Pfizer 2010 Annual Report Download - page 96

Notes to Consolidated Financial Statements
Pfizer Inc. and Subsidiary Companies
In the past, we had various employee stock and incentive plans under which stock options and other share-based awards were
granted. Stock options and other share-based awards that were granted under prior plans and were outstanding on April 22, 2004,
continue in accordance with the terms of the respective plans.
Although not required to do so, we have used authorized and unissued shares and, to a lesser extent, shares held in our Employee
Benefit Trust and treasury stock to satisfy our obligations under these programs.
A. Impact on Net Income
The components of share-based compensation expense and the associated tax benefit follow:
YEAR ENDED DECEMBER 31,
(MILLIONS OF DOLLARS) 2010 2009 2008
Stock option expense $ 150 $165 $ 194
Restricted stock unit expense 211 183 169
PSA and PCSA (expense reduction)/expense 14 (17) (2)
Short-term incentive award expense —113
TSRU expense 28 15 10
Directors’ compensation 22—
Share-based payment expense 405 349 384
Tax benefit for share-based compensation expense (129) (99) (114)
Share-based payment expense, net of tax $ 276 $250 $ 270
Amounts capitalized as part of inventory cost were not significant. In 2010, 2009 and 2008, the impact of modifications under our
cost-reduction initiatives to share-based awards was not significant. Generally, these modifications resulted in an acceleration of
vesting, either in accordance with plan terms or at management’s discretion.
B. Stock Options
Stock options, which, when vested, entitle the holder to purchase a specified number of shares of Pfizer common stock at a price
per share equal to the market price of Pfizer common stock on the date of grant, are accounted for using a fair-value-based method
at the date of grant in the consolidated statements of income. The values determined through this fair-value-based method generally
are amortized on an even basis over the vesting term into Cost of sales, Selling, informational and administrative expenses, and
Research and development expenses, as appropriate.
All eligible employees may receive stock option grants. No stock options were awarded to senior and other key management in
2010 or 2009; however, stock options were awarded to certain other employees. Except for stock options awarded to two executive
officers at the time they joined Pfizer, no stock options were awarded to senior and other 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 10 years. In most cases, stock options must be held for at least one year from the 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 for a period from
three months to their remaining term, depending on various conditions.
The fair-value-based method for valuing each stock option grant on the grant date uses, 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,
2010 2009 2008
Expected dividend yield(a) 4.00% 4.90% 5.54%
Risk-free interest rate(b) 2.87% 2.69% 2.90%
Expected stock price volatility(c) 26.85% 41.36% 27.21%
Expected term(d) (years) 6.25 6.0 5.75
(a) Determined using a constant dividend yield during the expected term of the option.
(b) Determined using the interpolated 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.
94 2010 Financial Report