McKesson 2008 Annual Report Download - page 105

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
98
II. Stock Plans
The 2005 Plan provides our employees, officers and non-employee directors share-based long-term incentives.
The 2005 Plan permits the granting of stock options, RS, RSUs, PeRSUs and other share-based awards. Under the
2005 Plan, 13 million shares were initially authorized for issuance and 15 million additional shares were authorized
on July 27, 2007. As of March 31, 2008, 16 million shares remain available for future grant. The 2005 Plan
replaced the following three plans in advance of their expirations: 1999 Stock Option and Restricted Stock Plan, the
1997 Directors’ Equity Compensation and Deferral Plan and the 1998 Canadian Incentive Plan (collectively, the
“Legacy Plans”). The aggregate remaining 11 million authorized shares under the Legacy Plans were cancelled,
although awards under those plans remain outstanding. The 2005 Plan is now the Company’ s only plan for
providing share-based incentive compensation to employees and non-employee directors of the Company and its
affiliates.
In anticipation of the requirements of SFAS No. 123(R), the Compensation Committee reviewed our long-term
compensation program for key employees across the Company. As a result, beginning in 2006, reliance on options
was reduced with more long-term incentive value delivered by grants of PeRSUs and performance-based cash
compensation.
III. Stock Options
Stock options are granted at not less than fair market value and those options granted under the 2005 Plan have
a contractual term of seven years. Prior to 2005, stock options typically vested over a four-year period and had a
contractual term of ten years. As noted above, in 2006 and 2005, we provided shortened vesting schedules to 2006
and 2005 employee stock options upon grant. Options granted in 2008 have a seven-year contractual life and
generally follow the four-year vesting schedule. We expect option grants in 2009 and future years will have the
same contractual life and vesting schedule as 2008 option grants. Stock options under the Legacy Plans, which are
substantially vested, generally have a ten-year contractual life.
Compensation expense for stock options is recognized on a straight-line basis over the requisite service period
and is based on the grant-date fair value for the portion of the awards that is ultimately expected to vest. We
continue to use the Black-Scholes model to estimate the fair value of our stock options. Once the fair value of an
employee stock option value is determined, current accounting practices do not permit it to be changed, even if the
estimates used are different from actual. The option pricing model requires the use of various estimates and
assumptions, as follows:
−Expected stock price volatility is based on a combination of historical volatility of our common stock and
implied market volatility. We believe that this market-based input provides a better estimate of our future stock
price movements and is consistent with emerging employee stock option valuation considerations. Through
2008, our expected stock price volatility assumption reflected a constant dividend yield during the expected
term of the option.
−Expected dividend yield is based on historical experience and investors’ current expectations.
−The risk-free interest rate for periods within the expected life of the option is based on the constant maturity
U.S. Treasury rate in effect at the time of grant.
−The expected life of the options is determined based on historical option exercise behavior data, and also
reflects the impact of changes in contractual life of current option grants compared to our historical grants.