Note L — Stock-Based Compensation

We maintain long-term incentive plans for the benefit of certain employees, consultants and directors. Our plans consist of the Rent-A-Center, Inc. Amended and Restated Long-Term Incentive Plan (the “Prior Plan”), the Rent-A-Center, Inc. 2006 Long-Term Incentive Plan (the “2006 Plan”), and the Rent-A-Center, Inc. 2006 Equity Incentive Plan (the “Equity Incentive Plan”), which are collectively known as the “Plans.”

The 2006 Plan authorizes the issuance of 7,000,000 shares of Rent-A-Center’s common stock that may be issued pursuant to awards granted under the 2006 Plan, of which no more than 3,500,000 shares may be issued in the form of restricted stock, deferred stock or similar forms of stock awards which have value without regard to future appreciation in value of or dividends declared on the underlying shares of common stock. In applying these limitations, the following shares will be deemed not to have been issued: (1) shares covered by the unexercised portion of an option that terminates, expires, or is canceled or settled in cash, and (2) shares that are forfeited or subject to awards that are forfeited, canceled, terminated or settled in cash. At December 31, 2013 and 2012, there were 1,729,969 and 1,616,983 shares, respectively, allocated to equity awards outstanding in the 2006 Plan.

We acquired the Equity Incentive Plan (formerly known as the Rent-Way, Inc. 2006 Equity Incentive Plan) in conjunction with our acquisition of Rent-Way in 2006. There were 2,468,461 shares of our common stock reserved for issuance under the Equity Incentive Plan. There were 1,020,361 and 870,643 shares allocated to equity awards outstanding in the Equity Incentive Plan at December 31, 2013 and 2012, respectively.

Under the Prior Plan, 14,562,865 shares of Rent-A-Center’s common stock were reserved for issuance under stock options, stock appreciation rights or restricted stock grants. There were no grants of stock appreciation rights and all equity awards were granted with fixed prices. At December 31, 2013 and 2012, there were 97,499 and 212,969 shares, respectively, allocated to equity awards outstanding under the Prior Plan. The Prior Plan was terminated on May 19, 2006, upon the approval by our stockholders of the 2006 Plan.

Options granted to our employees generally become exercisable over a period of one to four years from the date of grant and may be exercised up to a maximum of 10 years from the date of grant. Options granted to directors were immediately exercisable.

We grant restricted stock units to certain employees that vest after a three-year service requirement has been met. We recognize expense for these awards using the straight-line method over the requisite service period based on the number of awards expected to vest. We also grant performance-based restricted stock units that vest between 0% and 200% depending on our achievement of performance metrics that are established at the date of grant for the subsequent three-year period. We record expense for these awards over the requisite service period using an estimate of the number of awards that will vest, based on our performance against the established metrics, and net of the expected forfeiture rate, since the employee must maintain employment to vest in the award.

For the years ended December 31, 2013, 2012 and 2011, we recorded stock based compensation expense of approximately $6.5 million ($4.0 million net of tax), $8.4 million ($5.3 million net of tax) and $4.5 million ($2.8 million net of tax), respectively, related to stock options and restricted stock units granted. We issue new shares of stock to satisfy option exercises and the vesting of restricted stock units.

Information with respect to stock option activity related to the Plans follows:



	Equity Awards Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
						(In thousands)
Balance outstanding at January 1, 2013	2,260,410		$	28.57
Granted	760,322		36.05
Exercised	(478,652	)	24.93
Forfeited	(210,923	)	32.94
Balance outstanding at December 31, 2013	2,331,157		$	31.36	7.22 years	$	8,772

Exercisable at December 31, 2013	863,893		$	26.13	5.11 years	$	6,905

The intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011 was $5.8 million, $7.5 million and $24.1 million, respectively, resulting in tax benefits of $0.4 million, $4.3 million and $7.0 million, respectively, which are reflected as an outflow from operating activities and an inflow from financing activities in the consolidated statements of cash flows.

The fair value of unvested options that we expect to result in compensation expense was approximately $10.3 million with a weighted average number of years to vesting of 2.63 years at December 31, 2013.

During the year ended December 31, 2013, the weighted average fair values of the options granted under the Plans were calculated using the Black-Scholes method with the following assumptions:



Employee options:
Risk free interest rate (0.27% to 1.81%)		Weighted average 0.88%
Expected dividend yield (2.20% to 2.44%)		Weighted average 2.34%
Expected life (2.33 years to 6.25 years)		Weighted average 4.43 years
Expected volatility (28.64% to 44.35%)		Weighted average 37.88%
Forfeiture rate		7%
Employee stock options granted		760,322
Weighted average grant date fair value		$9.27

During the year ended December 31, 2012, the weighted average fair values of the options granted under the Plans were calculated using the binomial method with the following assumptions:



Employee options:
Risk free interest rate (0.12% to 0.77%)		Weighted average 0.35%
Expected dividend yield (1.70% to 1.90%)		Weighted average 1.74%
Expected life		6.25 years
Expected volatility (28.58% to 47.67%)		Weighted average 39.72%
Forfeiture rate (5.29% to 9.78%)		Weighted average 6.77%
Employee stock options granted		733,297
Weighted average grant date fair value		$10.08

During the year ended December 31, 2011, the weighted average fair values of the options granted under the Plans were calculated using the binomial method with the following assumptions:



Employee options:
Risk free interest rate (0.12% to 1.78%)		Weighted average 0.71%
Expected dividend yield (0.70% to 2.30%)		Weighted average 1.31%
Expected life		6.05 years
Expected volatility (33.42% to 50.12%)		Weighted average 42.48%
Forfeiture rate (7.55% to 13.41%)		Weighted average 9.48%
Employee stock options granted		770,245
Weighted average grant date fair value		$7.50

Information with respect to non-vested restricted stock unit activity follows:



	Restricted Awards Outstanding		Weighted Average Grant Date Fair Value
Balance outstanding at January 1, 2013	440,185		$	28.96
Granted	259,484		32.70
Vested	(149,669	)	21.66
Forfeited	(33,328	)	32.97
Balance outstanding at December 31, 2013	516,672		$	32.69

Restricted stock units are valued using the last trade before the day of the grant. Unrecognized compensation expense for unvested restricted stock units at December 31, 2013, was approximately $5.2 million expected to be recognized over a weighted average period of 1.83 years.