HP 2008 Annual Report Download - page 103

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 2: Stock-Based Compensation (Continued)
executive officers. Each PRU award reflects a target number of shares that may be issued to the award
recipient. The actual number of shares the recipient receives is determined at the end of a three-year
performance period based on results achieved versus company performance goals. Those goals are
based on HP’s annual cash flow from operations as a percentage of revenue and average total
shareholder return (‘‘TSR’’) relative to the S&P 500 over the performance period. Depending on HP’s
results during the three-year performance period, the actual number of shares that a grant recipient
receives at the end of the period may range from 0% to 200% of the targeted shares granted, based on
the calculations described below.
Cash flow performance goals are established at the beginning of each year. At the end of each
year, a portion of the target number of shares may be credited in the award recipient’s name
depending on the achievement of the cash flow performance goal for that year. The number of shares
credited varies between 0% if performance is below minimum level and 150% if performance is at or
above maximum level. For performance between the minimum level and the maximum level, a
proportionate percentage between 30% and 150% is applied based on relative performance between
minimum and maximum.
Following the expiration of the three-year performance period, the number of shares credited to
the award recipient during the performance period is adjusted by a TSR modifier. The TSR modifier,
which is determined at the beginning of each performance period, varies between 0%, if the minimum
level is not met, resulting in no payout under the PRU award, and 133%, if performance is at or above
the maximum level. For performance between the minimum level and the maximum level, a
proportionate TSR modifier between 66% and 133% is applied based on relative performance between
minimum and maximum. The number of shares, if any, received by the PRU award recipient equals the
number of shares credited to the award recipient during the performance period multiplied by the TSR
modifier.
Recipients of PRU awards generally must remain employed by HP on a continuous basis through
the end of the applicable three-year performance period in order to receive any portion of the shares
subject to that award. Target shares subject to PRU awards do not have dividend equivalent rights and
do not have the voting rights of common stock until earned and issued following the end of the
applicable performance period.
Stock Options
HP utilized the Black-Scholes option pricing model to value the stock options granted under its
principal option plans. HP examined its historical pattern of option exercises in an effort to determine
if there were any discernable activity patterns based on certain employee populations. From this
analysis, HP identified three employee populations on which to apply the Black-Scholes model. The
table below presents the weighted-average expected life in months of the combined three identified
employee populations. The expected life computation is based on historical exercise patterns and
post-vesting termination behavior within each of the three populations identified. The risk-free interest
rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in
effect at the time of grant.
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