14.

Long-Term Compensation

In May 2012, the stockholders of the REIT approved the 2012 Long-Term Incentive Plan (the “2012 LTIP”), which replaced all prior active long term incentive plans (“Prior Plans”). After approval of the 2012 LTIP, no further awards could be made under the Prior Plans but outstanding awards previously granted under Prior Plans will remain outstanding in accordance with their terms. The number of shares of common stock that may be issued under the 2012 LTIP is equal to 12.0 million plus the aggregate number of shares available for issuance under the Prior Plans at the time the 2012 LTIP was approved, resulting in a total of 27.2 million shares that have been reserved for issuance under the 2012 LTIP. As of December 31, 2012, there were 25.9 million shares of common stock available for future issuance at December 31, 2012 of which 9.5 million are subject to outstanding awards.

Officers, directors and other employees, consultants, and independent contractors of the REIT or its subsidiaries are eligible to become participants in the 2012 LTIP. Awards made under the 2012 LTIP can be in the form of stock options (non-qualified options and incentive stock options), stock appreciation rights (“SAR”), full value awards (restricted stock units and performance based shares) and cash incentive awards. No participant can be granted more than 1.5 million shares in any one calendar year. Awards can be made under the 2012 LTIP until it is terminated by the Board or until the ten-year anniversary of the effective date of the plan.

In 2011, in connection with the Merger, each outstanding award of ProLogis was converted into 0.4464 of a newly issued award of the REIT. Additionally, the exercise prices of stock options and the grant date fair values of full value awards have been adjusted to reflect the conversion of the underlying award. Values of stock options, restricted stock and restricted stock units of AMB were adjusted to their current fair value pursuant to the Merger. The fair value adjustment related to vested awards was recognized as an adjustment to paid-in capital and the portion of the adjustment related to unvested awards is being amortized to expense over their remaining service periods.

Performance Plans

In 2012, we granted performance-based cash incentive awards under two performance compensation plans approved by the compensation committee of the Board. Under the approved performance plans, referred to as the Outperformance Plan and the Private Capital Plan, certain officers and employees may earn incentive compensation in the form of cash incentive awards or stock awards. The plans are designed such that awards will be paid only as a result of extraordinary performance by the Company.

Outperformance Plan (“OPP”)

For plan year 2012, cash incentive awards were granted in February 2012 with a three-year performance period that began on January 1, 2012 and will end on December 31, 2014. These awards will only be earned to the extent our total shareholder return (“TSR”) for the performance period exceeds the TSR for the MSCI US REIT Index for the same period plus 100 basis points. If this outperformance hurdle is met, the compensation pool will be equal to 3% of the excess value created, subject to a maximum of the greater of $75 million or 0.5% of the our equity market capitalization at the start of the performance period. For 2012, each participant was allocated a percentage of the total compensation pool. Awards earned, if any, for the performance period beginning in 2012 will be paid in cash. Awards earned at the end of the performance period cannot be paid to participants unless our absolute TSR, as defined in the plan, is positive for the performance period. If the absolute TSR is not positive, payment will be delayed until such time as our absolute TSR becomes positive. If after seven years our absolute TSR has not become positive, the awards will be forfeited.

As the initial three-year performance period is payable in cash, the awards are liability-classified. The grant-date fair value of the award is measured at the beginning of the performance period and is amortized over the performance period. On a quarterly basis from the date of grant through the end of the performance period, the fair value of the award is re-measured and the expense is adjusted. We measure the liability at fair value each reporting period using the Monte Carlo simulation model. We recognized $9.0 million of compensation expense related to plan year 2012 based on the fair value of the liability of $27.1 million as of December 31, 2012.

