Stock-Based Compensation
Our stock-based compensation program is designed to attract and retain employees while also aligning employees’ interests with the interests of our shareholders. Stock options, restricted stock units (RSUs) and PepsiCo equity performance units (PEPUnits) are granted to employees under the shareholder-approved 2007 Long-Term Incentive Plan (LTIP). Starting in 2012, certain executive officers were granted PEPUnits. These PEPUnits are earned based on achievement of a cumulative net income performance target and provide an opportunity to earn shares of PepsiCo common stock with a value that adjusts based upon absolute changes in PepsiCo’s stock price as well as PepsiCo’s Total Shareholder Return relative to the S&P 500 over a three-year performance period.
The Company may use authorized and unissued shares to meet share requirements resulting from the exercise of stock options and the vesting of restricted stock awards.
As of December 28, 2013, 110 million shares were available for future stock-based compensation grants.
The following table summarizes our total stock-based compensation expense:
|
| | | | | | | | | | | |
| 2013 |
| | 2012 |
| | 2011 |
|
Stock-based compensation expense | $ | 303 |
| | $ | 278 |
| | $ | 326 |
|
Merger and integration charges | — |
| | 2 |
| | 13 |
|
Restructuring and impairment (benefits)/charges | — |
| | (7 | ) | | 4 |
|
Total | $ | 303 |
| | $ | 273 |
| | $ | 343 |
|
Income tax benefits recognized in earnings related to stock-based compensation | $ | 76 |
| | $ | 73 |
| | $ | 101 |
|
Method of Accounting and Our Assumptions
We account for our employee stock options under the fair value method of accounting using a Black-Scholes valuation model to measure stock option expense at the date of grant. In addition, we use the Monte-Carlo simulation option-pricing model to determine the fair value of market-based awards. The Monte-Carlo simulation option-pricing model uses the same input assumptions as the Black-Scholes model; however, it also further incorporates into the fair-value determination the possibility that the market condition may not be satisfied. Compensation costs related to awards with a market-based condition are recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided.
All stock option grants have an exercise price equal to the fair market value of our common stock on the date of grant and generally have a 10-year term. We do not backdate, reprice or grant stock-based compensation awards retroactively. Repricing of awards would require shareholder approval under the LTIP.
The fair value of stock option grants is amortized to expense over the vesting period, generally three years. Awards to employees eligible for retirement prior to the award becoming fully vested are amortized to expense over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. Executives who are awarded long-term incentives based on their performance may generally elect to receive their grant in the form of stock options or RSUs, or a combination thereof. Executives who elect RSUs receive one RSU for every four stock options that would have otherwise been granted. Certain senior executives do not have a choice and are granted 50% stock options and 50% performance-based RSUs. Beginning in 2012, certain executive officers and other senior executives are granted a combination of 60% PEPUnits measuring absolute and relative stock performance and 40% long-term cash based on achievement of specific operating metrics.
Our weighted-average Black-Scholes fair value assumptions are as follows:
|
| | | | | | | | |
| 2013 |
|
| 2012 |
|
| 2011 |
|
Expected life | 6 years |
|
| 6 years |
|
| 6 years |
|
Risk-free interest rate | 1.1 | % |
| 1.3 | % |
| 2.5 | % |
Expected volatility | 17 | % |
| 17 | % |
| 16 | % |
Expected dividend yield | 2.7 | % |
| 3.0 | % |
| 2.9 | % |
The expected life is the period over which our employee groups are expected to hold their options. It is based on our historical experience with similar grants. The risk-free interest rate is based on the expected U.S. Treasury rate over the expected life. Volatility reflects movements in our stock price over the most recent historical period equivalent to the expected life. Dividend yield is estimated over the expected life based on our stated dividend policy and forecasts of net income, share repurchases and stock price.
