Stock Based Compensation

During 2009, the Company obtained shareholder approval for the Macy’s 2009 Omnibus Incentive Compensation Plan under which up to fifty-one million shares of Common Stock may be issued. This plan is intended to help the Company attract and retain directors, officers, other key executives and employees and is also intended to provide incentives and rewards relating to the Company’s business plans to encourage such persons to devote themselves to the business of the Company. Prior to 2009, the Company had two equity plans; the Macy's 1995 Executive Equity Incentive Plan and the Macy's 1994 Stock Incentive Plan. After shareholders approved the 2009 Omnibus Incentive Compensation Plan, Common Stock may no longer be granted under the Macy's 1995 Executive Equity Incentive Plan or the Macy's 1994 Stock Incentive Plan. The following disclosures present the Company’s equity plans on a combined basis. The equity plan is administered by the Compensation and Management Development Committee of the Board of Directors (the “CMD Committee”). The CMD Committee is authorized to grant options, stock appreciation rights, restricted stock and restricted stock units to officers and key employees of the Company and its subsidiaries and to non-employee directors.

Stock option grants have an exercise price at least equal to the market value of the underlying common stock on the date of grant, have ten-year terms and typically vest ratably over four years of continued employment. Restricted stock and time-based restricted stock unit awards generally vest one to four years from the date of grant. Performance-based restricted stock units vest based on the results attained during the performance period.

As of January 28, 2012, 36.6 million shares of common stock were available for additional grants pursuant to the Company’s equity plan. Shares awarded are generally issued from the Company's treasury stock.

Stock-based compensation expense included the following components:



	2011		2010		2009
	(millions)
Stock options	$	28	$	34	$	43
Stock credits	20		19		26
Restricted stock	2		2		3
Restricted stock units	20		11		4
	$	70	$	66	$	76

All stock-based compensation expense is recorded in SG&A expense in the Consolidated Statements of Income. The income tax benefit recognized in the Consolidated Statements of Income related to stock-based compensation was approximately $25 million, approximately $24 million, and approximately $28 million, for 2011, 2010 and 2009, respectively.

During 2011 and 2010, the CMD Committee approved awards of performance-based restricted stock units to certain senior executives of the Company. Each award reflects a target number of shares (“Target Shares”) that may be issued to the award recipient. These awards may be earned upon the completion of three-year performance periods ending February 1, 2014 and February 2, 2013, respectively. Whether units are earned at the end of the performance period will be determined based on the achievement of certain performance objectives set by the CMD Committee in connection with the issuance of the units. The performance objectives are based on the Company’s business plan covering the performance period. The performance objectives include achieving a cumulative EBITDA level for the performance period and also include an EBITDA as a percent to sales ratio and a return on invested capital ratio. Depending on the results achieved during the three-year performance periods, the actual number of shares that a grant recipient receives at the end of the period may range from 0% to 150% of the Target Shares granted.

Also during 2011 and 2010, the CMD Committee approved awards of time-based restricted stock to certain senior executives of the Company and awards of time-based restricted stock units to the non-employee members of the Company’s board of directors.

During 2009, the CMD Committee approved awards of performance-based restricted stock units to certain senior executives of the Company (the “Founders Awards”). The Founders Awards were earned upon the completion of the three-year performance period ended January 28, 2012 as determined based on the achievement of relative total shareholder return (“TSR”) performance objectives set by the CMD Committee in connection with the issuance of the units. Relative TSR reflected the change in the value of the Company’s common stock over the performance period in relation to the change in the value of the common stock of a ten-company executive compensation peer group over the performance period, assuming the reinvestment of dividends. Because the Company’s TSR for the performance period was above the 66^th percentile for the peer group, 100% of the award opportunity had been earned.

The fair value of stock-options granted during 2011, 2010 and 2009 and the weighted average assumptions used to estimate the fair value are as follows:



	2011			2010			2009
Weighted average grant date fair value of stock options granted during the period	$	7.12		$	7.34		$	2.51
Dividend yield	2.3		%	1.0		%	2.3		%
Expected volatility	38.8		%	37.6		%	36.4		%
Risk-free interest rate	2.0		%	2.7		%	1.9		%
Expected life	5.6 years			5.5 years			5.4 years

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Company estimates the expected volatility and expected option life assumption consistent with ASC Topic 718, “Compensation – Stock Compensation.” The expected volatility of the Company’s common stock at the date of grant is estimated based on a historic volatility rate and the expected option life is calculated based on historical stock option experience as the best estimate of future exercise patterns. The dividend yield assumption is based on historical and anticipated dividend payouts. The risk-free interest rate assumption is based on observed interest rates consistent with the expected life of each stock option grant. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest. Compensation expense is recorded for all stock options expected to vest based on the amortization of the fair value at the date of grant on a straight-line basis primarily over the vesting period of the options.

