Federal Express 2009 Annual Report Download - page 56

FEDEX CORPORATION
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Note 9: Stock-Based
Compensation
Our total stock-based compensation expense for the years ended
May 31 was as follows (in millions):
2009 2008 2007
Stock-based compensation expense $ 99 $ 101 $ 103
We have two types of equity-based compensation: stock options
and restricted stock.
STOCK OPTIONS
Under the provisions of our incentive stock plans, key employees
and non-employee directors may be granted options to purchase
shares of our common stock at a price not less than its fair market
value on the date of grant. Options granted have a maximum term
of 10 years. Vesting requirements are determined at the discre-
tion of the Compensation Committee of our Board of Directors.
Option-vesting periods range from one to four years, with 82% of
our options vesting ratably over four years.
RESTRICTED STOCK
Under the terms of our incentive stock plans, restricted shares of
our common stock are awarded to key employees. All restrictions
on the shares expire ratably over a four-year period. Shares are
valued at the market price on the date of award. Compensation
related to these awards is recognized as expense over the req-
uisite service period.
For unvested stock options granted prior to June 1, 2006 and
all restricted stock awards, the terms of these awards provide
for continued vesting subsequent to the employee’s retirement.
Compensation expense associated with these awards is recog-
nized on a straight-line basis over the shorter of the remaining
service or vesting period. This postretirement vesting provision
was removed from all stock option awards granted subsequent
to May 31, 2006.
VALUATION AND ASSUMPTIONS
We use the Black-Scholes option pricing model to calculate the
fair value of stock options. The value of restricted stock awards
is based on the stock price of the award on the grant date. We
recognize stock-based compensation expense on a straight-
line basis over the requisite service period of the award in the
“ Salaries and employee benefi ts” caption in the accompanying
consolidated statements of income.
The key assumptions for the Black-Scholes valuation method
include the expected life of the option, stock price volatility, a
risk-free interest rate, and dividend yield. Many of these assump-
tions are judgmental and highly sensitive. Following is a table of
the weighted-average Black-Scholes value of our stock option
grants, the intrinsic value of options exercised (in millions), and
the key weighted-average assumptions used in the valuation cal-
culations for the options granted during the years ended May 31,
and then a discussion of our methodology for developing each of
the assumptions used in the valuation model:
2009 2008 2007
Weighted-average
Black-Scholes value
$ 23.66 $ 29.88 $ 31.60
Intrinsic value of options exercised $ 7 $ 126 $ 145
Black-Scholes Assumptions:
Expected lives 5.5 years 5 years 5 years
Expected volatility 23% 19% 22%
Risk-free interest rate 3.284% 4.763% 4.879%
Dividend yield 0.492% 0.337% 0.302%
Expected Lives. This is the period of time over which the options
granted are expected to remain outstanding. Generally, options
granted have a maximum term of 10 years. We examine actual
stock option exercises to determine the expected life of the
options. An increase in the expected term will increase com-
pensation expense.
Expected Volatility. Actual changes in the market value of our
stock are used to calculate the volatility assumption. We cal-
culate daily market value changes from the date of grant over a
past period equal to the expected life of the options to determine
volatility. An increase in the expected volatility will increase com-
pensation expense.
Risk-Free Interest Rate. This is the U.S. Treasury Strip rate posted
at the date of grant having a term equal to the expected life of
the option. An increase in the risk-free interest rate will increase
compensation expense.
Dividend Yield. This is the annual rate of dividends per share over
the exercise price of the option. An increase in the dividend yield
will decrease compensation expense.
The following table summarizes information about stock option activity for the year ended May 31, 2009:
Stock Options
Weighted- Weighted-Average Aggregate
Average Remaining Intrinsic Value
Shares Exercise Price Contractual Term (in millions) (1)
Outstanding at June 1, 2008 16,677,806 $ 78.09
Granted 2,209,919 86.78
Exercised (788,091) 55.25
Forfeited (456,545) 95.30
Outstanding at May 31, 2009 17,643,089 $ 79.90 5.6 years $ 85
Exercisable 12,149,247 $ 71.15 4.5 years $ 83
Expected to vest 5,054,335 $ 99.25 8.1 years $ 2
Available for future grants 11,914,914
(1) Only presented for options with market value at May 31, 2009 in excess of the exercise price of the option.