HP 2011 Annual Report Download - page 96

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 2: Stock-Based Compensation (Continued)
In fiscal 2008, HP implemented a program that provides for the issuance of PRUs representing
hypothetical shares of HP common stock. PRU awards may be granted to eligible employees, including
HP’s principal executive officer, principal financial officer and other executive officers. Each PRU
award reflects a target number of shares (‘‘Target Shares’’) that may be issued to the award recipient
before adjusting for performance and market conditions. 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 total shareholder return (‘‘TSR’’) relative to the S&P 500 over the
three-year performance period. Depending on the results achieved 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 Target Shares granted, based on the calculations described below.
Cash flow performance goals are established at the beginning of each fiscal year. At the end of
each fiscal year, a portion of the Target 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 the minimum level, and 150%, if performance is
at or above the 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
the minimum and the maximum levels.
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
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 the minimum and the maximum levels. 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. The expense for these awards, net of estimated forfeitures, is recorded
over the requisite service period based on the number of Target Shares that are expected to be earned
and the achievement of the cash flow goals during the performance period.
Stock options granted under the principal equity plans are generally non-qualified stock options,
but the principal equity plans permit some options granted to qualify as ‘‘incentive stock options’’
under the U.S. Internal Revenue Code. Stock options generally vest over three to four years from the
date of grant. The exercise price of a stock option is equal to the fair market value of HP’s common
stock on the option grant date (as determined by the reported sale prices of HP’s common stock when
the market closes on that date). The contractual term of options granted since fiscal 2003 was generally
eight years, while the contractual term of options granted prior to fiscal 2003 was generally ten years.
Prior to March 2010, HP could choose, in certain cases, to establish a discounted exercise price at no
less than 75% of fair market value on the grant date. HP has not granted any discounted options since
fiscal 2003. In fiscal 2011, HP granted performance-contingent stock options that require the
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