Your SlideShare is downloading. ×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

PwC’s Stock Compensation 2013 Assumption and Disclosure Survey

128

Published on

In preparing the survey, we analyzed 110 Mature companies, comprising Fortune 100 companies and other large and established companies, with a December 31 measurement date. We also looked at 46 High …

In preparing the survey, we analyzed 110 Mature companies, comprising Fortune 100 companies and other large and established companies, with a December 31 measurement date. We also looked at 46 High Tech/Emerging companies and compared side-by-side information that may be of interest. To obtain the financial information for the stock-based compensation plans included in the survey, we reviewed the public annual reports for the companies selected. We also included 2008 through 2011 data for comparison and 2006 data (when the stock compensation rules were adopted) for comparison in the study.

Published in: Business, Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
128
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
1
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. www.pwc.com Stock Compensation 2013 Assumption and Disclosure Survey Human Resource Services
  • 2. Dear Clients and Friends PwC is pleased to share with you our Stock Compensation 2013 Assumption and Disclosure Survey. This survey presents our analysis of the 2012 year-end assumptions and disclosures for Mature and High Tech/Emerging companies. In preparing the survey, we analyzed 110 Mature companies, comprising Fortune 100 companies and other large and established companies, with a December 31 measurement date. We also looked at 46 High Tech/Emerging companies and compared side-by-side information that may be of interest. To obtain the financial information for the stock-based compensation plans included in the survey, we reviewed the public annual reports for the companies selected. We also included 2008 through 2011 data for comparison and 2006 data (when the stock compensation rules were adopted) for comparison in the study. The survey highlights are summarized in the first section of this survey starting on the next page, followed by more detailed comparative information and discussion. We hope you will find the results of our Stock Compensation 2013 Assumption and Disclosure Survey useful in benchmarking your company’s assumptions and other data points associated with your stock compensation plans. PwC
  • 3. Table of Contents Summary .............................................................................................................................................................................. 4 Option-Pricing Model .......................................................................................................................................................... 6 Option-Pricing Model Assumptions ................................................................................................................................... 7 Option-Pricing Model Assumptions – Expected Term .....................................................................................................8 Option-Pricing Model Assumptions – Volatility ..............................................................................................................11 Option-Pricing Model Assumptions – Risk-Free Rate and Dividend Yield ................................................................... 13 Mix of Awards Granted ..................................................................................................................................................... 16 Mix of Awards Granted – Specific Type ........................................................................................................................... 18 Stock Compensation Expense ........................................................................................................................................... 19 Comparison to Year of ASC 718 (Formerly FAS 123R) Adoption ................................................................................... 21 For More Information Contact: ........................................................................................................................................22
