IBM 2012 Annual Report Download - page 118

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
117
Note R.
Stock-Based Compensation
Stock-based compensation cost is measured at grant date, based
on the fair value of the award, and is recognized over the employee
requisite service period. See note A, “Significant Accounting Policies,”
on page 82 for additional information.
The following table presents total stock-based compensation
cost included in the Consolidated Statement of Earnings.
($ in millions)
For the year ended December 31: 2012 2011 2010
Cost $ 132 $ 120 $ 94
Selling, general and administrative 498 514 488
Research, development
and engineering 59 62 48
Other (income) and expense (1) — (1)
Pre-tax stock-based
compensation cost 688 697 629
Income tax benefits (240) (246)(240)
Total stock-based
compensation cost $ 448 $ 450 $ 389
Total unrecognized compensation cost related to non-vested
awards at December 31, 2012 and 2011 was $1,101 million and $1,169
million, respectively, and is expected to be recognized over a
weighted-average period of approximately three years.
There was no significant capitalized stock-based compensation
cost at December 31, 2012, 2011 and 2010.
Incentive Awards
Stock-based incentive awards are provided to employees under
the terms of the company’s long-term performance plans (the
“Plans”). The Plans are administered by the Executive Compen-
sation and Management Resources Com mittee of the Board of
Directors (the “Committee”). Awards available under the Plans prin-
cipally include stock options, restricted stock units, performance
share units or any combination thereof.
The amount of shares originally authorized to be issued under
the company’s existing Plans was 274.1 million at December 31, 2012.
In addition, certain incentive awards granted under previous plans,
if and when those awards were canceled, could be reissued under
the company’s existing Plans. As such, 66.2 million additional
awards were considered authorized to be issued under the com-
pany’s existing Plans as of December 31, 2012. There were 121.2
million unused shares available to be granted under the Plans as
of December 31, 2012.
Under the company’s long-standing practices and policies, all
awards are approved prior to or on the date of grant. The awards
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 man-
agement and other employees are made on specific cycle dates
scheduled in advance. With respect to awards given in connection
with promotions 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.
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’s average high
and low 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 10 years.
The company estimates the fair value of stock options at the date
of grant 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.
During the years ended December 31, 2012, 2011 and 2010, the
company did not grant stock options.