3M 2012 Annual Report Download - page 117

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NOTE 14. Stock-Based Compensation
The 3M 2008 Long-Term Incentive Plan provides for the issuance or delivery of up to 64 million shares of 3M common
stock pursuant to awards granted under the plan. In May 2012, shareholders approved an additional 36 million shares,
increasing the number of approved shares to 100 million shares. Awards under this plan may be issued in the form of
Incentive Stock Options, Nonqualified Stock Options, Progressive Stock Options, Stock Appreciation Rights, Restricted
Stock, Restricted Stock Units, Other Stock Awards, and Performance Units and Performance Shares. Awards
denominated in shares of common stock other than options and Stock Appreciation Rights, per the 2008 Plan, count
against the 100 million share limit as 3.38 shares for every one share covered by such award (for full value awards with
grant dates prior to May 11, 2010), as 2.87 shares for every one share covered by such award (for full value awards with
grant dates on or after May 11, 2010 and prior to May 8, 2012), or as 3.50 shares for every one share covered by such
award (for full value awards with grant dates of May 8, 2012 or later). The remaining total shares available for grant under
the 2008 Long Term Incentive Plan Program are 48,786,751 as of December 31, 2012. There were approximately 11,564
participants with outstanding options, restricted stock, or restricted stock units at December 31, 2012.
The Company’s annual stock option and restricted stock unit grant is made in February to provide a strong and immediate
link between the performance of individuals during the preceding year and the size of their annual stock compensation
grants. The grant to eligible employees uses the closing stock price on the grant date. Stock options vest over a period
from one to three years with the expiration date at 10 years from date of grant. Accounting rules require recognition of
expense under a non-substantive vesting period approach, requiring compensation expense recognition when an
employee is eligible to retire. Employees are considered eligible to retire at age 55 and after having completed five years
of service. This retiree-eligible population represents 30 percent of the 2012 annual stock-based compensation award
expense dollars; therefore, higher stock-based compensation expense is recognized in the first quarter. Beginning in
2007, the Company reduced the number of traditional stock options granted under the Management Stock Ownership
Program (MSOP) plan by reducing the number of employees eligible to receive annual grants and by shifting a portion of
the annual grant away from traditional stock options primarily to restricted stock units. However, associated with the
reduction in the number of eligible employees, the Company provided a one-time “buyout” grant in 2007 of restricted stock
units to the impacted employees. 3M also has granted progressive (reload) options. These options are nonqualified stock
options that were granted to certain participants under the 1997 or 2002 MSOP, but for which the reload feature was
eliminated in 2005 (on a prospective basis only). Participants who had options granted prior to this effective date may still
qualify to receive new progressive (reload) stock options.
In addition to the annual grants, the Company makes other minor grants of stock options, restricted stock units and other
stock-based grants. The Company issues cash settled Restricted Stock Units and Stock Appreciation Rights in certain
countries. These grants do not result in the issuance of Common Stock and are considered immaterial by the Company.
Amounts recognized in the financial statements with respect to stock-based compensation programs, which include stock
options, restricted stock, restricted stock units, performance shares, and the General Employees’ Stock Purchase Plan
(GESPP), are provided in the following table. Capitalized stock-based compensation amounts were not material for the
twelve months ended 2012, 2011 and 2010. The income tax benefits shown in the table can fluctuate by period due to the
amount of employee “disqualifying dispositions” related to Incentive Stock Options (ISOs). The Company last granted
ISOs in 2002.
Stock-Based Compensation Expense
Years ended December 31
(Millions)
2012
2011
2010
Cost of sales
$
27
$
29
$
31
Selling, general and administrative expenses
167
192
209
Research, development and related expenses
29
32
34
Stock-based compensation expenses
$
223
$
253
$
274
Income tax benefits
$
(67)
$
(80)
$
(98)
Stock-based compensation expenses, net of tax
$
156
$
173
$
176