10. Stock-Based Compensation

The Company grants stock options to purchase HMS common stock, restricted stock awards and restricted stock units to HMS employees and directors under the Amended 2011 Stock Option and Stock Issuance Plan (the “HDI 2011 Stock Plan”), which the Company assumed in connection with the acquisition of HDI and the Fourth Amended and Restated 2006 Stock Plan (the “2006 Stock Plan”). The HDI 2011 Stock Plan superseded the HDI Amended 2004 Stock Option/Stock Issuance Plan. The 2006 Stock Plan was adopted in June 2006 and superseded the 1999 Long-Term Incentive Stock Plan (the “1999 Plan”). The Company has previously granted stock options outside of the plans, and as of December 31, 2015, none of those stock options remain outstanding.

Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period. Stock options granted under the HDI 2011 Stock Plan had vesting schedules ranging from one month to four years. Stock options granted under the 2006 Stock Plan generally vest over a one to four year period. All stock options granted under the 1999 Plan and outside the Company’s plans are fully vested. The restricted stock awards and restricted stock units granted under the 2006 Stock Plan vest over a one to five year period and the related stock-based compensation expense is ratably recognized over those same time periods.

During 2015, the Company revised the presentation of stock-based compensation expense. All stock-based compensation was previously recorded in SG&A, and in the current year the company has corrected the presentation to include a portion of the stock-compensation expense in cost of services-compensation expense. The Company has reflected stock compensation expense of $5.1 million and $4.5 million for the years ended December 31, 2014 and 2013, respectively in cost of services-compensation expense. In previous years, this amount was reflected in SG&A but classification was corrected in 2015 to conform to current year presentation. For the year ended December 31, 2015, the Company had stock compensation expense of $6.2 million included in cost of services – compensation and $8.1 million in SG&A, respectively.

The excess tax benefit from the exercise of stock options for the years ended December 31, 2015, 2014 and 2013 was $1.6 million, $1.8 million and $5.2 million, respectively.

(a) Amended 2011 Stock Option and Stock Issuance Plan

The Company assumed the HDI 2011 Stock Plan in connection with the acquisition of HDI. As of December 31, 2015, there were stock options to purchase 77,128 shares of common stock outstanding under the HDI 2011 Stock Plan.

The HDI 2011 Stock Plan is divided into two separate equity programs: a stock option grant program and a stock issuance program. The HDI 2011 Stock Plan permits the grant of incentive stock options, non-qualified stock options and share awards. A total of 836,122 shares have been authorized for issuance under the 2011 Stock Plan. The maximum number of shares available to be issued under the Plan is currently 366,806 shares, subject to adjustments for any stock splits, stock dividends or other specified adjustments which may take place in the future. Former HDI employees as well as new (i) employees, (ii) non-employee directors and (iii) consultants and other independent advisors are eligible to participate in the HDI 2011 Stock Plan. However, only employees are eligible to receive incentive stock options. The exercise price of stock options granted under the HDI 2011 Stock Plan may not be less than fair market value of a share of stock on the grant date, as measured by the closing price of the Company’s common stock on the NASDAQ Global Select Market and the term of a stock option may not exceed ten years.

(b) Fourth Amended and Restated 2006 Stock Plan

The 2006 Stock Plan permits the grant of incentive stock options, non-qualified stock options, stock appreciation rights (“SARs”), restricted stock awards and restricted stock units, performance shares and performance units and other share awards.

The Company’s 2006 Stock Plan was approved by the shareholders in June 2006. The purpose of the 2006 Stock Plan is to furnish a material incentive to HMS employees and non-employee directors by making available to them the benefits of a larger common stock ownership through stock options and awards. The Company believes that these increased incentives stimulate the efforts of employees and non-employee directors towards the Company’s continued success, as well as assist in the recruitment of new employees and non-employee directors.

A total of 18,000,000 shares have been authorized for issuance under the 2006 Stock Plan. Any shares issued in connection with awards other than stock options and SARs are counted against the 18,000,000 share limit as one and eighty-five hundredths (1.85) of a share for every one share issued in connection with such award or by which the award is valued by reference.

