EMC 2006 Annual Report Download - page 26

Table of Contents
FAS No. 123R requires recognizing compensation costs for all share-based payment awards made to employees and directors based upon the award's
estimated grant date fair value. The standard covers employee stock options, restricted stock, restricted stock units and employee stock purchases related to
our employee stock purchase plan ("ESPP"). Additionally, we applied the provisions of the SEC's Staff Accounting Bulletin ("SAB") No. 107 on Share-Based
Payment to our adoption of FAS No. 123R. Previously, we elected to account for these share-based payment awards under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and elected to only disclose the pro forma impact of expensing the fair value
of stock options in the notes to the financial statements.
Total after-tax stock-based compensation expense, which consists of expense from employee stock options, ESPP and restricted stock awards, was
$317.3 in 2006. For periods prior to our adoption of FAS No. 123R on January 1, 2006, stock-based compensation expense consisted of expense from
restricted stock awards and the amortization of deferred compensation costs associated with stock options issued as consideration in various acquisitions.
Accordingly, our financial results in 2006 were not prepared on a comparative basis to our financial results in 2005 and 2004. Total after-tax stock-based
compensation expense in 2005 and 2004 was $52.1 and $40.3, respectively.
We elected to estimate the fair value of employee stock option awards and ESPP purchases using the Black-Scholes model. The determination of the
fair value of share-based payment awards on the date of grant using the Black-Scholes model is affected by our stock price as well as assumptions regarding a
number of subjective variables. These variables include the expected term of the awards, the expected stock price volatility over the term of the awards, the
risk-free interest rate associated with the expected term of the awards and the expected dividends.
In 2006, our Black-Scholes option model included the following weighted average assumptions for our employee stock options and ESPP:
Stock Options ESPP
Dividend yield None None
Expected volatility 35.2% 27.6%
Risk-free interest rate 4.80% 4.82%
Expected life (in years) 4.0 0.5
Weighted-average fair value at grant date $ 3.80 $ 2.89
To determine an expected volatility assumption required in the Black-Scholes option pricing model, we used a combination of implied volatility for six-
month and two-year traded options on our stock as well as our historical stock price volatility. The expected term assumption is based upon actual historical
exercises and cancellations of EMC stock options. We are using the same methodology to calculate expected volatility and expected term that was used prior
to our adoption of FAS No. 123R. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of our
employee stock options and ESPP. The dividend yield assumption is based on the history and expectation of dividend payouts. Stock-based compensation
expense recognized within a given reporting period is based on awards that are expected to vest in current or future periods. Accordingly, recognized stock-
based compensation expense from stock options and ESPP is reduced for expected forfeitures. FAS No. 123R requires forfeitures to be estimated at the time
of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical
experience. See Note N to the Consolidated Financial Statements for more information regarding our implementation of FAS No. 123R.
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