Activision 2011 Annual Report Download - page 75

While the Compensation Committee has broad discretion to create equity incentives, our stock-based compensation
program for the most part currently utilizes a combination of options and restricted stock units. Options have time-based vesting
schedules, generally vesting annually over a period of three to five years, and all options expire ten years from the grant date.
Restricted stock units either have time-based vesting schedules, generally vesting in their entirety on the third anniversary of the
date of grant, or vesting annually over a period of three to five years, or vest only if certain performance measures are met. In
addition, under the terms of the 2008 Plan, the exercise price for the options must be equal to or greater than the closing price per
share of our common stock on the date the award is granted, as reported on NASDAQ.
At December 31, 2011, 102 million shares of our common stock were available for issuance under the 2008 Plan. The
number of shares of our common stock reserved for issuance under the 2008 Plan may be further increased from time to time by:
(i) the number of shares relating to awards outstanding under any prior stock compensation plans that: (a) expire, or are forfeited,
terminated or cancelled, without the issuance of shares; (b) are settled in cash in lieu of shares; or (c) are exchanged, prior to the
issuance of shares of our common stock, for awards not involving our common stock; and (ii) if the exercise price of any option
outstanding under any prior plan is, or the tax withholding requirements with respect to any award outstanding under any prior
plan are, satisfied by withholding shares otherwise then deliverable in respect of the award or the actual or constructive transfer
to the Company of shares already owned, the number of shares equal to the withheld or transferred shares. At December 31,
2011, we had approximately 55 million shares of our common stock reserved for future issuance under the 2008 Plan. Shares
issued in connection with awards made under the 2008 Plan are generally issued as new stock issuances.
Method and Assumptions on Valuation of Stock Options
Our employee stock options have features that differentiate them from exchange- traded options. These features
include lack of transferability, early exercise, vesting restrictions, pre- and post-vesting termination provisions, blackout dates,
and time-varying inputs. In addition, some of the options have non-traditional features, such as accelerated vesting upon the
satisfaction of certain performance conditions that must be reflected in the valuation. A binomial-lattice model was selected
because it is better able to explicitly address these features than closed-form models such as the Black- Scholes model, and is
able to reflect expected future changes in model inputs, including changes in volatility, during the option’s contractual term.
We have estimated expected future changes in model inputs during the option’s contractual term. The inputs required
by our binomial-lattice model include expected volatility, risk-free interest rate, risk-adjusted stock return, dividend yield,
contractual term, and vesting schedule, as well as measures of employees’ exercise and post-vesting termination behavior.
Statistical methods were used to estimate employee rank- specific termination rates. These termination rates, in turn, were used
to model the number of options that are expected to vest and post-vesting termination behavior. An exercise multiple based on a
stock to strike price ratio was used to reflect the employee exercise behavior pattern.
The following tables present the weighted-average assumptions and the weighted-average fair value at grant date
using the binomial-lattice model:
Employee and director options
For the Year Ended
December 31, 2011
For the Year Ended
December 31, 2010
For the Year Ended
December 31, 2009
Expected life (in years) .....................................................................
.
6.58 5.79 5.95
Risk free interest rate ........................................................................
.
1.91% 2.97% 3.63%
Volatility ............................................................................................
.
43.50% 46.20% 53.00%
Dividend yield ...................................................................................
.
1.34% 1.33% —%
Weighted-average fair value at grant date ........................................
.
$4.17 $3.98 $5.40
To estimate volatility for the binomial-lattice model, we use methods that consider the implied volatility method
based upon the volatilities for exchange- traded options on our stock to estimate short-term volatility, the historical method
(annualized standard deviation of the instantaneous returns on Activision Blizzard’s stock) during the option’s contractual term
to estimate long-term volatility, and a statistical model to estimate the transition or “mean reversion” from short-term volatility
to long-term volatility. Based on these methods, for options granted during the year ended December 31, 2011, the expected
stock price volatility ranged from 30.03% to 46.03%.
As is the case for volatility, the risk-free rate is assumed to change during the option’s contractual term. Consistent
with the calculation required by a binomial-lattice model, the risk-free rate reflects the interest from one time period to the next
(“forward rate”) as opposed to the interest rate from the grant date to the given time period (“spot rate”). The expected dividend
yield assumption for options granted during the year ended December 31, 2011 is based on the Company’s historical and
expected future amount of dividend payouts.
The expected life of employee stock options represents the weighted-average period the stock options are expected to
remain outstanding and is an output from the binomial-lattice model. The expected life of employee stock options depends on all
of the underlying assumptions and calibration of our model. A binomial-lattice model can be viewed as assuming that employees
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