All of the Company’s employees as well as HMS non-employee directors are eligible to participate in the 2006 Stock Plan. However, only HMS employees are eligible to receive incentive stock. The exercise price of stock options granted under the 2006 Stock Plan may not be less than fair market value of a share of stock on the grant date, as measured by the closing price of the Company’s common stock on the NASDAQ Global Select Market and the term of a stock option may not exceed seven years.

In November 2015, the Compensation Committee of the Board of Directors approved the grant of non-qualified stock options to purchase an aggregate of 612,391 shares of common stock to certain HMS directors, executive officers and employees, under the 2006 Stock Plan at an exercise price of $11.20 per share, which was the closing price of the Company’s common stock on the grant date. The Committee also approved the grant of non-qualified stock options to purchase an aggregate of 555,000 shares of common stock to certain of the Company’s directors and employees, including HMS executive officers, granted under the 2006 Stock Plan at an exercise price of $14 per share, equal to 125% of the fair market value on the grant date. The Committee also approved the grant of 57,391 restricted stock units to directors on the same date. The stock options granted to HMS employees and executive officers vest as follows: one-third increments on the first, second and third anniversaries of the Grant Date.

The stock options and restricted units granted to HMS directors in November 2015 vest quarterly over a one year period commencing on December 31, 2015.

During the year ended December 31, 2015, HMS granted stock options to purchase an aggregate of 2,442,081 shares of common stock and 726,784 restricted stock units under the 2006 Stock Plan.

As of December 31, 2015, there were 3,413,500 shares of common stock available for future grant under the 2006 Stock Plan. The Company had the following outstanding under the 2006 Stock Plan as of December 31, 2015: (i) stock options to purchase 4,952,950 shares of common stock and (ii) 1,154,157 restricted stock units. There are no restricted stock awards outstanding under the 2006 Stock Plan as of December 31, 2015.

The 1999 Plan was approved by the Company’s shareholders in March 1999 and was superseded by the 2006 Stock Plan in June 2006. Accordingly, no additional awards or options may be granted thereunder. As of December 31, 2015, there were no stock options outstanding under the 1999 Plan. As of December 31, 2014, there were 74,290 stock options outstanding under the 1999 Plan.

(d) Options Issued Outside the Plans

As of December 31, 2015, there were stock options to purchase an aggregate of 180,000 shares of the Company’s common stock outstanding that were not granted under the 2006 Stock Plan, the 1999 Plan or the HDI 2011 Stock Plan, of which 180,000 stock options were granted in July 2007 to the Company’s former Chief Financial Officer under the terms of his employment agreement. All of these stock options were exercised during 2015.

(e) Summary of Stock Options

Presented below is a summary of the stock option activity for the year ended December 31, 2015:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Terms		Aggregate Intrinsic Value
	(shares and aggregate intrinsic value in thousands)
Outstanding at December 31, 2014		4,101		$	18.72
Granted		2,442			14.69
Exercised		(578	)		7.25
Forfeitures		(560	)		21.53
Expired		(375	)		24.10
Outstanding at December 31, 2015		5,030			17.37		5.10		3,728

Expected to vest at December 31, 2015		3,104			16.42		6.22		714
Exercisable at December 31, 2015		1,857		$	18.98		3.19	$	2,999

For awards subject to service-based vesting conditions, HMS recognizes stock-based compensation expense, net of estimated forfeitures, equal to the grant date fair value of stock options on a straight-line basis over the requisite service period, which is generally the vesting term. For awards subject to both performance and service-based vesting conditions, HMS recognizes stock-based compensation expense using the straight-line recognition method when it is probable that the performance condition will be achieved. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The fair value of each option grant with service-based vesting conditions was estimated using the Black-Scholes pricing models. The performance share awards granted in 2015 and 2014 to executive management only are market condition awards as attainment is based on the performance of the Company’s common stock for the relevant performance period. These awards were valued on the date of grant using a Monte Carlo simulation model.

