HP 2012 Annual Report Download - page 101

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 2: Stock-Based Compensation (Continued)
Under the principal equity plans, HP granted certain employees restricted stock awards,
cash-settled awards, or both. Restricted stock awards are non-vested stock awards that may include
grants of restricted stock or grants of restricted stock units. Restricted stock awards and cash-settled
awards 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. However, shares underlying restricted stock units
are included in the calculation of diluted earnings per share (‘‘EPS’’). 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.
Stock options granted under the principal equity plans are generally non-qualified stock options,
but the principal equity plans permit some options granted to qualify as ‘‘incentive stock options’’
under the U.S. Internal Revenue Code. Stock options generally vest over three to 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). In fiscal 2012 and 2011, HP granted performance-contingent stock
options that vest only upon the satisfaction of both service and market conditions prior to the
expiration of the awards.
HP’s PRU program provides for the issuance of PRUs representing hypothetical shares of HP
common stock. Each PRU award reflects a target number of shares (‘‘Target Shares’’) that may be
issued to the award recipient before adjusting for performance and market conditions. The actual
number of shares the recipient receives is determined at the end of a three-year performance period
based on results achieved versus company performance goals and may range from 0% to 200% of the
Target Shares granted. The performance goals for PRUs granted in fiscal year 2012 are based on HP’s
annual cash flow from operations as a percentage of revenue and on HP’s annual revenue growth. The
performance goals for PRUs granted in previous years are based on HP’s annual cash flow from
operations as a percentage of revenue and on a market condition based on total shareholder return
(‘‘TSR’’) relative to the S&P 500 over the three-year performance period.
Recipients of PRU awards generally must remain employed by HP on a continuous basis through
the end of the applicable three-year performance period in order to receive any portion of the shares
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. The expense for these awards, net of estimated forfeitures, is recorded
over the requisite service period based on the number of Target Shares that are expected to be earned
and the achievement of the cash flow and revenue growth goals during the performance period.
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