Share-based Compensation

6 Months Ended

Jun. 30, 2011

Share-based Compensation

Share-based Compensation

(8)   Share-based Compensation

        We maintain programs that allow our Board of Directors (through its Compensation Committee) and our Chief Executive Officer to grant incentives to certain employees and our outside directors in any one or a combination of several forms, including incentive and non-qualified stock options; stock appreciation rights; restricted stock; restricted stock units and performance shares. As of June 30, 2011, we had reserved approximately 59 million shares of common stock that may be issued in connection with awards under our current incentive programs. We also offer an Employee Stock Purchase Plan whereby employees can purchase our common stock at a 15% discount based on the lower of the beginning or ending stock price during recurring six-month offering periods.

        During the second quarter of 2011, we granted 292,191 shares of restricted stock to certain executives and outside directors. The vesting period for these awards generally is three years. Vesting of certain awards is subject to the attainment of specified company performance measures.

        Upon the April 1, 2011, closing of our acquisition of Qwest, we assumed certain obligations under Qwest's pre-existing share-based compensation arrangements. Specifically:

• •

  all nonvested shares of Qwest restricted stock outstanding immediately prior to the acquisition converted into an aggregate of 780,455 nonvested shares of CenturyLink restricted stock,

  •

  all Qwest non-qualified stock options outstanding immediately prior to the acquisition converted into an aggregate of 7,198,331 CenturyLink non-qualified stock options (including 5,562,198 fully vested options), and

  •

  all Qwest market-based awards outstanding immediately prior to the acquisition vested in full and were paid out by us through the issuance of an aggregate of 563,269 shares of CenturyLink common stock in April 2011.

        The aggregate fair value of the assumed awards was $114 million, of which $85 million was attributable to services performed prior to the acquisition date and was included in the cost of the acquisition. The fair value of CenturyLink shares was determined based on the $41.55 closing price of our common stock on March 31, 2011. For non-qualified stock options, fair value was determined using the Black-Scholes option-pricing model, reflecting a risk-free interest rate ranging from 0% to 2.1% (depending on the expected life of the option), an expected dividend yield of 6.98%, an expected term ranging from 0.1 to 4.8 years (depending on the option's remaining contractual term and exercise price and on historical experience), and expected volatility ranging from 11% to 35% (based on the expected term and historical experience). The remaining $29 million of the aggregate fair value of the assumed awards was attributable to post-acquisition services and is being recognized as compensation expense, net of estimated forfeitures, over the remaining vesting periods for the awards, which range from 0.1 years to 3.0 years.

        The following table summarizes activity involving stock option awards for the six months ended June 30, 2011:

		Number of Options (in thousands)			Weighted- Average Exercise Price
Outstanding at December 31, 2010			5,040		$	39.06
	Assumed in Qwest acquisition		7,198		$	34.50
	Exercised		(1,651	)	$	30.29
	Forfeited/Expired		(901	)	$	66.41
Outstanding at June 30, 2011			9,686		$	34.62
Exercisable at June 30, 2011			8,551		$	35.52

        At June 30, 2011, the aggregate intrinsic value of options outstanding and exercisable was $83 million and $69 million, respectively. The weighted average remaining contractual term for such options was 5.0 years and 4.5 years, respectively.

        The following table summarizes activity involving restricted stock and restricted stock unit awards for the six months ended June 30, 2011:

		Number of Shares (in thousands)			Weighted- Average Grant Date Fair Value
Nonvested at December 31, 2010			2,892		$	33.69
	Granted		292		$	41.71
	Assumed in Qwest acquisition		780		$	41.55
	Vested		(1,673	)	$	34.31
	Forfeited		(17	)	$	35.23
Nonvested at June 30, 2011			2,274		$	36.96

        Total compensation expense for all share-based payment arrangements for the first six months of 2011 and 2010 was $32 million and $18 million, respectively. Compensation expense for the six months ended June 30, 2011 included $11 million for accelerated recognition of certain awards resulting from the consummation of the Qwest acquisition. As of June 30, 2011, there was $73 million of total unrecognized compensation expense related to our share-based payment arrangements, which we expect to recognize over a weighted-average period of 2.0 years.