Pfizer 2011 Annual Report Download - page 94

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Notes to Consolidated Financial Statements
Pfizer Inc. and Subsidiary Companies
Amounts capitalized as part of inventory cost and the impact of modifications under our cost-reduction and productivity initiatives to
share-based awards were not significant for any period presented. Generally, the modifications resulted in an acceleration of
vesting, either in accordance with plan terms or at management’s discretion.
B. Stock Options
Stock options are issued to select employees and, when vested, entitle the holder to purchase a specified number of shares of
Pfizer common stock at a price per share equal to the closing market price of Pfizer common stock on the date of grant.
All eligible employees may receive stock option grants. No stock options were awarded to senior and other key management in any
period presented; however, stock options were awarded to certain other employees. 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.
We measure the value of stock option grants as of the grant date using, for virtually all grants, the Black-Scholes-Merton option-
pricing model. The values determined through this fair-value-based method generally are amortized on a straight-line basis over the
vesting term into Cost of sales, Selling, informational and administrative expenses, and Research and development expenses,as
appropriate.
The weighted-average assumptions used in the valuation of stock options follow:
YEAR ENDED DECEMBER 31,
2011 2010 2009
Expected dividend yield(a) 4.14% 4.00% 4.90%
Risk-free interest rate(b) 2.59% 2.87% 2.69%
Expected stock price volatility (c) 25.55% 26.85% 41.36%
Expected term(d) (years) 6.25 6.25 6.0
(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.
The following table summarizes all stock option activity during 2011:
SHARES
(THOUSANDS)
WEIGHTED-AVERAGE
EXERCISE PRICE
PER SHARE
WEIGHTED-AVERAGE
REMAINING
CONTRACTUAL TERM
(YEARS)
AGGREGATE
INTRINSIC
VALUE(a)
(MILLIONS)
Outstanding, December 31, 2010 458,604 $28.29
Granted 66,850 18.92
Exercised (9,406) 16.31
Forfeited (6,513) 17.41
Canceled (79,982) 38.73
Outstanding, December 31, 2011 429,553 25.31 4.9 $751
Vested and expected to vest(b), December 31, 2011 421,754 25.46 4.9 $715
Exercisable, December 31, 2011 273,563 30.09 3.0 $ 17
(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.
The following table provides data related to all stock option activity:
YEAR ENDED/AS OF DECEMBER 31,
(MILLIONS OF DOLLARS, EXCEPT PER STOCK OPTION AMOUNTS) 2011 2010 2009
Weighted-average grant date fair value per stock option $3.15 $3.25 $3.30
Aggregate intrinsic value on exercise 32 52
Cash received upon exercise 153 16 7
Tax benefits realized related to exercise 10 11
Total compensation cost related to nonvested stock options not yet recognized,
pre-tax $ 177 $ 178 $ 147
Weighted-average period over which stock option compensation cost is expected to
be recognized (years) 1.3 1.3 1.2
C. Restricted Stock Units (RSUs)
RSUs are issued to select employees and, when vested, entitle the holder to receive a specified number of shares of Pfizer common
stock, including shares resulting from dividend equivalents paid on such RSUs. For RSUs granted during the periods presented, in
virtually all instances, the units vest after three years of continuous service from the grant date.
2011 Financial Report 93