NOTE 2 — SHARE-BASED COMPENSATION

Stock Incentive Plan

The 2006 Stock Incentive Plan for Key Employees of HCA Holdings, Inc. and its Affiliates, as Amended and Restated (the “Stock Incentive Plan”), is designed to promote the long term financial interests and growth of the Company by attracting and retaining management and other personnel and to motivate them to achieve long range goals and further the alignment of interests of participants with those of our stockholders through opportunities for increased stock, or stock-based, ownership in the Company. Portions of the options, stock appreciation rights (“SARs”) and restricted share units (“RSUs”) granted under the Stock Incentive Plan vest solely based upon continued employment over a specific period of time, and portions of the options, SARs and RSUs, and all performance share units (“PSUs”) vest based both upon continued employment over a specific period of time and upon the achievement of predetermined financial targets over time. We granted 1,601,300 and 1,746,300 SARs and 2,628,500 and 3,105,000 RSUs and PSUs under the Stock Incentive Plan during 2016 and 2015, respectively. At December 31, 2016, there were 11,957,900 stock options and SARs outstanding and exercisable, and there were 25,007,100 shares available for future grants under the Stock Incentive Plan.

Employee Stock Purchase Plan

The HCA Holdings, Inc. Employee Stock Purchase Plan (“ESPP”) was approved by the stockholders of the Company during the April 2014 Annual Meeting with 12,000,000 shares of our common stock reserved for issuance thereunder. The ESPP provides our participating employees an opportunity to obtain shares of our common stock at a discount (through payroll deductions over three-month periods). At December 31, 2016, 9,720,000 shares of common stock were reserved for issuance under the ESPP provisions. During 2016 and 2015, the Company recognized $8 million of compensation expense for each year related to the ESPP.

Stock Option, SAR, RSU and PSU Activity

The fair value of each stock option and SAR award is estimated on the grant date, using valuation models and the weighted average assumptions indicated in the following table. Awards under the Stock Incentive Plan generally vest based on continued employment (“Time Stock Options and SARs” and “Time RSUs”) and based upon continued employment and the achievement of certain financial targets (“Performance Stock Options and SARs”, “Performance RSUs” and “PSUs”). PSUs have a three-year cumulative earnings per share target, and the number of PSUs earned can vary from zero (for actual performance of less than 80% of target) to two times the original PSU grant (for actual performance of 120% or more of target). Each grant is valued as a single award with an expected term equal to the average expected term of the component vesting tranches. We use historical exercise behavior data and other factors to estimate the expected term of the options and SARs. The expected term of the share-based award is limited by the contractual term, and employee post-vesting termination behavior is incorporated in the historical exercise behavior data.

Compensation cost is recognized on the straight-line attribution method. The straight-line attribution method requires that total compensation expense recognized must at least equal the vested portion of the grant-date fair value. The expected volatility is derived using historical stock price information for our common stock and that of certain peer group companies, and the volatility implied by the trading of options to purchase our stock on open-market exchanges. The risk-free interest rate is the approximate yield on United States Treasury Strips having a life equal to the expected share-based award life on the date of grant. The expected life is an estimate of the number of years a share-based award will be held before it is exercised.


	2016			2015			2014
Risk-free interest rate		1.70	%		1.59	%		1.96	%
Expected volatility		36	%		36	%		37	%
Expected life, in years		6.25			6.25			6.25
Expected dividend yield		—			—			—

Information regarding Time Stock Options and SARs and Performance Stock Options and SARs activity during 2016, 2015 and 2014 is summarized below (share amounts in thousands):


	Time Stock Options and SARs			Performance Stock Options and SARs			Total Stock Options and SARs			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value (dollars in millions)
Options and SARs outstanding, December 31, 2013		16,809			18,377			35,186		$	15.82
Granted		1,723			1,722			3,445			48.56
Exercised		(3,322	)		(5,234	)		(8,556	)		9.15
Cancelled		(159	)		(121	)		(280	)		29.54

Options and SARs outstanding, December 31, 2014		15,051			14,744			29,795			21.39
Granted		1,746			—			1,746			69.16
Exercised		(4,093	)		(3,988	)		(8,081	)		12.77
Cancelled		(539	)		(329	)		(868	)		32.59

Options and SARs outstanding, December 31, 2015		12,165			10,427			22,592			27.73
Granted		1,601			—			1,601			69.96
Exercised		(2,521	)		(4,171	)		(6,692	)		15.85
Cancelled		(309	)		(126	)		(435	)		55.17

Options and SARs outstanding, December 31, 2016		10,936			6,130			17,066			35.65		5.5 years	$	655

Options and SARs exercisable, December 31, 2016		7,015			4,943			11,958		$	26.15		4.5 years	$	573

The weighted average fair values of stock options and SARs granted during 2016, 2015 and 2014 were $26.60, $26.10 and $19.13 per share, respectively. The total intrinsic value of stock options and SARs exercised in the year ended December 31, 2016 was $398 million. As of December 31, 2016, the unrecognized compensation cost related to nonvested stock options and SARs was $70 million.

Information regarding Time RSUs, Performance RSUs and PSUs activity during 2016, 2015 and 2014 is summarized below (share amounts in thousands):


	Time RSUs			Performance RSUs			PSUs			Total RSUs and PSUs			Weighted Average Grant Date Fair Value
RSUs and PSUs outstanding, December 31, 2013		5,099			2,399			—			7,498		$	33.30
Granted		2,603			1,229			—			3,832			48.53
Vested		(1,423	)		(692	)		—			(2,115	)		32.56
Cancelled		(384	)		(155	)		—			(539	)		38.30

RSUs and PSUs outstanding, December 31, 2014		5,895			2,781			—			8,676			39.89
Granted		1,694			—			1,411			3,105			69.43
Vested		(1,953	)		(928	)		—			(2,881	)		37.61
Cancelled		(334	)		(113	)		(40	)		(487	)		47.26

RSUs and PSUs outstanding, December 31, 2015		5,302			1,740			1,371			8,413			51.15
Granted		1,450			—			1,178			2,628			69.95
Vested		(2,242	)		(870	)		—			(3,112	)		41.71
Cancelled		(399	)		(80	)		(163	)		(642	)		59.66

RSUs and PSUs outstanding, December 31, 2016		4,111			790			2,386			7,287			61.21

As of December 31, 2016, the unrecognized compensation cost related to RSUs and PSUs was $277 million.