Stock-based Compensation

Tempur Sealy International has three stock-based compensation plans which provide for grants of non-qualified and incentive stock options, stock appreciation rights, restricted stock and stock unit awards, performance shares, stock grants and performance based awards to employees, non-employee directors, consultants and Company advisors. The plans under which equity awards may be granted are the 2002 Option Plan and the Amended and Restated 2003 Equity Incentive Plan, as amended, (the “2003 Plan”), and the 2013 Equity Incentive Plan (the “2013” Plan). It is the policy of the Company to issue stock out of Treasury shares upon issuance or exercise of share-based awards. The Company believes that awards and purchases made under these plans better align the interests of the plan participants with those of its stockholders.

The 2002 Option Plan was adopted on November 1, 2002 and provides for grants of stock options to purchase shares of common stock to employees and directors of the Company. Options granted under the 2002 Option Plan that qualify as incentive stock options, as defined by the Internal Revenue Code of 1986, as amended (the “Code”), must have an exercise price of not less than the fair market value of Tempur Sealy International’s common stock at the date of grant. Options granted under the 2002 Option Plan provided for vesting terms as determined by the Board of Directors at the time of grant, which are generally based on 4 years of continuous service. Options can be exercised up to 10 years from the grant date and up to 5 years from the grant date for any stockholders who own 10.0% or more of the total combined voting power of all shares of stock of Tempur Sealy International. Upon the exercise of all outstanding options under the 2002 Option Plan, Tempur Sealy International issued a maximum of 6.5 million shares of common stock, subject to certain adjustment provisions. In December 2003, the Company’s Board of Directors adopted a resolution that prohibited further grants under the 2002 Option Plan. As of December 31, 2013, there are no outstanding options under the 2002 Option Plan.

The 2003 Plan is administered by the Compensation Committee of the Board of Directors, which, together with the Board of Directors, has the exclusive authority to administer the 2003 Plan, including the power to determine eligibility to receive awards, the types and number of shares of stock subject to the awards, the price and timing of awards and the acceleration or waiver of any vesting and performance of forfeiture restrictions, in each case subject to the terms of the 2003 Plan. Any of the Company’s employees, non-employee directors, consultants and Company advisors, as determined by the Compensation Committee, may be selected to participate in the 2003 Plan. Tempur Sealy International may issue a maximum of 11.5 million shares of its common stock under the 2003 Plan. In May 2013 the Company's Board of Directors adopted a resolution that prohibited further grants under the 2003 Plan.

In 2010, the Board of Directors approved the terms of a Long-Term Incentive Plan established under the 2003 Plan. In 2013, the Board of Directors approved the terms of another Long-Term Incentive Plan established under the 2013 Plan. Awards under both Long-Term Incentive Plans consist of a mix of stock options and PRSUs. Shares with respect to the PRSUs will be granted and vest following the end of the applicable performance period and achievement of applicable performance metrics as determined by the Compensation Committee of the Board of Directors.

The 2013 Plan was adopted on May 22, 2013 by the Company’s Board of Directors, and provides for grants of stock options to purchase shares of common stock to employees and directors of the company. The 2013 Plan may be administered by the Compensation Committee of the Board of Directors, by the Board directly, or, in certain cases, by an executive officer or officers of the Company designated by the Compensation Committee. The shares issued or to be issued under the 2013 Plan may be either authorized but unissued shares of the Company’s common stock or shares held by the Company in its treasury. Tempur Sealy International will issue a maximum of 5.1 million shares of common stock under the 2013 Plan, subject to certain adjustment provisions.

The Company’s stock-based compensation expense for the year ended December 31, 2013 included PRSUs, stock options, RSUs and DSUs. A summary of the Company’s stock-based compensation expense is presented below:



	December 31,
(in millions)	2013		2012			2011
PRSU expense (benefit)	$	3.0	$	(0.9	)	$	9.5
Stock option expense	8.3		4.4			5.2
RSU/DSU expense	5.6		2.2			2.0
Total stock-based compensation expense	$	16.9	$	5.7		$	16.7

The Company granted PRSUs during the years ended December 31, 2013 and 2012. Actual payout under the PRSUs is dependent upon the achievement of certain financial goals, based on net sales and earnings before interest and taxes (EBIT) margin targets. The Company recorded a benefit in the accompanying Consolidated Statements of Income of $10.3 million, for the year ended December 31, 2012, after re-evaluation of the probability of meeting certain required financial metrics.

The following table shows the PRSUs granted under the LTIP during the year ended December 31, 2013:



(shares in millions)	Performance period	Target shares granted ⁽¹⁾	Weighted-average fair value per share
Year ended 2013	January 1, 2013 – December 31, 2014	0.3	$	39.34


(1)	At the end of the performance period, the actual number of shares issuable can range from zero to 200.0% of the target shares granted, which is assumed to be 100.0%.

