Share-Based Compensation

6 Months Ended

Jun. 30, 2011

Share-Based Compensation

Share-Based Compensation

9.      Share-Based Compensation

Stock Options

We have various stock option plans (collectively referred to as the "PS Plans").  Under the PS Plans, the Company has granted non-qualified options to certain trustees, officers and key employees to purchase the Company's common shares at a price equal to the fair market value of the common shares at the date of grant.  Options granted after December 31, 2002 vest generally over a five-year period and expire between eight years and ten years after the date they became exercisable.  The PS Plans also provide for the grant of restricted share units (see below) to officers, key employees and service providers on terms determined by an authorized committee of our Board.

We recognize compensation expense for stock options based upon their estimated fair value on the date of grant amortized over the applicable vesting period (the "Fair Value Method"), net of estimates for future forfeitures.  We estimate the fair value of our stock options based upon the Black-Scholes option valuation model.

For the three and six months ended June 30, 2011, we recorded $796,000 and $1,499,000, respectively, in compensation expense related to stock options, as compared to $825,000 and $1,425,000 for the same periods in 2010.

During the six months ended June 30, 2011, 35,000 stock options were granted, 207,729 options were exercised, and 29,500 options were forfeited.  A total of 2,748,663 stock options were outstanding at June 30, 2011 (2,950,892 at December 31, 2010).

Outstanding stock options are included on a one-for-one basis in our diluted weighted average shares, less a reduction for the treasury stock method applied to a) the average cumulative measured but unrecognized compensation expense during the period and b) the strike price proceeds expected from the employee upon exercise.

Restricted Share Units

Outstanding restricted share units vest ratably over a five or eight-year period from the date of grant.  The employee receives additional compensation equal to the per-share dividends received by common shareholders with respect to restricted share units outstanding.  Such compensation is accounted for as dividends paid.  Any dividends paid on units which are subsequently forfeited are expensed.  Upon vesting, the employee receives common shares equal to the number of vested restricted share units in exchange for the units.

The total value of each restricted share unit grant is amortized over the service period, net of estimates for future forfeitures, as compensation expense.  Restricted share unit grants that are subject to service conditions (other than the passage of time) are amortized using the accelerated attribution method, with each vesting of a share grant amortized separately.  We have elected to use the straight-line attribution method with respect to restricted share grants that are not subject to service conditions (other than the passage of time).  The related employer portion of payroll taxes is expensed as incurred.

During the six months ended June 30, 2011, 88,725 restricted share units were granted, 37,754 restricted share units were forfeited and 72,844 restricted share units vested.  This vesting resulted in the issuance of 46,831 common shares.  In addition, cash compensation totaling $2,946,000 was paid to employees in lieu of 26,013 common shares based upon the market value of the shares at the date of vesting is used to settle the employees' tax liability generated by the vesting and is charged against paid in capital.

At June 30, 2011, approximately 462,522 restricted share units were outstanding (484,395 at December 31, 2010).  A total of $5,955,000 and $10,322,000 in restricted share unit expense was recorded for the three and six months ended June 30, 2011, respectively, as compared to $2,346,000 and $4,378,000 in restricted share unit expense was recorded for the same periods in 2010.  Restricted share unit expense includes amortization of the grant-date fair value of the units reflected as an increase to paid-in capital, and $50,000 and $372,000 in related payroll taxes we incurred in the three and six months ended June 30, 2011, respectively, as compared to $25,000 and $339,000 for the same periods in 2010.

During the six months ended June 30, 2011, the Company entered into a performance-based restricted share unit program with selected employees.  Under the program, the Company established a targeted restricted share unit award for each selected employee, which would be earned only if the Company achieved same-store revenue growth in 2011 of at least 2% over 2010.  Depending upon the extent to which same-store revenue met or exceeded the 2% minimum target, restricted share unit awards would range from 50% to 200% of the target restricted share unit award.  To achieve 100% of the targeted award level, 2011 same-store growth over 2010 of at least 3% was required, and to achieve 200% of the targeted award level, 2011 same-store growth of at least 4% was required.  Up to approximately 267,000 restricted share units would be granted assuming achievement of the 4% same-store revenue growth target.  If awarded, 20% of the restricted share units would vest on the date of the award and an additional 20% would vest over each of the next four anniversary dates of the award, assuming continued employment with Public Storage through the vesting dates.  Based upon the expected performance of the Company for the year ending December 31, 2011 relative to the performance target, we expect that 267,000 restricted share units will be granted during the three months ending March 31, 2012.  Included in restricted share unit expense is $3,397,000 and $5,666,000 related to this performance-based restricted share unit program during the three and six months ended June 30, 2011, respectively.

See also "net income per common share" in Note 2 for further discussion regarding the impact of restricted share units on our net income per common and income allocated to common shareholders.