Stock-Based Compensation

12 Months Ended

Dec. 31, 2020

Note 16. Stock-Based Compensation

In connection with our initial public offering, our board of directors and stockholders adopted the Omnibus Incentive Plan. Prior to our initial public offering, our board of directors and stockholders had adopted the Amended and Restated ServiceMaster Global Holdings, Inc. Stock Incentive Plan, as amended as of October 25, 2012 (the “MSIP”). Upon adoption of the Omnibus Incentive Plan, we froze the MSIP and will make no further grants thereunder. However, awards previously granted under the MSIP are unaffected by the termination of the MSIP. The Omnibus Incentive Plan provides for awards in the form of stock options, stock purchase rights, restricted stock, RSUs, performance shares, performance units, stock appreciation rights, dividend equivalents, DSUs, deferred share equivalents, and other stock-based awards. The MSIP provided for the sale of shares and DSUs of our stock to our executives, officers and other employees and to our directors as well as the grant of RSUs, performance-based RSUs and options to purchase our shares to those individuals. Our Compensation Committee selects our executive officers, employees and directors eligible to participate in the Omnibus Incentive Plan and determines the specific number of shares to be offered or options to be granted to an individual.

On February 24, 2015, our board of directors approved and recommended for approval by our stockholders the Employee Stock Purchase Plan, which became effective for offering periods commencing July 1, 2015. The Employee Stock Purchase Plan is intended to qualify for the favorable tax treatment under the Code. Under the plan, eligible employees may purchase common stock, subject to Internal Revenue Service limits, during pre-specified offering periods at a discount established by us not to exceed ten percent of the then-current fair market value. On April 27, 2015, our stockholders approved the Employee Stock Purchase Plan with a maximum of one million shares of common stock authorized for sale under the plan. Under the Employee Stock Purchase Plan, we sold 45,840 shares in 2020, 14,429 shares in 2019, and no shares in 2018. As of December 31, 2020, there were 783,315 shares of our common stock reserved for future issuances under the Employee Stock Purchase Plan.

A maximum of 16,396,667 shares of our stock is authorized for issuance under the MSIP, the Omnibus Incentive Plan and the Employee Stock Purchase Plan, of which, as of December 31, 2020, 5,133,314 shares remain available for future grants. We currently intend to satisfy any need for our shares of common stock associated with the vesting of RSUs, exercise of options or purchase of shares issued under the Omnibus Incentive Plan, MSIP or Employee Stock Purchase Plan through new shares available for issuance or any shares repurchased, forfeited or surrendered from participants in the MSIP and the Omnibus Incentive Plan.

All option grants under the Omnibus Incentive Plan and the MSIP have been, and we expect that all future option grants will be, non-qualified options with a per-share exercise price no less than the fair market value of one share of our stock on the grant date. Any stock options granted prior to 2019 generally have a term of 10 years and vesting will be subject to an employee’s continued employment. In February 2019, our board of directors approved an amended Employee Stock Option Agreement, whereby all options granted in 2019 and thereafter will generally vest in three equal annual installments (rather than four), have a term of eight years

(rather than 10 years) and remain subject to an employee’s continued employment. The three year vesting period is the requisite service period over which compensation cost will be recognized on a straight-line basis for all grants. All options issued are accounted for as equity-classified awards. Our Compensation Committee may accelerate the vesting of an option at any time. In addition, vesting of options will be accelerated if we experience a change in control (as defined in the Omnibus Incentive Plan and the MSIP) unless options with substantially equivalent terms and economic value are substituted for existing options in place of accelerated vesting. Our stock option awards also have a “double-trigger provision” that provides for acceleration in the event of a change in control and subsequent termination of the employee from the acquiring company within 24 months of the change in control. For RSUs granted in July 2018 or thereafter, the Compensation Committee revised the RSU award agreements to include a double trigger provision relating to the acceleration of vesting RSUs on a change in control and subsequent termination of the employee from the acquiring company within 24 months of the change in control. Vesting of options and RSUs granted under the Omnibus Incentive Plan and the MSIP will also be accelerated, in whole or in part, in the event of an employee’s death or disability (as defined in the Omnibus Incentive Plan and the MSIP). Upon termination for cause (as defined in the Omnibus Incentive Plan and the MSIP), all options and RSUs held by an employee are immediately cancelled. Following a termination without cause, vested options will generally remain exercisable through the earlier of the expiration of their term or three months following termination of employment (one year in the case of death, disability or retirement at normal retirement age). Unless sooner terminated by our board of directors, the Omnibus Incentive Plan will remain in effect until June 26, 2024.