  • 4. Summary We performed an analysis of the stock compensation disclosures made by 46 High-Tech/Emerging companies and 110 Mature1 companies. All information in this analysis is based on published annual reports and other publicly available information of the selected companies. Due to transactions (e.g. acquisitions) or other data anomalies, certain companies included in prior years’ data are not included in the 2012 data and certain companies have been added to the 2012 data which may impact the year to year comparability of data in the study. The following highlights the results of our study and compares the 2012 data to our last Assumption and Disclosure Survey that was performed in 2011 based on data through 2010. Highlights High Tech/Emerging Mature Companies 2012 2010 2012 2010 46 50 110 114 17.31% 15.29% 4.50% 4.88% Stock Options 58% 67% 49% 33% Restricted Stock 42% 33% 51% 67% 83% 79% 85% 84% 5.45 5.30 5.75 5.50 Volatility 45.05% 46.09% 35.05% 35.00% Risk-free Rate 0.93% 2.06% 1.04% 2.40% Dividend Yield (for Companies with a non-zero yield) 1.70% 1.30% 2.57% 2.30% Number of Companies Stock Compensation as a Percentage of Earnings-Median Types of Equity Awards Granted Use of the Black-Scholes Valuation Model Only Assumptions Used for Black-Scholes Model-Median Expected Term (years) 1 "Mature" refers to companies that have been established for a minimum of 15 years. 4
  • 5. High Tech/Emerging Companies Overall, option-pricing model assumptions at December 31, 2012 changed modestly from assumptions at December 31, 2010 as reported in our 2011 Assumption Survey for High Tech/Emerging companies. Of the more significant changes, the average expected term assumed continues to lengthen, possibly reflecting longer holding periods experienced for “out of the money” options granted prior to the credit crisis and associated market downturn. The risk-free rate has also dramatically decreased, as a result of historically low interest rates in 2012. When valuing stock options2, companies continue to rely heavily on the Black-Scholes option-pricing model and primarily base their expected term and volatility assumptions on historical experience. Stock options continue to be the leading type of equity award granted (by share unit volume) for these companies, but trending to an increasing percentage of restricted stock3 (nearly 60/40 options to restricted stock now vs. nearly a 70/30 split in 2010). However, the value of restricted stock granted far outpaced stock options (approximately $733 million in stock option grants compared to over $2.5 billion in restricted stock grants) in 2012. Mature Companies Option-pricing model assumptions at December 31, 2012 also remained fairly consistent with those reported at December 31, 2010 for Mature companies. Volatility assumptions are essentially unchanged and the dividend yield has increased reflecting larger dividends paid or anticipated by those companies paying dividends. Equity awards granted by Mature companies are also showing a significant balance (by share unit volume) at nearly a 50/50 split between stock options and restricted stock awards in 2012 compared to nearly a 30/70 split in 2010. Stock options granted have continued to trend downwards since 2010. Similar to the High Tech/Emerging companies, the value of restricted stock awards (approximately $13 billion) far exceeded the value of stock options granted (well under $3 billion) in 2012. For purposes of this study "stock options" is used to refer to both employee stock option and stock appreciation right ("SAR") awards granted by a company, unless separately presented and identified. 3 For purposes of this study "restricted stock" is used to refer to restricted stock, restricted stock unit and unvested unit awards granted by a company. 2 5
  • 6. Option-Pricing Model Model Preferences – High Tech/Emerging Companies Companies generally have a choice of what option-pricing model to use to determine the fair value of their stock options. For High Tech/Emerging companies, the pricing model of choice has been the Black-Scholes optionpricing model and remained so through 2012. However, lattice pricing models are now used by about 17% of the High Tech/Emerging companies for some of their awards, perhaps due to an uptick in awards with market conditions (i.e., conditions to earn the award are being indexed to the value of the issuer’s shares) or other reasons necessitating more advanced valuation modelling. 