Eli Lilly 2013 Annual Report Download - page 71

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57
Note 11: Stock-Based Compensation
Stock-based compensation expense of $144.9 million, $141.5 million, and $147.4 million was recognized for
the years ended December 31, 2013, 2012, and 2011, respectively, as well as related tax benefits of $50.7
million, $49.5 million, and $51.6 million, respectively. Our stock-based compensation expense consists of
performance awards (PAs), shareholder value awards (SVAs), and restricted stock units (RSUs). We
recognize stock-based compensation expense over the requisite service period of the individual grantees,
which equals the vesting period. We provide newly issued shares and treasury stock to satisfy stock option
exercises and for the issuance of PA, SVA, and RSU shares. We classify tax benefits resulting from tax
deductions in excess of the compensation cost recognized for exercised stock options as a financing cash
flow in the consolidated statements of cash flows.
At December 31, 2013, additional stock-based compensation awards may be granted under the 2002 Lilly
Stock Plan for not more than 100.0 million shares.
Performance Award Program
PAs are granted to officers and management and are payable in shares of our common stock. The number of
PA shares actually issued, if any, varies depending on the achievement of certain pre-established earnings-
per-share targets over a two-year period. PA shares are accounted for at fair value based upon the closing
stock price on the date of grant and fully vest at the end of the measurement periods. The fair values of PAs
granted for the years ended December 31, 2013, 2012, and 2011 were $50.19, $35.74, and $31.90,
respectively. The number of shares ultimately issued for the PA program is dependent upon the earnings
achieved during the vesting period. Pursuant to this plan, approximately 0.7 million shares, 1.6 million shares,
and 3.9 million shares were issued during the years ended December 31, 2013, 2012, and 2011, respectively.
Approximately 0.6 million shares are expected to be issued in 2014. As of December 31, 2013, the total
remaining unrecognized compensation cost related to nonvested PAs was $18.9 million, which will be
amortized over the weighted-average remaining requisite service period of 12 months.
Shareholder Value Award Program
SVAs are granted to officers and management and are payable in shares of our common stock at the end of a
three-year period. The number of shares actually issued, if any, varies depending on our stock price at the
end of the three-year vesting period compared to pre-established target stock prices. We measure the fair
value of the SVA unit on the grant date using a Monte Carlo simulation model. The model utilizes multiple
input variables that determine the probability of satisfying the market condition stipulated in the award grant
and calculates the fair value of the award. Expected volatilities utilized in the model are based on implied
volatilities from traded options on our stock, historical volatility of our stock price, and other factors. Similarly,
the dividend yield is based on historical experience and our estimate of future dividend yields. The risk-free
interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The weighted-average
fair values of the SVA units granted during the years ended December 31, 2013, 2012, and 2011 were
$45.17, $30.35, and $28.33, respectively, determined using the following assumptions:
(Percents) 2013 2012 2011
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.50% 4.50% 4.90%
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .08-.43 .10-.36 .20-1.36
Range of volatilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.95-22.37 22.40-25.64 27.61-29.10
A summary of the SVA activity is presented below:
Units Attributable to SVAs (in thousands) 2013 2012 2011
Outstanding at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,539 7,036 6,381
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,795 2,439 2,561
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,397) (973) (428)
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (301) (963) (1,478)
Outstanding at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,636 7,539 7,036