CVS 2009 Annual Report Download - page 66

Notes to Consolidated Financial Statements
The following table is a summary of the assumptions used to
value the ESPP awards for each of the respective periods:
2009 2008 2007
Dividend yield (1) 0.50% 0.32% 0.33%
Expected volatility (2) 48.89% 25.22% 21.72%
Risk-free interest rate (3) 0.31% 2.75% 5.01%
Expected life (in years) (4) 0.5 0.5 0.5
Weighted average grant
date fair value $ 8.51 $ 8.73 $ 7.26
(1) The dividend yield is calculated based on semi-annual dividends paid
and the fair market value of the Company’s stock at the grant date.
(2) The expected volatility is based on the historical volatility of the
Company’s daily stock market prices over the previous six month
period.
(3) The risk-free interest rate is based on the Treasury constant maturity
interest rate whose term is consistent with the expected term of ESPP
options (i.e., 6 months).
(4) The expected life is based on the semi-annual purchase period.
The Company’s 1997 Incentive Compensation Plan (the “ICP”)
provides for the granting of up to 153 million shares of common
stock in the form of stock options and other awards to selected
officers, employees and directors of the Company. The ICP
allows for up to 7 million restricted shares to be issued. The
Company’s restricted awards are considered nonvested share
awards and require no payment from the employee. Compensa-
tion cost is recorded based on the market price on the grant
date and is recognized on a straight-line basis over the requisite
service period.
The Company granted 1,284,000, 1,274,000 and 1,129,000
restricted stock units with a weighted average fair value of
$27.77, $40.70 and $33.75 in 2009, 2008 and 2007, respectively.
Compensation costs for restricted shares and units totaled
$29 million, $19 million and $12 million in 2009, 2008 and 2007,
respectively. As of December 31, 2009, there was $34 million
of total unrecognized compensation costs related to the
restricted stock units that are expected to vest. These costs
are expected to be recognized over a weighted-average
period of 2.04 years.
In 2007, the Board of Directors adopted and shareholders
approved the 2007 Incentive Plan. The terms of the 2007
Incentive Plan provide for grants of annual incentive and
long-term performance awards to executive officers and other
officers and employees of the Company or any subsidiary
of the Company. The payment of such annual incentive and
long-term performance awards will be in cash, stock, other
awards or other property, in the discretion of the Management
Planning and Development Committee of the Company’s
Board of Directors, with any payment in stock to be pursuant
to the ICP discussed above.
Pursuant to various labor agreements, the Company is also
required to make contributions to certain union-administered
pension and health and welfare plans that totaled $37 million,
$49 million and $40 million in 2009, 2008 and 2007, respec-
tively. The Company also has nonqualified supplemental
executive retirement plans in place for certain key employees.
Note 10 Stock Incentive Plans
Stock-based compensation expense is measured at the grant
date based on the fair value of the award and is recognized
as expense over the applicable requisite service period of the
stock award (generally three to five years) using the straight-
line method. Stock-based compensation costs are included in
selling, general and administrative expenses.
Compensation expense related to stock options, which includes
the 1999 Employee Stock Purchase Plan (the “1999 ESPP”) and
the 2007 Employee Stock Purchase Plan (the “2007 ESPP” and
collectively, the “ESPP”) totaled $136 million, $106 million and
$85 million for 2009, 2008 and 2007, respectively. The recog-
nized tax benefit was $45 million, $33 million and $27 million
for 2009, 2008 and 2007, respectively. Compensation expense
related to restricted stock awards totaled $29 million, $19 million
and $12 million for 2009, 2008 and 2007, respectively.
The 1999 ESPP provides for the purchase of up to 15 million
shares of common stock. As a result of the 1999 ESPP not
having sufficient shares available for the program to continue
beyond 2007, the Board of Directors adopted, and shareholders
approved, the 2007 ESPP. Under the 2007 ESPP, eligible
employees may purchase common stock at the end of each
six-month offering period, at a purchase price equal to 85% of
the lower of the fair market value on the first day or the last
day of the offering period and provides for the purchase of up
to 15 million shares of common stock. During 2009, 2 million
shares of common stock were purchased, under the provisions
of the 2007 ESPP, at an average price of $24.70 per share.
As of December 31, 2009, 15 million and 4 million shares of
common stock have been issued under the 1999 ESPP and
2007 ESPP, respectively.
The fair value of stock-based compensation associated with
the Company’s ESPP is estimated on the date of grant (i.e.,
the beginning of the offering period) using the Black-Scholes
Option Pricing Model.
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