table summarizes the Company’s stock option valuation assumptions used with respect to stock options awarded in 2014, 2013 and 2012:


	2014		2013		2012
Risk-free rate	1.34	%	0.78	%	1.09	%
Expected life (in years)	4.5		4.5		5.9
Expected volatility	22.9	%	28.9	%	32.7	%
Expected dividend yield	5.4	%	5.8	%	5.9	%

Restricted Stock and Performance Restricted Stock Units

Under the 2006 and 2014 Plans, restricted stock and performance restricted stock units generally have a contractual life or vest over three- to five-year periods. The vesting of certain restricted shares and units may accelerate, as provided in the 2006 and 2014 Plans or in the applicable award agreement, upon retirement, a change in control or other specified events. When vested, each restricted stock unit or performance restricted stock unit is convertible into one share of common stock. The restricted stock and performance restricted stock units are valued on the grant date based on the closing market price of the Company’s common stock on that date. Generally, the Company recognizes the fair value of the awards over the applicable vesting period as compensation expense. Upon any exercise or payment of restricted shares or units, the participant is required to pay the related tax withholding obligation. Participants can generally elect to have the Company reduce the number of shares delivered to pay the related employee tax withholding obligation. The value of the shares withheld is dependent on the closing market price of the Company’s common stock on the trading date prior to the relevant transaction occurring. During 2014, 2013 and 2012, the Company withheld 323,000, 242,000 and 361,000 shares, respectively, to offset tax withholding obligations with respect to the restricted stock and restricted stock unit awards.

The following table summarizes additional information concerning restricted stock and restricted stock units at December 31, 2014 (units and shares in thousands):


		Weighted			Weighted
	Restricted	Average			Average
	Stock	Grant Date		Restricted	Grant Date
	Units	Fair Value		Shares	Fair Value
Unvested at January 1, 2014	1,208	$	38.82	226	$	35.70
Granted	528		39.58	—		—
Vested	(614)		39.18	(113)		32.78
Forfeited	(222)		31.13	(1)		26.48
Unvested at December 31, 2014	900		40.54	112		38.69

At December 31, 2014, the weighted average remaining vesting period of restricted stock units and restricted stock was one year. The total fair values (at vesting) of restricted stock and restricted stock units which vested for the years ended December 31, 2014, 2013 and 2012 were $24 million, $22 million and $39 million, respectively.

Pursuant to the HCP, Inc. 2006 Plan and effective February 3, 2014, certain officers were granted 176,088 performance units ("3-Year LTIP Awards"). The 3-Year LTIP Awards had a fair value of $7.2 million (fair value of the awards per target share of $40.68) on the grant date as determined by a lattice-binomial option-pricing model based on a Monte Carlo simulation. Seventy percent of the 3-Year LTIP Awards vest based upon the relative three-year total shareholder return ("TSR") of our common stock compared to the TSRs of the MSCI US REIT Index (25% weight) and the NAREIT Health Care Index (75% weight). TSR is measured over the performance period: January 1, 2014 through December 31, 2016. Thirty percent of the 3-Year LTIP Awards vest based upon the Company’s Net Debt to Adjusted Pro Forma EBITDA over the performance period. Compensation expense is charged to earnings on a straight-line basis over the respective performance period. At the end of the respective performance period, each participant will be issued shares of the Company’s common stock equal to the number of units granted to the participant pursuant to the 3-Year LTIP Awards multiplied by a percentage, ranging from zero to 200%, based on the outcome of the performance metrics for the performance period, as described above. The participants will also be entitled to dividend equivalents for shares issued pursuant to vested 3-Year LTIP Awards, which dividend equivalents represent any common dividends that would have been paid with respect to such issued shares after the grant of the 3-Year LTIP Awards and prior to the date of settlement.

As the Company pays dividends on its outstanding common stock, holders of restricted stock awards are generally entitled to any dividends on the underlying restricted shares, and holders of restricted stock units generally have the right to a cash payment equal to the dividends that would be paid on a number of shares of Company common stock equal to the number of outstanding units subject to the award.

In 2012, the Company implemented a clawback policy that is retroactive to prior years pursuant to which its Board of Directors or Compensation Committee shall, in such circumstances as they determine to be appropriate, require reimbursement or cancellation of all or a portion of any short- or long-term cash or equity incentive awards or payments to an officer (or former officer, as the case may be) of the Company where: (i) the amount of, or number of shares included in, any such payment or award was determined based on the achievement of financial results that were subsequently the subject of an accounting restatement due to noncompliance with any financial reporting requirement under the securities laws; (ii) a lesser payment or award of cash or shares would have been made to the individual based upon the restated financial results; and (iii) the payment or award of cash or shares was received by the individual prior to or during the 12-month period following the first public issuance or filing of the financial results that were subsequently restated.

Total share-based compensation expense recognized during the years ended December 31, 2014, 2013 and 2012 was $22 million, $40 million and $23 million, respectively; included in 2013 is a $27 million charge recognized in general and administrative expenses resulting from the termination of the Company’s former chief executive officer (“CEO”) that was comprised of: (i) the acceleration of $17 million of deferred compensation for restricted stock units and options that vested upon termination; and (ii) severance payments and other costs of approximately $10 million; these vestings and severance payments were in accordance with the terms of the former CEO’s employment agreement. As of December 31, 2014, there was $27 million of deferred compensation cost associated with future employee services, related to unvested share-based compensation arrangements granted under the Company’s incentive plans, which is expected to be recognized over a weighted average period of three years.

Employee Benefit Plan

The Company maintains a 401(k) and profit sharing plan that allows for eligible participants to defer compensation, subject to certain limitations imposed by the Code. The Company provides a matching contribution of up to 4% of each participant’s eligible compensation. During the years ended December 31, 2014, 2013 and 2012, the Company’s matching contributions were approximately $1 million for each of the years then ended.