Pepsi 2012 Annual Report Download - page 88

Method of Accounting and Our Assumptions
We account for our employee stock options under the fair
value method of accounting using a Black-Scholes valuation
model to measure stock option expense at the date of grant.
In addition, we use the Monte-Carlo simulation option-pricing
model to determine the fair value of market-based awards.
The Monte-Carlo simulation option-pricing model uses the
same input assumptions as the Black-Scholes model, however,
it also further incorporates into the fair-value determination
the possibility that the market condition may not be satisfied.
Compensation costs related to awards with a market-based
condition are recognized regardless of whether the market
condition is satisfied, provided that the requisite service has
been provided.
All stock option grants have an exercise price equal to the fair
market value of our common stock on the date of grant and gen-
erally have a 10-year term. We do not backdate, reprice or grant
stock-based compensation awards retroactively. Repricing of
awards would require shareholder approval under the LTIP.
The fair value of stock option grants is amortized to expense
over the vesting period, generally three years. Awards to
employees eligible for retirement prior to the award becoming
fully vested are amortized to expense over the period through
the date that the employee first becomes eligible to retire and
is no longer required to provide service to earn the award.
Executives who are awarded long-term incentives based on
their performance are generally offered the choice of stock
options or 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, through
2012, are granted 50% stock options and 50% performance-
based RSUs.
Our weighted-average Black-Scholes fair value assumptions
are as follows:
2012 2011 2010
Expected life 6 years 6 years 5 years
Risk-free interest rate 1.3%2.5%2.3%
Expected volatility 17%16%17%
Expected dividend yield 3.0%2.9%2.8%
The expected life is the period over which our employee
groups are expected to hold their options. It is based on our
historical experience with similar grants. The risk-free inter-
est rate is based on the expected U.S. Treasury rate over
the expected life. Volatility reflects movements in our stock
price over the most recent historical period equivalent to the
expected life. Dividend yield is estimated over the expected
life based on our stated dividend policy and forecasts of net
income, share repurchases and stock price.
A summary of our stock-based compensation activity for
the year ended December29, 2012 is presented below:
Our Stock Option Activity
Options(a)
Average
Price(b)
Average
Life
(years)(c)
Aggregate
Intrinsic
Value(d)
Outstanding at December31, 2011 91,075 $ 55.92
Granted 3,696 $ 67.13
Exercised (23,585) $ 47.33
Forfeited/expired (3,041) $ 63.81
Outstanding at December29, 2012 68,145 $ 59.15 5.04 $ 614,322
Exercisable at December29, 2012 48,366 $ 56.44 4.45 $ 567,761
Expected to vest as of December29, 2012 19,432 $ 65.79 7.85 $ 45,374
(a) Options are in thousands and include options previously granted under PBG, PAS and Quaker legacy plans. No additional options or shares may be granted under the PBG,
PAS and Quaker plans.
(b) Weighted-average exercise price.
(c) Weighted-average contractual life remaining.
(d) In thousands.
2012 PEPSICO ANNUAL REPORT86
Notes to Consolidated Financial Statements