Union Pacific 2007 Annual Report Download - page 57

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53
Stock-Based Compensation – We have several stock-based compensation plans under which employees and
non-employee directors receive stock options, nonvested retention shares, and nonvested stock units. We refer
to the nonvested shares and stock units collectively as “retention awards”. We issue treasury shares to cover
option exercises and stock unit vestings, while new shares are issued when retention shares vest.
We adopted FASB Statement No. 123(R), Share-Based Payment (FAS 123(R)), on January 1, 2006. FAS 123(R)
requires us to measure and recognize compensation expense for all stock-based awards made to employees
and directors, including stock options. Compensation expense is based on the calculated fair value of the
awards as measured at the grant date and is expensed ratably over the service period of the awards (generally
the vesting period). The fair value of retention awards is the closing stock price on the date of grant, while the
fair value of stock options is determined by using the Black-Scholes option pricing model. We elected to use
the modified prospective transition method as permitted by FAS 123(R) and did not restate financial results
for prior periods. We did not make an adjustment for the cumulative effect of estimated forfeitures, as the
impact was not material.
As a result of the adoption of FAS 123(R), we recognized expense for stock options in 2007 and 2006, in
addition to retention awards, which were expensed prior to 2006. Information regarding stock-based
compensation appears in the table below:
Millions of Dollars 2007 2006
Stock-based compensation, before tax:
Stock options .......................................................................................................... $21 $14
Retention awards .................................................................................................... 23 21
Total stock-based compensation, before tax ........................................................... $44 $35
Total stock-based compensation, after tax .............................................................. $27 $22
Prior to the adoption of FAS 123(R), we applied the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No
stock-based employee compensation expense related to stock option grants was reflected in net income, as all
options granted under those plans had a grant price equal to the market value of our common stock on the
date of grant. Stock-based compensation expense related to retention shares, stock units, and other incentive
plans was reflected in net income.