Stock-Based Compensation

12 Months Ended

Oct. 31, 2012

Stock-Based Compensation

Stock-Based Compensation

Note 2: Stock-Based Compensation

        HP's stock-based compensation plans include incentive compensation plans and an employee stock purchase plan ("ESPP").

Stock-Based Compensation Expense and Related Income Tax Benefits

        Total stock-based compensation expense before income taxes for fiscal 2012, 2011 and 2010 was $635 million, $685 million and $668 million, respectively. The resulting income tax benefit for fiscal 2012, 2011 and 2010 was $197 million, $219 million and $216 million, respectively.

        Cash received from option exercises and purchases under the ESPP was $0.7 billion in fiscal 2012, $0.9 billion in fiscal 2011 and $2.6 billion for fiscal 2010. The benefit realized for the tax deduction from option exercises of the share-based payment awards in fiscal 2012, 2011 and 2010 was $57 million, $220 million and $414 million, respectively.

Incentive Compensation Plans

        HP's incentive compensation plans include principal equity plans adopted in 2004 (as amended in 2010), 2000 and 1995 ("principal equity plans"), as well as various equity plans assumed through acquisitions under which stock-based awards are outstanding. Stock-based awards granted from the principal equity plans include restricted stock awards, stock options and performance-based restricted units ("PRUs"). Employees meeting certain employment qualifications are eligible to receive stock-based awards.

        Under the principal equity plans, HP granted certain employees restricted stock awards, cash-settled awards, or both. Restricted stock awards are non-vested stock awards that may include grants of restricted stock or grants of restricted stock units. Restricted stock awards and cash-settled awards are generally subject to forfeiture if employment terminates prior to the release of the restrictions. Such awards generally vest one to three years from the date of grant. During that period, ownership of the shares cannot be transferred. Restricted stock has the same cash dividend and voting rights as other common stock and is considered to be currently issued and outstanding. Restricted stock units have dividend equivalent rights equal to the cash dividend paid on restricted stock. Restricted stock units do not have the voting rights of common stock, and the shares underlying the restricted stock units are not considered issued and outstanding. However, shares underlying restricted stock units are included in the calculation of diluted earnings per share ("EPS"). HP expenses the fair market value of restricted stock awards, as determined on the date of grant, ratably over the period during which the restrictions lapse.

        Stock options granted under the principal equity plans are generally non-qualified stock options, but the principal equity plans permit some options granted to qualify as "incentive stock options" under the U.S. Internal Revenue Code. Stock options generally vest over three to four years from the date of grant. The exercise price of a stock option is equal to the fair market value of HP's common stock on the option grant date (as determined by the reported sale prices of HP's common stock when the market closes on that date). In fiscal 2012 and 2011, HP granted performance-contingent stock options that vest only upon the satisfaction of both service and market conditions prior to the expiration of the awards.

        HP's PRU program provides for the issuance of PRUs representing hypothetical shares of HP common stock. Each PRU award reflects a target number of shares ("Target Shares") that may be issued to the award recipient before adjusting for performance and market conditions. The actual number of shares the recipient receives is determined at the end of a three-year performance period based on results achieved versus company performance goals and may range from 0% to 200% of the Target Shares granted. The performance goals for PRUs granted in fiscal year 2012 are based on HP's annual cash flow from operations as a percentage of revenue and on HP's annual revenue growth. The performance goals for PRUs granted in previous years are based on HP's annual cash flow from operations as a percentage of revenue and on a market condition based on total shareholder return ("TSR") relative to the S&P 500 over the three-year performance period.

        Recipients of PRU awards generally must remain employed by HP on a continuous basis through the end of the applicable three-year performance period in order to receive any portion of the shares subject to that award. Target Shares subject to PRU awards do not have dividend equivalent rights and do not have the voting rights of common stock until earned and issued, following the end of the applicable performance period. The expense for these awards, net of estimated forfeitures, is recorded over the requisite service period based on the number of Target Shares that are expected to be earned and the achievement of the cash flow and revenue growth goals during the performance period.

• Restricted Stock Awards

        Non-vested restricted stock awards as of October 31, 2012 and 2011 and changes during fiscal 2012 and 2011 were as follows:

	2012					2011
	Shares			Weighted- Average Grant Date Fair Value Per Share		Shares			Weighted- Average Grant Date Fair Value Per Share
	In thousands					In thousands
Outstanding at beginning of year		16,813		$	39		5,848		$	45
Granted		20,316		$	27		17,569		$	38
Vested		(8,521	)	$	38		(5,660	)	$	41
Forfeited		(3,076	)	$	34		(944	)	$	43
Outstanding at end of year		25,532		$	31		16,813		$	39

        The details of restricted stock awards granted were as follows:

	2012				2011
	Shares		Weighted- Average Grant Date Fair Value Per Share		Shares		Weighted- Average Grant Date Fair Value Per Share
	In thousands				In thousands
Restricted stock		—	$	—		335	$	42
Restricted stock units		20,316	$	27		17,234	$	38
		20,316	$	27		17,569	$	38

        The details of non-vested restricted stock awards at fiscal year end were as follows:

	2012		2011
	Shares in thousands
Non-vested at October 31:
Restricted stock		349		984
Restricted stock units		25,183		15,829
		25,532		16,813

        At October 31, 2012, there was $508 million of unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards, which HP expected to recognize over the remaining weighted-average vesting period of 1.3 years. At October 31, 2011, there was $526 million of unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards, which HP expected to recognize over the remaining weighted-average vesting period of 1.4 years.

