Stock-Based Compensation

The Davey Tree Expert Company 2004 Omnibus Stock Plan (the “Stock Plan”) was approved by our shareholders at our annual shareholders' meeting in May 2004. The Stock Plan is administered by the Compensation Committee of the Board of Directors, with the maximum number of common shares that may be granted to or purchased by all employees and directors under the Stock Plan being 10,000,000. In addition to the maintenance of the Employee Stock Purchase Plan, the Stock Plan provides for the grant of stock options, restricted stock, stock appreciation rights, stock purchase rights, stock equivalent units, cash awards, and other stock or performance-based incentives. These awards are payable in cash or common shares, or any combination thereof, as established by the Compensation Committee.

Stock-Based Plans--The Stock Plan consolidates into a single plan provisions for the grant of stock options and other stock-based incentives and maintenance of the Employee Stock Purchase Plan. Prior to adoption of the Stock Plan and its predecessor, the 1994 Omnibus Stock Plan, we had two qualified stock option plans available for officers and management employees; the final grant of awards under those plans was December 10, 1993. The maximum number of shares that may be issued upon exercise of stock options, other than director options and nonqualified stock options, is 3,200,000 during the ten-year term of the Stock Plan. Shares purchased since 1994 under the Employee Stock Purchase Plan were 3,897,974. With 2009 as the transition year, each continuing nonemployee director receives an annual award of 3,000 stock-settled stock appreciation rights that vest ratably over five years. Prior to the transition to stock-settled stock appreciation rights, each nonemployee director elected or appointed received a director option with the right to purchase, for six years, 4,000 common shares at the fair market value per share at date of grant, exercisable six months from the date of grant. The aggregate number of common shares available for grant and the maximum number of shares granted annually are based on formulas defined in the Stock Plan. The grant of awards, other than director options, is at the discretion of the Compensation Committee of the Board of Directors. As of December 31, 2012, there were 865,704 shares available for grant.

Stock-based compensation expense under all share-based payment plans—our Employee Stock Purchase Plan, stock option plans, stock-settled stock appreciation rights, and performance-based restricted stock units—included in the results of operations follows:



	Year Ended December 31,
	2012		2011		2010
Compensation expense, all share-based payment plans	$	1,508	$	1,349	$	1,224
Income tax benefit	383		329		292

Stock-based compensation consisted of the following:

Employee Stock Purchase Plan--Under the Employee Stock Purchase Plan, all full-time employees with one year of service are eligible to purchase, through payroll deduction, common shares. Employee purchases under the Employee Stock Purchase Plan are at 85% of the fair market value of the common shares--a 15% discount. Purchases under the plan, at 85% of the fair market value of the common shares, have been as follows:



	Year Ended December 31,
	2012		2011		2010
Number of employees participating	1,157		1,272		1,230
Shares purchased during the year	136,947		150,253		156,381
Weighted-average per share purchase price paid	$	17.20	$	15.46	$	14.11
Cumulative shares purchased since 1982	8,517,782		8,380,835		8,230,582

Compensation costs are recognized as payroll deductions are made. The 15% discount of total shares purchased under the plan resulted in compensation cost recognized of $415 in 2012, $410 in 2011 and $389 in 2010.


O.	Stock-Based Compensation (continued)

Stock Option Plans--Stock options awarded before January 1, 2006 were granted at an exercise price equal to the fair market value of our common shares at the dates of grant. Stock-options awarded on or after January 1, 2006 were required to be measured at fair value. At December 31, 2012, there were 505,167 stock options outstanding that were awarded after January 1, 2006. The stock options were awarded under a graded vesting schedule and have a term of ten years. Compensation costs for stock options are recognized over the requisite service period on the straight-line recognition method. Compensation cost recognized for stock options was $166 in 2012, $269 in 2011 and $361 in 2010.

Stock-Settled Stock Appreciation Rights--During the year ended December 31, 2012, the Compensation Committee of the Board of Directors awarded 105,000 Stock-Settled Stock Appreciation Rights (“SSARs”) to certain management employees and nonemployee directors, which vest ratably over five years. A stock-settled stock appreciation right is an award that allows the recipient to receive common stock equal to the appreciation in the fair market value of our common stock between the date the award was granted and the conversion date of the shares vested.

