How does Budget measure stock-based compensation cost?
Budget Franchise · 2025 FDDAnswer from 2025 FDD Document
Stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense on a straight-line basis over the vesting period. Our policy is to record compensation expense for stock options, and restricted stock units that are time- and performance-based, for the portion of the award that vests. Compensation expense related to market-based restricted stock units is recognized provided that the requisite service is rendered, regardless of when, if ever, the market condition is satisfied. We estimate the fair value of restricted stock units using the market price of our common stock on the date of grant. We estimate the fair value of stock-based and cash unit awards containing a market condition using a Monte Carlo simulation model. Key inputs and assumptions used in the Monte Carlo simulation model include the stock price of the award on the grant date, the expected term, the risk-free interest rate over the expected term, the expected annual dividend yield and the expected stock price volatility. The expected volatility is based on a combination of the historical and implied volatility of our publicly traded, near-the-money stock options, and the valuation period is based on the vesting period of the awards. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the
time of grant and, since we do not currently pay or plan to pay a recurring dividend on our common stock, the expected dividend yield was zero.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 79)
What This Means (2025 FDD)
According to Budget's 2025 Franchise Disclosure Document, stock-based compensation cost is measured at the grant date. The cost is based on the fair value of the award and is recognized as an expense on a straight-line basis over the vesting period. This policy applies to stock options and restricted stock units that are time- and performance-based, with compensation expense recorded for the portion of the award that vests. For market-based restricted stock units, compensation expense is recognized as long as the service is rendered, regardless of whether the market condition is ever satisfied.
The fair value of restricted stock units is estimated using the market price of Budget's common stock on the grant date. For stock-based and cash unit awards containing a market condition, Budget uses a Monte Carlo simulation model to estimate fair value. The key inputs for this model include the stock price on the grant date, the expected term, the risk-free interest rate over the expected term, the expected annual dividend yield, and the expected stock price volatility. The expected volatility is based on a combination of historical and implied volatility of Budget's publicly traded stock options. The risk-free interest rate is derived from the U.S. Treasury yield curve at the time of grant, and the expected dividend yield is zero, as Budget does not currently pay or plan to pay recurring dividends on its common stock.
For prospective franchisees, understanding how Budget accounts for stock-based compensation may not have a direct impact on their day-to-day operations. However, it provides insight into the company's overall financial health and how it incentivizes its employees and directors. The use of models like the Monte Carlo simulation indicates a sophisticated approach to valuing stock-based awards, which can be a sign of a well-managed company. Franchisees may want to consider this information as part of their broader due diligence when evaluating the financial stability and management practices of Budget.