In 2020, 2019 and 2018, we completed various equity offerings to certain of our executives, officers and employees pursuant to the Omnibus Incentive Plan. The shares sold and options granted in connection with these equity offerings are subject to and governed by the terms of the Omnibus Incentive Plan. No other shares of common stock were sold by us in 2020, 2019 or 2018.

Stock Options

We granted our executives, officers and employees options to purchase 1,003,180; 634,743; and 502,004 shares of our common stock in 2020, 2019 and 2018, respectively, at a weighted-average exercise price of $36.51 per share for options issued in 2020, $40.04 per share for options issued in 2019, and $55.18 per share for options issued in 2018. These options are subject to and governed by the terms of the MSIP and Omnibus Incentive Plan. The per share purchase price and exercise price was based on the determination by our Compensation Committee of the fair market value of our common stock as of the purchase/grant dates. All options granted prior to 2020 generally will vest in four equal annual installments, while all options granted in 2020 generally will vest in three equal annual installments, subject to an employee’s continued employment. The three year and four year vesting periods are the requisite service period over which compensation cost will be recognized on a straight-line basis for all grants made in 2019 and 2020, and prior to 2019, respectively. All options issued are accounted for as equity-classified awards.

The value of each option award was estimated on the grant date using the Black-Scholes option valuation model that incorporates the assumptions noted in the following table. For options granted in 2020, 2019 and 2018, the expected volatility was based on historical and implied volatilities of our publicly traded stock. The expected life represents the period of time that options granted are expected to be outstanding and was calculated using the simplified method as outlined by the SEC in Staff Accounting Bulletins No. 107 and 110 as we do not have sufficient historical exercises to provide a reasonable basis upon which to estimate expected life due to the limited period of time our equity shares have been publicly traded. The risk-free interest rates were based on U.S. Treasury securities with terms similar to the expected lives of the options as of the grant dates.



	Year Ended December 31,
Assumption	2020		2019		2018
Expected volatility	33.8	%	28.4	%	25.9	%
Expected dividend yield	0.0	%	0.0	%	0.0	%
Expected life (in years)	4.9		5.0		6.3
Risk-free interest rate	0.27% - 1.38	%	2.49	%	2.63% - 2.94	%

The weighted-average grant-date fair value of the options granted during 2020, 2019 and 2018 was $11.23, $11.91 and $17.68 per option, respectively. During the year ended December 31, 2020, we applied a forfeiture assumption of 25.52 percent per annum in the recognition of the expense related to these options, with the exception of the options held by our CEO for which we applied a forfeiture rate of zero. The total intrinsic value of stock options exercised during the years ended December 31, 2020, 2019 and 2018, was $2 million, $10 million and $6 million, respectively. The total fair value of stock options vested during the years ended December 31, 2020, 2019 and 2018, was $5 million, $3 million and $3 million, respectively.

A summary of option activity under the MSIP and Omnibus Incentive Plan as of December 31, 2020 and changes during the year then ended is presented below:


					Aggregate	Weighted Avg.
		Weighted Avg.			Intrinsic	Remaining
	Stock	Exercise			Value	Contractual
	Options	Price			(in millions)	Term (in years)
Total outstanding, December 31, 2019	1,230,520	$	35.30	$	5	7.36
Granted to employees	1,003,180	$	36.52
Exercised	(204,768)	$	32.55
Forfeited	(588,504)	$	36.82
Expired	(150,104)	$	50.01
Total outstanding, December 31, 2020	1,290,324	$	36.47	$	19	6.74
Total exercisable, December 31, 2020	338,025	$	34.67	$	6	6.27

RSUs

We granted our executives, officers and employees 567,844; 516,775; and 354,931; RSUs in 2020, 2019 and 2018, respectively, with weighted-average grant date fair values of $37.81 per unit for 2020, $42.11 per unit for 2019, and $52.40 per unit for 2018, which was equivalent to the then current fair value of our common stock at the grant date. All RSUs outstanding as of December 31, 2020, will vest in three equal annual installments, subject to an employee’s continued employment. Upon vesting, each RSU will be converted into one share of our common stock. The total fair value of RSUs vested during the years ended December 31, 2020, 2019 and 2018, was $10 million, $8 million and $18 million, respectively.

On January 1, 2019, in connection with an acquisition, we granted 136,092 RSUs to an executive key to our urban markets strategy. All such RSUs cliff vest on the third anniversary of their grant and are subject to the executive’s continued employment.

