HP 2009 Annual Report Download - page 104

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 2: Stock-Based Compensation (Continued)
subject to that award. Target shares subject to PRU awards do not have dividend equivalent rights and
do not have the voting rights of common stock until earned and issued following the end of the
applicable performance period.
Stock options granted under the principal option plans are generally non-qualified stock options,
but the principal option plans permit some options granted to qualify as ‘‘incentive stock options’’
under the U.S. Internal Revenue Code. Stock options generally vest over four years from the date of
grant. The exercise price of a stock option is equal to the fair market value of HP’s common stock on
the option grant date (as determined by the reported sale prices of HP’s common stock when the
market closes on that date). The contractual term of options granted since fiscal 2003 was generally
eight years, while the contractual term of options granted prior to fiscal 2003 was generally ten years.
Under the principal option plans, HP may choose, in certain cases, to establish a discounted exercise
price at no less than 75% of fair market value on the grant date. HP has not granted any discounted
options since fiscal 2003.
Under the principal option plans, HP granted certain employees cash-settled awards, restricted
stock awards, or both. Restricted stock awards are non-vested stock awards that may include grants of
restricted stock or grants of restricted stock units. Cash-settled awards and restricted stock awards are
independent of option grants and are generally subject to forfeiture if employment terminates prior to
the release of the restrictions. Such awards generally vest one to three years from the date of grant.
During that period, ownership of the shares cannot be transferred. Restricted stock has the same cash
dividend and voting rights as other common stock and is considered to be currently issued and
outstanding. Restricted stock units have dividend equivalent rights equal to the cash dividend paid on
restricted stock. Restricted stock units do not have the voting rights of common stock, and the shares
underlying the restricted stock units are not considered issued and outstanding. HP expenses the fair
market value of restricted stock awards, as determined on the date of grant, ratably over the period
during which the restrictions lapse.
Performance-based Restricted Units
HP estimated the fair value of a target PRU share using the Monte Carlo simulation model, as the
TSR modifier contains a market condition. The following weighted-average assumptions were used to
determine the weighted-average fair values of the PRU awards for fiscal years ended October 31:
2009 2008
Weighted-average fair value of grants per share ............................ $40.56(1) $40.21(2)
Expected volatility(3) ................................................ 35% 26%
Risk-free interest rate ............................................... 1.34% 3.13%
Dividend yield .................................................... 0.88% 0.70%
Expected life in months ............................................. 30 33
(1) Reflects the weighted-average fair value for the second year of the three-year performance period
applicable to PRUs granted in fiscal 2008 and for the first year of the three-year performance
period applicable to PRUs granted in fiscal 2009. The estimated fair value of a target share for the
third year for PRUs granted in fiscal 2008 and for the second and third years for PRUs granted in
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