2012 2011 2010 2008 2009 Valuation model selected Black-Scholes 83.33% 80.49% 78.72% 80.85% 87.76% Lattice model 7.14% 7.32% 6.38% 4.26% 6.12% Black-Scholes and Lattice model 9.52% 12.20% 14.89% 14.89% 6.12% 100.00% 100.00% 100.00% 100.00% 100.00% Total Companies Model Preferences – Mature Companies For Mature companies, the pricing model of choice also has been the Black-Scholes option-pricing model and remained so through 2012. Over the last 5 years, there has been a modest reduction in companies employing a lattice model for their pricing model (from a high of about 20% in 2008 to 15% in 2012). 2012 2011 2010 2008 2009 Valuation model selected Black-Scholes 84.78% 83.84% 83.81% 81.31% 78.90% Lattice model 14.13% 15.15% 15.24% 15.89% 18.35% 1.09% 1.01% 0.95% 2.80% 2.75% 100.00% 100.00% 100.00% 100.00% 100.00% Black-Scholes and Lattice model Total Companies High Tech/Emerging 2012 Valuation Basis 10% Black-Scholes 7% Mature Companies 2012 Valuation Basis 14% 1% Black-Scholes Lattice model 83% Lattice model Black-Scholes and Lattice model Black-Scholes and Lattice model 85% 6
  • 7. Option-Pricing Model Assumptions Basis for Expected Term and Volatility – High Tech/Emerging Companies When setting the expected term or volatility assumptions (the more significant assumptions for the BlackScholes pricing model), High Tech/Emerging companies in this study continue to rely heavily on historical experience. For the expected term assumption, 90% of companies relied solely on their historical experience while 2% used the so-called simplified method3 and another 8% relied on other methods (e.g., Monte Carlo simulations) to estimate the expected term. As many High Tech/Emerging companies have been public for a longer time period, a significant number of companies have switched from the simplified method to historical experience. Of the 39 companies that granted stock options in 2012 and reported their assumptions, 90% of High Tech/Emerging companies used historical stock price data as the basis (or partly as the basis) for their volatility assumption, where 28% of these companies blended their historical experience with implied volatility (i.e., the volatility inherent in their market traded options) or other measure of volatility (such as use of peer group data). 10% of companies relied solely on their implied volatility. 2012 Expected Term Rationale 2012 Volatility Rationale 8% 2% 28% Historical experience Historical experience Simplified method Implied volatility Other method Blended volatility 10% 62% 90% 3 As described in ASC 718-10-S99 7
  • 8. Option-Pricing Model Assumptions – Expected Term Basis for Expected Term and Volatility – Mature Companies Mature companies have continued to rely on historical experience through 2012. For the expected term assumption, 77% of companies relied solely on their historical experience while 8% used the simplified method; another 15% relied on other methods (derived from lattice modelling, Monte Carlo simulation, or otherwise depending on the complexity of the valuation and/or award characteristics). Of the 94 companies that granted stock options in 2012, overall, 94% of Mature companies incorporated historical stock price data into their volatility assumption, but almost half of these companies used a blend of both historical and implied/other volatilities. Only 6% of the companies in the analysis rely solely on their implied volatility. 2012 Expected Term Rationale 2012 Volatility Rationale 15% 40% 8% Historical experience Historical experience 54% Simplified method Other method Implied volatility Blended volatility 77% 6% 8
  • 9. Expected Term Assumption – High Tech/Emerging Companies Over the 5-year period, the mean (average) for the expected term assumption has increased from 5.16 years to 5.62 years, increasing consistently each year. As companies primarily use historical experience to develop this assumption, the inference is that employees are choosing to hold stock options longer (likely because many remain underwater since the 2008 market downturn). Expected Term 2012 2011 2010 2008 2009 Low 3.70 3.50 3.16 3.38 3.46 Median (middle) 5.45 5.50 5.30 5.00 5.00 Mean (average) 5.62 5.55 5.31 5.16 5.16 High 8.10 7.85 7.65 7.65 10.00 For 2012, 57% of the companies used an expected term assumption falling within a range of 4 to 6 years compared to 61% in 2010. Over the past year, 49% of companies increased their expected term assumption (on average about.3 years) and 30% of companies decreased their expected term assumption from 2011 (on average by approximately .4 years). Expected Term Assumption (in years) Percent of Companies 35% 30% 25% 20% 15% 10% 5% 0% <4.00 2012 2011 4.01-4.50 2010 2009 4.51-5.00 5.01-5.50 5.51-6.00 >6.00 2008 9
