3M 2009 Annual Report Download - page 117

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111
NOTE 16. Stock-Based Compensation
In May 2008, shareholders approved 35 million shares for issuance under the “3M 2008 Long-Term Incentive Plan,”
which replaced and succeeded the 2005 Management Stock Ownership Program (MSOP), the 3M Performance Unit
Plan, and the 1992 Directors Stock Ownership Program. Shares under this plan may be issued in the form of
Incentive Stock Options, Nonqualified Stock Options, Progressive Stock Options, Stock Appreciation Rights,
Restricted Stock, Restricted Stock Units, Other Stock Awards, and Performance Units and Performance Shares.
Awards denominated in shares of common stock other than options and Stock Appreciation Rights, per the 2008
Plan, will be counted against the 35 million share limit as 3.38 shares for every one share covered by such award.
The remaining total shares available for grant under the 3M 2008 Long Term Incentive Plan are 15,507,162 as of
December 31, 2009.
In 2009, the Company changed the timing of its annual stock option and restricted stock unit grant dates from May to
February, in order to provide a stronger and more immediate link between the performance of individuals during the
preceding year and the size of their annual stock option grants. In 2008 and prior, the Company issued options to
eligible employees annually in May using the closing stock price on the grant date, which was the date of the Annual
Stockholders’ Meeting. Accounting rules require recognition of expense under a non-substantive vesting period
approach, requiring compensation expense recognition when an employee is eligible to retire. 3M employees in the
United States are eligible to retire at age 55 and after having completed five years of service. Approximately 25
percent of the stock-based compensation award expense dollars are for this retiree-eligible population. Therefore, in
2009 the retiree-eligible impact shifted stock-based compensation expense to the first quarter, whereas in 2008 and
prior this impact was recognized in the second quarter (because of the May grant date).
In addition to these annual grants, the Company makes other minor grants of stock options, restricted stock units and
other stock-based grants. The Company issues cash settled Restricted Stock Units and Stock Appreciation Rights in
certain countries. These grants do not result in the issuance of Common Stock and are considered immaterial by the
Company. There were approximately 14,008 participants with outstanding options, restricted stock, or restricted
stock units at December 31, 2009.
Effective with the May 2005 MSOP annual grant, the Company changed its vesting period from one to three years
with the expiration date remaining at 10 years from date of grant. Beginning in 2007, the Company reduced the
number of traditional stock options granted under the MSOP plan by reducing the number of employees eligible to
receive annual grants and by shifting a portion of the annual grant away from traditional stock options primarily to
restricted stock units. However, associated with the reduction in the number of eligible employees, the Company
provided a one-time “buyout” grant of restricted stock units to the impacted employees, which resulted in increased
stock-based compensation expense in 2007. The income tax benefits shown in the following table can fluctuate by
period due to the amount of Incentive Stock Options (ISOs) exercised since the Company receives the ISOs tax
benefit upon exercise. The Company last granted ISOs in 2002. Amounts recognized in the financial statements with
respect to stock-based compensation programs, which include stock options, restricted stock, restricted stock units
and the General Employees’ Stock Purchase Plan (GESPP), are as follows:
Stock-Based Compensation Expense
Years ended December 31
(Millions, except per share amounts) 2009 2008 2007
Cost of sales................................................................................... $38
$ 43 $ 47
Selling, general and administrative expenses................................ 144 122 137
Research, development and related expenses.............................. 35 37 44
Operating income (loss) ................................................................. $ (217) $ (202) $ (228)
Income tax benefits ........................................................................ $62
$ 71 $ 93
Net income (loss) attributable to 3M .............................................. $ (155) $ (131) $ (135)