McKesson 2012 Annual Report Download - page 72

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McKESSON CORPORATION
FINANCIAL NOTES (Continued)
68
The compensation expense recognized has been classified in the consolidated statements of operations or
capitalized on the consolidated balance sheets in the same manner as cash compensation paid to our employees.
There was no material share-based compensation expense capitalized as part of the cost of an asset in 2012, 2011
and 2010.
Impact on Net Income
The components of share-based compensation expense and related tax benefits are as follows:
Years Ended March 31,
(In millions) 2012 2011 2010
RSUs
(
1
)
$ 97 $
79
$ 47
PeRSUs
(
2
)
24
27
39
Stock options 23
22
19
Employee stock purchase plan 10
9
9
Share-based compensation expense 154
137
114
Tax benefit for share-based compensation expense
(
3
)
(55)
(48)
(41)
Share-based compensation expense, net of tax $ 99 $
89
$ 73
(1) This expense was primarily the result of PeRSUs awarded in prior years, which converted to RSUs due to the attainment of
goals during the applicable years’ performance period.
(2) Represents estimated compensation expense for PeRSUs that are conditional upon attaining performance objectives during
the current year’s performance period.
(3) Income tax expense is computed using the tax rates of applicable tax jurisdictions. Additionally, a portion of pre-tax
compensation expense is not tax-deductible.
Stock Plans
The 2005 Stock Plan provides our employees, officers and non-employee director’s share-based long-term
incentives. The 2005 Stock Plan permits the granting of up to 42.5 million shares in the form of stock options,
restricted stock, RSUs, PeRSUs and other share-based awards. As of March 31, 2012, 9.3 million shares remain
available for future grant under the 2005 Stock Plan.
Stock Options
Stock options are granted at no less than fair market value and those options granted under the 2005 Stock Plan
generally have a contractual term of seven years and follow a four-year vesting schedule.
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 options-pricing model to estimate the fair value of our stock options. Once the
fair value of an employee stock option is determined, current accounting practices do not permit it to be changed,
even if the estimates used are different from actual. The options-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 employee stock option valuation considerations.
–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.
–Expected life of the options is based primarily on historical employee stock option exercises and other
behavior data and reflects the impact of changes in contractual life of current option grants compared to our
historical grants.