Private Capital Plan (“PCP”)

Under the PCP, we established a compensation pool equal to 40% of the aggregate incentive fees earned by Prologis under agreements with our co-investment ventures. Each participant was allocated a percentage of the total compensation pool in February 2012. For plan year 2012, any awards earned under the PCP would be payable in cash. We evaluate the likelihood that we will earn incentive fees from our co-investment ventures on a quarterly basis. We record an accrual when it becomes probable and estimateable that we will earn these fees. At December 31, 2012, we determined that it was not probable that we would earn incentive fees from our co-investment ventures and therefore did not recognize any revenue or compensation costs associated with the PCP in 2012.

Stock Options

We have granted various stock options to our employees and outside directors, subject to certain conditions. Each stock option is exercisable into one share of common stock. Stock options granted to employees generally have graded vesting over a three or four year period and have an exercise price equal to the market price on the date of the grant. Stock options granted to outside directors generally vest immediately or within one year of the grant. The maximum contractual term of the stock option is ten years. No stock options were granted in 2012, 2011 and 2010. The outstanding options are primarily AMB stock options that we fair valued as of the Merger date.

The activity for the year ended December 31, 2012, with respect to our stock options is presented below:

Options Outstanding

Options Exercisable

Number of Options

Weighted Average
Exercise

Price

Number of
Options

Weighted
Average Exercise
Price

Weighted
Average Life
(in years)

Balance at January 1, 2012

9,879,960

34.93

Exercised

(2,060,994)

24.12

Forfeited/Expired

(305,749)

56.46

Balance at December 31, 2012

7,513,217

37.02

6,957,148

37.76

4.7

Total remaining compensation cost related to unvested options as of December 31, 2012, is $2.2 million, prior to adjustments for capitalized amounts due to our development and leasing activities. The remaining expense will be recognized through 2015, which equates to a weighted average period of 0.6 years. The aggregate intrinsic value of exercised options was $21.3 million.

As discussed in Note 3, we estimated the fair value of the AMB stock options using the Black-Scholes pricing model as of the Merger date. The fair value of the vested awards were included as part of the total Merger consideration. We used the following assumptions:


Expected volatility			25-55%
Weighted average volatility			44.6%
Expected dividends			3.73%
Expected term (in years)			1-6
Risk-free rate			0.19-1.92%

We use historical data to estimate dividend yield, expected term and employee departure behavior used in the Black-Scholes pricing model. The risk-free interest for periods within the expected term of the share option is based on the United States treasury yield curve in effect at the time of the Merger. To calculate the expected volatility of Prologis we weighted the historical volatility of ProLogis and AMB, as well as peer group data.

Full Value Awards

We have granted full value awards, generally in the form of restricted stock units (“RSUs”) and performance-based awards (“PSAs”), to certain employees, generally on an annual basis. We also grant deferred stock units (“DSUs”) to our outside directors. Full value awards each represent one share of common stock and generally vest over a continued service period. Full value awards earn cash dividends or dividend equivalent units (“DEUs”) (at our common stock dividend rate) over the vesting period that are charged to retained earnings.

The fair value of the full value awards is generally based on the market price of our common stock on the date the award is granted and is charged to compensation expense over the vesting or service period. For RSUs and PSAs the vesting period is generally three years. DSUs issued in 2011 and 2010 were fully vested at grant. DSUs granted in 2012 vest on the earlier of the date of the first annual stockholders meeting after the grant date or the first anniversary of the grant date.

The weighted average fair value of the full value awards granted during the years ended December 31, 2012, 2011 and 2010 was $32.60, $34.13 and $23.75, respectively.

We granted PSAs in 2011 and 2010, but none were granted in 2012. Employees were granted a targeted number of PSAs, which were then earned, based on specified performance criteria over a one-year performance period. PSAs earned are then subject to an additional two-year vesting period. During the performance period, the unearned PSAs accrue DEUs, which will be earned and vested according to the underlying award.

In 2011, we granted 280,525 PSAs and based on the attainment of specified individual and company performance goals, a total of 326,475 were earned. In 2010, we granted 242,406 PSAs and based on the attainment of specified individual and company performance goals, a total of 225,943 were earned.

