Pfizer 2008 Annual Report Download - page 80

Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies
Prior to 2006, stock options were accounted for under APB No. 25, using the intrinsic value method in the consolidated income
statement and fair value information was disclosed. In these disclosures of fair value, we allocated stock option compensation
expense based on the nominal vesting period, rather than the expected time to achieve retirement eligibility. In 2006, we changed
our method of allocating stock option compensation expense to a method based on the substantive vesting period for all new
awards, while continuing to allocate outstanding nonvested awards not yet recognized as of December 31, 2005, under the nominal
vesting period method. Specifically, under this prospective change in accounting policy, compensation expense related to stock
options granted prior to 2006, that are subject to accelerated vesting upon retirement eligibility, is being recognized over the vesting
term of the grant, even though the service period after retirement eligibility is not considered to be a substantive vesting requirement.
The impact of this change was not significant.
All employees may receive stock option grants. Except for stock options awarded to two executive officers at the time they joined
Pfizer, no stock options were awarded to senior and key management in 2008. In virtually all instances, stock options granted since
2005 vest after three years of continuous service from the grant date and have a contractual term of ten years. In all cases, even for
stock options that are subject to accelerated vesting upon voluntary retirement, stock options must be held for at least one year from
grant date before any vesting may occur. In the event of a divestiture or restructuring, options held by employees are immediately
vested and are exercisable from three months to their remaining term, depending on various conditions.
The fair value of each stock option grant is estimated on the grant date using, for virtually all grants, the Black-Scholes-Merton
option-pricing model, which incorporates a number of valuation assumptions noted in the following table, shown at their weighted-
average values:
YEAR ENDED DECEMBER 31,
2008 2007 2006
Expected dividend yield(a) 5.54% 4.49% 3.65%
Risk-free interest rate(b) 2.90% 4.69% 4.59%
Expected stock price volatility(c) 27.21% 21.28% 24.47%
Expected term(d) (years) 5.75 5.75 6.00
(a) Determined using a constant dividend yield during the expected term of the option.
(b) Determined using the extrapolated yield on U.S. Treasury zero-coupon issues.
(c) Determined using implied volatility, after consideration of historical volatility.
(d) Determined using historical exercise and post-vesting termination patterns.
The following table summarizes all stock option activity during 2008, 2007 and 2006:
SHARES
(THOUSANDS)
WEIGHTED-AVERAGE
EXERCISE PRICE
PER SHARE
WEIGHTED-AVERAGE
REMAINING
CONTRACTUAL TERM
(YEARS)
AGGREGATE
INTRINSIC
VALUE(a)
(MILLIONS)
Outstanding, January 1, 2006 627,404 $33.51
Granted 69,300 26.20
Exercised (38,953) 16.09
Forfeited (9,370) 39.01
Cancelled (63,591) 32.51
Outstanding, December 31, 2006 584,790 33.96
Granted 51,215 25.84
Exercised (27,391) 19.68
Forfeited (8,152) 28.00
Cancelled (77,257) 34.47
Outstanding, December 31, 2007 523,205 33.93
Granted 49,522 22.49
Exercised (1,724) 16.81
Forfeited (7,648) 26.55
Cancelled (74,301) 34.16
Outstanding, December 31, 2008 489,054 32.91 4.6 $—
Vested and expected to vest(b), December 31, 2008 482,360 33.02 4.5 $—
Exercisable, December 31, 2008 347,164 36.15 3.2 $—
(a) Market price of underlying Pfizer common stock less exercise price.
(b) The number of options expected to vest takes into account an estimate of expected forfeitures.
78 2008 Financial Report