• Stock Options

        HP utilized the Black-Scholes option pricing model to value the service-based stock options granted under its principal equity plans. HP examined its historical pattern of option exercises in an effort to determine if there were any discernable activity patterns based on certain employee populations. From this analysis, HP identified three employee populations for which to apply the Black-Scholes model. The table below presents the weighted-average expected life in months of the combined three identified employee populations. The expected life computation is based on historical exercise patterns and post-vesting termination behavior within each of the three populations identified. The risk-free interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. HP estimates the fair value of the performance-contingent stock options using a combination of the Monte Carlo simulation model and lattice model, as these awards contain market conditions.

        HP estimated the weighted-average fair value of stock options using the following weighted-average assumptions:

	2012			2011			2010
Weighted-average fair value of grants per share(1)	$	9.06		$	7.85		$	13.33
Implied volatility		42	%		41	%		30	%
Risk-free interest rate		1.17	%		1.20	%		2.06	%
Dividend yield		1.83	%		1.97	%		0.68	%
Expected life in months		67			63			61

⁽¹⁾

The fair value calculation was based on stock options granted during the period.

        Option activity as of October 31 during each fiscal year was as follows:

	2012									2011
	Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value		Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
	In thousands					In years		In millions		In thousands					In years		In millions
Outstanding at beginning of year		120,243		$	28						142,916		$	28
Granted and assumed through acquisitions		7,529		$	27						18,804		$	21
Exercised		(29,683	)	$	20						(37,121	)	$	23
Forfeited/cancelled/expired		(10,793	)	$	35						(4,356	)	$	39
Outstanding at end of year		87,296		$	29		3.0	$	15		120,243		$	28		3.0	$	460
Vested and expected to vest at end of year		85,935		$	29		2.9	$	15		117,066		$	28		2.9	$	442
Exercisable at end of year		68,437		$	31		1.9	$	12		97,967		$	29		2.0	$	332

        In connection with fiscal 2011 acquisitions, HP assumed options to purchase approximately 6 million shares with a weighted-average exercise price of $14 per share.

        The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have received had all option holders exercised their options on October 31, 2012 and 2011. The aggregate intrinsic value is the difference between HP's closing stock price on the last trading day of fiscal 2012 and fiscal 2011 and the exercise price, multiplied by the number of in-the-money options. Total intrinsic value of options exercised in fiscal 2012, 2011 and 2010 was $0.2 billion, $0.7 billion and $1.3 billion, respectively. Total grant date fair value of options vested and expensed in fiscal 2012, 2011 and 2010 was $104 million, $95 million and $93 million, respectively, net of taxes.

        Information about options outstanding at October 31, 2012 was as follows:

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Shares Outstanding		Weighted- Average Remaining Contractual Life		Weighted- Average Exercise Price Per Share		Shares Exercisable		Weighted- Average Exercise Price Per Share
	In thousands		In years				In thousands
$0-$9.99		1,097		5.3	$	6		994	$	6
$10-$19.99		8,441		5.3	$	14		4,622	$	14
$20-$29.99		36,396		3.6	$	24		22,369	$	23
$30-$39.99		21,962		1.4	$	32		21,645	$	32
$40-$49.99		18,313		2.3	$	43		17,945	$	43
$50-$59.99		810		4.2	$	52		585	$	52
$60 and over		277		1.5	$	75		277	$	75
		87,296		3.0	$	29		68,437	$	31

        At October 31, 2012, there was $157 million of unrecognized pre-tax stock-based compensation expense related to stock options, which HP expected to recognize over a weighted-average vesting period of 1.8 years. At October 31, 2011, there was $264 million of unrecognized pre-tax stock-based compensation expense related to stock options, which HP expected to recognize over a weighted-average vesting period of 2.3 years.

• Performance-Based Restricted Units

        For PRU awards granted in fiscal year 2012, HP estimates the fair value of the Target Shares using HP's closing stock price on the measurement date. The weighted-average fair value per share for the first year of the three-year performance period applicable to PRUs granted in fiscal year 2012 was $27.00. The estimated fair value of the Target Shares for the second and third years for PRUs granted in fiscal year 2012 will be determined on the measurement date applicable to those PRUs, which will occur during the period that the annual performance goals are approved for those PRUs, and the expense will be amortized over the remainder of the applicable three-year performance period.

