Note 6 — Stock-Based Compensation

Our stock-based compensation program is designed to attract and retain employees while also aligning employees' interests with the interests of our shareholders. Stock options and restricted stock units (RSU) are granted to employees under the shareholder-approved 2007 Long-Term Incentive Plan (LTIP), the only stock-based plan under which we currently grant stock options and RSUs. Stock-based compensation expense was $343 million in 2011, $352 million in 2010 and $227 million in 2009. In 2011, $326 million was recorded as stock-based compensation expense, $13 million was included in merger and integration charges and $4 million was included in restructuring charges. In 2010, $299 million was recorded as stock-based compensation expense and $53 million was included in merger and integration charges. $86 million of the $352 million recorded in 2010 was related to the unvested acquisition-related grants described below. Income tax benefits related to stock-based compensation expense and recognized in earnings were $101 million in 2011, $89 million in 2010 and $67 million in 2009. At year-end 2011, 136 million shares were available for future stock-based compensation grants.

In connection with our acquisition of PBG in 2010, we issued 13.4 million stock options and 2.7 million RSUs at weighted-average grant prices of $42.89 and $62.30, respectively, to replace previously held PBG equity awards. In connection with our acquisition of PAS in 2010, we issued 0.4 million stock options at a weighted-average grant price of $31.72 to replace previously held PAS equity awards. Our equity issuances included 8.3 million stock options and 0.6 million RSUs which were vested at the acquisition date and were included in the purchase price. The remaining 5.5 million stock options and 2.1 million RSUs issued were unvested at the issuance date and are being amortized over their remaining vesting period, up to 3 years from the issuance date.

As a result of our annual benefits review in 2010, the Company approved certain changes to our benefits programs to remain market competitive relative to other leading global companies. These changes included ending the Company's broad-based SharePower stock option program. Consequently, beginning in 2011, no new awards were granted under the SharePower program. Outstanding SharePower awards from 2010 and earlier continue to vest and are exercisable according to the terms and conditions of the program. See Note 7 for additional information regarding other related changes.

Method of Accounting and Our Assumptions

We account for our employee stock options under the fair value method of accounting using a Black-Scholes valuation model to measure stock option expense at the date of grant. All stock option grants have an exercise price equal to the fair market value of our common stock on the date of grant and generally have a 10-year term. We do not backdate, reprice or grant stock-based compensation awards retroactively. Repricing of awards would require shareholder approval under the LTIP.

The fair value of stock option grants is amortized to expense over the vesting period, generally three years. Executives who are awarded long-term incentives based on their performance are generally offered the choice of stock options or RSUs. Executives who elect RSUs receive one RSU for every four stock options that would have otherwise been granted. Senior officers do not have a choice and, through 2011, are granted 50% stock options and 50% performance-based RSUs.

Beginning in 2012, senior officers will be granted 60% market stock units and 40% long-term cash awards, each of which will be subject to pre-established performance targets. Vesting of RSU awards for senior officers is contingent upon the achievement of pre-established performance targets approved by the Compensation Committee of the Board of Directors. RSU expense is based on the fair value of PepsiCo stock on the date of grant and is amortized over the vesting period, generally three years. Each RSU is settled in a share of our stock after the vesting period.

Our weighted-average Black-Scholes fair value assumptions are as follows:


	2011			2010			2009
Expected life		6 yrs.			5 yrs.			6 yrs.
Risk-free interest rate		2.5	%		2.3	%		2.8	%
Expected volatility		16	%		17	%		17	%
Expected dividend yield		2.9	%		2.8	%		3.0	%

The expected life is the period over which our employee groups are expected to hold their options. It is based on our historical experience with similar grants. The risk-free interest rate is based on the expected U.S. Treasury rate over the expected life. Volatility reflects movements in our stock price over the most recent historical period equivalent to the expected life. Dividend yield is estimated over the expected life based on our stated dividend policy and forecasts of net income, share repurchases and stock price.

A summary of our stock-based compensation activity for the year ended December 31, 2011 is presented below:

Our Stock Option Activity


	Options^(a)			Average Price^(b)		Average Life (years)^(c)		Aggregate Intrinsic Value^(d)
Outstanding at December 25, 2010		106,203		$	54.03
Granted		7,150		$	64.31
Exercised		(19,980	)	$	47.74
Forfeited/expired		(2,298	)	$	65.73

Outstanding at December 31, 2011		91,075		$	55.92		5.07	$	932,748

Exercisable at December 31, 2011		58,708		$	53.86		4.94	$	725,781

(a)	Options are in thousands and include options previously granted under PBG, PAS and Quaker legacy plans. No additional options or shares may be granted under the PBG, PAS and Quaker plans.

(b)	Weighted-average exercise price.

(c)	Weighted-average contractual life remaining.

(d)	In thousands.

Our RSU Activity


	RSUs^(a)			Average Intrinsic Value^(b)		Average Life (years)^(c)		Aggregate Intrinsic Value^(d)
Outstanding at December 25, 2010		10,662		$	63.27
Granted		5,333		$	63.87
Converted		(2,610	)	$	65.81
Forfeited/expired		(1,045	)	$	63.71

Outstanding at December 31, 2011		12,340		$	62.96		1.57	$	818,776

(a)	RSUs are in thousands and include RSUs previously granted under a PBG plan. No additional RSUs or shares may be granted under the PBG plan.

(b)	Weighted-average intrinsic value at grant date.

(c)	Weighted-average contractual life remaining.

(d)	In thousands.

Other Stock-Based Compensation Data


	2011		2010		2009
*Stock Options*
Weighted-average fair value of options granted	$	7.79	$	13.93	$	7.02
Total intrinsic value of options exercised^(a)	$	385,678	$	502,354	$	194,545

*RSUs*
Total number of RSUs granted^(a)		5,333		8,326		2,653
Weighted-average intrinsic value of RSUs granted	$	63.87	$	65.01	$	53.22
Total intrinsic value of RSUs converted^(a)	$	173,433	$	202,717	$	124,193

(a)	In thousands.

As of December 31, 2011, there was $436 million of total unrecognized compensation cost related to nonvested share-based compensation grants. This unrecognized compensation is expected to be recognized over a weighted-average period of two years.