  • 10. Expected Term Assumption – Mature Companies Over the 5-year period, the mean (average) for expected term assumption has increased from 5.30 years to 5.73 years. In 2012, 30% of companies increased their expected term assumption (on average by about .3 years) and 23% of companies decreased their expected term assumption from 2011 (on average by .4 years). Expected Term 2012 2011 2010 2009 2008 Low 3.00 1.00 1.30 2.40 2.00 Median (middle) 5.75 5.80 5.50 5.50 5.20 Mean (average) 5.73 5.67 5.53 5.41 5.30 High 8.80 8.50 10.00 8.00 8.00 For the last two years, 60% of the companies assumed an expected term within the range of 4 to 6 years as compared to 56% of companies in 2010 and 68% in 2008. Comparing 2012 to 2011, the number of companies with an expected term of less than 4 years remained at about 8%; and the number of companies with an expected term above 6 years remained at 32%. Expected Term Assumption (in years) Percent of Companies 40% 30% 20% 10% 0% <4.00 2012 2011 4.01-4.50 2010 2009 4.51-5.00 5.01-5.50 5.51-6.00 >6.00 2008 Additionally, for companies in each percentile shown, the expected term assumption for High Tech/Emerging companies is somewhat less than that for Mature companies. More interestingly, with both groups of companies, the expected term assumption for companies in the (longer) 80th percentile is nearly 2 full years greater than the expected term for companies at the (shorter) 20th percentile. Comparison of 2012 Expected Term Assumption - High Tech/Emerging vs. Mature Assumption 8.00 6.00 4.00 2.00 0.00 20% High Tech/Emerging 40% Mature 50% 60% 80% Percentile 10
  • 11. Option-Pricing Model Assumptions – Volatility Volatility Assumption – High Tech/Emerging Companies For High Tech/Emerging companies, overall volatility increased most significantly from 2008 to 2009, on average by 5.5%. However, volatility assumptions have decreased from 2009 levels and have remained in a relatively tight range through 2010-2012. 2012 2011 2010 2009 2008 Low 22.20% 23.50% 28.00% 31.60% 27.00% Median (middle) 45.05% 47.00% 46.09% 47.35% 40.90% Mean (average) 50.31% 51.00% 49.96% 51.54% 45.99% High 92.50% 94.85% 90.00% 100.00% 80.00% Volatility Beginning in 2011, more companies are in the range of 40% to 50% for their volatility assumption. Percent of Companies Volatility Assumption 50% 40% 30% 20% 10% 0% <30.00% 2012 2011 2010 30.01%-40.00% 2009 40.01%-50.00% 50.01%-60.00% 60.01%-70.00% >70.00% 2008 11
  • 12. Volatility Assumption – Mature Companies For Mature companies, the average volatility increased most significantly from 2008 to 2009, by just over 9%. While volatility assumptions have decreased from 2009 levels and have remained steady through 2010-2012, average volatility still exceeds historical levels (2008 and earlier). In 2012, 57 companies’ volatility increased (on average by approximately 2.0%), while 23 companies’ volatility decreased from the 2011 Survey levels (by nearly 3.0%) and 13 companies had relatively consistent levels of volatility since 2011. 2012 2011 2010 2009 2008 Low 12.86% 12.54% 14.77% 15.60% 13.10% Median (middle) 35.05% 34.22% 35.00% 36.00% 28.80% Mean (average) 36.53% 36.06% 36.80% 39.06% 30.04% High 90.00% 87.00% 83.00% 82.00% 59.50% Volatility For 2012, most companies are not in any one range (e.g., spread across 20% to 50%), contrasting with the result shown for the High Tech/Emerging companies (40% to 50%). Volatility Assumption Percent of Companies 50% 40% 30% 20% 10% 0% <20.00% 2012 20.01%-30.00% 2011 2010 2009 30.01%-40.00% 40.01%-50.00% 50.01%-60.00% 60.01%-70.00% >70.00% 2008 For companies in each percentile, High Tech/Emerging companies are using significantly greater volatility assumptions, with the 20th percentile volatility for High Tech/Emerging companies approaching twice that of Mature companies. Comparison of 2012 Volatility Assumption - High Tech/Emerging vs. Mature Assumption 80.00% 60.00% 40.00% 20.00% 0.00% 20% High Tech / Emerging 40% 50% Percentile 60% 80% Mature 12