        For PRU awards granted prior to fiscal year 2012, HP estimates the fair value of the Target Shares subject to those awards using the Monte Carlo simulation model, as the TSR modifier represents a market condition. The following weighted-average assumptions, in addition to projections of market conditions, were used to determine the weighted-average fair values of these PRU awards for fiscal years ended October 31:

	2012			2011			2010
Weighted-average fair value of grants per share	$	3.35	(1)	$	27.59	(2)	$	57.13	(3)
Expected volatility(4)		41	%		30	%		38	%
Risk-free interest rate		0.14	%		0.38	%		0.73	%
Dividend yield		1.78	%		0.75	%		0.64	%
Expected life in months		15			19			22

⁽¹⁾

Reflects the weighted-average fair value for the third year of the three-year performance period applicable to PRUs granted in fiscal 2010 and for the second year of the three-year performance period applicable to PRUs granted in fiscal 2011. The estimated fair value of the Target Shares for the third year for PRUs granted in fiscal 2011 will be determined on the measurement date applicable to those PRUs, which will occur during the period that the annual performance goals are approved for those PRUs, and the expense will be amortized over the remainder of the applicable three-year performance period.

⁽²⁾

Reflects the weighted-average fair value for the third year of the three-year performance period applicable to PRUs granted in fiscal 2009, for the second year of the three-year performance period applicable to PRUs granted in fiscal 2010 and for the first year of the three-year performance period applicable to PRUs granted in fiscal 2011.

⁽³⁾

Reflects the weighted-average fair value for the third year of the three-year performance period applicable to PRUs granted in fiscal 2008, for the second year of the three-year performance period applicable to PRUs granted in fiscal 2009 and for the first year of the three-year performance period applicable to PRUs granted in fiscal 2010.

⁽⁴⁾

HP uses historic volatility for PRU awards, as implied volatility cannot be used when simulating multivariate prices for companies in the S&P 500.

        Non-vested PRUs as of October 31, 2012 and 2011 and changes during fiscal 2012 and 2011 were as follows:

	2012			2011
	Shares in thousands
Outstanding Target Shares at beginning of year		11,382			18,508
Granted		1,251			5,950
Vested		—			—
Change in units due to performance and market conditions achievement for PRUs vested in the year(1)		(5,617	)		(10,862	)
Forfeited		(1,328	)		(2,214	)
Outstanding Target Shares at end of year		5,688			11,382
Outstanding Target Shares of PRUs assigned a fair value at end of year		3,492	(2)		5,867	(3)

⁽¹⁾

The minimum level of TSR was not met for PRUs granted in fiscal 2010 and 2009, which resulted in the cancellation of approximately 5.6 million and 10.9 million Target Shares on October 31, 2012 and October 31, 2011, respectively.

⁽²⁾

Excludes Target Shares for the third year for PRUs granted in fiscal 2011 and for the second and third years for PRUs granted in fiscal 2012, as the measurement date has not yet been established. The measurement date and related fair value for the excluded PRUs will be established when the annual performance goals are approved.

⁽³⁾

Excludes Target Shares for the third year for PRUs granted in fiscal 2010 and for the second and third years for PRUs granted in fiscal 2011, as the measurement date has not yet been established.

        At October 31, 2012, there was $17 million of unrecognized pre-tax stock-based compensation expense related to PRUs with an assigned fair value, which HP expected to recognize over the remaining weighted-average vesting period of 1.1 years. At October 31, 2011, there was $82 million of unrecognized pre-tax stock-based compensation expense related to PRUs with an assigned fair value, which HP expected to recognize over the remaining weighted-average vesting period of 1.4 years.

Employee Stock Purchase Plan

        HP sponsors the Hewlett-Packard Company 2011 Employee Stock Purchase Plan (the "2011 ESPP"), pursuant to which eligible employees may contribute up to 10% of base compensation, subject to certain income limits, to purchase shares of HP's common stock. Purchases made prior to fiscal year 2011 were made under the Hewlett-Packard Company 2000 Employee Stock Purchase Plan (the "2000 ESPP"), which expired in November 2010.

        For purchases made on or after October 31, 2011, employees purchased stock under the 2011 ESPP at a price equal to 95% of the fair market value on the purchase date. Because all the criteria of a non-compensatory plan were met, no stock-based compensation expense was recorded in connection with those purchases. From May 1, 2009 to October 31, 2010, no discount was offered for purchases made under the 2000 ESPP.

        The ESPP activity as of October 31 during each fiscal year was as follows:

	2012		2011		2010
	In millions, except weighted-average purchase price per share
Compensation expense, net of taxes	$	—	$	—	$	—
Shares purchased		6.21		1.75		1.62
Weighted-average purchase price per share	$	17	$	25	$	47

	2012		2011		2010
	In thousands
Employees eligible to participate		301		261		251
Employees who participated		21		18		18

Shares Reserved

        Shares available for future grant and shares reserved for future issuance under the ESPP and incentive compensation plans were as follows:

	2012		2011		2010
	Shares in thousands
Shares available for future grant at October 31		152,837		172,259		124,553	(1)
Shares reserved for future issuance under all stock-related benefit plans at October 31		270,498		319,602		296,973

⁽¹⁾

Includes 30 million shares that expired in November 2010.