Note 13—Stock-Based Compensation

Torchmark’s stock-based compensation consists of stock options, restricted stock, restricted stock units, and performance shares. Certain employees, directors, and consultants have been granted fixed equity options to buy shares of Torchmark stock at the market value of the stock on the date of grant, under the provisions of the Torchmark stock option plans. The options are exercisable during the period commencing from the date they vest until expiring according to the terms of the grant. Options generally expire the earlier of employee termination or option contract term, which ranges from seven to ten years. Options generally vest in accordance with the following schedule:

Grants under the Torchmark Corporation 2011 Incentive Plan:

Directors – vest in six months.

Employees:

Seven year grants – vest one half in two years, and one half in three years.

Ten year grants – vest one fourth in two years, and one fourth in each of the next three years.

Grants under all previous compensation plans:

Directors – vest in six months.

Employees – vest one half in two years, and one half in three years.

All employee options vest immediately upon retirement on or after the attainment of age 65, upon death, or disability. Torchmark generally issues shares for the exercise of stock options from treasury stock. The Company generally uses the proceeds from option exercises to buy shares of Torchmark common stock in the open market to reduce the dilution from option exercises.

An analysis of shares available for grant is as follows:


	Available for Grant
	2012			2011			2010
Balance at January 1		6,099,342			255,263			1,724,540
Approval of Torchmark Corporation 2011 Incentive Plan*		0			7,950,000			0
Cancellation of available shares from prior plans		0			(229,333	)		0
Expired and forfeited during year		5,850			0			26,269
Options granted during year		(1,072,725	)		(1,338,013	)		(1,358,175	)
Restricted stock, restricted stock units, and performance shares granted under the Torchmark Corporation 2011 Incentive Plan (counted as 3.1 options per grant)*		(496,166	)		(519,558	)		0
Restricted stock and restricted stock units granted during the year under previous plans		0			(19,017	)		(137,371	)

Balance at December 31		4,536,301			6,099,342			255,263


* Plan allows for grant of restricted stock such that each stock grant reduces 3.1 options available for grant

A summary of stock compensation activity for each of the years in the three years ended December 31, 2012 is presented below:


	2012		2011		2010
Stock-based compensation expense recognized*	$	21,605	$	14,954	$	11,848
Tax benefit recognized		7,562		5,234		4,147
Weighted-average grant-date fair value of options granted		15.70		15.48		10.35
Intrinsic value of options exercised		80,781		40,991		12,102
Cash received from options exercised		181,022		162,613		37,863
Actual tax benefit received from exercises		28,086		14,347		4,236

* No stock-based compensation expense was capitalized in any period.

An analysis of option activity for each of the three years ended December 31, 2012 is as follows:


	2012					2011					2010
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Outstanding-beginning of year		11,620,393		$	35.42		15,185,729		$	34.09		15,509,978		$	34.04
Granted		1,072,725			45.97		1,338,013			44.37		1,358,175			30.86
Exercised		(5,354,381	)		33.82		(4,829,892	)		33.67		(1,273,598	)		29.73
Expired and forfeited		(6,600	)		44.63		(73,425	)		39.17		(408,826	)		35.05
Adjustment due to 7/1/11 stock split		0			0.00		(32	)		32.96		0			0.00

Outstanding-end of year		7,332,137		$	38.14		11,620,393		$	35.42		15,185,729		$	34.09

Exercisable at end of year		4,261,817		$	35.37		8,265,818		$	36.28		11,830,076		$	36.10

A summary of restricted stock and restricted stock units granted during each of the years in the three year period ended December 31, 2012 is presented in the table below. Restricted stock holders are entitled to dividends on the stock and holders of restricted stock units are entitled to dividend equivalents. Executive grants vest over five years and director grants vest over six months.


	2012			2011			2010
Executives restricted stock:
Shares		60,000			167,250			112,500
Price per share	$	46.12		$	44.39		$	30.87
Aggregate value	$	2,767		$	7,424		$	3,473
Percent vested as of 12/31/12		0	%		20	%		40	%

Directors restricted stock:
Shares		9,720			6,303			9,423
Price per share	$	43.74		$	40.45		$	30.85
Aggregate value	$	425		$	255		$	291
Percent vested as of 12/31/12		100	%		100	%		100	%

Directors restricted stock units (including dividend equivalents):
Shares		9,719			13,063			15,443	*
Price per share	$	43.74		$	40.49		$	29.95
Aggregate value	$	425		$	529		$	463
Percent vested as of 12/31/12		100	%		100	%		100	%

* 2,013 shares at $29.84 per share were later forfeited in 2010.

