Pfizer 2007 Annual Report Download - page 69

2007 Financial Report 67
Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies
D. Performance Share Awards (PSAs) and Performance-
Contingent Share Awards (PCSAs)
PSAs in 2007 and 2006, and PCSAs in 2005 and earlier, entitle the
holder to receive, at the end of a vesting term, a number of
shares of our common stock, within a specified range of shares,
calculated using a non-discretionary formula that measures our
performance relative to an industry peer group. PSAs are
accounted for at fair value at the date of grant in the income
statement beginning with grants in 2006. Further, PSAs are
generally amortized on an even basis over the vesting term into
Cost of sales, Selling, informational and administrative expenses
and Research and development expenses, as appropriate. For
grants in 2005 and earlier years, PCSA grants are accounted for
using the intrinsic value method in the income statement. Senior
and other key members of management may receive PSA and
PCSA grants. In most instances, PSA grants vest after three years
and PCSA grants vest after five years of continuous service from
the grant date. In certain instances, PCSA grants vest over two to
four years of continuous service from the grant date. The vesting
terms are equal to the contractual terms.
The 2004 Plan limitations on the maximum amount of share-
based awards apply to all awards, including PCSA and PSA grants.
In 2001, our shareholders approved the 2001 Performance-
Contingent Share Award Plan (the 2001 Plan), allowing a
maximum of 12.5 million shares to be awarded to all participants.
This maximum was applied to awards for performance periods
beginning after January 1, 2002 through 2004. The 2004 Plan is
the only plan under which share-based awards may be granted
in the future.
PSA grants made in 2007 and 2006 will vest and be paid based on
a non-discretionary formula that measures our performance using
relative total shareholder return over a performance period
relative to an industry peer group. If our minimum performance
in the measure is below the threshold level relative to the peer
group, then no shares will be paid. PCSA grants made prior to 2006
will vest and be paid based on a non-discretionary formula, which
measures our performance using relative total shareholder return
and relative change in diluted EPS over a performance period
relative to an industry peer group. If our minimum performance
in the measures is below the threshold level relative to the peer
group, then no shares will be paid.
As of January 1, 2006, we measure PSA grants at fair value, using
a Monte Carlo simulation model, times the target number of
shares. The target number of shares is determined by reference
to the fair value of share-based awards to similar employees in
the industry peer group. We measure PCSA grants at intrinsic value
whereby the probable award was allocated over the term of the
award, then the resultant shares are adjusted to the fair value of
our common stock at each accounting period until the date of
payment.
The following table summarizes all PSA and PCSA activity during
2007, 2006 and 2005, with the shares granted representing the
maximum award that could be achieved:
_____________________________________________________________________________________________________________________
WEIGHTED-
AVERAGE
GRANT DATE
SHARES VALUE PER
(THOUSANDS) SHARE
Nonvested, January 1, 2005 16,466 $26.89
Granted 2,549 26.15
Vested (1,652) 26.20
Forfeited(a) (1,384) 26.28
Nonvested, December 31, 2005 15,979 23.32
Granted 1,728 34.84
Vested (1,583) 26.20
Reinvested dividend equivalent 44 25.36
Forfeited(a) (2,388) 26.11
Nonvested, December 31, 2006 13,780 26.78
Granted 1,183 28.80
Vested (1,788) 25.87
Reinvested dividend equivalents 22 24.82
Forfeited(a) (5,166) 26.44
Modifications(b) 2,192 25.66
Nonvested, December 31, 2007 10,223 24.81
(a) Forfeited includes nil in 2007, 345 thousand shares in 2006 and
454 thousand shares in 2005 that were forfeited by retirees. At
the discretion of the Compensation Committee of our Board of
Directors, $9.0 million in 2006 and $11.9 million in 2005 were paid
in cash to such retirees, which amounts were equivalent to the
fair value of the forfeited shares pro rated for the portion of the
performance period that was completed prior to retirement.
(b) Includes modifications to PCSA and PSA awards to pro rate the
awards for services to the date of termination for 34 employees.
The modifications were made at the discretion of the Board of
Directors, the Executive Leadership Team or the current Chairman.
There was no incremental cost related to the modifications.
The following table provides data related to all PSA and PCSA
activity:
YEAR ENDED DEC. 31,
____________________________________________________
(MILLIONS OF DOLLARS, EXCEPT PER
PCSA AMOUNTS AND YEARS) 2007 2006 2005
Weighted-average grant
date fair value per PCSA $22.73 $25.90 $23.32
Total intrinsic value of
vested PCSA shares $46 $51 $56
Total compensation cost
related to nonvested PSA
grants not yet recognized,
pre-tax $15 $ 10 N/A
Weighted-average period in
years over which PSA cost
is expected to be
recognized 22 N/A
We entered into forward-purchase contracts that partially offset
the potential impact on net income of our obligation under the
pre-2006 PCSAs. At settlement date, we would, at the option of
the counterparty to each of the contracts, either receive our own
stock or settle the contracts for cash. We had contracts for
approximately 3 million shares of our stock at a per share price