McKesson 2016 Annual Report Download - page 89

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McKESSON CORPORATION
FINANCIAL NOTES (Continued)
(1) Includes compensation expense recognized for RSUs, PeRSUs and TSRUs. Our TSRUs were awarded
beginning in 2015.
(2) 2016 includes non-cash credits of $14 million representing the reversal of previously recognized share-
based compensation, which was recorded due to employee terminations associated with the March 2016
restructuring plan.
(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, TSRUs and other share-based
awards. The 2013 Stock Plan reserves 30 million shares plus the remaining number of shares reserved but unused
under the 2005 Stock Plan. As of March 31, 2016, 29 million shares remain available for future grant under the
2013 Stock Plan.
Stock Options
Stock options are granted with an exercise price at no less than the fair market value and those options
granted under the stock plans 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.
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