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
	2013			2012			2011
Balance at January 1		4,536,301			6,099,342			255,263
Approval of Torchmark Corporation 2011 Incentive Plan*		0			0			7,950,000
Cancellation of available shares from prior plans		0			0			(229,333	)
Options expired and forfeited during year		85,406			5,850			0
Restricted stock expired and forfeited during year (counted as 3.1 options)*		6,417			0			0
Options granted during year		(1,084,575	)		(1,072,725	)		(1,338,013	)
Restricted stock, restricted stock units, and performance shares granted under the Torchmark Corporation 2011 Incentive Plan (counted as 3.1 options per grant)*		(631,047	)		(496,166	)		(519,558	)
Restricted stock and restricted stock units granted during the year under previous plans		0			0			(19,017	)

Balance at December 31		2,912,502			4,536,301			6,099,342


* 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 three years ended December 31, 2013 is presented below:


	2013		2012		2011
Stock-based compensation expense recognized*	$	25,642	$	21,605	$	14,954
Tax benefit recognized		8,975		7,562		5,234
Weighted-average grant-date fair value of options granted		18.55		15.70		15.48
Intrinsic value of options exercised		72,793		80,781		40,991
Cash received from options exercised		97,815		181,022		162,613
Actual tax benefit received from exercises		25,478		28,086		14,347

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

An analysis of option activity for each of the three years ended December 31, 2013 is as follows:


	2013					2012					2011
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Outstanding-beginning of year		7,332,137		$	38.14		11,620,393		$	35.42		15,185,729		$	34.09
Granted:
7-year term		907,800			56.43		846,300			46.10		1,129,663			44.37
10-year term		176,775			56.10		226,425			45.49		208,350			44.40
Exercised		(2,611,838	)		37.45		(5,354,381	)		33.82		(4,829,892	)		33.67
Expired and forfeited		(85,406	)		48.49		(6,600	)		44.63		(73,425	)		39.17
Adjustment due to 7/1/11 stock split		0			0.00		0			0.00		(32	)		32.96

Outstanding-end of year		5,719,468		$	41.76		7,332,137		$	38.14		11,620,393		$	35.42

Exercisable at end of year		2,930,368		$	34.42		4,261,817		$	35.37		8,265,818		$	36.28

A summary of restricted stock and restricted stock units granted during each of the years in the three year period ended December 31, 2013 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.


	2013			2012			2011
Executives restricted stock:
Shares		39,130			60,000			167,250
Price per share	$	60.14		$	46.12		$	44.39
Aggregate value	$	2,353		$	2,767		$	7,424
Percent vested as of 12/31/13		0	%		20	%		30	%

Directors restricted stock:
Shares		10,030			9,720			6,303
Price per share	$	53.18		$	43.74		$	40.45
Aggregate value	$	533		$	425		$	255
Percent vested as of 12/31/13		100	%		100	%		100	%

Directors restricted stock units (including dividend equivalents):
Shares		11,332			10,331			13,063
Price per share	$	53.98		$	44.03		$	40.49
Aggregate value	$	612		$	455		$	529
Percent vested as of 12/31/13		100	%		100	%		100	%

Certain senior executives of the Company have been granted performance shares. On February 27, 2013, a grant was made of 99 thousand performance shares at a price of $56.10 per share for an aggregate grant price of $5.5 million. On February 21 and 22, 2012 grants were made of 80 thousand performance shares with grant prices ranging from $48.72 to $49.09 per share for an aggregate grant price of $3.9 million. Performance 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 99 thousand shares and 80 thousand shares for the 2013 and 2012 grants, respectively, the determination of the actual settlement in shares will be based on the achievement of certain performance objectives of Torchmark over the respective three-year contract periods. The actual shares could be distributed in a range from 0 to 197 thousand shares for the 2013 grants, and 0 to 160 thousand shares for the 2012 grants. The performance shareholders are not entitled to dividend equivalents, and are not entitled to dividend payments until vested and settled.

An analysis of unvested restricted stock is as follows:


	Executives Restricted Stock			Executive Performance Shares		Directors Restricted Stock			Total

2011:
Balance at January 1, 2011		237,150			0		0			237,150
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

2013:
Grants		39,130			98,500		10,030			147,660
Estimated additional performance shares*		0			63,200		0			63,200
Restriction lapses		(100,500	)		0		(10,030	)		(110,530	)
Forfeitures		(20,700	)		0		0			(20,700	)

Balance at December 31, 2013		229,630			241,700		0			471,330

*Additional share grants expected due to achievement of performance criteria.

Restricted stock units outstanding at each of the year ends 2013, 2012, and 2011 were 57,145, 53,272, and 42,938, 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 2011 through 2013. 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, 2013 and 2012 is as follows:


	2013		2012
Outstanding options:
Weighted-average remaining contractual term (in years)		4.11		3.72
Aggregate intrinsic value	$	208,152	$	99,212

Exercisable options:
Weighted-average remaining contractual term (in years)		2.49		2.29
Aggregate intrinsic value	$	128,150	$	69,472

Unrecognized compensation*	$	37,397	$	32,808
Weighted average period of expected recognition (in years)*		0.96		0.74

Includes restricted stock

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


	2013		2012
Number of shares outstanding		2,789,100		3,070,320
Weighted-average exercise price (per share)	$	49.47	$	41.98
Weighted-average remaining contractual term (in years)		5.81		5.70
Aggregate intrinsic value	$	80,002	$	29,740

Torchmark expects that substantially all unvested options will vest.

The following table summarizes information about stock options outstanding at December 31, 2013.


	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		461,983		2.11	$	17.69		457,386	$	17.57
30.87 - 30.87		962,124		3.03		30.87		962,124		30.87
35.93 - 42.92		986,616		1.12		40.35		979,202		40.37
43.06 - 44.39		1,228,295		4.68		44.37		526,806		44.35
44.79 - 48.72		1,004,375		5.72		45.78		4,850		45.49
56.10 - 64.59		1,076,075		6.54		56.38		0		0

$15.67 - $64.59		5,719,468		4.11	$	41.76		2,930,368	$	34.42

No equity awards were cash settled during the three years ended December 31, 2013.