Note 11: Stock-Based Compensation

Stock-based compensation expense of $144.9 million, $141.5 million, and $147.4 million was recognized for the years ended December 31, 2013, 2012, and 2011, respectively, as well as related tax benefits of $50.7 million, $49.5 million, and $51.6 million, respectively. Our stock-based compensation expense consists of performance awards (PAs), shareholder value awards (SVAs), and restricted stock units (RSUs). We recognize stock-based compensation expense over the requisite service period of the individual grantees, which equals the vesting period. We provide newly issued shares and treasury stock to satisfy stock option exercises and for the issuance of PA, SVA, and RSU shares. We classify tax benefits resulting from tax deductions in excess of the compensation cost recognized for exercised stock options as a financing cash flow in the consolidated statements of cash flows.

At December 31, 2013, additional stock-based compensation awards may be granted under the 2002 Lilly Stock Plan for not more than 100.0 million shares.

Performance Award Program

PAs are granted to officers and management and are payable in shares of our common stock. The number of PA shares actually issued, if any, varies depending on the achievement of certain pre-established earnings-per-share targets over a two-year period. PA shares are accounted for at fair value based upon the closing stock price on the date of grant and fully vest at the end of the measurement periods. The fair values of PAs granted for the years ended December 31, 2013, 2012, and 2011 were $50.19, $35.74, and $31.90, respectively. The number of shares ultimately issued for the PA program is dependent upon the earnings achieved during the vesting period. Pursuant to this plan, approximately 0.7 million shares, 1.6 million shares, and 3.9 million shares were issued during the years ended December 31, 2013, 2012, and 2011, respectively. Approximately 0.6 million shares are expected to be issued in 2014. As of December 31, 2013, the total remaining unrecognized compensation cost related to nonvested PAs was $18.9 million, which will be amortized over the weighted-average remaining requisite service period of 12 months.

Shareholder Value Award Program

SVAs are granted to officers and management and are payable in shares of our common stock at the end of a three-year period. The number of shares actually issued, if any, varies depending on our stock price at the end of the three-year vesting period compared to pre-established target stock prices. We measure the fair value of the SVA unit on the grant date using a Monte Carlo simulation model. The model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model are based on implied volatilities from traded options on our stock, historical volatility of our stock price, and other factors. Similarly, the dividend yield is based on historical experience and our estimate of future dividend yields. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The weighted-average fair values of the SVA units granted during the years ended December 31, 2013, 2012, and 2011 were $45.17, $30.35, and $28.33, respectively, determined using the following assumptions:



(Percents)	2013		2012		2011
Expected dividend yield	3.50	%	4.50	%	4.90	%
Risk-free interest rate	.08-.43		.10-.36		.20-1.36
Range of volatilities	18.95-22.37		22.40-25.64		27.61-29.10

A summary of the SVA activity is presented below:



Units Attributable to SVAs (in thousands)	2013		2012		2011
Outstanding at January 1	7,539		7,036		6,381
Granted	1,795		2,439		2,561
Issued	(2,397	)	(973	)	(428	)
Forfeited or expired	(301	)	(963	)	(1,478	)
Outstanding at December 31	6,636		7,539		7,036

Approximately 2.2 million shares are expected to be issued in 2014. As of December 31, 2013, the total remaining unrecognized compensation cost related to nonvested SVAs was $51.6 million, which will be amortized over the weighted-average remaining requisite service period of 20 months.

Restricted Stock Units

RSUs are granted to certain employees and are payable in shares of our common stock. RSU shares are accounted for at fair value based upon the closing stock price on the date of grant. The corresponding expense is amortized over the vesting period, typically 3 years. The fair values of RSU awards granted during the years ended December 31, 2013, 2012, and 2011 were $54.10, $39.65, and $35.80, respectively. The number of shares ultimately issued for the RSU program remains constant with the exception of forfeitures. Pursuant to this plan, 1.1 million, 1.4 million, and 1.5 million shares were granted during the years ended December 31, 2013, 2012, and 2011, respectively, and approximately 0.8 million, 0.3 million, and 0.2 million shares were issued during the years ended December 31, 2013, 2012, and 2011, respectively. Approximately 0.8 million shares are expected to be issued in 2014. As of December 31, 2013, the total remaining unrecognized compensation cost related to nonvested RSUs was $58.4 million, which will be amortized over the weighted-average remaining requisite service period of 21 months.

Stock Option Program

Stock options were granted prior to 2007 to officers, management, and board members at exercise prices equal to the fair market value of our stock at the date of grant. Options fully vested 3 years from the grant date and have a term of 10 years.

Stock option activity during the year ended December 31, 2013 is summarized below:



	Shares of Common Stock Attributable to Options (in thousands)		Weighted-Average Exercise Price of Options		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at January 1, 2013	27,232		$	63.89
Exercised	(208	)	54.27
Forfeited or expired	(10,884	)	59.95
Outstanding at December 31, 2013	16,140		66.66		0.7	$	—
Exercisable at December 31, 2013	16,140		66.66		0.7	—

For options exercised during the years ended December 31, 2013, 2012, and 2011, the related intrinsic value, cash received, and tax benefits were not material.