Pepsi 2013 Annual Report Download - page 108

Download and view the complete annual report

Please find page 108 of the 2013 Pepsi annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 164

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156
  • 157
  • 158
  • 159
  • 160
  • 161
  • 162
  • 163
  • 164

90
The following table summarizes our total stock-based compensation expense:
2013 2012 2011
Stock-based compensation expense $ 303 $ 278 $ 326
Merger and integration charges —213
Restructuring and impairment (benefits)/charges —(7) 4
Total $ 303 $ 273 $ 343
Income tax benefits recognized in earnings related to stock-based
compensation $76
$ 73 $ 101
Method of Accounting and Our Assumptions
We account for our employee stock options under the fair value method of accounting using a Black-Scholes
valuation model to measure stock option expense at the date of grant. In addition, we use the Monte-Carlo
simulation option-pricing model to determine the fair value of market-based awards. The Monte-Carlo
simulation option-pricing model uses the same input assumptions as the Black-Scholes model; however, it
also further incorporates into the fair-value determination the possibility that the market condition may not
be satisfied. Compensation costs related to awards with a market-based condition are recognized regardless
of whether the market condition is satisfied, provided that the requisite service has been provided.
All stock option grants have an exercise price equal to the fair market value of our common stock on the
date of grant and generally have a 10-year term. We do not backdate, reprice or grant stock-based compensation
awards retroactively. Repricing of awards would require shareholder approval under the LTIP.
The fair value of stock option grants is amortized to expense over the vesting period, generally three years.
Awards to employees eligible for retirement prior to the award becoming fully vested are amortized to expense
over the period through the date that the employee first becomes eligible to retire and is no longer required
to provide service to earn the award. Executives who are awarded long-term incentives based on their
performance may generally elect to receive their grant in the form of stock options or RSUs, or a combination
thereof. Executives who elect RSUs receive one RSU for every four stock options that would have otherwise
been granted. Certain senior executives do not have a choice and are granted 50% stock options and 50%
performance-based RSUs. Beginning in 2012, certain executive officers and other senior executives are
granted a combination of 60% PEPUnits measuring absolute and relative stock performance and 40% long-
term cash based on achievement of specific operating metrics.
Our weighted-average Black-Scholes fair value assumptions are as follows:
2013 2012 2011
Expected life 6 years 6 years 6 years
Risk-free interest rate 1.1% 1.3% 2.5%
Expected volatility 17% 17% 16%
Expected dividend yield 2.7% 3.0% 2.9%
The expected life is the period over which our employee groups are expected to hold their options. It is based
on our historical experience with similar grants. The risk-free interest rate is based on the expected U.S.
Treasury rate over the expected life. Volatility reflects movements in our stock price over the most recent
historical period equivalent to the expected life. Dividend yield is estimated over the expected life based on
our stated dividend policy and forecasts of net income, share repurchases and stock price.