CVS 2015 Annual Report Download - page 86

84 CVS Health
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 requisite service period of the stock award (generally three to five years) using the
straight-line method.
Compensation expense related to stock options, which includes the Employee Stock Purchase Plan (the “ESPP”)
totaled $90 million, $103 million and $100 million for 2015, 2014 and 2013, respectively. The recognized tax benefit
was $26 million, $33 million and $32 million for 2015, 2014 and 2013, respectively. Compensation expense related
to restricted stock awards totaled $140 million, $62 million and $41 million for 2015, 2014 and 2013, respectively.
Stock-based compensation for the year ended December 31, 2015 includes $38 million associated with accelerated
vesting of restricted stock replacement awards issued to Omnicare executives who were terminated subsequent to
the acquisition.
The ESPP provides for the purchase of up to 15 million shares of common stock. In March 2013, the Board of
Directors approved an amendment to the ESPP to provide an additional 15 million shares of common stock for
issuance. Under the 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. During 2015, approximately 1 million shares of common stock were purchased under the provisions
of the ESPP at an average price of $72.21 per share. As of December 31, 2015, approximately 14 million shares of
common stock were available for issuance under the ESPP.
The fair value of stock-based compensation associated with the ESPP is estimated on the date of grant (the first day
of the six month 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:
2015 2014 2013
Dividend yield (1) 0.71 % 0.75 % 0.86 %
Expected volatility (2)
13.92 % 14.87 % 16.94 %
Risk-free interest rate
(3)
0.11 % 0.08 % 0.10 %
Expected life
(in years)
(4)
0.50 0.5 0.5
Weighted-average grant date fair value
$ 18.72 $ 13.74 $ 10.08
(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 terms of the Company’s Incentive Compensation Plan (“ICP”) 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. Payment of such annual incentive and long-term performance awards will be in cash, stock, other awards
or other property, at the discretion of the Management Planning and Development Committee of the Company’s
Board of Directors. The ICP allows for a maximum of 74 million shares to be reserved and available for grants.
The ICP is the only compensation plan under which the Company grants stock options, restricted stock and other
stock-based awards to its employees, with the exception of the Company’s ESPP. In November 2012, the Company’s
Board of Directors approved an amendment to the ICP to eliminate the share recycling provision of the ICP. As of
December 31, 2015, there were approximately 24 million shares available for future grants under the ICP.