AbbVie 2013 Annual Report Download - page 92

Note 11 Equity
Stock-Based Compensation
Stock-based compensation expense was $212 million, $187 million and $163 million in 2013, 2012 and
2011, respectively. The related tax benefit recognized was $68 million, $56 million and $48 million in
2013, 2012 and 2011, respectively. In 2013, realized excess tax benefits associated with stock-based
compensation totaled $38 million and was presented in the consolidated statements of cash flows as an
outflow within the operating section and an inflow within the financing section. For 2013, $134 million
of stock-compensation expense was classified in SG&A, $58 million in R&D and $20 million in cost of
products sold. Stock-based compensation expense for both 2012 and 2011 was allocated to AbbVie
based on the portion of Abbott’s incentive stock program in which AbbVie employees participated. For
both 2012 and 2011, more than half of stock-based compensation expense was classified in SG&A, with
the remainder classified in R&D and cost of products sold. Compensation cost capitalized as part of
inventory at December 31, 2013 and 2012 was not significant.
Compensation expense for stock-based awards is measured based on the fair value of the awards, as of
the date the stock-based awards are granted and adjusted to the estimated number of awards that are
expected to vest. Forfeitures are estimated based on historical experience at the time of grant and
revised in subsequent periods if actual forfeitures differ from those estimates. Compensation cost for
stock-based awards are amortized over their service period, which could be shorter than the vesting
period if an employee is retirement eligible, with a charge to compensation expense. For stock-based
awards granted to retirement-eligible employees, compensation expense is recognized immediately at
the grant date because the employee is able to retain the award without continuing to provide service.
Prior to separation, AbbVie employees participated in Abbott’s incentive stock program. The AbbVie
2013 Incentive Stock Program, adopted at the time of separation, facilitated the assumption of certain
awards granted under Abbott’s incentive stock program and authorizes the post-separation grant of
several different forms of benefits, including nonqualified stock options, RSAs, RSUs and performance-
based RSAs and RSUs. Under the AbbVie 2013 Incentive Stock Program, 100 million shares of
common stock were reserved for issuance with respect to post-separation awards for participants.
In connection with the separation, outstanding Abbott employee stock options, RSAs and RSUs
previously issued under Abbott’s incentive stock program were adjusted and converted into new Abbott
and AbbVie stock-based awards using a formula designed to preserve the intrinsic value and fair value
of the awards immediately prior to the separation. Upon the separation on January 1, 2013, holders of
Abbott stock options, RSAs and RSUs generally received one AbbVie stock-based award for each
Abbott stock-based award outstanding. These adjusted awards retained the vesting schedule and
expiration date of the original awards. No awards have been granted to Abbott employees other than in
connection with the separation.
Stock Options
The exercise price for options granted is at least equal to 100 percent of the market value on the date
of grant. Stock options typically have a contractual term of 10 years and generally vest in one-third
increments over a three-year period except for stock options with a replacement feature. Pre-2005
options were granted with a replacement option feature. The terms and conditions of the replacement
option are the same in all material respects as those applicable to the original grant. When the exercise
price of an option with a replacement option feature is paid with common shares held by the employee,
a replacement option is granted for the number of shares used to make that payment. The closing price
of the common share on the business day before the exercise is used to determine the number of
shares required to exercise the related option and the exercise price of the replacement option. The
replacement option is exercisable in full six months after the date of grant, and has a term expiring on
the expiration date of the original option.
88