3. Share-Based Compensation

We provide share-based compensation for our employees, officers and non-employee directors, including stock options, an employee stock purchase plan, restricted stock units ("RSUs") and performance-based restricted stock units ("PeRSUs") (collectively, "share-based awards.") Most of our share-based awards are granted in the first quarter of each fiscal year.

Compensation expense for the share-based awards is recognized for the portion of awards ultimately expected to vest. We estimate the number of share-based awards, which will ultimately vest primarily based on historical experience. The estimated forfeiture rate established upon grant is re-assessed throughout the requisite service period. As required, the forfeiture estimates are adjusted to reflect actual forfeitures when an award vests. The actual forfeitures in future reporting periods could be higher or lower than current estimates.

The compensation expense recognized has been classified in the consolidated statements of operations or capitalized on the consolidated balance sheets in the same manner as cash compensation paid to our employees. There was no material share-based compensation expense capitalized as part of the cost of an asset in 2012, 2011 and 2010.

Impact on Net Income

The components of share-based compensation expense and related tax benefits are as follows:


Years Ended March 31,
(In millions)		2012			2011			2010
RSUs ⁽¹⁾	$	97		$	79		$	47
PeRSUs ⁽²⁾		24			27			39
Stock options		23			22			19
Employee stock purchase plan		10			9			9
Share-based compensation expense		154			137			114
Tax benefit for share-based compensation expense ⁽³⁾		(55	)		(48	)		(41	)
Share-based compensation expense, net of tax	$	99		$	89		$	73

(1) This expense was primarily the result of PeRSUs awarded in prior years, which converted to RSUs due to the attainment of goals during the applicable years' performance period.

(2) Represents estimated compensation expense for PeRSUs that are conditional upon attaining performance objectives during the current year's performance period.

(3) Income tax expense is computed using the tax rates of applicable tax jurisdictions. Additionally, a portion of pre-tax compensation expense is not tax-deductible.

Stock Plans

The 2005 Stock Plan provides our employees, officers and non-employee director's share-based long-term incentives. The 2005 Stock Plan permits the granting of up to 42.5 million shares in the form of stock options, restricted stock, RSUs, PeRSUs and other share-based awards. As of March 31, 2012, 9.3 million shares remain available for future grant under the 2005 Stock Plan.

Stock Options

Stock options are granted at no less than fair market value and those options granted under the 2005 Stock Plan generally have a contractual term of seven years and follow a four-year vesting schedule.

Compensation expense for stock options is recognized on a straight-line basis over the requisite service period and is based on the grant-date fair value for the portion of the awards that is ultimately expected to vest. We continue to use the Black-Scholes options-pricing model to estimate the fair value of our stock options. Once the fair value of an employee stock option is determined, current accounting practices do not permit it to be changed, even if the estimates used are different from actual. The options-pricing model requires the use of various estimates and assumptions as follows:

– Expected stock price volatility is based on a combination of historical volatility of our common stock and implied market volatility. We believe that this market-based input provides a better estimate of our future stock price movements and is consistent with employee stock option valuation considerations.

– Expected dividend yield is based on historical experience and investors' current expectations.

– The risk-free interest rate for periods within the expected life of the option is based on the constant maturity U.S. Treasury rate in effect at the time of grant.

– Expected life of the options is based primarily on historical employee stock option exercises and other behavior data and reflects the impact of changes in contractual life of current option grants compared to our historical grants.

Weighted-average assumptions used to estimate the fair value of employee stock options were as follows:


	Years Ended March 31,
	2012		2011		2010
Expected stock price volatility	27	%	29	%	33	%
Expected dividend yield	1.0	%	1.1	%	0.7	%
Risk-free interest rate	2	%	3	%	2	%
Expected life (in years)	5		5		5

The following is a summary of options outstanding at March 31, 2012:


						Options Outstanding			Options Exercisable
					Number of				Number of
						Weighted-
					Options	Average		Weighted-	Options		Weighted-
					Outstanding	Remaining		Average	Exercisable		Average
	Range of Exercise				At Year End	Contractual		Exercise	at Year End		Exercise
		Prices			(In millions)	Life (Years)		Price	(In millions)		Price
$	27.35	-	$	41.02	3	3	$	38.09	1	$	36.52
$	41.03	-	$	54.70	1	1		45.99	1		46.36
$	54.71	-	$	68.37	3	4		63.01	2		61.20
$	68.38	-	$	84.41	1	6		83.04	0		74.57
					8				4

The following table summarizes stock option activity during 2012, 2011 and 2010:


					Weighted-
					Average
				Weighted-	Remaining		Aggregate
				Average Exercise	Contractual		Intrinsic
(In millions, except per share data and years)	Shares			Price	Term (Years)		Value ⁽²⁾
Outstanding, March 31, 2009	19		$	39.28	3	$	33
Granted	2			40.59
Exercised	(5	)		33.34
Outstanding, March 31, 2010	16		$	41.26	3	$	394
Granted	1			67.95
Exercised	(8	)		37.63
Outstanding, March 31, 2011	9		$	49.01	4	$	269
Granted	1			83.30
Exercised	(2	)		42.20
Outstanding, March 31, 2012	8		$	56.88	4	$	226

Vested and expected to vest ⁽¹⁾	7		$	56.71	4	$	225
Vested and exercisable, March 31, 2012	4			49.86	3		142

(1) The number of options expected to vest takes into account an estimate of expected forfeitures.

