IBM 2009 Annual Report Download - page 108

Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
of ten years. The plan element permitting executives to defer
annual incentive compensation into IBM equity and receive at-
the-money stock options was terminated at December 31, 2006.
The company estimates the fair value of stock options using
the Black-Scholes valuation model. Key inputs and assumptions
used to estimate the fair value of stock options include the grant
price of the award, the expected option term, volatility of the
company’s stock, the risk-free rate and the company’s dividend
yield. Estimates of fair value are not intended to predict actual
future events or the value ultimately realized by employees who
receive equity awards, and subsequent events are not indicative
of the reasonableness of the original estimates of fair value made
by the company.
The fair value of each stock option grant was estimated at
the date of grant using a Black-Scholes option pricing model.
The following table presents the weighted-average assumptions
used in the valuation and the resulting weighted-average fair
value per option granted.
For the year ended December 31: 2009* 2008* 2007
Option term (years)** — — 5
Volatility
+ — — 23.1%
Risk-free interest rate (zero
coupon U.S. treasury note) — — 4.5%
Dividend yield — — 1.4%
Weighted-average fair value
per option granted — — $26
* During the years ended December 31, 2009 and 2008, the company did not
grant stock options.
** The option term is the number of years that the company estimates, based upon
history, that options will be outstanding prior to exercise or forfeiture.
+ The company’s estimates of expected volatility are principally based on daily
price changes of the company’s stock over the expected option term, as
well as the additional requirements included in accounting guidance on share-
based payments.
approval process specifies the individual receiving the grant,
the number of options or the value of the award, the exercise
price or formula for determining the exercise price and the date
of grant. All awards for senior management are approved by
the Committee. All awards for employees other than senior
management are approved by senior management pursuant to
a series of delegations that were approved by the Committee,
and the grants made pursuant to these delegations are reviewed
periodically with the Committee. Awards that are given as part
of annual total compensation for senior management and other
employees are made on specific cycle dates scheduled in
advance. With respect to awards given in connection with pro-
motions or new hires, the company’s policy requires approval of
such awards prior to the grant date, which is typically the date
of the promotion or the date of hire. The exercise price of these
options is the average of the high and low market price on the
date of grant.
Stock Options
Stock options are awards which allow the employee to purchase
shares of the company’s stock at a fixed price. Stock options are
granted at an exercise price equal to the company stock price on
the date of grant. These awards, which generally vest 25 percent
per year, are fully vested four years from the date of grant and
have a contractual term of ten years. The company also had a
stock-based program under the Plans for its senior executives,
designed to drive improved performance and increase the own-
ership executives have in the company. These executives had the
opportunity to receive at-the-money stock options by agreeing to
defer a certain percentage of their annual incentive compensation
into IBM equity, where it is held for three years or until retirement.
In 2005, this program was expanded to cover all executives of
the company. Options under this program become fully vested
three years from the date of grant and have a contractual term
The following table summarizes option activity under the Plans during the years ended December 31, 2009, 2008 and 2007.
2009 2008 2007
Wtd. Avg. No. of Shares Wtd. Avg. No. of Shares Wtd. Avg. No. of Shares
Exercise Price Under Option Exercise Price Under Option Exercise Price Under Option
Balance at January 1 $102 119,307,170 $100 157,661,257 $ 95 207,663,223
Options granted — — — — 103 1,087,381
Options exercised 120 (28,100,192) 91 (36,282,000) 77 (46,961,380)
Options canceled/expired 127 (17,996,521) 109 (2,072,087) 106 (4,127,967)
Balance at December 31 $ 98 73,210,457 $102 119,307,170 $100 157,661,257
Exercisable at December 31 $ 98 72,217,126 $102 114,445,381 $100 144,092,169
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