8. Employee Stock Plans

Upon the issuance of Host Inc.’s common stock under either of the two stock-based compensation plans described below, Host L.P. will issue to Host Inc. common OP units of an equivalent value. Accordingly, these liabilities and related disclosures are included in both Host Inc.’s and Host L.P.’s consolidated financial statements.

Host Inc. maintains two stock-based compensation plans, the Comprehensive Stock and Cash Incentive Plan (the “2009 Comprehensive Plan”), under which Host Inc. may award to participating employees restricted stock awards of Host Inc.’s common stock and options to purchase our common stock and the Employee Stock Purchase Plan (“ESPP”). At December 31, 2012, there were approximately 19 million shares of Host Inc.’s common stock reserved and available for issuance under the 2009 Comprehensive Plan.

We recognize costs resulting from share-based payments in our financial statements over their vesting periods. No compensation cost is recognized for awards for which employees do not render the requisite services. We classify share-based payment awards granted in exchange for employee services as either equity or liability awards. Equity awards are measured based on their fair value as of the date of grant. In contrast, liability classified awards are re-measured to fair value each reporting period.

During 2012, 2011 and 2010, we recorded stock-based compensation expense of approximately $16 million, $19 million and $40 million, respectively. Shares granted in 2012, 2011 and 2010 totaled 1.8 million, 0.2 million and 0.4 million, respectively, while 0.9 million, 1.5 million and 2.6 million, respectively, vested during those years.

Senior Executive Plan

During 2012, Host Inc. granted 1.6 million shares of restricted stock awards and 0.2 million shares of stock option awards to senior executives (the “2012 Senior Executive Plan”). The restricted stock awards and stock option awards vest on an annual basis; therefore, no awards were outstanding at December 31, 2012.

Restricted stock awards

Vesting of restricted stock awards is based on (1) the achievement of relative total shareholder return (“TSR”) and (2) the personal performance attributable to specific management business objectives. Approximately 50% of the restricted stock awards are based on the satisfaction of the TSR compared to (i) the NAREIT index, (ii) the Standards & Poor index and (iii) a Selected Lodging Company index that serves as a relevant industry/asset specific measurement to our competitors, with the remaining 50% based on the achievement of management business objectives. Restricted stock awards granted to U.S. senior executives are classified as liability awards, due to settlement features that allow the recipient to have a percentage of the restricted stock awards withheld to meet tax requirements in excess of the statutory minimum withholding requirements. The fair value of these shares is adjusted at each balance sheet date and, at year end, is equal to the number of shares earned during the year at the December 31, 2012 stock price. Of the awards granted in 2012, 92% were classified as liability awards. In contrast, restricted stock awards granted to senior executives operating out of our international offices do not have this settlement feature and are considered equity awards. The fair value of these equity awards is based on the fair value on the grant date, and is not adjusted for subsequent movements in fair values.

During 2012, 2011 and 2010, we recorded compensation expense of approximately $12 million, $15 million and $36 million, respectively, related to the restricted stock awards to senior executives. The following table is a summary of the status of our senior executive plans for the three years ended December 31, 2012:


	Year ended December 31, 2012
	2012					2011					2010
	Shares (in millions)			Fair Value (per share)		Shares (in millions)			Fair Value (per share)		Shares (in millions)			Fair Value (per share)
Balance, at beginning of year		—		$	—		3.7		$	11		5.6		$	7
Granted		1.6			14		0.1			17		0.3			17
Vested (1)		(0.6	)		16		(1.3	)		15		(1.9	)		18
Forfeited/expired		(1.0	)		16		(2.5	)		15		(0.3	)		11

Balance, at end of year		—			—		—			—		3.7			11

Issued in calendar year (1)		0.8			16		1.1			15		0.8			11

(1)

Shares that vest at December 31 of each year are issued to the employees in the first quarter of the following year, although the requisite service period is complete. Accordingly, the 0.8 million shares issued in 2012 include shares vested at December 31, 2011, after adjusting for shares withheld to meet employee tax requirements. The shares withheld for employee tax requirements were valued at $9.5 million, $15.4 million and $6.9 million, for 2012, 2011 and 2010, respectively.

Stock Option Awards

As of December 31, 2012, 1.0 million shares of stock option awards were outstanding and exercisable with a weighted average remaining life of 7 years and a weighted average exercise price of $9.86 per share. During 2012, 2011 and 2010, stock option grants totaled 201,000, 22,000 and 54,000, respectively. Stock compensation expense was $1.6 million during 2012 and $1.8 million during 2011 and 2010, respectively, and all stock option awards outstanding as of December 31, 2012 were fully vested. We expense stock option awards over the vesting period based on the estimated fair value of the options at the grant date using a binomial pricing model. To calculate the fair value of stock option awards granted from 2010 to 2012, we assumed (i) a volatility ranging between 57% and 66%, (ii) a risk free rate ranging between 1.0% and 2.2%, (iii) a dividend yield ranging between 3.5% and 5.0% and (iv) an expected life of 5.5 years.

Other Stock Plans

In addition to the share-based plans described above, we maintain an upper-middle management plan and an employee stock purchase plan. The awards are time-based equity awards that vest within three years of the grant date and expense is recognized over the life of the award based on the grant date fair value. Through the employee stock purchase plan, employees can purchase stock at a 10% discount of the lower price of the beginning and ending stock price each quarter. During 2012, 2011 and 2010 we granted 84,000 shares, 93,000 shares and 120,000 shares, respectively, under both of these programs and recorded expenses of $1.9 million, $1.9 million and $2.2 million, respectively.