Share-Based Payment and Other Benefits

In May 2006, the Company implemented the MasterCard Incorporated 2006 Long-Term Incentive Plan, which was amended and restated as of October 13, 2008 (the “LTIP”). The LTIP is a shareholder-approved omnibus plan that permits the grant of various types of equity awards to employees.

The Company has granted non-qualified stock options (“Options”), restricted stock units (“RSUs”) and performance stock units (“PSUs”) under the LTIP. The options, which expire ten years from the date of grant, generally vest ratably over four years from the date of grant. The RSUs and PSUs vest after three to four years. The Company uses the straight-line method of attribution for expensing equity awards. Compensation expense is recorded net of estimated forfeitures. Estimates are adjusted as appropriate.

Upon termination of employment, a participant's unvested awards are forfeited. However, when a participant terminates employment due to disability or retirement more than six months after receiving the award, the participant retains all of their awards without providing additional service to the Company. Retirement eligibility is dependent upon age and years of service. Compensation expense is recognized over the shorter of the vesting periods stated in the LTIP or the date the individual becomes eligible to retire but not less than six months.

There are approximately 116 million shares of Class A common stock authorized for equity awards under the LTIP. Although the LTIP permits the issuance of shares of Class B common stock, no such shares have been authorized for issuance. Shares issued as a result of option exercises and the conversions of RSUs and PSUs were funded primarily with the issuance of new shares of Class A common stock.

Stock Options

The fair value of each option is estimated on the date of grant using a Black-Scholes option pricing model. The following table presents the weighted-average assumptions used in the valuation and the resulting weighted-average fair value per option granted for the years ended December 31:



	2013			2012			2011
Risk-free rate of return	0.8		%	1.2		%	2.6		%
Expected term (in years)	5.00			6.25			6.25
Expected volatility	27.1		%	35.2		%	33.7		%
Expected dividend yield	0.5		%	0.3		%	0.2		%
Weighted-average fair value per option granted	$	12.33		$	14.85		$	8.91

The risk-free rate of return was based on the U.S. Treasury yield curve in effect on the date of grant. In 2013, the expected term and the expected volatility were based on historical MasterCard information. In 2012 and 2011, the Company utilized the simplified method for calculating the expected term of the option based on the vesting terms and the contractual life of the option. The expected volatility in 2012 and 2011 was based on the average of the implied volatility of MasterCard and a blend of the historical volatility of MasterCard and the historical volatility of a group of comparable companies. The expected dividend yields were based on the Company's expected annual dividend rate on the date of grant.

The following table summarizes the Company's option activity for the year ended December 31, 2013:



	Options		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
	(in thousands)				(in years)	(in millions)
Outstanding at January 1, 2013	6,415		$	25
Granted	1,832		$	52
Exercised	(1,242	)	$	21
Forfeited/expired	(45	)	$	46
Outstanding at December 31, 2013	6,960		$	33	7.1	$	355
Exercisable at December 31, 2013	2,965		$	21	5.7	$	185
Options vested and expected to vest at December 31, 2013	6,862		$	32	7.1	$	351

As of December 31, 2013, there was $24 million of total unrecognized compensation cost related to non-vested options. The cost is expected to be recognized over a weighted-average period of 2.6 years.

Restricted Stock Units

The following table summarizes the Company's RSU activity for the year ended December 31, 2013:



	Units		Weighted-Average Grant-Date Fair Value		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
	(in thousands)				(in years)	(in millions)
Outstanding at January 1, 2013	5,456		$	30
Granted	1,530		$	52
Converted	(1,496	)	$	23
Forfeited/expired	(160	)	$	36
Outstanding at December 31, 2013	5,330		$	38	1.1	$	445
RSUs vested and expected to vest at December 31, 2013	5,165		$	38	1.1	$	432

The fair value of each RSU is the closing stock price on the New York Stock Exchange of the Company's Class A common stock on the date of grant, adjusted for the exclusion of dividend equivalents. Upon vesting, a portion of the RSU award may be withheld to satisfy the minimum statutory withholding taxes. The remaining RSUs will be settled in shares of the Company's Class A common stock after the vesting period. As of December 31, 2013, there was $83 million of total unrecognized compensation cost related to non-vested RSUs. The cost is expected to be recognized over a weighted-average period of 1.8 years.

Performance Stock Units

The following table summarizes the Company's PSU activity for the year ended December 31, 2013:



	Units		Weighted-Average Issue-Date Fair Value^1,		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
	(in thousands)				(in years)	(in millions)
Outstanding at January 1, 2013	1,135		$	27
Issued	180		$	56
Performance	49		$	32
Converted	(577	)	$	52
Forfeited/expired	—		$	—
Outstanding at December 31, 2013	787		$	37	0.9	$	66
PSUs vested and expected to vest at December 31, 2013	771		$	37	0.9	$	64

¹ For PSUs issued in 2012 and 2011, the grant date is not established until the performance terms are fixed and the ultimate number of shares to be issued is determined. PSUs issued and converted during 2013 show a weighted-average grant-date fair value in the above figure.

In 2013, PSUs containing performance and market conditions were issued. Performance measures used to determine the actual number of shares that vest after three years include net revenue growth, EPS growth, and relative total shareholder return (“TSR”). Relative TSR is considered a market condition, while net revenue and EPS growth are considered performance conditions. The Monte Carlo simulation valuation model is used to determine the grant-date fair value.

The PSUs issued in 2012 and 2011 contain performance conditions based on the Company's performance against an annually predetermined return on equity goal, with an average return on equity per year over the three-year period commencing on January 1 of the grant year. The initial fair value of each PSU is the closing price on the New York Stock Exchange of the Company's Class A common stock on the date of issuance. Given that the performance conditions are subjective and not fixed on the date of issuance, these PSUs will be remeasured at the end of each reporting period, at fair value, until the time the performance conditions are fixed and the ultimate number of shares to be issued is determined. The grant-date fair value for each PSU issued in 2011 is $82.

Compensation expenses for PSUs are recognized over the requisite service period if it is probable that the performance target will be achieved and subsequently adjusted if the probability assessment changes. As of December 31, 2013, there was $11 million of total unrecognized compensation cost related to non-vested PSUs. The cost is expected to be recognized over a weighted-average period of 1.5 years.

Additional Information

On July 18, 2006, the Company's stockholders approved the MasterCard Incorporated 2006 Non-Employee Director Equity Compensation Plan, which was amended and restated as of June 5, 2012 (the “Director Plan”). The Director Plan provides for awards of Deferred Stock Units (“DSUs”) to each director of the Company who is not a current employee of the Company.

The following table includes additional share-based payment information for each of the years ended December 31:



	2013		2012		2011
	(in millions, except weighted-average fair value)
Share-based compensation expense: Options, RSUs and PSUs	$	121	$	88	$	79
Income tax benefit recognized for equity awards	42		30		28
Income tax benefit related to options exercised	16		27		7
Additional paid-in-capital balance attributed to equity awards	233		187		151

Options:
Total intrinsic value of Options exercised	48		77		22
RSUs:
Weighted-average grant-date fair value of awards granted	52		42		26
Total intrinsic value of RSUs converted into shares of Class A common stock	78		91		4
PSUs:
Weighted-average issue-date fair value of awards granted	56		39		22
Total intrinsic value of PSUs converted into shares of Class A common stock	29		27		93
DSUs:
General and administrative expense	2		1		1
Total intrinsic value of DSUs converted into shares of Class A common stock	2		2		2