Dow Chemical 2015 Annual Report Download - page 139

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NOTE 21 – STOCK-BASED COMPENSATION
The Company provides stock-based compensation in the form of the Employee Stock Purchase Plan (“ESPP”), which grants
eligible employees the right to purchase shares of the Company's common stock at a discounted price. The Company also
grants stock-based compensation to employees and non-employee directors in the form of stock incentive plans, which include
stock options, deferred stock, performance deferred stock 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:
Weighted-Average Assumptions 2015 2014 2013
Dividend yield 3.54% 3.08% 3.89%
Expected volatility 27.84% 28.11% 29.93%
Risk-free interest rate 1.02% 1.11% 1.08%
Expected life of stock options granted during period (years) 7.7 7.7 7.8
Life of Employee Stock Purchase Plan (months) 6 6 5
The dividend yield assumption for 2015 was equal to the dividend yield on the grant date, which reflected the most recent
quarterly dividend payment of $0.42 per share. The dividend yield assumption for 2014 was equal to the dividend yield on the
grant date, which for stock options was the most recent quarterly dividend declared on the grant date of $0.37 per share and for
the ESPP was the first quarter dividend payment of $0.32 per share. The dividend yield assumption for 2013 was equal to the
dividend yield on the grant date, which reflected the most recent quarterly dividend payment of $0.32 per share. The expected
volatility assumptions for options and ESPP were based on an equal weighting of the historical daily volatility for the term of
the awards and current implied volatility from exchange-traded options. The expected volatility assumption for the market
portion of the performance deferred stock awards was based on historical daily volatility for the term of the award. 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.
Employee Stock Purchase Plan
On February 9, 2012, the Board of Directors authorized The Dow Chemical Company 2012 Employee Stock Purchase Plan
which was approved by stockholders at the Company’s annual meeting on May 10, 2012. Under the 2015 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
salary. 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 at an amount equal to at least 85 percent of the fair market value (closing price) of the common stock on
a date during the fourth quarter of the year prior to the offering, or the average fair market value (closing price) of the common
stock over a period during the fourth quarter of the year prior to the offering, in each case, specified by the plan administrator.