On September 15, 2020, we granted retention RSUs with a fair value of $2 million to Kim Scott, President, Terminix Residential and Gregory L. Rutherford, President, Terminix Commercial, with a weighted average exercise price $40.67. The RSUs vest on the first anniversary of the grant date, subject to continued employment through such date, and will vest on a pro rata basis if Ms. Scott or Mr. Rutherford is terminated by the Company before such date, calculated from the grant date through the date of termination. On January 22, 2021, Terminix announced that Mr. Rutherford will be leaving Terminix as of March 15, 2021. Mr. Rutherford’s $1 million retention award equated to 24,589 restricted stock units; pursuant to the terms of that award, on March 15, 2021, a pro-rated number of those units will vest, entitling him to 12,194 shares of Terminix common stock.

A summary of RSU activity under the Omnibus Incentive Plan as of December 31, 2020, and changes during the year then ended is presented below:


		Weighted Avg.
		Grant Date
	RSUs	Fair Value
Total outstanding, December 31, 2019	692,926	$	40.11
Granted to employees	567,844	$	37.81
Vested	(262,013)	$	46.56
Forfeited	(245,845)	$	44.75
Total outstanding, December 31, 2020	752,912	$	40.53

Performance Shares

We granted our executives 95,916 performance shares in 2020 with a weighted-average grant date fair value of $36.99 per share, and 107,149 performance shares in 2019 with a weighted–average grant date fair value of $40.04 per share, which were equivalent to the then current fair value of our common stock at the grant date. The performance shares vest at the end of a three year period based on the achievement of a cumulative revenue and Adjusted EPS targets established at the grant date and subject to an executive’s continued employment. As the performance shares contain a performance condition, stock-based compensation expense, net of estimated forfeitures, is recorded over the requisite service period based on the number of awards expected to vest. No performance shares were granted in 2018 due the complexities in determining longer-term financial goals given the spin-off and financial separation of the American Home Shield business.

In 2020 and 2019, we granted 38,178 and 8,912, respectively, of performance shares to key management in connection with a strategic acquisition. The grants had a grant date fair value of $36.35 per share and $56.11 per share, respectively, which represented the then current fair values of our common stock at the grant dates. These performance shares are scheduled to vest on December 31, 2023, based on the achievement of four year cumulative Adjusted EPS and revenue targets established at the grant date and subject to continued employment. As the performance shares contain a performance condition, stock-based compensation expense, net of estimated forfeitures, is recorded over the requisite service period based on the number of awards expected to vest.

In 2019, we granted 87,920 of performance shares to Nomor executives in connection with the acquisition. The grant had a grant date fair value of $56.87 per share, which represented the then current fair value of our common stock at the grant date. These performance shares are scheduled to vest on December 31, 2022, based on the achievement of three year cumulative Adjusted EPS and revenue targets established at the grant date and subject to an executive’s continued employment. These awards were cancelled in 2020 as a result of the impact of COVID-19 on the financial performance of Nomor. The performance share awards were significantly below threshold and did not have the possibility of achieving threshold levels for any payout. The Nomor executives were granted time vested restricted stock units in 2020 and Terminix will evaluate establishing new performance targets to incentivize the Nomor executives.

A summary of performance share activity under the Omnibus Incentive Plan as of December 31, 2020, and changes during the year then ended is presented below:



		Weighted Avg.
	Performance	Grant Date
	Shares	Fair Value
Total outstanding, December 31, 2019	187,746	$	50.13
Granted to executives	134,094	$	36.81
Forfeited	(171,896)	$	49.77
Total outstanding, December 31, 2020	149,944	$	37.77

Stock-based compensation expense

During the years ended December 31, 2020, 2019 and 2018, we recognized stock-based compensation expense of $16 million ($12 million, net of tax), $14 million ($10 million, net of tax) and $13 million ($9 million, net of tax), respectively. These charges are recorded within Selling and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss) and, in the year ended December 31, 2018, included $3 million of stock-based compensation expense related to retention awards granted to employees instrumental to the spin-off. For the years ended December 31, 2020, 2019 and 2018, stock-based compensation expense recognized related to employees of ServiceMaster Brands and Frontdoor is included within Net earnings from discontinued operations on the Consolidated Statements of Operations and Comprehensive Income (Loss).

As of December 31, 2020, there was $33 million of total unrecognized compensation costs related to non-vested stock options, RSUs and PSUs granted under the MSIP and Omnibus Incentive Plan. These remaining costs are expected to be recognized over a weighted-average period of 1.75 years.