Prudential 2007 Annual Report Download - page 151

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
15. SHARE-BASED PAYMENTS
Omnibus Incentive Plan
In March 2003, the Company’s Board of Directors adopted the Prudential Financial, Inc. Omnibus Incentive Plan (as subsequently
amended and restated, the “Omnibus Plan”). Upon adoption of the Omnibus Plan, the Prudential Financial, Inc. Stock Option Plan
previously adopted by the Company on January 9, 2001 (the “Option Plan”) was merged into the Omnibus Plan. The nature of stock based
awards provided under the Omnibus Plan are stock options, stock appreciation rights, restricted stock shares, restricted stock units, and
equity-based performance awards (“performance shares”). Dividend equivalents are provided on restricted stock shares, restricted stock
units and performance shares. Generally, the requisite service period is the vesting period.
As of December 31, 2007, 44,081,293 authorized shares remain available for grant under the Omnibus Plan including previously
authorized but unissued shares under the Option Plan.
Compensation Costs
Compensation cost for employee stock options is based on the fair values estimated on the grant date, while compensation cost for
non-employee stock options is re-estimated at each period-end through the vesting date, using the approach and assumptions described
below. Compensation cost for restricted stock shares, restricted stock units and performance shares granted to employees is measured by
the share price of the underlying Common Stock at the date of grant. Compensation cost for restricted stock shares and restricted stock
units granted to non-employees is measured by the share price as of the balance sheet date for unvested shares and the share price at the
vesting date for vested shares.
The fair value of each stock option award is estimated on the date of grant for stock options issued to employees and the balance sheet
date or vesting date for stock options issued to non-employees. The weighted average assumptions used in a binomial option valuation
model are as follows:
2007 2006 2005
Expected volatility ................................................................ 18.21% 20.65% 23.77%
Expected dividend yield ............................................................ 1.10% 1.20% 1.20%
Expected term .................................................................... 4.87 years 5.14 years 5.19 years
Risk-free interest rate .............................................................. 4.74% 4.58% 3.74%
Expected volatilities are based on implied volatilities from traded options on the Company’s Common Stock, historical volatility of
the Company’s Common Stock and other factors. The Company uses historical data to estimate option exercises and employee
terminations within the valuation model. The expected term of options granted is derived from the output of the valuation model and
represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the expected term of
the option is based on the U.S. Treasury yield curve in effect at the time of grant.
The following chart summarizes the compensation cost recognized and the related income tax benefit for stock options, restricted
stock shares, restricted stock units, and performance share awards for the years ended December 31, 2007, 2006 and 2005:
2007 2006 2005
Total
Compensation
Cost
Recognized
Income
Tax
Benefit
Total
Compensation
Cost
Recognized
Income
Tax
Benefit
Total
Compensation
Cost
Recognized
Income
Tax
Benefit
(in millions)
Employee stock options ................................... $ 53 $19 $ 60 $22 $ 46 $ 16
Non-employee stock options ................................ 4 1 3 1 4 1
Employee restricted stock shares, restricted stock units, and
performance shares ..................................... 107 39 117 42 78 29
Non-employee restricted stock shares and restricted stock units .... 4 1 3 1 1 —
Total .................................................. $168 $60 $183 $66 $129 $ 46
Compensation costs for all stock based compensation plans capitalized in deferred acquisition costs for the years ended December 31,
2007 and 2006 amounted to $2 million and $3 million, respectively. Total compensation costs capitalized in deferred acquisition costs for
the year ended December 31, 2005 was de minimis.
Prudential Financial 2007 Annual Report 149