Pfizer 2009 Annual Report Download - page 87

Download and view the complete annual report

Please find page 87 of the 2009 Pfizer 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 110

  • 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

Notes to Consolidated Financial Statements
Pfizer Inc. and Subsidiary Companies
A. Impact on Net Income
The components of share-based compensation expense and the associated tax benefit follow:
YEAR ENDED DECEMBER 31,
(MILLIONS OF DOLLARS) 2009 2008 2007
Stock option expense $165 $ 194 $ 286
Restricted stock unit expense 183 169 160
PSA and PCSA (expense reduction)/expense (17) (2) (9)
Short-term incentive award expense 113 —
TSRU expense 15 10 —
Directors’ compensation 2——
Share-based payment expense 349 384 437
Tax benefit for share-based compensation expense (99) (114) (141)
Share-based payment expense, net of tax $250 $ 270 $ 296
Amounts capitalized as part of inventory cost were not significant. In 2009, 2008 and 2007, the impact of modifications under our
cost-reduction initiatives to share-based awards was not significant. Generally, these modifications resulted in an acceleration of
vesting, either in accordance with plan terms or at management’s discretion.
B. Stock Options
Stock options, which, when vested, entitle the holder to purchase a specified number of shares of Pfizer common stock at a price
per share equal to the market price of Pfizer common stock on the date of grant, are accounted for using a fair-value-based method
at the date of grant in the consolidated statements of income. The values determined through this fair-value-based method generally
are 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.
All employees may receive stock option grants. No stock options were awarded to senior and key management in 2009; however,
stock options were awarded to certain other employees. Except for stock options awarded to two executive officers at the time they
joined Pfizer, no stock options were awarded to senior and key management in 2008. In virtually all instances, stock options granted
since 2005 vest after three years of continuous service from the grant date and have a contractual term of 10 years. In all cases,
even for stock options that are subject to accelerated vesting upon voluntary retirement, stock options must be held for at least one
year from the grant date before any vesting may occur. In the event of a divestiture or restructuring, options held by employees are
immediately vested and are exercisable for a period from three months to their remaining term, depending on various conditions.
The fair-value-based method for valuing each stock option grant on the grant date uses, for virtually all grants, the Black-Scholes-
Merton option-pricing model, which incorporates a number of valuation assumptions noted in the following table, shown at their
weighted-average values:
YEAR ENDED DECEMBER 31,
2009 2008 2007
Expected dividend yield(a) 4.90% 5.54% 4.49%
Risk-free interest rate(b) 2.69% 2.90% 4.69%
Expected stock price volatility(c) 41.36% 27.21% 21.28%
Expected term(d) (years) 6.0 5.75 5.75
(a) Determined using a constant dividend yield during the expected term of the option.
(b) Determined using the interpolated yield on U.S. Treasury zero-coupon issues.
(c) Determined using implied volatility, after consideration of historical volatility.
(d) Determined using historical exercise and post-vesting termination patterns.
The following table summarizes all stock option activity during 2009:
SHARES
(THOUSANDS)
WEIGHTED-AVERAGE
EXERCISE PRICE
PER SHARE
WEIGHTED-AVERAGE
REMAINING
CONTRACTUAL
TERM (YEARS)
AGGREGATE
INTRINSIC
VALUE(a)
(MILLIONS)
Outstanding, December 31, 2008 489,054 $32.91
Granted 49,454 12.74
Exercised (556) 12.70
Forfeited (3,988) 21.55
Canceled (86,271) 36.54
Outstanding, December 31, 2009 447,693 30.11 4.6 $259
Vested and expected to vest(b), December 31, 2009 441,480 30.26 4.6 $246
Exercisable, December 31, 2009 318,808 34.20 3.2 $ 3
(a) Market price of underlying Pfizer common stock less exercise price.
(b) The number of options expected to vest takes into account an estimate of expected forfeitures.
2009 Financial Report 85