Waste Management 2007 Annual Report Download - page 95

The most significant difference between the fair value approaches prescribed by SFAS No. 123 and
SFAS No. 123(R) and the intrinsic value method prescribed by APB No. 25 relates to the recognition of
compensation expense for stock option awards based on their grant date fair value. Under SFAS No. 123, we
estimated the fair value of stock option grants using the Black-Scholes-Merton option-pricing model. The following
table reflects the pro forma impact on net income and earnings per common share for the year ended December 31,
2005 of accounting for our equity-based compensation using SFAS No. 123 (in millions, except per share amounts):
Reported net income ..................................................... $1,182
Add: Equity-based compensation expense included in reported net income, net of tax
benefit .............................................................. 12
Less: Total equity-based compensation expense per SFAS No. 123, net of tax benefit ..... (99)
Pro forma net income..................................................... $1,095
Basic earnings per common share:
Reported net income ..................................................... $ 2.11
Add: Equity-based compensation expense included in reported net income, net of tax
benefit .............................................................. 0.02
Less: Total equity-based compensation expense per SFAS No. 123, net of tax benefit ..... (0.17)
Pro forma net income..................................................... $ 1.96
Diluted earnings per common share:
Reported net income ..................................................... $ 2.09
Add: Equity-based compensation expense included in reported net income, net of tax
benefit .............................................................. 0.02
Less: Total equity-based compensation expense per SFAS No. 123, net of tax benefit ..... (0.17)
Pro forma net income..................................................... $ 1.94
Weighted average fair value per share of stock options granted ...................... $ 6.26
In December 2005, the Management Development and Compensation Committee of our Board of Directors
approved the acceleration of the vesting of all unvested stock options awarded under our stock incentive plans,
effective December 28, 2005. The decision to accelerate the vesting of outstanding stock options was made
primarily to reduce the non-cash compensation expense that we would have otherwise recorded in future periods as
a result of adopting SFAS No. 123(R). We estimated that the acceleration eliminated approximately $55 million of
cumulative pre-tax compensation charges that would have been recognized during 2006, 2007 and 2008 as the stock
options would have continued to vest. We recognized a $2 million pre-tax charge to compensation expense during
the fourth quarter of 2005 as a result of the acceleration, but do not expect to recognize future compensation expense
for the accelerated options under SFAS No. 123(R). Total equity-based compensation expense per SFAS No. 123,
net of tax benefit as presented in the table above, includes a pro forma charge of $41 million, net of tax benefit, for
the December 2005 accelerated vesting of outstanding stock options.
Additionally, as a result of changes in accounting required by SFAS No. 123(R) and a desire to design our long-
term incentive plans in a manner that creates a stronger link to operating and market performance, the Management
Development and Compensation Committee approved a substantial change in the form of awards that we grant.
Beginning in 2005, annual stock option grants were eliminated and, for key members of our management and
operations personnel, replaced with grants of restricted stock units and performance share units. Stock option grants
in connection with new hires and promotions were replaced with grants of restricted stock units. The terms of our
restricted stock units and performance share units are summarized in Note 15.
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WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)