4. Stock-Based Compensation

The fair value of each employee stock option and each employee stock purchase plan right granted is estimated on the grant date under the fair value method using the Black-Scholes valuation model, which requires the Company to make a number of assumptions including the estimated expected life of the award and related volatility. The fair value of restricted stock units is estimated based on the market price of the Company’s common stock on the date of grant. The estimated fair values of stock options, purchase plan rights, and restricted stock units are then expensed over the requisite service period, which is generally the vesting period. For restricted stock units requiring satisfaction of both market and service conditions, the estimated fair values are generally expensed over the longest of the explicit, implicit and derived service periods. Through 2023, the Company granted performance stock units that vest upon the achievement of certain pre-defined company-specific performance-based criteria. Expense related to these performance stock units is recognized ratably over the expected performance period once the pre-defined performance-based criteria for vesting becomes probable and can vest up to 200 percent of the target number of shares granted. The fair value of these performance stock units are estimated based on the closing market price of the Company’s common stock on the date of grant. Beginning in 2024, the structure of the performance stock unit design was revised with a relative total shareholder return (rTSR) approach such that awards are earned for the Company’s rTSR performance over three-year measurement periods relative to a peer group of companies and the actual numbers of performance stock units that will vest at the end of the performance period may be anywhere from zero to 150 percent of the target number of shares granted. The fair value of these performance stock units is estimated using a Monte Carlo model because the performance target is based on a market condition. Expense related to these performance stock units are recognized ratably over the three-year measurement period.