NOTE 13: STOCK-BASED COMPENSATION

We currently have three stock-based compensation plans: the 2010 Equity Incentive Plan ("2010 Plan"), our Employee Stock Purchase Plan ("ESPP") and the 2002 Nonemployee Director Stock Incentive Plan. Additionally, as part of our acquisition of HauteLook, we granted awards from shares available that were not allocated to a specific plan.

In 2010, our shareholders approved the adoption of the 2010 Plan, which replaced the 2004 Equity Incentive Plan ("2004 Plan"). The 2010 Plan authorizes the grant of stock options, performance share units, restricted stock units, stock appreciation rights and both restricted and unrestricted shares of common stock to employees. The aggregate number of shares to be issued under the 2010 Plan may not exceed 11.6 plus any shares currently outstanding under the 2004 Plan which are forfeited or which expire during the term of the 2010 Plan. No future grants will be made under the 2004 Plan. As of January 28, 2012, we have 54.4 shares authorized, 30.4 shares issued and outstanding and 9.5 shares remaining available for future grants under the 2010 Plan.

Under the ESPP, employees may make payroll deductions of up to ten percent of their base and bonus compensation. At the end of each six-month offering period, participants may apply their accumulated payroll deductions toward the purchase of shares of our common stock at 90% of the fair market value on the last day of the offer period. As of January 28, 2012, we had 12.6 shares authorized and 4.1 shares available for issuance under the ESPP. We issued 0.3 shares under the ESPP during 2011. At the end of each of 2011 and 2010, we had current liabilities of $5, for future purchases of shares under the ESPP.

The 2002 Nonemployee Director Stock Incentive Plan authorizes the grant of stock awards to our nonemployee directors. These awards may be deferred or issued in the form of restricted or unrestricted stock, non-qualified stock options or stock appreciation rights. As of January 28, 2012, we had 0.9 shares authorized and 0.6 shares available for issuance under this plan. In 2011, we deferred shares with a total expense of less than $1.

The following table summarizes our stock-based compensation expense:


Fiscal year	2011		2010		2009
Stock options		$32		$35		$26
HauteLook stock compensation		9		–		–
Performance share units		4		3		3
Employee stock purchase plan		2		2		1
Other		3		2		2
Total stock-based compensation expense, before income tax benefit		50		42		32
Income tax benefit		(17)		(16)		(12)
Total stock-based compensation expense, net of income tax benefit		$33		$26		$20

The stock-based compensation expense before income tax benefit was recorded in our consolidated statements of earnings as follows:


Fiscal year	2011		2010		2009
Cost of sales and related buying and occupancy costs		$12		$13		$10
Selling, general and administrative expenses		38		29		22
Total stock-based compensation expense before income tax benefit		$50		$42		$32

The benefits of tax deductions in excess of the compensation cost recognized for stock-based awards are classified as financing cash inflows and are reflected as "Excess tax benefit from stock-based compensation" in the consolidated statements of cash flows.

Stock Options

We used the following assumptions to estimate the fair value for stock options at grant date:

Fiscal year

2011

2010

2009

Risk-free interest rate: Represents the yield on U.S. Treasury zero-coupon securities that mature over the ten-year life of the stock options.

0.4% – 3.5%

0.5% – 4.0%

0.7% – 3.3%

Weighted-average volatility: Based on a combination of the historical volatility of our common stock and the implied volatility of exchange traded options for our common stock.

39.0%

40.0%

61.0%

Weighted-average expected dividend yield: Our forecasted dividend yield for the next ten years.

2.0%

1.3%

Expected life in years: Represents the estimated period of time until option exercise. The expected term of options granted was derived from the output of the Binomial Lattice option valuation model and was based on our historical exercise behavior, taking into consideration the contractual term of the option and our employees' expected exercise and post–vesting employment termination behavior.

