Paychex 2010 Annual Report Download - page 63

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Risk-free interest rates are yields for zero coupon U.S. Treasury notes maturing approximately at the end of the
expected option life. The estimated volatility factor is based on a combination of historical volatility using weekly
stock prices over a period equal to the expected option life and implied market volatility. The expected option life is
based on historical exercise behavior.
The Company has determined that the Black-Scholes option pricing model, as well as the underlying
assumptions used in its application, are appropriate in estimating the fair value of its stock option grants. The
Company periodically assesses its assumptions as well as its choice of valuation model, and will reconsider use of
this model if additional information becomes available in the future indicating that another model would provide a
more accurate estimate of fair value, or if characteristics of future grants would warrant such a change.
Restricted stock awards: The Board has approved grants of restricted stock awards to the Company’s
officers and outside directors in accordance with the 2002 Plan. All shares underlying awards of restricted stock are
restricted in that they are not transferable until they vest. The recipients of the restricted stock have voting rights and
earn dividends, which are paid to the recipient at the time of vesting of the awards. If the recipient leaves Paychex
prior to the vesting date for any reason, the shares of restricted stock and the dividends accrued on those shares will
be forfeited and returned to Paychex.
For restricted stock awards granted to officers, the shares vest upon the fifth anniversary of the grant date
provided the recipient is still an employee of the Company on that date. These awards have a provision for the
acceleration of vesting based on achievement of performance targets established by the Board. If the established
targets are met for a fiscal year, up to one-third of the award may vest. If all the targets are met for three consecutive
years, the award will be fully vested. For outside directors, the shares vest on the third anniversary of the grant date.
The fair value of restricted stock awards is equal to the closing market price of the underlying common stock as of
the date of grant and is expensed over the requisite service period on a straight-line basis.
The following table summarizes restricted stock activity for the three years ended May 31, 2010:
In thousands, except per share amounts
Restricted
shares
Weighted-average
grant-date
fair value
per share
Nonvested as of May 31, 2007 .............................. 105 $36.87
Granted .............................................. 134 $43.91
Vested ............................................... (33) $36.87
Forfeited ............................................. (16) $41.09
Nonvested as of May 31, 2008 .............................. 190 $41.48
Granted .............................................. 140 $31.76
Vested ............................................... (66) $39.82
Forfeited ............................................. (19) $36.81
Nonvested as of May 31, 2009 .............................. 245 $36.74
Granted .............................................. 153 $24.60
Vested ............................................... (9) $35.79
Forfeited ............................................. (19) $32.66
Nonvested as of May 31, 2010 .............................. 370 $31.95
Restricted stock units: Beginning in July 2007, the Board approved grants of restricted stock units (“RSUs”)
to non-officer management as a replacement of non-qualified stock options. RSUs do not have voting rights or earn
dividend equivalents during the vesting period. These awards vest 20% per annum over five years with a small
population of awards vesting on the fourth anniversary of the grant date. The fair value of RSUs is equal to the
47
PAYCHEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)