STOCK-BASED COMPENSATION
The Company grants stock-based compensation to employees and non-employee directors in the form of the Employee Stock Purchase Plan (“ESPP”) and stock incentive plans, which include stock options, deferred stock and restricted stock. Information regarding these plans is provided below.
Accounting for Stock-Based Compensation
The Company grants stock-based compensation awards that vest over a specified period or upon employees meeting certain performance and/or retirement eligibility criteria. The fair value of equity instruments issued to employees is measured on the grant date. The fair value of liability instruments issued to employees (specifically, performance deferred stock awards, which are granted to executive employees subject to stock ownership requirements, that provide the recipient the option to elect to receive a cash payment equal to the value of the stock award on the date of delivery) is measured at the end of each quarter. The fair value of equity and liability instruments is expensed over the vesting period or, in the case of retirement, from the grant date to the date on which retirement eligibility provisions have been met and additional service is no longer required.
The Company uses a lattice-based option valuation model to estimate the fair value of stock options, the Black-Scholes option valuation model for subscriptions to purchase shares under the ESPP and Monte Carlo simulation for the market portion of performance deferred stock awards. The weighted-average assumptions used to calculate total stock-based compensation are included in the following table:
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| | | | | | | | | |
Weighted-Average Assumptions | | 2013 |
| | 2012 |
| | 2011 |
|
Dividend yield | | 3.89 | % | | 3.34 | % | | 2.5 | % |
Expected volatility | | 29.93 | % | | 38.39 | % | | 34.61 | % |
Risk-free interest rate | | 1.08 | % | | 0.95 | % | | 1.71 | % |
Expected life of stock options granted during period (years) | | 7.8 |
| | 7.6 |
| | 7.4 |
|
Life of Employee Stock Purchase Plan (months) | | 5 |
| | 6 |
| | 6 |
|
The dividend yield assumption for 2013 was equal to the dividend yield on the grant date, which reflected the most recent quarterly dividend payment of $0.32 per share. The dividend yield assumption for 2012 was based on a 10 percent/90 percent blend of the Company’s current declared dividend as a percentage of the stock price on the grant date and a 10-year dividend yield average. The dividend yield assumption for 2011 was based on a 20 percent/80 percent blend. The expected volatility assumption was based on an equal weighting of the historical daily volatility and current implied volatility from exchange-traded options for the contractual term of the options. The risk-free interest rate was based on the weighted-average of U.S. Treasury strip rates over the contractual term of the options. The expected life of stock options granted was based on an analysis of historical exercise patterns.
Employee Stock Purchase Plan
On February 9, 2012, the Board of Directors authorized The Dow Chemical Company 2012 Employee Stock Purchase Plan (the "2012 ESPP") which was approved by stockholders at the Company’s annual meeting on May 10, 2012. The 2012 ESPP supersedes the prior employee stock purchase plan. Under the 2013 annual offering, most employees were eligible to purchase shares of common stock of the Company valued at up to 10 percent of their annual base salary. The value is determined using the plan price multiplied by the number of shares subscribed to by the employee. The plan price of the stock is set each year at an amount equal to at least 85 percent of the fair market value of the common stock on a specific date or the average fair market value of the common stock over a period, in each case, specified by the plan administrator.
