The Company has the following share-based compensation plans: the Amended and Restated Herbalife Ltd. 2005 Stock Incentive Plan, or the 2005 Stock Incentive Plan, and the Amended and Restated Herbalife Ltd. 2014 Stock Incentive Plan, or the 2014 Stock Incentive Plan. Additionally, the Company has the Amended and Restated Non-Management Directors Compensation Plan, or the Non-Management Directors Plan, the purpose of which is to facilitate equity ownership in the Company by its directors through equity awards under the 2005 Stock Incentive Plan, and for grants made on and after April 30, 2014, under the 2014 Stock Incentive Plan. The 2014 Stock Incentive Plan replaced the 2005 Stock Incentive Plan and after the adoption thereof, no additional awards were made under the 2005 Stock Incentive Plan. The terms of the 2014 Stock Incentive Plan are substantially similar to the terms of the 2005 Stock Incentive Plan. The 2014 Stock Incentive Plan authorizes the issuance of 17.4 million common shares pursuant to awards granted under the plan, plus any shares that remained available for issuance under the 2005 Stock Incentive Plan as of April 29, 2014. As of December 31, 2020, an aggregate of approximately 2.3 million common shares remain available for future issuance under the 2014 Stock Incentive Plan.

The Company’s share-based compensation plans generally provide for grants of stock options, SARs, and stock unit awards, which are collectively referred to herein as awards. Certain SARs generally vest annually over a three-year period. The contractual term of stock options and SARs is generally ten years. Certain stock unit awards under the 2014 Stock Incentive Plan vest annually over a three-year period. Certain stock unit awards subject to service and performance conditions vest after the passage of a performance period as determined by the compensation committee of the Company’s board of directors. Stock unit awards granted to directors generally vest over a one-year period.

Awards can be subject to the following: market and service conditions, or market condition awards; performance and service conditions, or performance condition awards; market, service and performance conditions, or market and performance condition awards; or be subject only to continued service with the Company, or service condition awards. All awards granted by the Company are market condition awards, performance condition awards, or service condition awards. Unless otherwise determined at the time of grant, upon vesting, each stock unit award represents the right to receive one common share. For stock unit awards, the Company issues new shares, net of shares withheld for tax purposes, when vested. For SARs, the Company issues new shares based on the intrinsic value when exercised, net of shares withheld for tax purposes. The Company’s stock compensation awards outstanding as of December 31, 2020 included SARs and stock unit awards.

% in the first succeeding year,

% in the second succeeding year, and

% in the third succeeding year, subject to achievement of certain sales leader retention metrics. The fair value of these SARs was determined on the date of grant using the Black-Scholes-Merton option pricing model. The compensation expense for these grants is recognized over the vesting term using the graded vesting

During the years ended December 31, 2020, 2019, and 2018, the Company granted performance stock unit awards to certain executives, which will vest on December 31, 2022, December 31, 2021, and December 31,

2020, respectively, subject to their continued employment through that date and the achievement of certain performance conditions. Generally, performance conditions include targets for local currency net sales, Volume Points, adjusted earnings before interest and taxes, and/or adjusted earnings per share. These performance stock unit awards can vest at

between 0% and 200% of the target award based on the achievement of the performance conditions.

During the years ended December 31, 2020, 2019, and 2018, the Company granted stock unit awards with service conditions to directors and certain employees, which generally vest annually over a one-year and three-year period, respectively.

Share-based compensation expense is included in selling, general, and administrative expenses within the Company’s consolidated statements of income. The Company’s policy is to estimate the number of forfeitures expected to occur. Share-based compensation expense relating to service condition awards amounted to $38.3 million, $31.8 million, and $26.2 million for the years ended December 31, 2020, 2019, and 2018, respectively. Share-based compensation expense relating to market condition awards amounted to zero, zero, and less than $0.1 million for the years ended December 31, 2020, 2019, and 2018, respectively. Share-based compensation expense relating to performance condition awards amounted to $12.7 million, $6.8 million, and $9.2 million for the years ended December 31, 2020, 2019, and 2018, respectively. The related income tax benefits recognized in earnings for all awards amounted to $9.6 million, $8.3 million, and $8.1 million for the years ended December 31, 2020, 2019, and 2018, respectively. Excess tax benefits on share-based compensation arrangements totaled $3.1 million, $5.8 million, and $53.1 million for the years ended December 31, 2020, 2019, and 2018, respectively.

As of December 31, 2020, the total unrecognized compensation cost related to non-vested service condition stock awards was $55.0 million and the related weighted-average period over which it is expected to be recognized is approximately 1.3 years. As of December 31, 2020, the total unrecognized compensation cost related to non-vested performance condition awards was $18.3 million and the related weighted-average period over which it is expected to be recognized is approximately 1.8 years.

Stock unit awards are valued at the market value on the date of grant. The fair value of service condition SARs and performance condition SARs are estimated on the date of grant using the Black-Scholes-Merton option-pricing model. The fair value of SARs with market conditions or with market and performance conditions are estimated on the date of grant using the Monte Carlo lattice model. The Company calculates the expected term of its SARs based on historical data. All groups of employees have been determined to have similar historical exercise patterns for valuation purposes. The expected volatility of the SARs is based upon the historical volatility of the Company’s common shares and is also validated against the volatility rates of a peer group of companies. The risk free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the SARs. The expected dividend yield assumption is based on the Company’s historical and expected amount of dividend payouts.

There were no SARs granted during the years ended December 31, 2020, 2019, and 2018.

 

The total intrinsic value of service condition SARs exercised during the years ended December 31, 2020, 2019, and 2018 was $28.0 million, $33.7 million, and $211.0 million, respectively. The total intrinsic value of performance condition SARs exercised during the years ended December 31, 2020, 2019, and 2018 was $28.8 million, $0.1 million, and $95.0 million, respectively. The total intrinsic value of market condition SARs exercised during the years ended December 31, 2020, 2019, and 2018 was zero, zero, and $7.8 million.

 

The total vesting date fair value of stock units which vested during the years ended December 31, 2020, 2019, and 2018 was $23.0 million, $13.0 million, and $2.2 million, respectively.

During 2007, the Company adopted a qualified employee stock purchase plan, or ESPP, which was implemented during the first quarter of 2008. In connection with the adoption of the ESPP, the Company has reserved for issuance a total of 4.0 million common shares. As of December 31, 2020, approximately 3.1 million common shares remain available for future issuance. Under the terms of the ESPP, rights to purchase common shares may be granted to eligible qualified employees subject to certain restrictions. The ESPP enables the Company’s eligible employees, through payroll withholdings, to purchase a limited number of common shares at 85% of the fair market value of a common share at the purchase date. Purchases are made on a quarterly basis.