Equity-Based Compensation
Under various plans, the Company may grant stock options and other equity-based awards to executive, management, and creative personnel. The Company’s approach to long-term incentive compensation contemplates awards of stock options and restricted stock units (RSUs). Certain RSUs awarded to senior executives vest based upon the achievement of market and/or performance conditions (Performance RSUs).
Stock options are generally granted at exercise prices equal to or exceeding the market price at the date of grant and become exercisable ratably over a four-year period from the grant date. The following table summarizes contractual terms for our stock option grants:
|
| | |
Grant dates | | Contractual Term |
Prior to January 2005 | | 10 years |
January 2005 through December 2010 | | 7 years |
After December 2010 | | 10 years |
At the discretion of the Compensation Committee of the Company’s Board of Directors, options can occasionally extend up to 15 years after date of grant.
The following table summarizes vesting terms for our RSUs:
|
| | |
Grant dates | | Vesting Terms |
RSUs: | | |
Prior to January 2009 | | 50% on each of the second and fourth anniversaries of the grant date |
| |
Effective January 2009 | | Ratably over four years |
| |
Performance RSUs: | | |
Prior to January 2010 | | 50% on each of the second and fourth anniversaries of the grant date subject to achieving market and/or performance conditions |
| |
Effective January 2010 | | Fully after three years, subject to achieving market and/or performance conditions |
Starting March 2009 for our primary plan, each share granted subject to a stock option award reduces the number of shares available by one share while each share granted subject to a RSU award reduces the number of shares available by two shares. In March 2011, shareholders of the Company approved the 2011 Stock Incentive Plan, which increased the number of shares authorized to be awarded as grants by 64 million shares. In March 2012, shareholders of the Company approved an amendment to the 2011 Stock Incentive Plan, which increased the number of shares authorized to be awarded as grants by an incremental 15 million shares. As of September 28, 2013, the maximum number of shares available for issuance (assuming all the awards are in the form of stock options) was approximately 113 million shares and the number available for issuance assuming all awards are in the form of RSUs was approximately 57 million shares. The Company satisfies stock option exercises and vesting of RSUs with newly issued shares. Stock options and RSUs are generally forfeited by employees who terminate prior to vesting.
Each year, generally during the second quarter, the Company awards stock options and restricted stock units to a broad-based group of management and creative personnel. The fair value of options is estimated based on the binomial valuation model. The binomial valuation model takes into account variables such as volatility, dividend yield and the risk-free interest rate. The binomial valuation model also considers the expected exercise multiple (the multiple of exercise price to grant price at which exercises are expected to occur on average) and the termination rate (the probability of a vested option being cancelled due to the termination of the option holder) in computing the value of the option.
In fiscal years 2013, 2012 and 2011, the weighted average assumptions used in the option-valuation model were as follows:
|
| | | | | | | | |
| 2013 | | 2012 | | 2011 |
Risk-free interest rate | 1.8 | % | | 2.0 | % | | 3.2 | % |
Expected volatility | 26 | % | | 31 | % | | 28 | % |
Dividend yield | 1.60 | % | | 1.56 | % | | 1.15 | % |
Termination rate | 2.7 | % | | 2.7 | % | | 2.5 | % |
Exercise multiple | 1.41 |
| | 1.41 |
| | 1.40 |
|
Although the initial fair value of stock options is not adjusted after the grant date, changes in the Company’s assumptions may change the value of, and therefore the expense related to, future stock option grants. The assumptions that cause the greatest variation in fair value in the binomial valuation model are the expected volatility and expected exercise multiple. Increases or decreases in either the expected volatility or expected exercise multiple will cause the binomial option value to increase or decrease, respectively.
The volatility assumption considers both historical and implied volatility and may be impacted by the Company’s performance as well as changes in economic and market conditions.
Compensation expense for RSUs and stock options is recognized ratably over the service period of the award. Compensation expense for RSUs is based on the market price of the shares underlying the awards on the grant date. Compensation expense for Performance RSUs reflects the estimated probability that the market and/or performance conditions will be met. Effective January 2010, equity-based award grants generally provide continued vesting, in the event of termination, for employees that reach age 60 or greater, have at least ten years of service and have held the award for at least one year.
