Pepsi 2006 Annual Report Download - page 42

We believe that we will achieve our
best results if our employees act and are
rewarded as business owners. There-
fore, we believe stock ownership and
stock-based incentive awards are the
best way to align the interests of
employees with those of our sharehold-
ers. A majority of our employees
participate in our stock-based compen-
sation programs. Stock option grants
are made at the current stock price,
meaning each employee’s exercise price
is equivalent to our stock price on the
date of grant. Employees must gener-
ally provide three additional years of
service to earn the grant, referred to as
the vesting period. Our options gener-
ally have a 10-year term, which means
our employees would have up to seven
years after the vesting period to elect to
pay the exercise price to purchase one
share of our stock for each option exer-
cised. Employees benefit from stock
options to the extent our stock price
appreciates above the exercise price
after vesting and during the term of
the grant. There have been no reduc-
tions to the exercise price of previously
issued awards, and any repricing of
awards would require approval of
our shareholders.
Executives who are awarded long-
term incentives based on their
performance are offered the choice of
stock options or restricted stock units
(RSUs). Executives who elect RSUs
receive one RSU for every four stock
options that would have otherwise
been granted. Senior officers do not
have a choice and are granted 50%
stock options and 50% RSUs. RSU
expense is based on the fair value of
PepsiCo stock on the date of grant and
is amortized over the vesting period,
generally three years. Each RSU is set-
tled in a share of our stock after the
vesting period. Vesting of RSU awards
for senior officers is contingent upon
the achievement of pre-established per-
formance targets.
We also continued, as we have since
1989, to grant an annual award of stock
options to all eligible employees, based
on job level or classification, under our
broad-based stock option program,
SharePower. SharePower awards gener-
ally have a 10-year term and vest over
three years.
Method of Accounting
We account for our employee stock
options, which include grants under
our executive program and broad-
based SharePower program, under the
fair value method of accounting using
a Black-Scholes valuation model to
measure stock option expense at the
date of grant. All stock grants have an
exercise price equal to the fair market
value of our common stock on the date
of grant. The fair value of stock option
grants is amortized to expense over the
vesting period.
On January 1, 2006, we adopted
Statement of Financial Accounting
Standards (SFAS) 123R, Share-Based
Payment, under the modified prospec-
tive method. Since we had previously
accounted for our stock-based compen-
sation plans under the fair value
provisions of SFAS 123, our adoption did
not significantly impact our financial
position or our results of operations.
Under SFAS 123R, actual tax benefits
recognized in excess of tax benefits pre-
viously established upon grant are
reported as a financing cash inflow.
Prior to adoption, such excess tax bene-
fits were reported as an operating
cash inflow.
Our divisions are held accountable
for stock-based compensation expense
and, therefore, this expense is allocated
to our divisions as an incremental
employee compensation cost. The allo-
cation of stock-based compensation
expense in 2006 was approximately
28% to FLNA, 19% to PBNA, 32% to PI,
4% to QFNA and 17% to corporate
unallocated expenses. The expense
allocated to our divisions excludes any
impact of changes in our Black-Scholes
assumptions during the year which
reflect market conditions over which
division management has no control.
Therefore, any variances between allo-
cated expense and our actual expense
are recognized in corporate
unallocated expenses.
Stock–Based Compensation Expense
40
On January 1, 2006, we adopted SFAS 123R,
Share-Based Payment. Since we had previously
accounted for our stock-based compensation
under the fair value method, our adoption did
not significantly impact our financial position or
our results of operations.
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