Equity-Based Compensation

12 Months Ended

Dec. 31, 2022

Share-Based Payment Arrangement [Abstract]

Transactions in which the Company receives employee and non-employee services in exchange for the Company’s equity instruments or liabilities that are based on the fair value of the Company’s equity securities or may be settled by the issuance of these securities are accounted for using a fair value method. The Company’s policy is to recognize compensation expense using the straight line method over the relevant vesting period for units that vest based on time.

Equity-based awards are granted pursuant to the Surgery Partners, Inc. 2015 Omnibus Incentive Plan, as amended and restated effective January 1, 2020 ("2015 Omnibus Incentive Plan"). Under this plan, the Company can grant stock options, stock appreciation rights, restricted stock, unrestricted stock, stock units, performance awards, cash awards and other awards convertible into or otherwise based on shares of its common stock. As of December 31, 2022, 11,815,700 shares were authorized to be granted under the 2015 Omnibus Incentive Plan and 5,072,239 were available for future equity grants.

Restricted and Performance Share-Based Awards

During the years ended December 31, 2022 and 2021, the Company granted 257,291 and 232,097 restricted stock awards ("RSAs") to certain officers, employees and non-employee directors in accordance with the 2015 Omnibus Incentive Plan, respectively. Vesting and payment of these RSAs are generally subject to continuing service of the employee or non-employee director over the ratable vesting periods beginning one year from the date of grant to three or five years after the date of grant. The fair values of these RSAs were determined based on the closing price of the Company’s common stock on the trading date immediately prior to the grant date.

During the years ended December 31, 2022 and 2021, the Company granted 203,549 and 182,964 performance-based restricted stock units ("PSUs") subject to the achievement of a combination of performance conditions, respectively. In addition to the achievement of the performance conditions, these PSUs are generally subject to the continuing service of the employee over the ratable vesting period from the earned date continuing for two years. For these PSUs, the number of shares payable at the end of the performance periods ranges from 0% to 150% of the targeted units based on the Company’s actual performance and/or market conditions results as compared to the targets. These PSUs are not considered outstanding until earned. During the years ended December 31, 2022 and 2021, 146,937 and 776,988 of the PSUs previously granted were deemed to have been earned, respectively.

Restricted and Performance Share-Based Activity

A summary of non-vested restricted share-based activity for the years ended December 31, 2022, 2021, and 2020 follows:


	Unvested Shares	Weighted Average Grant Date Fair Value
Outstanding at December 31, 2019	775,886	$	13.78
Granted/Earned	1,387,059	6.87
Forfeited/Cancelled	(162,635)	13.77
Vested	(552,943)	12.78
Outstanding at December 31, 2020	1,447,367	$	9.75
Granted/Earned	1,009,085	39.90
Forfeited/Cancelled	(77,844)	47.40
Vested	(723,212)	42.88
Outstanding at December 31, 2021	1,655,396	$	11.55
Granted/Earned	404,287	47.38
Forfeited/Cancelled	(116,485)	39.65
Vested	(947,785)	51.28
Outstanding at December 31, 2022	995,413	$	23.87

Stock Options

No stock options were granted during the years ended December 31, 2022, 2021 and 2020. Options to purchase shares are granted with an exercise price equal to the fair market value of the Company’s common stock on the day of grant, based on the closing price of the Company’s common stock on the trading date immediately prior to the grant date. The estimated fair value of options is amortized to expense on a straight-line basis over the options’ vesting period.

Option Valuation

In applying the Monte Carlo simulation model to value the stock options, the Company used the following assumptions:

▪ Risk-free interest rate. The risk-free interest rate is used as a component of the fair value of stock options to take into account the time value of money. For the risk-free interest rate, the Company uses the implied yield on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life, in years, of the options granted.

▪ Expected volatility. Volatility, for the purpose of share-based compensation, is a measurement of the amount that a share price has fluctuated. Expected volatility involves reviewing historical volatility and determining what, if any, change the share price will have in the future. The Company used historical stock price information of certain peer group companies for a period of time equal to the expected option life period to determine estimated volatility.

▪ Expected life, in years. A clear distinction is made between the expected life of an option and the contractual term of the option. The expected life of an option is considered the amount of time, in years, that an option is expected to be outstanding before it is exercised. Whereas, the contractual term of the stock option is the term an option is valid before it expires.

▪ Expected dividend yield. Since issuing dividends will affect the fair value of a stock option, GAAP requires companies to estimate future dividend yields or payments. The Company has not historically issued dividends and does not intend to issue dividends in the future. As a result, the Company does not apply a dividend yield component to its valuation.

Stock Option Activity

A summary of stock option activity for the years ended December 31, 2022, 2021, and 2020 follows:


	Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)
Outstanding at December 31, 2019	2,769,187	$	13.02	9.0
Granted	—
Exercised	(4,199)	20.24		5.8
Forfeited/Cancelled	(4,473)	19.00		4.8
Outstanding at December 31, 2020	2,760,515	$	12.88	8.0
Granted	—
Exercised	(9,155)	6.28		7.7
Forfeited/Cancelled	(366,500)	13.42		7.2
Outstanding at December 31, 2021	2,384,860	$	12.82	7.0
Granted	—
Exercised	(301,998)	13.42		6.2
Forfeited/Cancelled	(134,502)	13.42		6.2
Outstanding at December 31, 2022 (1)	1,948,360	$	12.69	5.9

(1) Of the outstanding stock options, 1,898,360 were exercisable as of December 31, 2022.

Stock Appreciation Rights

As of December 31, 2022, there were 200,000 stock-settled stock appreciation right awards (the "SAR Awards") outstanding. These SAR Awards were granted on December 16, 2018. These were the only SAR Awards granted as of December 31, 2022. The SAR Awards have an exercise price of $12.90, and a remaining contractual term of 5.0 years. Fifty percent (50%) of the SAR Awards will vest in five equal annual installments on each of the first five anniversaries of the date of grant, generally subject to continued employment on each vesting date. Twenty-five percent (25%) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $25.00 over a period of sixty (60) consecutive trading days, and twenty-five percent (25%) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $35.00 over a period of sixty (60) consecutive trading days, in each case, generally subject to continued employment on each vesting date. Forfeitures are recognized as incurred. Of the outstanding SAR Awards, 160,000 were exercisable as of December 31, 2022.

Other information pertaining to equity-based compensation

At December 31, 2022, unrecognized compensation cost related to unvested shares, stock options and SAR Awards was approximately $19.1 million. Unrecognized compensation cost will be expensed annually based on the number of shares, stock options and SAR Awards that vest during the year.

The Company records equity-based compensation expense to recognize the fair value of the restricted shares, stock options and SAR Awards granted over the relevant vesting period. The Company recorded equity-based compensation expense of $18.4 million, $17.4 million and $13.2 million for the years ended December 31, 2022, 2021 and 2020, respectively.