Prudential 2012 Annual Report Download - page 168

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
16. EARNINGS PER SHARE (continued)
In September 2009, the Company issued $500 million of surplus notes with an interest rate of 5.36% per annum which are
exchangeable at the option of the note holders for shares of Common Stock. The exchange rate used in the diluted earnings per share
calculation for the surplus notes is 10.1235 shares of Common Stock per each $1,000 principal amount of surplus notes. In calculating
diluted earnings per share under the if-converted method, the potential shares that would be issued assuming a hypothetical exchange,
weighted for the period the notes are outstanding, is added to the denominator, and interest expense, net of tax, is added to the numerator, if
the overall effect is dilutive. See Note 14 for additional information regarding the exchangeable surplus notes.
Class B Stock
Income from continuing operations per share of Class B Stock for the years ended December 31, are presented below. There are no
potentially dilutive shares associated with the Class B Stock.
2012 2011 2010
Income
Weighted
Average
Shares
Per Share
Amount Income
Weighted
Average
Shares
Per Share
Amount Income
Weighted
Average
Shares
Per Share
Amount
(in millions, except per share amounts)
Basic earnings per share
Income from continuing operations attributable to the
Closed Block Business ......................... $43 $146 $494
Less: Direct equity adjustment ..................... 20 24 36
Income from continuing operations attributable to the
Closed Block Business available to holders of Class B
Stock after direct equity adjustment ............... $23 2.0 $11.50 $122 2.0 $61.00 $458 2.0 $229.00
17. SHARE-BASED PAYMENTS
Omnibus Incentive Plan
In March 2003, the Company’s Board of Directors adopted the Prudential Financial, Inc. Omnibus Incentive Plan (as subsequently
amended and restated, the “Omnibus Plan”). Upon adoption of the Omnibus Plan, the Prudential Financial, Inc. Stock Option Plan
previously adopted by the Company on January 9, 2001 (the “Option Plan”) was merged into the Omnibus Plan. The nature of stock based
awards provided under the Omnibus Plan are stock options, stock appreciation rights, restricted stock shares, restricted stock units, stock
settled performance shares, and cash settled performance units. Dividend equivalents are generally provided on restricted stock shares and
restricted stock units outstanding as of the record date. Dividend equivalents are generally accrued on target performance shares and units
outstanding as of the record date. These dividend equivalents are paid only on the shares and units released up to a maximum of the target
number of shares and units awarded. Generally, the requisite service period is the vesting period.
As of December 31, 2012, 18,785,951 authorized shares remain available for grant under the Omnibus Plan including previously
authorized but unissued shares under the Option Plan.
Compensation Costs
Compensation cost for employee stock options is based on the fair values estimated on the grant date, using the approach and
assumptions described below. Compensation cost for restricted stock units, performance shares and performance units granted to
employees is measured by the share price of the underlying Common Stock at the date of grant.
The fair value of each stock option award is estimated using a binomial option-pricing model on the date of grant for stock options
issued to employees. The weighted average grant date assumptions used in the binomial option valuation model are as follows:
2012 2011 2010
Expected volatility ................................................................ 41.80% 39.86% 44.41%
Expected dividend yield ............................................................ 3.00% 2.00% 1.10%
Expected term .................................................................... 5.44 years 5.28 years 5.10 years
Risk-free interest rate .............................................................. 0.93% 2.48% 2.34%
Expected volatilities are based on historical volatility of the Company’s Common Stock and implied volatilities from traded options
on the Company’s Common Stock. The Company uses historical data and expectations of future exercise patterns to estimate option
exercises and employee terminations within the valuation model. The expected term of options granted represents the period of time that
options granted are expected to be outstanding. The risk-free rate for periods associated with the expected term of the option is based on the
U.S. Treasury yield curve in effect at the time of grant.
166 Prudential Financial, Inc. 2012 Annual Report