A summary of the Company’s PRSU activity and related information for the years ended December 31, 2013 and 2012 is presented below:



(shares in millions)	Shares		Weighted Average Grant Date Fair Value
Awards unvested at December 31, 2011	0.3		$	37.93
Granted	0.4		71.52
Vested	(0.4	)	28.48
Forfeited	—		—
Awards unvested at December 31, 2012	0.3		$	58.52
Granted	0.3		39.34
Vested	—		—
Forfeited	(0.3	)	56.92
Awards unvested at December 31, 2013	0.3		$	39.04

During the year ended December 31, 2013, PRSUs granted in 2010 with an aggregate intrinsic value of $14.9 million were issued from treasury stock following the satisfaction of certain financial metrics over the performance period. The PRSUs were issued from treasury stock at 282.0% of the target award, out of a maximum payout of 300.0%. The aggregate intrinsic value of PRSUs outstanding as of December 31, 2013 was $13.6 million.

The Company uses the Black-Scholes option pricing model to calculate the fair value of stock options granted. The assumptions used in the Black-Scholes pricing model for the years ended December 31, 2013, 2012 and 2011 are set forth in the following table. Expected volatility is based on the unbiased standard deviation of Tempur Sealy International’s common stock over the option term. The expected life of the options represents the period of time that the Company expects the options granted to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grant of the option for the expected term of the instrument. The dividend yield reflects an estimate of dividend payouts over the term of the award.



	Year Ended
	December 31,
	2013	2012	2011
Expected volatility range of stock	63.0% - 72.8%	49.0% - 73.0%	72.0% - 74.0%
Expected life of option, range in years	2 - 3	2 - 4	3 - 4
Risk-free interest range rate	0.3% - 0.6%	0.3% - 0.7%	0.7% - 1.7%
Expected dividend yield on stock	0.6% - 0.9%	0.0% - 1.3%	0.0% - 0.7%

A summary of the Company’s unvested shares relating to stock options as of December 31, 2013 and 2012 and changes during the years ended December 31, 2013 and 2012 are presented below:



(shares in millions)	Shares		Weighted Average Grant Date Fair Value
Options unvested at December 31, 2011	1.3		$	5.44
Granted	0.4		35.75
Vested	(0.8	)	11.49
Forfeited	—		—
Options unvested at December 31, 2012	0.9		$	23.49
Granted	0.6		39.77
Vested	(0.8	)	19.71
Forfeited	(0.1	)	39.62
Options unvested at December 31, 2013	0.6		$	42.16

A summary of the Company’s stock option activity under the 2002 Option Plan, 2003 Plan and 2013 Plan for the years ended December 31, 2013 and 2012 is presented below:



(in millions, except exercise price and years)	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Options outstanding at December 31, 2011	3.4		$	11.15
Granted	0.4		35.75
Exercised	(0.9	)	12.61
Terminated	—		—
Options outstanding at December 31, 2012	2.9		$	17.00
Granted	0.6		39.77
Exercised	(0.6	)	14.54
Terminated	(0.1	)	39.62
Options outstanding at December 31, 2013	2.8		$	21.73	5.82	$	82.6

Options exercisable at December 31, 2013	2.2		$	15.63	4.88	$	60.1

The aggregate intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011 was $17.1 million, $29.8 million and $59.2 million, respectively.

A summary of the Company's RSU and DSU Activity and related information for the years ended December 31, 2013 and 2012 is presented below:



(in millions, except release price and years)	Shares		Weighted Average Release Price		Aggregate Intrinsic Value
Awards outstanding at December 31, 2011	0.2		$	30.41
Granted	—		62.03
Exercised	—		—
Terminated	—		—
Awards outstanding at December 31, 2012	0.2		$	32.03
Granted	0.2		45.56
Exercised	(0.2	)	30.49
Terminated	—		—
Awards outstanding at December 31, 2013	0.2		$	47.00	$	10.8

The Company granted 0.01 million DSUs during the year ended December 31, 2013. The Company granted 0.2 million RSUs during the year ended December 31, 2013. At December 31, 2013, the Company had 0.2 million of unvested DSUs/RSUs. The aggregate intrinsic value of RSU and DSUs outstanding as of December 31, 2013 was $10.8 million.

A summary of total unrecognized stock-based compensation expense based on current performance estimates related to the options, DSUs, RSUs and PRSUs granted during the year ended December 31, 2013 is presented below:



(in millions, except years)	December 31, 2013		Weighted Average Remaining Vesting Period (Years)
Unrecognized stock option expense	$	5.2	1.15
Unrecognized DSU/RSU expense	2.9		0.89
Unrecognized PRSU expense	2.4		1.34
Total unrecognized stock-based compensation expense	$	10.5	1.12

Cash received from options exercised under all stock-based compensation plans, including cash received from options issued from treasury shares for the years ended December 31, 2013, 2012 and 2011 was $8.7 million, $11.4 million, and $26.3 million, respectively.