Discover 2009 Annual Report Download - page 130

A person that became an eligible director prior to December 31, 2007 was entitled to receive a number of RSUs equal
to the number obtained by dividing $350,000 by the fair market value of a share of stock on the date of grant. However,
if such person was elected or appointed as a director after the date of the Distribution but before December 31, 2007,
this initial award was prorated for the two-year period following the Distribution. Subsequent awards for eligible directors
are obtained by dividing $125,000 by the fair market value of a share of stock on the date of grant. The initial RSUs will
be subject to a restriction period whereby 50% of such units shall vest on the first anniversary of the date of grant and the
remaining units shall vest on the second anniversary of the date of grant. Subsequent awards will be subject to a
restriction period whereby 100% of such units shall vest on the first anniversary of the date of grant.
Employee Stock Purchase Plan. The Company adopted the Discover Financial Services Employee Stock Purchase Plan
(“ESPP”) in connection with the Distribution, which became effective May 1, 2008. The ESPP allows eligible employees to
purchase DFS common stock at a 5% discount from market value. The total number of shares that may be granted under
the ESPP is 3 million shares. The Company’s ESPP is considered noncompensatory for accounting purposes and
accordingly, no expense was recorded in the consolidated statements of income during 2009 and 2008.
Impact of Distribution on Stock-Based Awards Granted Under Morgan Stanley Plans. At the time of the Distribution,
270 individual holders of Morgan Stanley RSUs and options who were current employees of Discover had their awards
converted into newly issued Company RSUs and options pursuant to a formula that was intended to preserve the intrinsic
value of the pre-Distribution RSUs and options. The Company’s stock-based compensation awards issued upon
completion of the conversion of existing Morgan Stanley equity awards into Discover equity awards on June 30, 2007
and the related weighted-average grant-date fair value is presented below:
Shares Converted upon Distribution
Number
of Shares
Weighted-
Average Grant
Date Fair Value(1)
Stock options........................................................................................................................................................... 5,223,738 $11.33
Restricted stock units................................................................................................................................................. 3,832,871 $20.14
(1) For stock options, amount includes incremental cost related to the modification of awards upon conversion (see discussion below for further details).
The conversion of all existing Morgan Stanley stock-based compensation awards into Discover awards was considered
a modification of these awards in accordance with ASC 718-20-35. As a result, Discover compared the fair value of the
stock option award immediately prior to the Distribution to the fair value of the award immediately after the Distribution to
measure the incremental compensation cost. This resulted in the recognition of a one-time incremental expense of $1.3
million, which was recorded during the year ended November 30, 2007.
Stock-Based Compensation. The following table details the compensation cost, net of forfeitures, related to each of the
above plans, as well as those costs allocated by Morgan Stanley prior to the Distribution (dollars in thousands):
For the Years Ended
November 30,
2009 2008 2007
Restricted stock units ................................................................................................................................................ $42,733 $73,020 $41,865
Stock options .......................................................................................................................................................... 156 1,084 3,028
Employee stock purchase plan ................................................................................................................................... — — 540
Total stock-based compensation expense.................................................................................................................. $42,889 $74,104 $45,433
Income tax benefit from stock-based compensation expense ........................................................................................... $16,006 $27,874 $16,775
On July 2, 2007, the Company issued “Founder’s Grants” of RSUs to certain directors, executive officers and
employees of the Company in the aggregate amount of $134.1 million, which are subject to various vesting terms of up
to four years. In connection with these awards, the Company recognized expense of $22.9 million, $53.2 million, and
$23.5 million net of estimated forfeitures, for the years ended November 30, 2009, 2008, and 2007, respectively.
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