5.9

5.7

5.3

The weighted-average fair value per option at the grant date was $15, $13 and $7 in 2011, 2010 and 2009. In 2011, 2010 and 2009, stock option awards to employees were approved by the Compensation Committee of our Board of Directors and their exercise price was set at $45, $37 and $13, the closing price of our common stock on February 25, 2011, February 26, 2010 and February 27, 2009 (the dates of grant). The awards are determined based upon a percentage of the recipients' base salary and the fair value of the stock options. In 2011, we awarded stock options to 1,331 employees, compared with 1,259 and 1,213 employees in 2010 and 2009.

As of January 28, 2012, we have 14.1 options outstanding under the 2010 Plan. Options vest over four years, and expire ten years after the date of grant. A summary of the stock option activity for 2011 is presented below:

Fiscal year

2011

Shares

Weighted-

average

exercise price

Weighted-average

remaining contractual

life (years)

Aggregate

intrinsic

value

Outstanding, beginning of year

14.7

$27

Granted

2.7

Exercised

(3.0

)

Cancelled

(0.3

)

Expired

–

Outstanding, end of year

14.1

$32

$240

Options exercisable at end of year

7.0

$31

$129

Options vested or expected to vest at end of year

13.1

$32

$226

The total intrinsic value of options exercised during 2011, 2010 and 2009 was $80, $51 and $23. The total fair value of stock options vested during 2011, 2010 and 2009 was $29, $27 and $25. As of January 28, 2012, the total unrecognized stock-based compensation expense related to nonvested stock options was $39, which is expected to be recognized over a weighted-average period of 28 months.

HauteLook

As discussed in Note 2: HauteLook, consideration for our acquisition of HauteLook payable in Nordstrom stock includes ongoing vesting requirements for HauteLook's employees. These amounts are recorded as compensation expense as the related service is performed over the respective employee vesting periods of up to four years after the acquisition date.

A summary of the nonvested restricted stock award activity related to HauteLook for 2011 is as follows:


Fiscal year	2011
	Shares			Weighted- average grant- date fair value


Outstanding, beginning of year		–			–
Granted		1.2			$42
Vested		(0.2	)		42
Forfeited¹		(0.2	)		42
Outstanding, end of year		0.8			$42

¹Includes 0.2 of restricted stock units related to the HauteLook acquisition that were cancelled in connection with the HauteLook acquisition amendment.

The total fair value of restricted stock vested during 2011 was $10. As of January 28, 2012, the total unrecognized stock-based compensation expense related to HauteLook nonvested restricted stock awards was $19, which is expected to be recognized over a weighted-average period of 14 months.

Performance Share Units

We grant performance share units to executive officers as one of the ways to align compensation with shareholder interests. Performance share units vest after a three-year period only when our total shareholder return (reflecting daily stock price appreciation and compounded reinvestment of dividends) is positive and outperforms companies in a defined group of competitors determined by the Compensation Committee of our Board of Directors. The percentage of units that are earned depends on our relative position at the end of the vesting period and can range from 0% to 125% of the number of units granted.

Performance share units are payable in either cash or stock as elected by the employee; therefore, they are classified as a liability award. The liability is remeasured, with a corresponding adjustment to earnings, at each fiscal quarter-end during the vesting period. The performance share unit liability is remeasured using the estimated percentage of units earned multiplied by the closing market price of our common stock on the current period-end date and is pro-rated based on the amount of time passed in the vesting period. The price used to issue stock or cash for the performance share units upon vesting is the closing market price of our common stock on the vest date.

Following is a summary of performance share unit activity:


Fiscal year			2011
Outstanding, beginning of year			199,186
Granted			60,934
Vested but unearned			–
Vested and earned			(132,752)
Cancelled			–
Outstanding, end of year			127,368

Total fair value of performance share units earned			$6
Total fair value of performance share units settled or to be settled in cash			$6

As of January 28, 2012, our other liabilities included $7 for performance share units. As of January 28, 2012, the remaining unrecognized stock-based compensation expense for unvested performance share units was $2, which is expected to be recognized over a weighted-average period of 24 months.