The following table summarizes the SSARs as of December 31, 2012:



Stock-Settled Stock Appreciation Rights	Number of Rights		Weighted- Average Award Date Value		Weighted- Average Remaining Contractual Life	Unrecognized Compensation Cost		Aggregate Intrinsic Value
Unvested, January 1, 2012	210,188		$	3.47
Granted	105,000		2.70
Forfeited	—		—
Vested	(57,371	)	3.43
Unvested, December 31, 2012	257,817		$	3.17	2.8 years	$	573	$	5,363
Employee SSARs	218,400		$	3.31	2.7 years	$	495	$	4,543
Nonemployee Director SSARs	39,417		$	2.34	3.4 years	$	78	$	820

Compensation costs for stock appreciation rights are determined using a fair-value method and amortized over the requisite service period. Compensation expense for stock appreciation rights totaled $283 in 2012, $185 in 2011 and $105 in 2010.

Performance-Based Restricted Stock Units--During the year ended December 31, 2012, the Compensation Committee of the Board of Directors awarded 23,058 Performance-Based Restricted Stock Units to certain management employees.

Similar awards were made in prior periods. The awards vest over specified periods. The following table summarizes

Performance-Based Restricted Stock Units as of December 31, 2012:



Performance-Based Restricted Stock Units	Number of Stock Units		Weighted- Average Grant Date Value		Weighted- Average Remaining Contractual Life	Unrecognized Compensation Cost		Aggregate Intrinsic Value
Unvested, January 1, 2012	113,908		$	15.15
Granted	23,058		19.41
Forfeited	—		—
Vested	(58,313	)	14.52
Unvested, December 31, 2012	78,653		$	16.87	3.9 years	$	626	$	1,636


O.	Stock-Based Compensation (continued)

The fair value of the restricted stock units for awards made prior to January 1, 2006 is based on the market price of our common shares on the date of award and is recognized as compensation cost on the straight-line recognition method over the vesting period. Compensation cost for awards made after December 31, 2005 is determined using a fair-value method, amortized over the requisite service period. “Intrinsic value” is defined as the amount by which the fair market value of a common share of stock exceeds the exercise price of a performance-based restricted stock unit. Compensation expense on restricted stock awards totaled $644 in 2012, $485 in 2011 and $369 in 2010.

For stock-based awards issued on or after January 1, 2006, the fair value of each award was estimated on the date of grant using a binomial option-pricing model. The binomial model considers a range of assumptions related to volatility, risk-free interest rate and employee exercise behavior. Expected volatilities utilized in the binomial model are based on historical volatility of our share prices and other factors. Similarly, the dividend yield is based on historical experience and expected future changes. The binomial model also incorporates exercise and forfeiture assumptions based on an analysis of historical

data. The expected life of the stock-based awards is derived from the output of the binomial model and represents the period of time that awards granted are expected to be outstanding.

The fair values of stock-based awards granted were estimated at the dates of grant with the following weighted-average assumptions:



	Year Ended December 31,
	2012		2011		2010
Volatility rate	11.7	%	11.9	%	12.2	%
Risk-free interest rate	1.6	%	2.9	%	3.0	%
Expected dividend yield	1.5	%	1.5	%	1.5	%
Expected life of awards (years)	9.1		8.9		9.4

General Stock Option Information--The following table summarizes activity under the stock option plans for the year ended December 31, 2012:



Stock Options	Number of Options Outstanding		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life	Unrecognized Compensation Cost		Aggregate Intrinsic Value
Outstanding, January 1, 2012	1,110,785		$	10.62
Granted	—		—
Exercised	(341,531	)	9.01
Forfeited	(8,000	)	7.91
Outstanding, December 31, 2012	761,254		$	11.38	3.8 years	$	8,660	$	7,174
Exercisable, December 31, 2012	639,654		$	10.44	3.1 years			$	6,630


O.	Stock-Based Compensation (continued)

“Intrinsic value” is defined as the amount by which the market price of a common share of stock exceeds the exercise price of an option. Information regarding the stock options outstanding at December 31, 2012 is summarized below:



Stock Options Exercise Price		Number Outstanding	Weighted-Average Remaining Contractual Life	Weighted- Average Exercise Price		Number Exercisable	Weighted- Average Exercise Price
Employee options:
	$6.75	256,087	0.9 years	$	6.75	256,087	$	6.75
11.25		251,433	3.4 years	11.25		251,433	11.25
16.00		131,000	6.8 years	16.00		75,400	16.00
16.60		109,400	7.8 years	16.60		43,400	16.60
		747,920	3.8 years	$	11.32	626,320	$	10.35
Director options:
$12.95 to $16.40		13,334	0.9 years	14.33		13,334	14.33
		761,254	3.8 years	$	11.38	639,654	$	10.44

We issue common shares from treasury upon the exercise of stock options, stock-settled stock appreciation rights, performance-based restricted stock units or purchases under the Employee Stock Purchase Plan.