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| | | | | | | |
Employee Stock Purchase Plan | | 2013 |
Shares in thousands | | Shares |
| | Exercise Price |
|
Outstanding at beginning of year | | — |
| | — |
|
Granted | | 8,298 |
| | $ | 27.05 |
|
Exercised | | (7,311 | ) | | $ | 27.05 |
|
Forfeited/Expired | | (987 | ) | | $ | 27.05 |
|
Outstanding and exercisable at end of year | | — |
| | — |
|
|
| | | | | | | | | | | | |
Additional Information about Employee Stock Purchase Plan In millions, except per share amounts | | 2013 |
| | 2012 |
| | 2011 |
|
Weighted-average fair value per share of purchase rights granted | | $ | 7.20 |
| | $ | 8.32 |
| | $ | 11.39 |
|
Total compensation expense for ESPP | | $ | 60 |
| | $ | 79 |
| | $ | 123 |
|
Related tax benefit | | $ | 22 |
| | $ | 29 |
| | $ | 46 |
|
Total amount of cash received from the exercise of purchase rights | | $ | 198 |
| | $ | 166 |
| | $ | 197 |
|
Total intrinsic value of purchase rights exercised (1) | | $ | 68 |
| | $ | 41 |
| | $ | 98 |
|
Related tax benefit | | $ | 25 |
| | $ | 15 |
| | $ | 36 |
|
| |
(1) | Difference between the market price at exercise and the price paid by the employee to exercise the purchase rights. |
Stock Incentive Plan
The Company has historically granted equity awards under various plans (the "Prior Plans"). On February 9, 2012, the Board of Directors authorized The Dow Chemical Company 2012 Stock Incentive Plan (the "2012 Plan"). The 2012 Plan was approved by stockholders at the Company's annual meeting on May 10, 2012 and became effective on that date. The 2012 Plan supersedes the Prior Plans. Under the 2012 Plan, the Company may grant options, deferred stock, performance deferred stock, restricted stock, stock appreciation rights and stock units to employees and non-employee directors over the 10-year duration of the Plan, subject to an aggregate limit and annual individual limits. The terms of the grants are fixed at the grant date. At December 31, 2013, there were 20,582,818 shares available for grant under the 2012 Plan.
Stock Options
The Company grants stock options to certain employees. Under the 1988 Award and Option Plan (the "1988 Plan"), a plan approved by stockholders, the Company granted options or shares of common stock to its employees subject to certain annual and individual limits. The terms of the grants are fixed at the grant date. At December 31, 2012, there were no shares available for grant under this plan. The 1988 Plan was superseded by the 2012 Plan on May 10, 2012.
Under the 1994 Non-Employee Directors’ Stock Plan, the Company was previously allowed to grant up to 300,000 options to non-employee directors; however, no additional grants will be made under this plan. At December 31, 2013, there were 19,250 options outstanding under this plan.
Under the 2003 Non-Employee Directors' Stock Incentive Plan (the "2003 Plan"), the Company was previously allowed to grant up to 1.5 million shares (including options, restricted stock and deferred stock) to non-employee directors over the 10-year duration of the program. The 2003 Plan was superseded by the 2012 Plan on May 10, 2012. No additional grants will be made under the 2003 Plan. At December 31, 2013, there were 106,950 options outstanding under this plan.
The following table provides stock option activity for 2013:
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| | | | | | | | | | | | | | | | |
Stock Options | | 2013 |
| | 1988 Plan | | 2012 Plan |
Shares in thousands | | Shares |
| | Exercise Price (1) |
| | Shares |
| | Exercise Price (1) |
|
Outstanding at January 1, 2013 | | 68,868 |
| | $ | 35.82 |
| | — |
| | $ | — |
|
Granted | | — |
| | $ | — |
| | 17,080 |
| | $ | 32.16 |
|
Exercised | | (7,700 | ) | | $ | 25.13 |
| | — |
| | $ | — |
|
Forfeited/Expired | | (1,893 | ) | | $ | 42.15 |
| | (57 | ) | | $ | 32.16 |
