Target 2005 Annual Report Download - page 38

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Valuation of Share-Based Compensation
2005 2004 2003
Stock option valuation assumptions:
Dividend yield 0.7% 0.7% 0.8%
Volatility 27% 22% 29%
Risk-free interest rate 4.4% 3.8% 3.0%
Expected life in years 5.5 5.5 5.0
Grant date weighted-average fair value $16.85 $13.10 $11.04
Performance share grant date
weighted-average fair value $53.96 $49.43 $38.25
Compensation expense recognized
in Statements of Operations (millions) (a) $93 $60 $57
Related income tax benefit (millions) $37 $23 $22
Compensation realized by employees
upon option exercises (millions) $180 $201 $ 72
Related income tax benefit (millions) $71 $77 $28
(a) Represents the total fair value of options vested and performance shares earned.
As of January 28, 2006, there was $102 million of total
unrecognized compensation expense related to nonvested stock
options. That cost is expected to be recognized over a weighted
average period of 1.4 years. The weighted average remaining life of
currently exercisable options is 4.6 years, while total outstanding
options have a weighted average remaining life of six years. Future
compensation expense related to performance shares depends on
future performance and could range from a credit of $39 million for
previously recognized amounts up to a maximum of $50 million of
expense assuming full payout under all outstanding awards.
27. Defined Contribution Plans
Employees who meet certain eligibility requirements can participate
in a defined contribution 401(k) plan by investing up to 80 percent of
their compensation, as limited by statute or regulation. Generally, we
match 100 percent of each employee’s contribution up to 5 percent
of total compensation. Our contribution to the plan is initially invested
in Target Corporation common stock. These amounts are free to be
diversified by the employee three years after initial eligibility in the plan.
In addition, we maintain non-qualified, unfunded deferred
compensation plans for highly-compensated employees whose
participation in our 401(k) plan is limited by statute or regulation. These
employees choose from a menu of crediting rate alternatives which are
the same as the investment choices in our 401(k) plan. We credit an
additional 2 percent per year to the accounts of active employees, in
part to recognize the risks inherent to their participation in a plan of this
nature. We also maintain a frozen non-qualified, unfunded plan for
certain officers in which deferred compensation earns returns tied to
market levels of interest rates plus an additional 6 percent return as
determined by the plan’s terms. We control some of our risk of offering
the non-qualified plans through investing in vehicles that offset a
substantial portion of our economic exposure to the returns of those
plans. These investment vehicles are marked to market with the
related gains and losses recognized in the Consolidated Statements
of Operations in the period they occur. At times, adjusting our position
in these investment vehicles includes repurchasing shares of Target
common stock. In 2005, 2004 and 2003, these repurchases totaled
1.5 million, 0.8 million and 1.5 million shares, respectively.
(millions) 2005 2004 2003
401(k) Defined Contribution Plan
401(k) matching contributions $118 $118 $117
Non-Qualified Deferred
Compensation Plans
Benefits expense $64 $63 $86
Related investments (34) (40) (58)
Net expense $30 $23 $28
In 2005, 2004 and 2003, certain retired executives accepted
our offer to exchange our obligation to them under certain frozen non-
qualified plans for cash or deferrals in our current non-qualified
deferred compensation plan. These exchange transactions resulted
in expense of $7 million, $17 million, and $17 million, respectively.
We expect lower future expenses as a result of these transactions.
Expenses for Marshall Field’s and Mervyn’s employees are
included in the table above to the extent we retained the related assets
and obligations of their plans subsequent to the 2004 divestiture of
those businesses.
28. Pension and Postretirement Health Care Benefits
We have a qualified defined benefit pension plan covering all U.S.
employees who meet age and service requirements. We also have
unfunded non-qualified pension plans for employees with qualified
plan compensation restrictions. Benefits are provided based on years
of service and the employee’s compensation. During fiscal 2004, we
merged our three qualified U.S. pension plans into one plan. This
merger did not have a material impact on the financial results of the
plan. Upon retirement employees also become eligible for certain health
care benefits if they meet minimum age and service requirements and
agree to contribute a portion of the cost.
We recorded a reduction in our accumulated post-retirement
benefit obligation of $7 million in 2004 as a result of the Medicare
Prescription Drug, Improvements and Modernization Act of 2003. In
addition, the expense amounts shown in the table below for 2004
reflect a $1 million reduction due to the amortization of the actuarial
gain and reduction in interest cost due to the effects of the Act.
In 2005, certain non-qualified pension and survivor benefits owed
to current officers were exchanged for cash or deferrals in our current
non-qualified deferred compensation plan, which resulted in expense
of $11 million. The effect of these exchange transactions is included in
the pension tables below. There were no such exchange transactions
during 2004 or 2003.