  • 13. Option-Pricing Model Assumptions – Risk-Free Rate and Dividend Yield Other Black-Scholes Pricing Model Assumptions – High Tech/Emerging Companies Generally, the risk-free rate and the dividend yield assumptions may not have as significant an impact on the Black-Scholes pricing model results as the expected term and volatility assumptions, but they are still important factors in determining fair market value of the stock options. The risk-free interest rate decreased from 2011 to 2012, on average by roughly 80 basis points. However, the corresponding decrease from 2008 to 2012 is on average nearly 200 basis points, mirroring the change in market interest rates. The period in which a company grants its equity awards could influence the movement of the risk-free rate as compared to the prior year. The average dividend yield for the 9 High Tech/ Emerging companies declaring dividends decreased from 1.64% in 2011 to 1.58% in 2012. The modest decrease in average rate is due to 3 companies now assuming dividend yields that on average are slightly less than the group average in 2011. For the 5-year period, the dividend yield has stayed within a narrow range, though in 2009 the higher average rate was likely due to depressed stock prices at that time. Risk-Free Interest Rate 2012 2011 2010 2009 2008 Low 0.50% 0.80% 1.20% 1.40% 0.00% Median (middle) 0.93% 1.80% 2.06% 2.05% 2.90% Mean (average) 1.04% 1.85% 2.20% 2.21% 2.98% High 2.16% 3.30% 3.30% 3.30% 4.90% 2012 2011 2010 2009 2008 Low 0.12% 1.00% 1.00% 0.60% 0.60% Median (middle) 1.70% 1.77% 1.30% 2.20% 1.75% Mean (average) 1.58% 1.64% 1.70% 2.43% 1.65% High 2.69% 2.20% 3.30% 4.84% 2.60% Dividend Yield * In 2012, 9 companies used a non-zero dividend yield assumption, up from 6 in 2011 and 5 in 2010; the information shown above is only for those companies using a non-zero dividend yield assumption. 13
  • 14. Other Black-Scholes Pricing Model Assumptions – Mature Companies The option pricing assumptions for both Mature and High Tech/Emerging companies trended in the same direction. Mature company data gathered from the companies reporting assumptions for their option-pricing model with respect to the risk-free rate and the dividend yield is shown below. As evidenced by the High Tech/Emerging companies, average risk-free rates in 2012 are about half that in 2011 and a third of where they were in 2008, following market interest rate trends. Dividend yield also stayed within a narrow range for the 5-year period with a bump in 2009. From 2011 to 2012, we see a small increase in dividend yield coming from 48% of companies increasing their assumed yield and partially offset by just 35% of companies decreasing their assumption. Risk-Free Interest Rate 2012 2011 2010 2009 2008 Low 0.59% 0.20% 0.60% 0.40% 1.50% Median (middle) 1.04% 2.16% 2.40% 2.10% 2.97% Mean (average) 1.09% 2.12% 2.41% 2.22% 2.96% High 2.19% 3.60% 3.71% 3.70% 4.70% 2012 2011 2010 2009 2008 Low 0.56% 0.32% 0.20% 0.02% 0.10% Median (middle) 2.57% 2.30% 2.30% 2.75% 2.09% Mean (average) 2.55% 2.35% 2.38% 2.94% 2.47% High 5.40% 5.96% 6.61% 10.09% 8.75% Dividend Yield * Reflects only those companies using a non-zero dividend yield assumption. 14
  • 15. Other Black-Scholes Pricing Model Assumptions (continued) With nearly all of the percentile groups, Mature companies are assuming a slightly higher risk-free rate than High Tech/Emerging companies. Only in the 80th percentile do we see High Tech/Emerging with a slightly higher rate, the impact of sample size and a few companies with higher risk-free rates. Comparison of 2012 Risk-Free Interest Rate Assumption - High Tech/Emerging vs. Mature Assumption 1.50% 1.00% 0.50% 0.00% 20% High Tech/Emerging 40% 50% 60% 80% Percentile Mature High Tech/Emerging companies that assume a dividend yield are across the board assuming yields less than the Mature companies in the same percentile group. Comparison of 2012 Dividend Yield Assumption - High Tech/Emerging vs. Mature Assumption 4.00% 3.00% 2.00% 1.00% 0.00% 20% High Tech/Emerging 40% Mature 50% 60% 80% Percentile 15
