Stock-Based Compensation

6 Months Ended

Jun. 30, 2011

Stock-Based Compensation

Stock-Based Compensation

Note 10 – Stock-Based Compensation

Stock compensation expense totaled $3 million and $5 million for the second quarters of 2011 and 2010, respectively, and $7 million and $9 million for the six months ended June 30, 2011 and 2010, respectively. This expense relates primarily to the company's performance-based long-term incentive program ("LTIP") and time-vested restricted stock unit awards. LTIP awards cover three-year performance cycles and are measured partly on performance criteria (cumulative earnings per share or cumulative free cash flow generation) and partly on market criteria (total shareholder return relative to a peer group of companies). In September 2010, the LTIP was modified to allow a portion of the awards to be paid in cash in an amount substantially equal to the estimated tax liability triggered by such awards. LTIP awards outstanding at September 2010 were modified, which changed them to liability-classified awards from equity-classified awards. Both liability-classified and equity-classified awards recognize the fair value of the award ratably over the performance period; however, equity-classified awards only measure the fair value at the grant date, whereas liability-classified awards measure the fair value at each reporting date, with changes in the fair value of the award cumulatively adjusted through expense each period. For modified awards, expense is recognized at the greater of the equity-method or the liability-method. Fair value of LTIP awards measured on performance criteria are based on the company's expectations of performance achievement and the closing stock price on the measurement date, a Level 3 fair value measurement. Fair value of LTIP awards based on market criteria are measured using a Monte-Carlo simulation using publicly available data, a Level 2 fair value measurement. For the quarter and six months ended June 30, 2011, $2 million and $1 million, respectively, was reclassified from liabilities to "Capital surplus" for the change in the liability value of the modified awards, and "Capital surplus" increased a total of $5 million and $8 million during the quarter and for the six months ended June 30, 2011, respectively, as a result of stock compensation.