CVS 2010 Annual Report Download - page 68

Notes to Consolidated Financial Statements
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 $127 million, $136 million and
$106 million for 2010, 2009 and 2008, respectively. The recognized tax benefit was $42 million, $45 million and $33 million for
2010, 2009 and 2008, respectively. Compensation expense related to restricted stock awards totaled $23 million, $29 million and
$19 million for 2010, 2009 and 2008, 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 2010, 3 million shares of common stock were
purchased, under the provisions of the 2007 ESPP, at an average price of $25.97 per share. As of December 31, 2010, 15 million
and 7 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.
The following table is a summary of the assumptions used to value the ESPP awards for each of the respective periods:
2010 2009 2008
Dividend yield (1) 0.57 % 0.50 % 0.32 %
Expected volatility (2) 32.58 % 48.89 % 25.22 %
Risk-free interest rate (3) 0.21 % 0.31 % 2.75 %
Expected life (in years) (4) 0.5 0.5 0.5
Weighted-average grant date fair value $ 7.31 $ 8.51 $ 8.73
(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.
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 perfor-
mance 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 Company’s
1997 Incentive Compensation Plan (the “1997 ICP”).
The Company’s 1997 ICP provided 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 1997 ICP allowed for up to 7 million restricted
shares to be issued. The Company’s restricted awards are considered non-vested share awards and require no payment from the
employee. Compensation 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.
In May 2010, the Company’s Board of Directors adopted and the shareholders approved the 2010 Incentive Compensation
Plan (the “2010 ICP”). The 2010 ICP allows for a maximum of 74 million shares to be reserved and available for grants, plus the
number of shares subject to awards under the Company’s 1997 ICP which become available due to cancellation or forfeiture.
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CVS Caremark 2010 Annual Report