Costco 2014 Annual Report Download - page 62

Note 7—Stock-Based Compensation Plans
The Company grants stock-based compensation to employees and non-employee directors. Stock option
awards were granted under the Amended and Restated 2002 Stock Incentive Plan, amended as of
January 2006 (Second Restated 2002 Plan), and predecessor plans until, effective in the fourth quarter of
fiscal 2006, the Company began awarding RSUs under the Second Restated 2002 Plan in lieu of stock
options. Beginning in 2009, RSU grants to all executive officers have been performance-based. Through
a series of shareholder approvals, there have been amended and restated plans and new provisions
implemented by the Company. RSUs held by employees and non-employee directors are subject to
quarterly or daily vesting, respectively, upon certain terminations of employment or service. Employees
who attain certain years of service with the Company receive shares under accelerated vesting provisions
on the annual vesting date rather than upon qualified retirement. The Sixth Restated 2002 Stock Incentive
Plan (Sixth Plan), amended in the second quarter of fiscal 2012, is the Company’s only stock-based
compensation plan with shares available for grant at the end of 2014. Each share issued in respect of
stock awards is counted as 1.75 shares toward the limit of shares made available under the Sixth Plan.
The Sixth Plan authorized the issuance of 16,000,000 shares (9,143,000 RSUs) of common stock for
future grants. The Company issues new shares of common stock upon exercise of stock options and
upon vesting of RSUs. Shares for vested RSUs are generally delivered to participants annually, net of
shares equal to minimum statutory withholding taxes.
In conjunction with the special cash dividend discussed in Note 6, adjustments were made to awards
outstanding on the dividend record date to preserve their value following the dividend, as follows: (i) the
number of shares subject to outstanding RSUs was increased; and (ii) the exercise prices of outstanding
stock options were reduced and the number of shares subject to such options was increased.
Approximately 2,905,000 stock options were adjusted by 221,000 shares, and approximately 9,676,000
RSUs were adjusted by 732,000 shares. These adjustments did not result in additional stock-based
compensation expense, as the fair value of the outstanding awards did not change. As further required by
the Sixth Plan, the maximum number of shares issuable under the Sixth Plan was also proportionally
adjusted, which resulted in an additional 1,362,000 shares (778,000 RSUs) available to be granted.
Summary of Restricted Stock Unit Activity
RSUs granted to employees and to non-employee directors generally vest over five years and three
years, respectively; however, the terms of the RSUs provide for accelerated vesting for employees and
non-employee directors who have attained 25 or more years and five or more years of service with the
Company, respectively, and provides for vesting upon certain terminations of employment or service.
Recipients are not entitled to vote or receive dividends on non-vested and undelivered shares. At the end
of 2014, 7,972,000 shares were available to be granted as RSUs under the Sixth Plan.
The following awards were outstanding at the end of 2014:
• 8,505,000 time-based RSUs that vest upon continued employment over specified periods of time;
• 612,000 performance-based RSUs, of which 269,000 were granted to executive officers subject to
the certification of the attainment of specified performance targets for 2014. This certification
occurred in September 2014, at which time a portion vested as a result of the long service of all
executive officers. The awards are subject to future time-based and long-service vesting.
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