|
Outstanding at December 31, 2013 | | 59,275 |
| | $ | 37.01 |
| | 17,023 |
| | $ | 32.16 |
|
Remaining contractual life in years | |
| | 4.71 |
| | | | 9.11 |
|
Aggregate intrinsic value in millions | | $ | 476 |
| |
|
| | $ | 208 |
| | |
Exercisable at December 31, 2013 | | 47,487 |
| | $ | 37.45 |
| | — |
| | $ | — |
|
Remaining contractual life in years | |
| | 3.98 |
| | | | — |
|
Aggregate intrinsic value in millions | | $ | 368 |
| |
|
| | $ | — |
| | |
| |
(1) | Weighted-average per share |
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Additional Information about Stock Options In millions, except per share amounts | | 2013 |
| | 2012 |
| | 2011 |
|
Weighted-average fair value per share of options granted | | $ | 6.99 |
| | $ | 9.38 |
| | $ | 10.64 |
|
Total compensation expense for stock option plans | | $ | 101 |
| | $ | 106 |
| | $ | 88 |
|
Related tax benefit | | $ | 37 |
| | $ | 39 |
| | $ | 33 |
|
Total amount of cash received from the exercise of options | | $ | 188 |
| | $ | 137 |
| | $ | 147 |
|
Total intrinsic value of options exercised (1) | | $ | 102 |
| | $ | 64 |
| | $ | 66 |
|
Related tax benefit | | $ | 38 |
| | $ | 24 |
| | $ | 24 |
|
| |
(1) | Difference between the market price at exercise and the price paid by the employee to exercise the options. |
Total unrecognized compensation cost related to unvested stock option awards of $72 million at December 31, 2013 is expected to be recognized over a weighted-average period of 0.89 years.
The exercise price of each stock option equals the market price of the Company’s stock on the date of grant. Options vest from one to three years, and have a maximum term of 10 years.
Deferred Stock
The Company grants deferred stock to certain employees. The grants vest after a designated period of time, generally one to three years. The Company historically issued grants under the 1988 Plan; however beginning May 10, 2012, grants of deferred stock are made under the 2012 Plan. The following table shows changes in nonvested deferred stock:
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| | | | | | | | | | | | | | |
Deferred Stock | | 2013 |
| | 1988 Plan | | 2012 Plan |
Shares in thousands | | Shares |
| | Grant Date Fair Value (1) |
| | Shares |
| | Grant Date Fair Value (1) |
|
Nonvested at beginning of year | | 10,957 |
| | $ | 32.70 |
| | 209 |
| | $ | 30.49 |
|
Granted | | — |
| | $ | — |
| | 3,747 |
| | $ | 32.13 |
|
Vested | | (4,162 | ) | | $ | 27.79 |
| | — |
| | $ | — |
|
Canceled | | (139 | ) | | $ | 36.60 |
| | (24 | ) | | $ | 33.11 |
|
Nonvested at end of year | | 6,656 |
| | $ | 35.76 |
| | 3,932 |
| | $ | 32.05 |
|
| |
(1) | Weighted-average per share |
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Additional Information about Deferred Stock In millions, except per share amounts | | 2013 |
| | 2012 |
| | 2011 |
|
Weighted-average fair value per share of deferred stock granted | | $ | 32.13 |
| | $ | 33.81 |
| | $ | 37.60 |
|
Total fair value of deferred stock vested and delivered (1) | | $ | 137 |
| | $ | 252 |
| | $ | 123 |
|
Related tax benefit | | $ | 51 |
| | $ | 93 |
| | $ | 46 |
|
Total compensation expense for deferred stock awards | | $ | 104 |
| | $ | 129 |
| | $ | 124 |
|
Related tax benefit | | $ | 39 |
| | $ | 48 |
| | $ | 46 |
|
| |
(1) | Includes the fair value of shares vested in prior years and delivered in the reporting year. |
Total unrecognized compensation cost related to deferred stock awards of $85 million at December 31, 2013 is expected to be recognized over a weighted-average period of 0.88 years. At December 31, 2013, approximately 71,903 deferred shares with a grant date weighted-average fair value per share of $34.99 had previously vested, but were not issued. These shares are scheduled to be issued to employees within one to three years or upon retirement.
