CVS 2010 Annual Report Download - page 69

Following approval and adoption of the 2010 ICP, no new grants can be made under the 1997 ICP. The 2010 ICP is the only
compensation plan under which the Company grants stock options, restricted stock and other stock-based awards to its employ-
ees, with the exception of the Company’s 2007 ESPP. As of December 31, 2010, there were 72 million shares available for future
grants under the 2010 ICP.
The Company granted 1,095,000, 1,284,000 and 1,274,000 restricted stock units with a weighted average fair value of $35.25,
$27.77 and $40.70 in 2010, 2009 and 2008, respectively. As of December 31, 2010, 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 1.80 years.
The following table is a summary of the restricted unit and restricted share award activity under the ICPs as of December 31:
2010 2009
Weighted Average Grant Weighted Average Grant
units in thousands Units Date Fair Value Units Date Fair Value
Nonvested at beginning of year 3,347 $ 32.90 4,052 $ 31.88
Granted 1,095 35.25 1,284 27.77
Vested (1,618) 32.35 (1,807) 26.49
Forfeited (136) 33.58 (182) 37.55
Nonvested at end of year 2,688 $ 34.16 3,347 $ 32.90
All grants under the 2010 ICP are awarded at fair market value on the date of grant. The fair value of stock options is estimated
using the Black-Scholes Option Pricing Model and stock-based compensation is recognized on a straight-line basis over the
requisite service period. Options granted prior to 2004 generally become exercisable over a four-year period from the grant date
and expire ten years after the date of grant. Options granted during and subsequent to fiscal 2004 generally become exercisable
over a three-year period from the grant date and expire seven years after the date of grant.
Excess tax benefits of $28 million, $19 million and $53 million were included in financing activities in the accompanying consoli-
dated statements of cash flow during 2010, 2009 and 2008, respectively. Cash received from stock options exercised, which includes
the ESPP, totaled $285 million, $250 million and $328 million during 2010, 2009 and 2008, respectively. The total intrinsic value of
options exercised was $118 million, $104 million and $250 million in 2010, 2009 and 2008, respectively.
The fair value of each stock option is estimated using the Black-Scholes Option Pricing Model based on the following assump-
tions at the time of grant:
2010 2009 2008
Dividend yield (1) 1.00 % 1.07 % 0.60 %
Expected volatility (2) 33.15 % 31.34 % 22.98 %
Risk-free interest rate (3) 1.85 % 1.65 % 2.28 %
Expected life (in years) (4) 4.3 4.3 4.3
Weighted-average grant date fair value $ 9.49 $ 7.20 $ 8.53
(1) The dividend yield is based on annual dividends paid and the fair market value of the Company’s
stock at the grant date.
(2) The expected volatility is estimated using the Company’s historical volatility over a period equal to
the expected life of each option grant after adjustments for infrequent events such as stock splits.
(3) The risk-free interest rate is selected based on yields from U.S. Treasury zero-coupon issues
with a remaining term equal to the expected term of the options being valued.
(4) The expected life represents the number of years the options are expected to be outstanding
from grant date based on historical option holder exercise experience.
As of December 31, 2010, unrecognized compensation expense related to unvested options totaled $156 million, which the
Company expects to be recognized over a weighted-average period of 1.66 years. After considering anticipated forfeitures,
the Company expects approximately 28 million of the unvested options to vest over the requisite service period.
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