3M 2011 Annual Report Download - page 116

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NOTE 16. Stock-Based Compensation
In May 2008, shareholders approved 35 million shares for issuance under the “3M 2008 Long-Term Incentive Plan,”
which replaced and succeeded the 2005 Management Stock Ownership Program (MSOP), the 3M Performance Unit
Plan, and the 1992 Directors Stock Ownership Program. In May 2010, shareholders approved an additional 29
million shares for issuance under the 2008 Plan, increasing the number of approved shares from 35 million to 64
million shares. Awards under this plan may be issued in the form of Incentive Stock Options, Nonqualified Stock
Options, Progressive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Other
Stock Awards, and Performance Units and Performance Shares. Awards denominated in shares of common stock
other than options and Stock Appreciation Rights, per the 2008 Plan, count against the 64 million share limit as 3.38
shares for every one share covered by such award (for full value awards with grant dates prior to May 11, 2010), or
as 2.87 shares for every one share covered by such award (for full value awards with grant dates of May 11, 2010, or
later). The remaining total shares available for grant under the 2008 Long Term Incentive Plan Program are
22,004,273 as of December 31, 2011.
The Company’s annual stock option and restricted stock unit grant is made in February to provide a strong and
immediate link between the performance of individuals during the preceding year and the size of their annual stock
compensation grants. The grant to eligible employees uses the closing stock price on the grant date. Stock options
vest over a period from one to three years with the expiration date at 10 years from date of grant. Accounting
rules require recognition of expense under a non-substantive vesting period approach, requiring compensation
expense recognition when an employee is eligible to retire. Employees are considered eligible to retire at age 55 and
after having completed five years of service. This retiree-eligible population represents 28 percent of the 2011 annual
stock-based compensation award expense dollars; therefore, higher stock-based compensation expense is
recognized in the first quarter. Beginning in 2007, the Company reduced the number of traditional stock options
granted under the MSOP plan by reducing the number of employees eligible to receive annual grants and by shifting
a portion of the annual grant away from traditional stock options primarily to restricted stock units. However,
associated with the reduction in the number of eligible employees, the Company provided a one-time “buyout” grant
in 2007 of restricted stock units to the impacted employees. 3M also has granted progressive (reload) options. These
options are nonqualified stock options that were granted to certain participants under the 1997 or 2002 MSOP, but
for which the reload feature was eliminated in 2005 (on a prospective basis only). Participants who had options
granted prior to this effective date may still qualify to receive new progressive (reload) stock options.
In addition to the annual grants, the Company makes other minor grants of stock options, restricted stock units and
other stock-based grants. The Company issues cash settled Restricted Stock Units and Stock Appreciation Rights in
certain countries. These grants do not result in the issuance of Common Stock and are considered immaterial by the
Company. There were approximately 12,944 participants with outstanding options, restricted stock, or restricted
stock units at December 31, 2011.
Amounts recognized in the financial statements with respect to stock-based compensation programs, which include
stock options, restricted stock, restricted stock units, performance shares, and the General Employees’ Stock
Purchase Plan (GESPP), are provided in the following table. Capitalized stock-based compensation amounts were
not material for the twelve months ended 2011, 2010 and 2009. The income tax benefits shown in the table can
fluctuate by period due to the amount of employee “disqualifying dispositions” related to Incentive Stock Options
(ISOs). The Company last granted ISOs in 2002.
Stock-Based Compensation Expense
Years ended December 31
(Millions) 2011 2010 2009
Cost of sales ............................................................................. $ 29 $ 31 $ 38
Selling, general and administrative expenses .......................... 192 209 144
Research, development and related expenses ........................ 32
34 35
Stock-based compensation expenses ..................................... $ 253
$ 274 $ 217
Income tax benefits .................................................................. $ (80 ) $ (98) $ (62 )
Stock-based compensation expenses, net of tax .................... $ 173
$ 176 $ 155