Dow Chemical 2013 Annual Report Download - page 146

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Nonconsolidated Variable Interest Entity
The Company holds a variable interest in a joint venture that manufactures crude acrylic acid in the United States and Germany
on behalf of the Company and the other joint venture partner. The variable interest relates to a cost-plus arrangement between
the joint venture and each joint venture partner. The Company is not the primary beneficiary, as a majority of the joint venture’s
output is sold to the other joint venture partner; therefore, the entity is accounted for under the equity method of accounting. At
December 31, 2013, the Company’s investment in the joint venture was $159 million ($161 million at December 31, 2012),
classified as “Investment in nonconsolidated affiliates” in the consolidated balance sheets, representing the Company’s
maximum exposure to loss.
NOTE 20 – STOCK-BASED COMPENSATION
The Company grants stock-based compensation to employees and non-employee directors in the form of the Employee Stock
Purchase Plan (“ESPP”) and stock incentive plans, which include stock options, deferred stock and restricted stock.
Information regarding these plans is provided below.
Accounting for Stock-Based Compensation
The Company grants stock-based compensation awards that vest over a specified period or upon employees meeting certain
performance and/or retirement eligibility criteria. The fair value of equity instruments issued to employees is measured on the
grant date. The fair value of liability instruments issued to employees (specifically, performance deferred stock awards, which
are granted to executive employees subject to stock ownership requirements, that provide the recipient the option to elect to
receive a cash payment equal to the value of the stock award on the date of delivery) is measured at the end of each quarter. The
fair value of equity and liability instruments is expensed over the vesting period or, in the case of retirement, from the grant
date to the date on which retirement eligibility provisions have been met and additional service is no longer required.
The Company uses a lattice-based option valuation model to estimate the fair value of stock options, the Black-Scholes option
valuation model for subscriptions to purchase shares under the ESPP and Monte Carlo simulation for the market portion of
performance deferred stock awards. The weighted-average assumptions used to calculate total stock-based compensation are
included in the following table:
Weighted-Average Assumptions 2013 2012 2011
Dividend yield 3.89% 3.34% 2.5%
Expected volatility 29.93% 38.39% 34.61%
Risk-free interest rate 1.08% 0.95% 1.71%
Expected life of stock options granted during period (years) 7.8 7.6 7.4
Life of Employee Stock Purchase Plan (months) 5 6 6
The dividend yield assumption for 2013 was equal to the dividend yield on the grant date, which reflected the most recent
quarterly dividend payment of $0.32 per share. The dividend yield assumption for 2012 was based on a 10 percent/90 percent
blend of the Company’s current declared dividend as a percentage of the stock price on the grant date and a 10-year dividend
yield average. The dividend yield assumption for 2011 was based on a 20 percent/80 percent blend. The expected volatility
assumption was based on an equal weighting of the historical daily volatility and current implied volatility from exchange-
traded options for the contractual term of the options. The risk-free interest rate was based on the weighted-average of U.S.
Treasury strip rates over the contractual term of the options. The expected life of stock options granted was based on an
analysis of historical exercise patterns.
Employee Stock Purchase Plan
On February 9, 2012, the Board of Directors authorized The Dow Chemical Company 2012 Employee Stock Purchase Plan
(the "2012 ESPP") which was approved by stockholders at the Company’s annual meeting on May 10, 2012. The 2012 ESPP
supersedes the prior employee stock purchase plan. Under the 2013 annual offering, most employees were eligible to purchase
shares of common stock of the Company valued at up to 10 percent of their annual base salary. The value is determined using
the plan price multiplied by the number of shares subscribed to by the employee. The plan price of the stock is set each year at
an amount equal to at least 85 percent of the fair market value of the common stock on a specific date or the average fair
market value of the common stock over a period, in each case, specified by the plan administrator.