  • 16. Mix of Awards Granted High Tech/Emerging Companies After an increase in 2009, award activity returned to historical levels in 2010 and 2011 with a decrease in 2012. Depressed stock prices were a contributing factor for high units in 2009, and as stock prices began to rebound, the number of units granted decreased to pre-2009 levels. The number of stock options granted in 2012 decreased fairly significantly from 2011. In comparison, the number and total fair value of restricted stock granted has continued to increase. The total fair value of restricted stock grants as compared to the total fair value of stock options granted steadily increased over the five year period and in 2012 was more than three times the total fair value of stock options granted. 2012 2011 2010 2009 2008 110,813 154,453 144,412 349,567 159,205 $733,228 $883,793 $758,957 $831,338 $1,085,708 80,444 79,165 71,430 82,173 78,277 $2,555,509 $2,162,128 $1,758,925 $1,407,513 $1,768,883 Total options * Total grant date option value * Total stock * Total grant date stock value * * In thousands Award Mix – Options and Restricted Stock (percent of share units awarded) 100% 81% 80% 67% 58% 60% 67% 67% 42% 33% 33% 40% 33% 19% 20% 0% Options 2012 Restricted Stock 2011 2010 2009 2008 Award Mix – Options and Restricted Stock (percent of value) 100% 78% 80% 70% 71% 37% 40% 20% 62% 63% 60% 29% 22% 38% 30% 0% 2012 Options 2011 2010 2009 2008 Restricted Stock 16
  • 17. Mature Companies Award activity continued to decline in 2012 below historical levels for stock options with a slight shift to restricted stock awards. Similar to the trend for High Tech/Emerging companies, in 2009 total fair values for equity awards decreased from prior years even though the total number of awards increased reflecting the economic environment at the time. However, as stock prices began to rebound, the total number of awards returned to pre-2009 levels. From 2008 through 2010, restricted stock awards steadily increased in number of awards granted but returned to historical levels in 2011 and continued at nearly the same level in 2012. Much of the movement from stock options to restricted stock in 2010 was related to companies within the financial services sector. 2012 2011 2010 2009 2008 377,628 438,856 544,108 1,174,790 599,960 $2,742,961 $3,278,703 $4,329,668 $4,863,435 $5,365,314 386,715 341,365 1,108,024 533,304 337,382 $12,547,916 $11,502,405 $15,823,326 $8,826,501 $11,193,661 Total options * Total grant date option value * Total stock * Total grant date stock value * * In thousands Award Mix – Options and Restricted Stock (percent of share units awarded) 100% 80% 60% 51% 69% 67% 56% 49% 44% 40% 64% 33% 36% 31% 20% 0% 2012 Options 2011 2010 2009 2008 Restricted Stock Award Mix – Options and Restricted Stock (percent of value ) 100% 82% 80% 79% 78% 68% 64% 60% 36% 40% 20% 32% 18% 22% 21% 0% Options 2012 Restricted Stock 2011 2010 2009 2008 17
  • 18. Mix of Awards Granted – Specific Type High Tech/Emerging Companies Only 26% of High Tech/Emerging companies analyzed in 2012 granted one type of equity award (13% granted stock options only, 11% granted restricted stock only, and 2% granted SARs only). The majority of companies (74%) provided a mix of equity award types including both stock options and restricted stock, and SARs were occasionally in the mix (34% of companies granted SARs along with stock options and restricted stock). 2012 Award Mix – By Specific Type (percent of companies) 80% 60% 40% 20% 34% 30% 13% 11% 8% 2% 2% 0% Options Only RSU/RS SARs Only Options & R&S Options & SARs RS& SARs Options & RS & SARs Mature Companies Only about 12% companies analyzed in 2012 granted one type of award (4% granted stock options only, 8% granted restricted stock only, and 0% granted SARs only.) The majority of companies (88%) provided a mix of both stock options and restricted stock. Differing from the High Tech/Emerging companies, only 8% of Mature companies utilized SARs, stock options, and restricted stock. 2012 Award Mix – By Specific Type (percent of companies) 76% 80% 60% 40% 20% 4% 8% 0% Options Only RSU/RS SARs Only 8% 3% 0% Options & RS 1% Options & SARs RS & SARs Options & RS & SARs 18
  • 19. Stock Compensation Expense High Tech/Emerging Companies The median Stock Compensation Expense for 2012 was $11 million, unchanged from that of 2011 and reflecting a few large increases offset by many companies staying level or showing a decrease in their expense. Median pre-tax earnings in 2012 were again at pre-2009 levels, the majority of companies sampled having slightly lower earnings in 2012 than in 2011. Median Stock Compensation Expense and Company Earnings (pre-tax, in millions) 2012 2009 2008 $11 $9 $13 $12 $30 Earnings 2010 $11 Stock Comp. Expense 2011 $44 $32 $11 $33 Stock Compensation Expense as a percent of earnings was the highest it has been since 2009 but still in a relatively narrow band. Stock Compensation Expense as % of Income/Loss before Taxes* 2012 * 2010 2009 2008 17.31% Median 2011 16.41% 15.29% 17.53% 16.44% Absolute values were used for companies with net loss High Tech/Emerging companies have been fairly consistent from 2011 to 2012 for stock compensation expense as a percent of earnings, but far more volatile in prior years. Stock Compensation Expense as a Percent of Earnings 30% Percent of Companies 25% 20% 15% 10% 5% 0% <5.00% 2012 2011 5.01%-10.00% 2010 2009 10.01%-15.00% 15.01%-25.00% 25.01%-40.00% >40.00% 2008 19