(2) The intrinsic value is calculated as the difference between the period-end market price of the Company's common stock and the exercise price of "in-the-money" options.

The following table provides data related to stock option activity:


	Years Ended March 31,
(In millions, except per share data and years)		2012		2011		2010
Weighted-average grant date fair value per stock option $		20.32	$	18.37	$	12.56
Aggregate intrinsic value on exercise	$	108	$	276	$	115
Cash received upon exercise	$	113	$	319	$	165
Tax benefits realized related to exercise	$	40	$	106	$	37
Total fair value of stock options vested	$	23	$	21	$	16
Total compensation cost, net of estimated forfeitures,
related to unvested stock options not yet recognized,
pre-tax	$	40	$	41	$	37
Weighted-average period in years over which stock
option compensation cost is expected to be recognized		1		1		1

RSUs and PeRSUs

RSUs, which entitle the holder to receive at the end of a vesting term a specified number of shares of the Company's common stock, are accounted for at fair value at the date of grant. Total compensation expense for RSUs under our stock plans is determined by the product of the number of shares that are expected to vest and the grant date market price of the Company's common stock. The Compensation Committee determines the vesting terms at the time of grant. These awards generally vest in three to four years. We recognize expense for RSUs with a single vest date on a straight-line basis over the requisite service period. We have elected to expense the grant date fair value of RSUs with only graded vesting and service conditions on a straight-line basis over the requisite service period.

Non-employee directors receive an annual grant of RSUs, which vest immediately and are expensed upon grant. The director may choose to receive payment immediately or defer receipt of the underlying shares if they meet director stock ownership guidelines. At March 31, 2012, 128,000 RSUs for our directors are vested, but shares have not been issued.

PeRSUs are RSUs for which the number of RSUs awarded may be conditional upon the attainment of one or more performance objectives over a specified period. PeRSUs are accounted for as variable awards until the performance goals are reached and the grant date is established. Total compensation expense for PeRSUs is determined by the product of the number of shares eligible to be awarded and expected to vest, and the market price of the Company's common stock, commencing at the inception of the requisite service period. During the performance period, the compensation expense for PeRSUs is re-computed using the market price and the performance modifier at the end of a reporting period. At the end of the performance period, if the goals are attained, the awards are granted and classified as RSUs and accounted for on that basis. For PeRSUs granted during or prior to 2009, for which the related RSU grant has multiple vesting dates, we recognize the compensation expense of these awards on a graded vesting basis over the requisite aggregate service period of four years. For PeRSUs granted during or after 2009, for which the related RSU has a single vesting date, we recognize compensation expense of these awards on a straight-line basis over the requisite aggregate service period of four years.

The following table summarizes RSU activity during 2012, 2011 and 2010:


				Weighted-
				Average
				Grant Date Fair
(In millions, except per share data)	Shares			Value Per Share
Nonvested, March 31, 2009	3		$	54.70
Granted	2			40.94
Vested	(1	)		50.42
Nonvested, March 31, 2010	4		$	49.21
Granted	3			67.84
Vested	(1	)		61.05
Nonvested, March 31, 2011	6		$	57.79
Granted	2			82.71
Vested	(1	)		57.95
Nonvested, March 31, 2012	7		$	65.14

The following table provides data related to RSU activity:


	Years Ended March 31,
(Dollars in millions)		2012		2011		2010
Total fair value of shares vested	$	44	$	43	$	74
Total compensation cost, net of estimated forfeitures,
related to nonvested RSU awards not yet recognized,
pre-tax	$	143	$	131	$	61
Weighted-average period in years over which RSU cost
is expected to be recognized		3		2		2

In May 2011, the Compensation Committee approved 1 million PeRSU target share units representing the base number of awards that could be granted, if goals are attained, and would be granted in the first quarter of 2013 (the "2012 PeRSU"). These target share units are not included in the table above as they have not been granted in the form of RSUs. As of March 31, 2012, the total pre-tax compensation expense, net of estimated forfeitures, related to nonvested 2012 PeRSUs not yet recognized was approximately $81 million, (based on the period-end market price of the Company's common stock) and the weighted-average period over which the cost is expected to be recognized is 3 years.

Employee Stock Purchase Plan ("ESPP")

The Company has an ESPP under which 16 million shares have been authorized for issuance. The ESPP allows eligible employees to purchase shares of our common stock through payroll deductions. The deductions occur over three-month purchase periods and the shares are then purchased at 85% of the market price at the end of each purchase period. Employees are allowed to terminate their participation in the ESPP at any time during the purchase period prior to the purchase of the shares. The 15% discount provided to employees on these shares is included in compensation expense. The shares related to funds outstanding at the end of a quarter are included in the calculation of diluted weighted average shares outstanding. These amounts have not been significant. In 2012, 2011 and 2010, 1 million shares were issued under the ESPP and 2 million shares remain available for issuance at March 31, 2012.