The impact of stock options/rights and RSUs on income and cash flows for fiscal years 2013, 2012 and 2011, was as follows:
|
| | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
Stock option/rights compensation expense (1) | $ | 101 |
| | $ | 115 |
| | $ | 133 |
|
RSU compensation expense | 311 |
| | 310 |
| | 300 |
|
Total equity-based compensation expense (2) | 412 |
| | 425 |
| | 433 |
|
Tax impact | (139 | ) | | (145 | ) | | (151 | ) |
Reduction in net income | $ | 273 |
| | $ | 280 |
| | $ | 282 |
|
Equity-based compensation expense capitalized during the period | $ | 58 |
| | $ | 56 |
| | $ | 66 |
|
Tax benefit reported in cash flow from financing activities | $ | 204 |
| | $ | 122 |
| | $ | 124 |
|
| |
(1) | Includes stock appreciation rights. |
| |
(2) | Equity-based compensation expense is net of capitalized equity-based compensation and excludes amortization of previously capitalized equity-based compensation costs. Amortization of previously capitalized equity-based compensation totaled $65 million, $59 million and $57 million in fiscal years 2013, 2012 and 2011, respectively. |
The following table summarizes information about stock option transactions (shares in millions):
|
| | | | | | |
| 2013 |
| Shares | | Weighted Average Exercise Price |
Outstanding at beginning of year | 54 |
| | $ | 32.02 |
|
Awards forfeited | (1 | ) | | 39.62 |
|
Awards granted | 8 |
| | 51.37 |
|
Awards exercised | (20 | ) | | 29.57 |
|
Awards expired/cancelled | — |
| | — |
|
Outstanding at end of year | 41 |
| | 37.06 |
|
Exercisable at end of year | 18 |
| | 30.03 |
|
The following tables summarize information about stock options vested and expected to vest at September 28, 2013 (shares in millions):
|
| | | | | | | | | |
| | Vested |
Range of Exercise Prices | | Number of Options | | Weighted Average Exercise Price | | Weighted Average Remaining Years of Contractual Life |
$ 0 — $ 20 | | 1 |
| | $ | 18.90 |
| | 1.8 |
$ 21 — $ 25 | | 3 |
| | 21.70 |
| | 1.9 |
$ 26 — $ 30 | | 6 |
| | 28.84 |
| | 1.7 |
$ 31 — $ 35 | | 5 |
| | 32.38 |
| | 3.6 |
$ 36 — $ 45 | | 3 |
| | 39.60 |
| | 7.7 |
| | 18 |
| | | | |
|
| | | | | | | | | |
| | Expected to Vest |
Range of Exercise Prices | | Number of Options (1) | | Weighted Average Exercise Price | | Weighted Average Remaining Years of Contractual Life |
$ 0 — $ 30 | | 1 |
| | $ | 27.84 |
| | 2.5 |
$ 31 — $ 35 | | 2 |
| | 31.19 |
| | 6.3 |
$ 36 — $ 45 | | 10 |
| | 39.11 |
| | 7.9 |
$ 46 — $ 65 | | 7 |
| | 51.17 |
| | 9.3 |
| | 20 |
| | | | |
| |
(1) | Number of options expected to vest is total unvested options less estimated forfeitures. |
The following table summarizes information about RSU transactions (shares in millions):
|
| | | | | | |
| 2013 |
| Units | | Weighted Average Grant-Date Fair Value |
Unvested at beginning of year | 27 |
| | $ | 35.49 |
|
Granted (1) | 7 |
| | 50.92 |
|
Vested | (12 | ) | | 31.73 |
|
Forfeited | (1 | ) | | 36.65 |
|
Unvested at end of year (2) | 21 |
| | 42.28 |
|
(1) RSU grants include 0.4 million shares of Performance RSUs.
(2) 1.3 million of the unvested RSUs are Performance RSUs.
The weighted average grant-date fair values of options granted during 2013, 2012 and 2011 were $12.38, $10.65 and $10.96, respectively. The total intrinsic value (market value on date of exercise less exercise price) of options exercised and RSUs vested during 2013, 2012 and 2011 totaled $1,162 million, $1,033 million and $969 million, respectively. The aggregate intrinsic values of stock options vested and expected to vest at September 28, 2013 were $635 million and $459 million, respectively.
As of September 28, 2013, there was $147 million of unrecognized compensation cost related to unvested stock options and $520 million related to unvested RSUs. That cost is expected to be recognized over a weighted-average period of 1.6 years for stock options and 1.6 years for RSUs.
Cash received from option exercises for 2013, 2012 and 2011 was $587 million, $1,008 million and $1,128 million, respectively. Tax benefits realized from tax deductions associated with option exercises and RSU activity for 2013, 2012 and 2011 totaled $398 million, $360 million and $342 million, respectively.