  • 20. Mature Companies The median Stock Compensation Expense for 2012 was $50 million, compared to $46 million in 2011, reflecting a few more companies in the sample with increases in expense compared to those with decreases. While lower than 2011, median pre-tax earnings in 2012 exceeded pre-tax earnings during the 2008-2010 period. Stock Compensation Expense as a percent of Earnings has continued to be lower than 2009 levels. Median Earnings and Stock Compensation Expense (pre-tax, in millions) 2012 2009 2008 $46 $53 $49 $43 $1,021 Earnings 2010 $50 Stock Comp. Expense 2011 $1,063 $948 $583 $666 As a percent of earnings, the median for 2012 is slightly greater than for 2011, but remains within a narrow band for the 5-year period. Stock Compensation Expense as % of Income before Taxes 2012 * 2010 2009 2008 4.50% Median 2011 4.32% 4.88% 5.07% 4.36% Absolute values were used for companies with net loss Stock compensation expense for Mature companies remained fairly consistent with years prior for this 5-year period. Stock Compensation Expense as a Percent of Earnings 70% Percent of Companies 60% 50% 40% 30% 20% 10% 0% 2012 <5.00% 2011 2010 5.01%-10.00% 2009 2008 10.01%-15.00% 15.01%-25.00% 25.01%-40.00% >40.00% 20
  • 21. Comparison to Year of ASC 718 (Formerly FAS 123R) Adoption The following is a comparison of 2012 data to 2006 when the stock compensation rules were adopted. While stock compensation expense as a percent of earnings in 2012 remains within the range of 2006 results, for the High Tech/Emerging companies, the types of equity awards granted is moving more towards a balance between stock options and restricted with a nearly 60/40 split between stock options and restricted stock as compared to a nearly 85/15 split in 2006. For the Mature companies, the types of equity awards granted are nearly a 50/50 split between stock options and restricted stock compared to a nearly 75/25 split in 2006. Both groups rely heavily on the Black-Scholes model in 2012, with High Tech/Emerging using other models more now than the group did in 2006, possibly reflecting more complexities or conditions in the terms of the awards. We see both groups having moved their expected term assumption to a longer period (note that most companies reported using historical data for this assumption). Additionally, both groups have lowered their risk-free rates (following market trends, noted previously). We also see both groups of companies increasing their dividend yield assumption. While the High Tech/Emerging companies remain in the same range for volatility and are still experiencing much more volatility than Mature companies, we see a dramatic increase in the assumed volatility for Mature companies since 2006, perhaps reflecting the recent market swings as well as a longer basis for the expected term assumption. Comparison to 2006 Data High Tech/Emerging Mature Companies 2012 2006 2012 2006 46 50 110 114 17.31% 19.74% 4.50% 3.70% Stock Options 58% 84% 49% 74% Restricted Stock 42% 16% 51% 26% 83% 96% 85% 81% 5.45 4.85 5.75 5.00 45.05% 45.00% 35.05% 26.00% Risk-free Rate .93% 4.70% 1.04% 4.63% Divided Yield 1.70% 1.35% 2.57% 2.00% Number of Companies Stock Compensation as a Percentage of Earnings-Median Types of Equity Awards Granted Use of the Black-Scholes Valuation Model Only Assumptions Used for Black-Scholes Model-Median(Average Rates) Expected Term (years) Volatility 21
  • 22. For More Information Contact: If you would like additional details on our analysis, please contact any of the authors listed below or your regional Human Resource Services professional: Authors Ken Stoler (646) 471-5745 Kevin Hassan kevin.hassan@us.pwc.com (203) 539-4049 ken.stoler@us.pwc.com (267) 330-1377 Teresa Yannacone teresa.yannacone@us.pwc.com Ken Gritzan ken.gritzan@us.pwc.com (646) 471-4596 22
  • 23. pwc.com This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. © 2013 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. PwC

×