AbbVie 2012 Annual Report Download - page 94

Stock Compensation Expense
Stock compensation expense recognized in the combined statements of earnings was $187 million,
$163 million and $167 million in 2012, 2011 and 2010, respectively. The related tax benefit recognized
was $56 million, $48 million and $51 million in 2012, 2011 and 2010, respectively. More than half of
stock-compensation expense was classified in SG&A, with the remainder classified in R&D and cost of
products sold. Compensation costs capitalized in the combined balance sheets at December 31, 2012
and 2011 was not significant.
Compensation expense for stock-based awards is measured based on the fair value of the awards, as of
the date the share-based awards are granted and adjusted to the estimated number of awards that are
expected to vest. Forfeitures are estimated based on historical experience at the time of grant and
revised in subsequent periods if actual forfeitures differ from those estimates. Compensation cost for
stock-based awards are amortized over their service period, which could be shorter than the vesting
period if an employee is retirement eligible, with a charge to compensation expense. For stock-based
awards granted to retirement-eligible employees, compensation expense is recognized immediately at
the grant date because the employee is able to retain the award without continuing to provide service.
Stock Options
The exercise price for options granted is at least equal to 100 percent of the market value on the date
of grant. Stock options typically have a contractual term of 10 years and generally vest in one-third
increments over a three-year period except for options with a replacement feature. Pre-2005 options
were granted with a replacement option feature. The terms and conditions of the replacement option
are the same in all material respects as those applicable to the original grant. When the exercise price
of an option with a replacement option feature is paid with the common shares held by the employee,
a replacement option is granted for the number of shares used to make that payment. The closing price
of the common share on the business day before the exercise is used to determine the number of
shares required to exercise the related option and the exercise price of the replacement option. The
replacement option is exercisable in full six months after the date of grant, and has a term expiring on
the expiration date of the original option.
The fair value of stock options is determined using the Black-Scholes model. The weighted-average
assumptions used in estimating the fair value of stock options granted during each year, along with
weighted-average grant-date fair values, were as follows.
years ended December 31 2012 2011 2010
Risk-free interest rate 1.2% 2.7% 2.9%
Average life of options (years) 6.0 6.0 6.0
Volatility 21.0% 21.0% 22.0%
Dividend yield 3.6% 4.1% 3.2%
Fair value per stock option $6.80 $6.23 $9.24
The risk-free interest rate is based on the rates available at the time of the grant for zero-coupon U.S.
government issues with a remaining term equal to the option’s expected life. The average life of an
option is based on both historical and projected exercise and lapsing data. Expected volatility is based
on implied volatilities from traded options on Abbott’s stock and historical volatility of Abbott’s stock
over the expected life of the option. Dividend yield is based on the option’s exercise price and annual
dividend rate at the time of grant.
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