The Company historically granted performance deferred stock awards under the 1988 Plan. The 2012 Plan supersedes the 1988 Plan. Under both plans, the performance deferred stock awards vest when the Company attains specified performance targets over a predetermined period, generally one to three years. Compensation expense related to performance deferred stock awards is recognized over the lesser of the service or performance period. Changes in the fair value of liability instruments are recognized as compensation expense each quarter. The following table shows the performance deferred stock awards granted:
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| | | | | | | | | | |
Performance Deferred Stock Awards | | Target Shares Granted (1) |
| | Grant Date Fair Value (2) |
|
Shares in thousands | | |
Year | | Plan | Performance Period | |
2013 | | 2012 Plan | January 1, 2013 - December 31, 2015 | | 1,321 |
| | $ | 32.16 |
|
2012 | | 1988 Plan | January 1, 2012 – December 31, 2014 | | 1,205 |
| | $ | 34.00 |
|
2011 | | 1988 Plan | January 1, 2011 – December 31, 2013 | | 1,109 |
| | $ | 38.07 |
|
| |
(1) | At the end of the performance period, the actual number of shares issued can range from zero to 250 percent of the target shares granted. |
| |
(2) | Weighted-average per share |
The following table shows changes in nonvested performance deferred stock:
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Performance Deferred Stock | | 2013 |
| | 1988 Plan | | 2012 Plan |
Shares in thousands | | Target
Shares
Granted (1) |
| | Grant Date Fair Value (2) |
| | Target Shares Granted (1) |
| | Grant Date Fair Value (2) |
|
Nonvested at beginning of year | | 2,254 |
| | $ | 35.92 |
| | — |
| | $ | — |
|
Granted | | — |
| | $ | — |
| | 1,321 |
| | $ | 32.16 |
|
Vested | | (1,065 | ) | | $ | 38.06 |
| | — |
| | $ | — |
|
Canceled | | (1 | ) | | $ | 37.57 |
| | (5 | ) | | $ | 32.16 |
|
Nonvested at end of year | | 1,188 |
| | $ | 34.00 |
| | 1,316 |
| | $ | 32.16 |
|
| |
(1) | At the end of the performance period, the actual number of shares issued can range from zero to 250 percent of the target shares granted. |
| |
(2) | Weighted-average per share |
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Additional Information about Performance Deferred Stock | | | | |
In millions | | 2013 |
| | 2012 |
| | 2011 |
|
Total fair value of performance deferred stock vested and delivered (1) | | $ | 14 |
| | $ | 68 |
| | $ | 77 |
|
Related tax benefit | | $ | 5 |
| | $ | 25 |
| | $ | 28 |
|
Total compensation expense for performance deferred stock awards | | $ | 62 |
| | $ | 21 |
| | $ | 36 |
|
Related tax benefit | | $ | 23 |
| | $ | 8 |
| | $ | 13 |
|
| |
(1) | Includes the fair value of shares vested in prior years and delivered in the reporting year. |
During 2013, the Company settled 0.2 million shares of performance deferred stock for $6 million in cash. During 2012, the Company settled 1.0 million shares of performance deferred stock for $34 million in cash. During 2011, the Company settled 1.2 million shares of performance of deferred stock for $36 million in cash. Total unrecognized compensation cost related to performance deferred stock awards of $22 million at December 31, 2013 is expected to be recognized over a weighted-average period of 0.89 years. At December 31, 2013, approximately 0.3 million performance deferred shares with a grant date weighted-average fair value of $38.06 per share were vested, but not issued. These shares are scheduled to be issued in February 2014.
Restricted Stock
Under the 2012 Plan, the Company may grant shares (including options, stock appreciation rights, stock units and restricted stock) to non-employee directors over the 10-year duration of the program, subject to the plan's aggregate limit as well as annual individual limits. In 2013, 35,280 shares of restricted stock with a weighted-average fair value of $34.46 per share were issued under this plan. The restricted stock issued under this plan cannot be sold, assigned, pledged or otherwise transferred by the non-employee director, until the director is no longer a member of the Board.
