McKesson 2014 Annual Report Download - page 79

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McKESSON CORPORATION
FINANCIAL NOTES (Continued)
76
Impact on Net Income
The components of share-based compensation expense and related tax benefits are as follows:
Years Ended March 31,
(In millions) 2014 2013 2012
RSUs (1) $ 88 $ 109 $ 97
PeRSUs (2) 38 23 24
Stock options 22 24 23
Employee stock purchase plan 12 11 10
Share-based compensation expense 160 167 154
Tax benefit for share-based compensation expense (3) (55)(59)(55)
Share-based compensation expense, net of tax $ 105 $ 108 $ 99
(1) This expense was primarily the result of PeRSUs awarded in prior years, which converted to RSUs due to the attainment of goals during the applicable years’
performance period.
(2) Represents estimated compensation expense for PeRSUs that are conditional upon attaining performance objectives during the current year’s performance
period.
(3) Income tax benefit is computed using the tax rates of applicable tax jurisdictions. Additionally, a portion of pre-tax compensation expense is not tax-
deductible.
Stock Plans
In July 2013, our stockholders approved the 2013 Stock Plan to replace the 2005 Stock Plan. These stock plans provide our
employees, officers and non-employee directors the opportunity to receive equity-based, long-term incentives in the form of stock
options, restricted stock, RSUs, PeRSUs and other share-based awards. The 2013 Stock Plan reserves 30.0 million shares plus
the remaining number of shares reserved but unused under the 2005 Stock Plan. As of March 31, 2014, 33.6 million shares remain
available for future grant under the 2013 Stock Plan.
Stock Options
Stock options are granted at no less than fair market value, and those options granted under the 2013 Stock Plan generally
have a contractual term of seven years and follow a four-year vesting schedule.
Compensation expense for stock options is recognized on a straight-line basis over the requisite service period and is based
on the grant-date fair value for the portion of the awards that is ultimately expected to vest. We use the Black-Scholes options-
pricing model to estimate the fair value of our stock options. Once the fair value of an employee stock option is determined,
current accounting practices do not permit it to be changed, even if the estimates used are different from actual. The options-
pricing model requires the use of various estimates and assumptions as follows:
• Expected stock price volatility is based on a combination of historical volatility of our common stock and implied market
volatility. We believe that this market-based input provides a reasonable estimate of our future stock price movements
and is consistent with employee stock option valuation considerations.
• Expected dividend yield is based on historical experience and investors’ current expectations.
• The risk-free interest rate for periods within the expected life of the option is based on the constant maturity U.S. Treasury
rate in effect at the time of grant.
• Expected life of the options is based primarily on historical employee stock option exercises and other behavior data and
reflects the impact of changes in contractual life of current option grants compared to our historical grants.