Expected volatilities are calculated based on the historical volatility of the Company’s common stock. Management monitors stock option exercises and employee termination patterns to estimate forfeiture rates within the valuation model. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected holding period of options represents the period of time that options granted are expected to be outstanding. The expected terms of options granted are based on the Company’s historical experience for similar types of stock option awards. The risk-free interest rate is based on U.S. Treasury notes. HMS does not anticipate paying any cash dividends in the foreseeable future and therefore, use an expected dividend yield of zero in the option valuation models.

The weighted-average grant-date fair value per share of the stock options granted during the years ended December 31, 2015, 2014 and 2013 was $5.37, $7.59 and $7.07, respectively. HMS estimated the fair value of each stock option grant on the date of grant using a Black-Scholes option pricing model and weighted–average assumptions set forth in the following table:

	Years ended December 31,
	2015			2014			2013
Expected dividend yield		0	%		0	%		0	%
Risk-free interest rate		1.54	%		1.57	%		1.21	%
Expected volatility		40.62	%		38.18	%		37.22	%
Expected life (years)		4.89			4.82			4.51

During the years ended December 31, 2015, 2014 and 2013, the Company issued 577,559 shares, 516,552 shares and 1,305,538 shares, respectively, of the Company’s common stock upon the exercise of outstanding stock options and received proceeds of $4.2 million, $4.1 million and $9.2 million, respectively. The total intrinsic value of options exercised during the years ended December 31, 2015, 2014 and 2013 was $5.9 million, $6.5 million and $23.9 million, respectively.

Stock-based compensation expense relating to stock options charged against income was approximately $6.4 million, $7.6 million and $6.7 million, for the years ended December 31, 2015, 2014 and 2013, respectively.

As of December 31, 2015, there was approximately $14.5 million of total unrecognized compensation cost, adjusted for estimated forfeitures, related to stock options outstanding, which is expected to be recognized over a weighted-average period of 1.42 years.

(f) Restricted Stock Units

In 2015, 2014 and 2013, certain employees received restricted stock units under the 2006 Stock Plan. The fair value of restricted stock units is estimated based on the closing sale price of the Company’s common stock on the NASDAQ Global Select Market on the date of issuance. The total number of restricted stock units expected to vest is adjusted by estimated forfeiture rates. As of December 31, 2015, 2014 and 2013, 1,029,972, 813,346 and 571,204 restricted stock units remain unvested and there was approximately $13.4 million, $13.8 million and $11.6 million, respectively, of unamortized compensation cost related to restricted stock units which is expected to be recognized over the remaining weighted-average vesting period of 1.16 years.

Stock-based compensation expense related to restricted stock units was $7.9 million, $5.7 million and $4.5 million for the years ended December 31, 2015, 2014 and 2013, respectively.

A summary of the status of the Company’s restricted stock units and of changes in restricted stock units outstanding under the 2006 Stock Plan, as amended, as of December 31, 2015 is as follows:

	Number of Units			Weighted Average Grant Date Fair Value per Share		Aggregate Intrinsic Value
	(in thousands, except for weighted average grant date fair value per unit)
Outstanding balance at December 31, 2014		910		$	22.84
Granted		727			16.23
Vesting of restricted stock units, net of shares withheld for taxes		(174	)		23.22
Shares withheld for taxes		(71	)		23.22
Forfeitures		(238	)		21.60

Outstanding balance at December 31, 2015		1,154		$	18.85	$	14,274

(g) Restricted Stock Awards

Certain executive officers have received grants of restricted stock awards under the 2006 Stock Plan. The vesting of restricted stock awards is subject to the executive officers’ continued employment with the Company. Recipients of restricted stock awards are not required to provide the Company with any consideration other than rendering service and in addition, restricted stock holders are permitted to vote and receive dividends.

The stock-based compensation expense for restricted stock awards is determined based on the closing market price of the Company’s common stock on the grant date of the awards applied to the total number of awards that are anticipated to fully vest. Shares withheld to pay taxes are retired upon the vesting of the restricted stock awards. HMS did not issue restricted stock awards during the year ended December 31, 2015. At December 31, 2015, there are no unvested shares underlying restricted stock awards and there is no unrecognized compensation cost related to restricted stock awards. For the years ended December 31, 2014 and 2013, stock-based compensation expense related to restricted stock awards was $0.1 million, and $0.7 million, respectively.