9. Stock-based Compensation

On May 20, 2014 the shareholders approved the adoption of The Hanover Insurance Group 2014 Long-Term Incentive Plan (the “2014 Stock Plan”). With respect to new share-based award issuances, the 2014 Stock Plan replaced The Hanover Insurance Group, Inc. 2006 Long-Term Incentive Plan (the “2006 Stock Plan”) and provided authorization for 6,100,000 shares in a new share pool plus any shares from the 2006 Stock Plan that may become available as a result of the cash settlement, forfeiture, expiration or cancellation of such awards. The 2014 Stock Plan provides for the granting of the same types of awards as the 2006 Stock Plan, which includes stock options and SARS, restricted and unrestricted stock, stock units, performance based stock awards and cash awards. In accordance with the 2014 Stock Plan, the issuance of one share of common stock in the form of an option or SAR will reduce the share pool by one share, whereas the issuance of one share of common stock for the other types of stock awards provided by the plan will reduce the pool by 3.8 shares. As of June 30, 2014, there were 6,096,349 shares available for grants under the 2014 Stock Plan.

Additionally, on May 20, 2014, the shareholders approved The Hanover Insurance Group 2014 Employee Stock Purchase plan (the “ESPP Plan”) and the Chaucer Share Incentive Plan (the “SIP Plan”), authorizing the issuance of 2,500,000 and 750,000 shares, respectively, under such plans. As of June 30, 2014, 23,105 shares and 2,737 shares have been issued under the ESPP Plan and the SIP Plan, respectively.

Compensation cost and the related tax benefits were as follows:



	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)	2014		2013		2014		2013
Stock-based compensation expense	$	3.8	$	2.1	$	7.3	$	5.7
Tax benefit		(1.4)		(0.7)		(2.6)		(2.0)
Stock-based compensation expense, net of taxes	$	2.4	$	1.4	$	4.7	$	3.7

Stock Options

Information on the Company’s stock option plans is summarized below.



	Six Months Ended June 30,
	2014			2013
(in whole shares and dollars)	Shares		Weighted Average Exercise Price	Shares		Weighted Average Exercise Price
Outstanding, beginning of period	2,049,173	$	41.18	2,892,882	$	38.28
Granted	683,200		58.02	537,300		42.51
Exercised	(243,491)		38.66	(798,790)		32.84
Forfeited or cancelled	(34,085)		41.84	(164,500)		41.74
Outstanding, end of period	2,454,797		46.10	2,466,892		40.74

Restricted Stock Units

The following tables summarize activity information about employee restricted stock units:



	Six Months Ended June 30,
	2014			2013
(in whole shares and dollars)	Shares		Weighted Average Grant Date Fair Value	Shares		Weighted Average Grant Date Fair Value
Time-based restricted stock units:
Outstanding, beginning of period	525,980	$	41.20	750,837	$	40.15
Granted	94,240		58.02	130,912		42.80
Vested	(202,006)		42.09	(259,440)		39.60
Forfeited	(9,300)		40.73	(37,257)		40.49
Outstanding, end of period	408,914		44.65	585,052		40.96

Performance-based and market-based restricted stock units:
Outstanding, beginning of period	184,626	$	40.42	132,775	$	39.97
Granted	60,338		55.73	79,850		41.67
Vested	(22,826)		44.78	-		-
Forfeited	(3,800)		37.90	(22,700)		40.83
Outstanding, end of period	218,338		44.24	189,925		40.58

Performance based restricted stock units are based upon the achievement of the performance metric at 100%. These units have the potential to range from 0% to 200% of the shares disclosed, which varies based on grant year and individual participation level. Increases above the 100% target level are reflected as granted in the period in which performance-based stock unit goals are achieved. Decreases below the 100% target level are reflected as forfeited. Included in the amounts granted above for the performance-based restricted stock units were 1,013 shares related to awards that a performance metric in excess of 100% was achieved. These awards vested in the first quarter of 2014.

In the first six months of 2014 and 2013, the Company granted market-based awards totaling 56,625 and 76,175, respectively, to certain members of senior management, which are included in the table above as performance and market-based restricted stock activity. The vesting of these stock units is based on the relative total shareholder return (“TSR”) of the Company. This metric is generally based on relative TSR for a three-year period, as compared to a Property and Casualty Index of peer companies. The fair value of market based awards was estimated at the date of grant using a valuation model. These units have the potential to range from 0% to 150% of the shares disclosed. Included in the amount granted above were 1,875 shares related to market-based awards that achieved a payout in excess of 100%. These awards vested in the first quarter of 2014.