Stock option activity for 2011 is as follows:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
	(thousands)				(years)	(millions)
Outstanding, beginning of period	38,101.3		$	25.59
Granted	4,874.9		$	23.43
Canceled or forfeited	(1,532.7	)	$	26.90
Exercised	(7,038.2	)	$	20.07
Outstanding, end of period	34,405.3		$	26.36
Exercisable, end of period	23,381.3		$	29.57	4.1	$	99
Options expected to vest	9,701.1		$	19.56	8.1	$	138

Additional information relating to stock options is as follows:



	2011		2010		2009
	(millions)
Intrinsic value of options exercised	$	64	$	13	$	2
Grant date fair value of stock options that vested during the year	50		55		71
Cash received from stock options exercised	141		39		8
Tax benefits realized from exercised stock options and vested restricted stock	20		4		—

The Company also has a stock credit plan. In 2006, key management personnel became eligible to earn a stock credit grant over a two-year performance period ending February 2, 2008. In general, with respect to the stock credits awarded to participants in 2006, the value of one half of the stock credits earned plus reinvested dividend equivalents was paid in cash in early 2010 and the value of the other half of such earned stock credits plus reinvested dividend equivalents was paid in cash in early 2011. In 2008, key management personnel became eligible to earn a stock credit grant over a two-year performance period ending January 30, 2010. There were a total of 1,649,870 stock credit awards outstanding as of January 28, 2012, relating to the 2008 grant. In general, with respect to the stock credits awarded to participants in 2008, the value of one-half of the stock credits earned plus reinvested dividend equivalents was paid in cash in early 2012 and the value of the other half of such earned stock credits plus reinvested dividend equivalents will be paid in cash in early 2013. Compensation expense for stock credit awards is recorded on a straight-line basis primarily over the vesting period and is calculated based on the ending stock price for each reporting period. At January 28, 2012 and January 29, 2011, the liability under the stock credit plans, which is reflected in accounts payable and accrued liabilities and other liabilities on the Consolidated Balance Sheets, was $55 million and $52 million, respectively.

Activity related to stock credits for 2011 is as follows:



	Shares
Stock credits, beginning of period	2,418,345
Additional dividend equivalents earned	20,961
Stock credits forfeited	(61,807	)
Stock credits distributed	(727,629	)
Stock credits, end of period	1,649,870

The weighted average grant date fair value of restricted stock and restricted stock units granted during 2011, 2010 and 2009 are as follows:



	2011		2010		2009
Restricted stock	$	23.43	$	20.89	$	—
Restricted stock units	$	23.69	$	20.95	$	3.59

The fair value of the Target Shares and restricted stock awards are based on the fair value of the underlying shares on the date of grant. The fair value of the Founders Award was determined using a Monte Carlo simulation analysis to estimate the total shareholder return ranking of the Company among a ten-company executive compensation peer group over the remaining performance period. The expected volatility of the Company’s common stock at the date of grant was estimated based on a historical average volatility rate for the approximate three-year performance period. The dividend yield assumption was based on historical and anticipated dividend payouts. The risk-free interest rate assumption was based on observed interest rates consistent with the approximate three-year performance measurement period.

Compensation expense is recorded for all restricted stock and restricted stock unit awards based on the amortization of the fair market value at the date of grant over the period the restrictions lapse or over the performance period of the performance-based restricted stock units.

Restricted stock award activity for 2011 is as follows:



	Shares		Weighted Average Grant Date Fair Value
Nonvested, beginning of period	250,046		$	28.48
Granted	115,236		23.43
Forfeited	(5,724	)	21.84
Vested	(145,936	)	33.90
Nonvested, end of period	213,622		$	22.23

Activity related to restricted stock units for 2011 is as follows:



	Shares		Weighted Average Grant Date Fair Value
Nonvested, beginning of period	3,788,634		$	8.57
Granted – performance-based	715,100		23.43
Performance adjustment	476,922		22.72
Granted – time-based	37,719		28.63
Dividend equivalents	116,422		23.04
Forfeited	(288,071	)	10.29
Vested	(40,401	)	22.54
Nonvested, end of period	4,806,325		$	12.47

There have been no grants of stock appreciation rights under the equity plans.

As of January 28, 2012, the Company had $39 million of unrecognized compensation costs related to nonvested stock options, which is expected to be recognized over a weighted average period of approximately 1.8 years, $2 million of unrecognized compensation costs related to nonvested restricted stock, which is expected to be recognized over a weighted average period of approximately 1.6 years, and $26 million of unrecognized compensation costs related to nonvested restricted stock units, which is expected to be recognized over a weighted average period of approximately 1.3 years.