Dow Chemical 2012 Annual Report Download - page 151

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December 31, 2012, the Company’s investment in the joint venture was $161 million ($144 million at December 31, 2011),
classified as “Investment in nonconsolidated affiliates” in the consolidated balance sheets, representing the Company’s
maximum exposure to loss.
NOTE 20 – STOCK-BASED COMPENSATION
The Company grants stock-based compensation to employees and non-employee directors in the form of the Employees’ Stock
Purchase Plan (“ESPP”) and stock option plans, which include deferred and restricted stock. Information regarding these plans
is provided below.
Accounting for Stock-Based Compensation
The Company grants stock-based compensation awards that vest over a specified period or upon employees meeting certain
performance and/or retirement eligibility criteria. The fair value of equity instruments issued to employees is measured on the
grant date. The fair value of liability instruments issued to employees (specifically, performance deferred stock awards, which
are granted to executive employees subject to stock ownership requirements, that provide the recipient the option to elect to
receive a cash payment equal to the value of the stock award on the date of delivery) is measured at the end of each quarter. The
fair value of equity and liability instruments is expensed over the vesting period or, in the case of retirement, from the grant
date to the date on which retirement eligibility provisions have been met and additional service is no longer required.
The Company uses a lattice-based option valuation model to estimate the fair value of stock options, the Black-Scholes
option valuation model for subscriptions to purchase shares under the ESPP and Monte Carlo simulation for the market portion
of performance deferred stock awards. The weighted-average assumptions used to calculate total stock-based compensation are
included in the following table:
2012 2011 2010
Dividend yield 3.34% 2.5% 2.5%
Expected volatility 38.39% 34.61% 47.35%
Risk-free interest rate 0.95% 1.71% 1.28%
Expected life of stock options granted during period (years) 7.6 7.4 6.5
Life of Employees’ Stock Purchase Plan (months) 665
The dividend yield assumption for 2012 was based on a 10 percent/90 percent blend of the Company’s current declared
dividend as a percentage of the stock price on the grant date and a 10-year dividend yield average. The dividend yield
assumption for 2011 was based on a 20 percent/80 percent blend. The dividend yield assumption for 2010 was based on a 30
percent/70 percent blend. The expected volatility assumption was based on an equal weighting of the historical daily volatility
and current implied volatility from exchange-traded options for the contractual term of the options. The risk-free interest rate
was based on the weighted-average of U.S. Treasury strip rates over the contractual term of the options. The expected life of
stock options granted was based on an analysis of historical exercise patterns.
Employees’ Stock Purchase Plan
On February 13, 2003, the Board of Directors authorized a 10-year ESPP (the "2003 ESPP"), which was approved by
stockholders at the Company’s annual meeting on May 8, 2003. Under the 2012 annual offering, most employees were eligible
to purchase shares of common stock of the Company valued at up to 10 percent of their annual base earnings. The value is
determined using the plan price multiplied by the number of shares subscribed to by the employee. The plan price of the stock
is set each year at no less than 85 percent of market price.
Employees’ Stock Purchase Plan 2012
Shares in thousands Shares
Exercise
Price (1)
Outstanding at beginning of year ——
Granted 9,523 $ 25.42
Exercised (6,538) $ 25.42
Forfeited/Expired (2,985) $ 25.42
Outstanding and exercisable at end of year ——
(1) Weighted-average per share