Note 8—Stock-Based Compensation

Our stock-based compensation expense consists primarily of time-based and performance-based options of Caesars Entertainment and one of its subsidiaries that have been granted to management, other personnel and key service providers. The Company has recognized compensation expense associated with its stock-based compensation programs as follows:


	Quarter Ended September 30,				Nine Months Ended September 30,
(In millions)	2012		2011		2012		2011
Amounts included in:
Corporate expense	$	6.3	$	4.1	$	20.5	$	10.0
Property, general, administrative, and other		3.5		3.3		22.5		7.6

Total stock-based compensation expense	$	9.8	$	7.4	$	43.0	$	17.6

During the quarter and nine months ended September 30, 2012, the Company recorded $2.0 million and $18.2 million, respectively, of expense related to stock-based awards of its subsidiaries, of which $1.8 million and $17.3 million, respectively, related to liability-classified awards that are re-measured to fair value at each reporting date, and $0.2 million and $0.9 million, respectively, related to equity-classified awards that are measured at their fair value at the date of grant.

In February 2012, the Company declared a 1.742-for-one stock split in connection with its public offering, and the Board of Directors adopted the 2012 Performance Incentive Plan (the “2012 Incentive Plan”). Directors, employees, officers and consultants or advisors who render services to the Company or its subsidiaries may be selected to receive awards under the 2012 Incentive Plan. Our Board of Directors or a subcommittee thereof has the authority to administer the 2012 Incentive Plan. The 2012 Incentive Plan includes the following limits:

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no more than 6,867,018 shares may be issued with respect to incentive stock options under the 2012 Incentive Plan;

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the maximum number of shares of common stock subject to those options and stock appreciation rights that are granted during any calendar year to any individual under the 2012 Incentive Plan is 3,433,509 shares, prior to consideration of the July 2012 amendment as further described below;

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the maximum number of shares of common stock which may be delivered pursuant to performance-based awards (other than options and stock appreciation rights intended to satisfy the requirements for “performance-based compensation” under Internal Revenue Code Section 162(m), and other than cash awards covered by the cap in the following sentence) that are granted to any one participant in any calendar year will not exceed 1,373,404 shares, either individually or in the aggregate;

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in addition, the aggregate amount of compensation to be paid to any one participant in respect of all performance-based awards payable only in cash and not related to shares of common stock and granted to that participant in any one calendar year will not exceed $25.0 million; and

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awards cancelled during the year will be counted against the limits in the preceding two bullets to the extent required by Section 162 (m) of the Internal Revenue Code.

As a result of adopting the 2012 Incentive Plan, options may no longer be granted under the Company’s Management Equity Incentive Plan adopted February 27, 2008 (the “2008 Incentive Plan”).

During the third quarter of 2012, the Company’s stockholders approved (1) an amendment to the 2012 Incentive Plan to increase the maximum number of shares of the Company’s common stock with respect to which stock options and stock appreciation rights may be granted during any calendar year to any individual under the 2012 Incentive Plan from 3,433,509 shares to 6,500,000 shares, and (2) a one-time stock option exchange program (the “Option Exchange”), to permit the Company to cancel certain stock options held by some of our employees, service providers and directors in exchange for new, replacement options to purchase an equal number of shares of our common stock (the “Replacement Options”).

Options eligible for the Option Exchange (the “Eligible Options”) were granted on or prior to February 9, 2012 and had an exercise price equal to or greater than $20.09 per share. Replacement Options have an exercise price of $8.22 per share, a ten-year term and a new vesting schedule determined on a grant-by-grant basis, as follows:

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Vesting of Time-Based Options. Each Replacement Option granted in exchange for a time-based eligible option will have a new vesting schedule as follows: 20% of the Replacement Options will be immediately vested, with the remainder vesting in four equal installments of 20% each on each of the first four anniversaries of the exchange date.

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Vesting of Performance-Based Options. Each Replacement Option granted in exchange for a performance-based eligible option will have a new vesting schedule as follows:

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With respect to the Eligible Options subject to vesting if funds affiliated with TPG Capital, L.P. (the “TPG Members”) and Apollo Global Management, LLC (the “Apollo Members” and together with the TPG Members, the “Sponsors”) achieve a return on their investment that is equal to or greater than 1.5x, the Replacement Options granted in exchange for such options will vest on the date that the Company’s 30-day trailing average closing common stock price equals or exceeds $35.00 per share.

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With respect to the Eligible Options subject to vesting if funds affiliated with the Sponsors achieve a return on their investment that is equal to or greater than 2.0x, the Replacement Options granted in exchange for such options will vest on the date that the Company’s 30-day trailing average closing common stock price equals or exceeds $57.41 per share.

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Vesting of Loveman Performance-Based Option. With respect to the Eligible Option to purchase 290,334 shares of the Company’s common stock granted on November 29, 2011 to Gary Loveman, the Company’s Chairman of the Board, Chief Executive Officer and President, the vesting of which differs from the vesting of the other outstanding performance-based eligible options described above and is eligible to vest if funds affiliated with the Sponsors achieve a return on their investment that is equal to or greater than 1.0x (the “Loveman Performance-Based Option”), the Replacement Option granted in exchange for the Loveman Performance-Based Option will vest on the date that the Company’s 30-day trailing average closing common stock price equals or exceeds $57.41 per share.

As a result of the Option Exchange, additional expense of $2.2 million was recognized in the third quarter of 2012. An additional $13.0 million will be recognized in future periods as the Replacement Options vest.

The following is a summary of share-based option activity, adjusted for the stock split, including options under the 2008 Incentive Plan and 2012 Incentive Plan and warrants to purchase common stock, for the nine months ended September 30, 2012:


	Shares			Weighted Average Exercise Price
Outstanding at December 31, 2011		8,744,649		$	38.15
Granted		7,992,285		$	8.47
Canceled		(8,296,470	)	$	31.35

Outstanding at September 30, 2012		8,440,464		$	10.71

Vested and expected to vest at September 30, 2012		7,033,200		$	10.71

Exercisable at September 30, 2012		1,404,145		$	10.69