Pepsi 2014 Annual Report Download - page 111

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91
The following table summarizes our total stock-based compensation expense:
2014 2013 2012
Stock-based compensation expense $ 297 $ 303 $ 278
Merger and integration charges —— 2
Restructuring and impairment benefits (3) — (7)
Total $ 294 $ 303 $ 273
Income tax benefits recognized in earnings related to stock-based
compensation $ 75 $ 76 $ 73
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. The fair value of RSUs is measured
at the market price of the Company’s stock on the date of grant. The fair value of PSUs is measured at the
market price of the Company’s stock on the date of grant with the exception of market-based awards, for
which we use the Monte-Carlo simulation option-pricing model to determine the fair value. 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 these awards 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 generally 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-based award grants is amortized to expense over the vesting period, primarily 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 may generally elect to receive their grant in the form of stock options or RSUs, or a
combination thereof. Executives who elect RSUs receive one RSU for every four stock options that would
have otherwise been granted. Certain executive officers and other senior executives do not have a choice
and are granted a combination of 60% PEPunits measuring both absolute and relative stock price performance
and 40% long-term cash based on achievement of specific performance operating metrics. Certain executives
are granted performance-based stock units which require the achievement of specified financial and/or
operational performance metrics. The number of shares may be increased to the maximum or reduced to the
minimum threshold based on the results of these performance metrics in accordance with the terms established
at the time of the award.
Our weighted-average Black-Scholes fair value assumptions are as follows:
2014 2013 2012
Expected life 6 years 6 years 6 years
Risk-free interest rate 1.9% 1.1% 1.3%
Expected volatility 16% 17% 17%
Expected dividend yield 2.9% 2.7% 3.0%
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 interest 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