Summary of Activity of our RSUs and PSAs

The activity for the year ended December 31, 2012 with respect to our RSU and PSA awards was as follows:


	Number of Shares		Weighted Average Grant-Date Fair Value		Number of Shares Vested
Balance at January 1, 2012		1,684,713	$	30.43		48,735

Granted		1,609,527		32.60
Vested		(1,238,036)		30.26
Forfeited		(56,856)		31.60

Balance at December 31, 2012		1,999,348	$	32.28		47,680

Restricted Stock

Restricted stock awards are full value awards that were granted under the AMB’s Prior Plans until the 2012 LTIP was approved. Restricted stock awards are valued based on the market price of common stock on the grant date. The vesting period for restricted stock is generally three to four years. We recognize the value of the restricted stock earned as compensation expense over the applicable service period, which is generally the vesting period. Restricted stock has voting rights during the vesting period.

The activity for the year ended December 31, 2012, with respect to our unvested restricted stock was as follows:


	Number of Shares		Weighted Average Grant-Date Fair Value
Balance at January 1, 2012		1,192,982	$	34.07
Granted		5,000		29.24
Vested		(507,840)		34.07
Forfeited		(2,865)		34.07

Balance at December 31, 2012		687,277	$	34.03

Compensation Expense

During the years ended December 31, 2012, 2011 and 2010, we recognized $49.6 million, $31.5 million and $25.1 million, respectively, of compensation expense including awards granted to our outside directors and net of forfeited awards. These amounts include expense reported as General and Administrative Expenses and Merger, Acquisition and Other Integrated Expenses and are net of $8.8 million, $8.7 million and $5.3 million, respectively, that was capitalized due to our development and leasing activities.

Total remaining compensation cost related to unvested full value awards as of December 31, 2012 was $51.4 million, prior to adjustments for capitalized amounts due to our development and leasing activities. The remaining expense will be recognized through 2015, which equates to a weighted average period of 1.4 years. The fair value of the full value awards which vested in 2012 was $60.3 million.

Other Plans

In 2011, we had two 401(k) Savings Plan and Trusts (“401(k) Plans”), one from ProLogis and one from AMB. Effective January 1, 2012, the AMB 401(k) Plan merged into the ProLogis 401(k) Plan, with the Prologis Plan (the “Plan”) continuing on as the surviving plan. The new Plan provides for matching employer contributions of 50 cents for every dollar contributed by an employee, up to 6% of the employee’s annual compensation (within the statutory compensation limit). In the Plan, vesting in the matching employer contributions is based on the employee’s years of service, with 100% vesting at the completion of one year of service.

In 2011, the ProLogis 401(k) plan provided for matching employer contributions of 50 cents for every dollar contributed by an employee, up to 6% of the employee’s annual compensation (within the statutory compensation limit). Vesting in the matching employer contributions was based on the employee’s years of service, with 20% vesting each year of service, over a five-year period. In the AMB 401(k) plan, matching employer contributions vested in full after one year of service by the employee.

In 2011, we had two nonqualified savings plans to provide benefits for certain employees, one from ProLogis and one from AMB. The purpose of these plans was to allow highly compensated employees the opportunity to defer the receipt and income taxation of a certain portion of their compensation in excess of the amount permitted under the 401(k) Plans. In the ProLogis deferred compensation plan, we matched the lesser of (a) 50% of the sum of deferrals under both the 401(k) Plan and this plan, and (b) 3% of total compensation up to certain levels. These matching contributions vested in the same manner as the ProLogis 401(k) Plan. In the AMB deferred compensation plan, employer matching was not offered. Effective as of January 1, 2012, a new deferred compensation plan for Prologis was established. Employer matching is not offered in the new plan.

On a combined basis for all plans, our contributions under the matching provisions were $1.8 million, $1.6 million and $1.3 million for 2012, 2011 and 2010, respectively.