Certain senior executives of the Company were granted 80 thousand performance shares on February 21 and 22, 2012. Grant prices ranged from $48.72 to $49.09 per share for an aggregate grant price of $3.9 million. These grants have a three year contract life, and they do not vest prior to the termination of the contract period. While the target distribution is 80 thousand shares, the determination of the actual settlement in shares will be based on the achievement of certain performance objectives of Torchmark over the three year contract period. The actual shares could be distributed in a range from 0 to 160 thousand shares.

An analysis of unvested restricted stock is as follows:


	Executives Restricted Stock			Executive Performance Shares		Directors Restricted Stock			Total

2010:
Balance at January 1, 2010		203,250			0		0			203,250
Grants		112,500			0		9,423			121,923
Restriction lapses		(71,100	)		0		(9,423	)		(80,523	)
Forfeitures		(7,500	)		0		0			(7,500	)

Balance at December 31, 2010		237,150			0		0			237,150

2011:
Grants		167,250			0		6,303			173,553
Restriction lapses		(72,600	)		0		(6,303	)		(78,903	)
Forfeitures		(4,800	)		0		0			(4,800	)

Balance at December 31, 2011		327,000			0		0			327,000

2012:
Grants		60,000			80,000		9,720			149,720
Restriction lapses		(75,300	)		0		(9,720	)		(85,020	)
Forfeitures		0			0		0			0

Balance at December 31, 2012		311,700			80,000		0			391,700

Restricted stock units outstanding at each of the year ends 2012, 2011, and 2010 were 53,272, 42,938, and 29,872, respectively. Restricted stock units are only available to directors, and are not converted to shares until the director’s retirement, death, or disability. There were no unvested director restricted shares outstanding at the end of any of the years 2010 through 2012. Director restricted stock and restricted stock units are generally granted on the first working day of the year and vest in six months. Dividend equivalents are earned on restricted stock units only. They are granted in the form of additional restricted stock units and vest immediately upon grant.

Additional information about Torchmark’s stock-based compensation as of December 31, 2012 and 2011 is as follows:


	2012		2011
Outstanding options:
Weighted-average remaining contractual term (in years)		3.72		2.95
Aggregate intrinsic value	$	99,212	$	94,270

Exercisable options:
Weighted-average remaining contractual term (in years)		2.29		1.89
Aggregate intrinsic value	$	69,472	$	59,097

Unrecognized compensation*	$	32,808	$	30,299
Weighted average period of expected recognition (in years)*		0.74		1.68

Includes restricted stock

Additional information concerning Torchmark’s unvested options is as follows at December 31:


	2012		2011
Number of shares outstanding		3,070,320		3,354,575
Weighted-average exercise price (per share)	$	41.98	$	33.30
Weighted-average remaining contractual term (in years)		5.70		5.55
Aggregate intrinsic value	$	29,740	$	35,173

Torchmark expects that substantially all unvested options will vest.

The following table summarizes information about stock options outstanding at December 31, 2012.


	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding		Weighted- Average Remaining Contractual Life (Years)		Weighted- Average Exercise Price		Number Exercisable		Weighted- Average Exercise Price
$15.67 - $30.40		826,159		2.66	$	19.76		818,013	$	19.66
30.87 - 30.87		1,238,872		4.05		30.87		581,578		30.87
35.33 - 40.45		998,259		1.99		37.63		987,904		37.64
41.79 - 42.97		1,387,010		1.95		41.93		1,387,010		41.93
43.06 - 44.39		1,646,212		4.82		44.12		330,112		43.07
44.79 - 48.72		1,235,625		6.02		45.90		157,200		45.45

$15.67 - $48.72		7,332,137		3.72	$	38.14		4,261,817	$	35.37

No equity awards were cash settled during the three years ended December 31, 2012.