Kraft 2010 Annual Report Download - page 81

All stock awards are issued to employees from treasury stock. We have no specific policy to repurchase Common Stock to mitigate the dilutive impact of
options; however, we have historically made adequate discretionary purchases, based on cash availability, market trends and other factors, to satisfy stock
option exercise activity.
Stock Options:
Stock options are granted at an exercise price equal to the market value of the underlying stock on the grant date, generally become exercisable in three annual
installments beginning on the first anniversary of the grant date and have a maximum term of ten years. Prior to 2008, we had not granted stock options
through a broad-based program since 2002.
We account for our employee stock options under the fair value method of accounting using a modified Black-Scholes methodology to measure stock option
expense at the date of grant. The fair value of the stock options at the date of grant is amortized to expense over the vesting period. We recorded compensation
expense related to stock options of $46 million in 2010, $31 million in 2009 and $18 million in 2008. The deferred tax benefit recorded related to this
compensation expense was $15 million in 2010, $11 million in 2009 and $6 million in 2008. The unamortized compensation expense related to our stock
options was $60 million at December 31, 2010 and is expected to be recognized over a weighted-average period of two years. Our weighted-average Black-
Scholes fair value assumptions were as follows:
Risk-Free
Interest Rate
Expected
Life
Expected
Volatility
Expected
Dividend Yield
Fair Value
at Grant Date
2010 2.82% 6 years 19.86% 4.14% $ 3.69
2009 2.46% 6 years 21.36% 4.90% $ 2.68
2008 3.08% 6 years 21.04% 3.66% $ 4.49
The risk-free interest rate represents the constant maturity U.S. government treasuries rate with a remaining term equal to the expected life of the options.
The expected life is the period over which our employees are expected to hold their options. It is based on the simplified method from the SEC's safe
harbor guidelines. Volatility reflects historical movements in our stock price for a period commensurate with the expected life of the options. Dividend
yield is estimated over the expected life of the options based on our stated dividend policy.
Stock option activity for the year ended December 31, 2010 was:
Shares
Subject to
Option
Weighted-
Average
Exercise Price
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Balance at January 1, 2010 46,727,697 $ 25.56
Options granted 18,077,470 29.24
Options exercised (7,611,479) 18.25
Options cancelled (2,957,527) 27.56
Balance at December 31, 2010 54,236,161 27.71 6.5 years $ 206 million
Exercisable at December 31, 2010 23,564,404 27.89 3.9 years $ 85 million
In February 2010, as part of our annual equity program, we granted 15.0 million stock options to eligible employees at an exercise price of $29.15. We also
issued 3.1 million off-cycle shares of stock options during 2010 at a weighted-average exercise price of $29.73 on the date of grant, including options issued
to Cadbury employees under our annual equity program.
In February 2009, as part of our annual equity program, we granted 16.3 million stock options to eligible employees at an exercise price of $23.64.
In February 2008, as part of our annual equity program, we granted 13.5 million stock options to eligible employees at an exercise price of $29.49. We also
granted 0.1 million off-cycle stock options during 2008 at an exercise price of $30.78.
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