A summary of our stock-based compensation activity for the year ended December 28, 2013 is as follows:
|
| | | | | | | | | | | | |
Our Stock Option Activity | Options(a) |
| Average Price(b) |
| Average Life (years)(c) |
| Aggregate Intrinsic Value(d) |
Outstanding at December 29, 2012 | 68,145 |
|
| $ | 59.15 |
|
|
|
|
|
Granted | 2,868 |
|
| $ | 76.39 |
|
|
|
|
|
Exercised | (20,275 | ) |
| $ | 55.31 |
|
|
|
|
|
Forfeited/expired | (1,276 | ) |
| $ | 64.65 |
|
|
|
|
|
Outstanding at December 28, 2013 | 49,462 |
|
| $ | 61.58 |
|
| 4.86 |
| $ | 1,045,116 |
|
Exercisable at December 28, 2013 | 37,858 |
|
| $ | 59.64 |
|
| 4.55 |
| $ | 873,257 |
|
Expected to vest as of December 28, 2013 | 11,159 |
| | $ | 67.52 |
| | 7.85 | | $ | 169,498 |
|
| |
(a) | Options are in thousands and include options previously granted under PBG and PAS plans. No additional options or shares were granted under the PBG and PAS plans after 2009. |
| |
(b) | Weighted-average exercise price. |
| |
(c) | Weighted-average contractual life remaining. |
|
| | | | | | | | | | | | |
Our RSU Activity | RSUs(a) |
| Average Intrinsic Value(b) |
| Average Life (years)(c) |
| Aggregate Intrinsic Value(d) |
Outstanding at December 29, 2012 | 11,982 |
|
| $ | 65.60 |
|
|
|
|
|
Granted | 4,231 |
|
| $ | 76.30 |
|
|
|
|
|
Converted | (3,457 | ) |
| $ | 66.38 |
|
|
|
|
|
Forfeited | (817 | ) |
| $ | 67.46 |
|
|
|
|
|
Outstanding at December 28, 2013 | 11,939 |
|
| $ | 69.04 |
|
| 1.37 |
| $ | 987,473 |
|
Expected to vest as of December 28, 2013 | 11,346 |
| | $ | 68.45 |
| | 1.21 | | $ | 938,435 |
|
| |
(a) | RSUs are in thousands and include RSUs previously granted under the PBG plan. No additional RSUs or shares were granted under the PBG plan after 2009. |
| |
(b) | Weighted-average intrinsic value at grant date. |
| |
(c) | Weighted-average contractual life remaining. |
|
| | | | | | | | | | | | |
Our PEPUnit Activity | PEPUnits(a) |
| Average Intrinsic Value(b) |
| Average Life (years)(c) |
| Aggregate Intrinsic Value(d) |
Outstanding at December 29, 2012 | 368 |
|
| $ | 64.89 |
|
|
|
|
|
Granted | 355 |
|
| $ | 68.48 |
|
|
|
|
|
Converted | (48 | ) |
| $ | 66.78 |
|
|
|
|
|
Forfeited | — |
|
| $ | — |
|
|
|
|
|
Outstanding at December 28, 2013 | 675 |
|
| $ | 66.65 |
|
| 1.70 |
| $ | 55,809 |
|
Expected to vest as of December 28, 2013 | 608 |
| | $ | 66.55 |
| | 1.69 | | $ | 50,284 |
|
| |
(a) | PEPUnits are in thousands. |
| |
(b) | Weighted-average intrinsic value at grant date. |
| |
(c) | Weighted-average contractual life remaining. |
Other Stock-Based Compensation Data
|
| | | | | | | | | | | |
| 2013 |
|
| 2012 |
|
| 2011 |
|
Stock Options |
|
|
|
|
|
Total number of options granted(a) | 2,868 |
| | 3,696 |
| | 7,150 |
|
Weighted-average fair value of options granted | $ | 8.14 |
|
| $ | 6.86 |
|
| $ | 7.79 |
|
Total intrinsic value of options exercised(a) | $ | 471,475 |
|
| $ | 512,636 |
|
| $ | 385,678 |
|
RSUs |
|
|
|
|
|
Total number of RSUs granted(a) | 4,231 |
|
| 4,404 |
|
| 5,333 |
|
Weighted-average intrinsic value of RSUs granted | $ | 76.30 |
|
| $ | 66.64 |
|
| $ | 63.87 |
|
Total intrinsic value of RSUs converted(a) | $ | 294,065 |
|
| $ | 236,575 |
|
| $ | 173,433 |
|
PEPUnits | | | | | |
Total number of PEPUnits granted(a) | 355 |
| | 410 |
| |
|
|
Weighted-average intrinsic value of PEPUnits granted | $ | 68.48 |
| | $ | 64.85 |
| |
|
|
Total intrinsic value of PEPUnits converted(a) | $ | 3,868 |
| | — |
| |
|
|
As of December 28, 2013, there were approximately 290,000 outstanding awards, consisting primarily of phantom stock units that were granted under the PepsiCo Director Deferral Program and will be settled in shares of PepsiCo Common Stock pursuant to the LTIP at the end of the applicable deferral period, not included in the tables above.
As of December 28, 2013, there was $373 million of total unrecognized compensation cost related to nonvested share-based compensation grants. This unrecognized compensation is expected to be recognized over a weighted-average period of two years.
