Northrop Grumman 2010 Annual Report Download - page 112

been granted under the LTISP. Stock awards, in the form of restricted performance stock rights and restricted
stock rights, are granted to key employees without payment to the company.
Recipients of restricted performance stock rights earn shares of stock, based on financial metrics determined by
the board of directors in accordance with the plan. For grants prior to 2007, if the objectives have not been met
at the end of the applicable performance period, up to 100 percent of the original grant for the eight highest
compensated employees and up to 70 percent of the original grant for all other recipients will be forfeited. If the
financial metrics are met or exceeded during the performance period, all recipients can earn up to 150 percent
of the original grant. Beginning in 2007, all members of the Corporate Policy Council (consisting of the CEO
and certain other leadership positions) could forfeit up to 100 percent of the original grant, and all recipients
could earn up to 200 percent of the original grant. Restricted stock rights issued under either plan generally vest
after three years. Termination of employment can result in forfeiture of some or all of the benefits extended. Of
the 50 million shares approved for issuance under the 2001 LTISP, approximately 9.4 million shares were
available for future grants as of December 31, 2010.
Non-Employee Plans – Under the 1993 SPND, at least half of the retainer fee earned by each director must be
deferred into a stock unit account (Automatic Stock Units). Effective January 1, 2010, the amended SPND
provides that the Automatic Stock Units be awarded at the conclusion of board service or as specified by the
director. If a director has less than 5 years of service, the stock units are awarded at the conclusion of board
service. In addition, directors may defer payment of all or part of the remaining retainer fee and other annual
committee fees, which are placed in a stock unit account (Elective Stock Units). The Elective Stock Units are
awarded at the conclusion of board service or as specified by the director, regardless of years of service. Directors
are credited with dividend equivalents in connection with the stock units until the shares are awarded. The 1995
SPND provided for annual stock option grants, and effective June 1, 2005, no new grants have been issued from
this plan. The 1995 SPND was amended in May 2007 to permit payment of the stock unit portion of the
retainer fee described above. Each grant of stock options under the 1995 SPND was made at the closing market
price on the date of the grant, was immediately exercisable, and expires ten years after the grant date. At
December 31, 2010, approximately 93 thousand shares were available for future grants under the 1995 SPND.
Compensation Expense
Total stock-based compensation for the years ended December 31, 2010, 2009, and 2008, was $134 million,
$101 million, and $111 million, respectively, of which $27 million, $20 million, and $15 million related to stock
options and $107 million, $81 million, and $96 million, related to stock awards, respectively. Tax benefits
recognized in the consolidated statements of operations for stock-based compensation during the years ended
December 31, 2010, 2009, and 2008, were $53 million, $40 million, and $44 million, respectively. In addition,
the company realized tax benefits of $17 million from the exercise of stock options and $34 million from the
issuance of stock awards in 2010.
At December 31, 2010, there was $172 million of unrecognized compensation expense related to unvested
awards granted under the company’s stock-based compensation plans, of which $19 million relates to stock
options and $153 million relates to stock awards. These amounts are expected to be charged to expense over a
weighted-average period of 1.4 years.
Stock Options
The fair value of each of the company’s stock option awards is estimated on the date of grant using a Black-
Scholes option-pricing model that uses the assumptions noted in the table below. The fair value of the company’s
stock option awards is expensed on a straight-line basis over the vesting period of the options, which is generally
three to four years. Expected volatility is based on an average of (1) historical volatility of the company’s stock
and (2) implied volatility from traded options on the company’s stock. The risk-free rate for periods within the
contractual life of the stock option award is based on the yield curve of a zero-coupon U.S. Treasury bond on
the date the award is granted with a maturity equal to the expected term of the award. The company uses
historical data to estimate future forfeitures. The expected term of awards granted is derived from historical
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NORTHROP GRUMMAN CORPORATION