Annual report pursuant to Section 13 and 15(d)

STOCK-BASED COMPENSATION

v2.4.0.6
STOCK-BASED COMPENSATION
 12 Months Ended
Dec. 31, 2012
Share-based Compensation [Abstract]  
STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION
Incentive Compensation Plan
The UPS Incentive Compensation Plan permits the grant of nonqualified and incentive stock options, stock appreciation rights, restricted stock and stock units, and restricted performance shares and units, to eligible employees. The number of shares reserved for issuance under the Incentive Compensation Plan is 27 million. Each share issued pursuant to an option and each share issued subject to the exercised portion of a stock appreciation right will reduce the share reserve by one share. Each share issued pursuant to restricted stock and stock units, and restricted performance shares and units, will reduce the share reserve by one share. As of December 31, 2012, stock options, restricted performance units and restricted stock units had been granted under the Incentive Compensation Plan. We had 27 million shares available to be issued under the Incentive Compensation Plan as of December 31, 2012.
Management Incentive Award
Non-executive management earning the right to receive Management Incentive Awards are determined annually by the Salary Committee, which is comprised of executive officers of the Company. Awards granted to executive officers are determined annually by the Compensation Committee of the UPS Board of Directors. Our Management Incentive Awards program provides, with certain exceptions, that one-half to two-thirds of the annual Management Incentive Award will be made in Restricted Units (depending upon the level of management involved), which generally vest over a five-year period. The other one-third to one-half of the award is in the form of cash or unrestricted shares of class A common stock, and is fully vested at the time of grant.
Upon vesting, Restricted Units result in the issuance of the equivalent number of UPS class A common shares after required tax withholdings. Except in the case of death, disability, or retirement, Restricted Units granted for our Management Incentive Awards and previous Long-Term Incentive Program generally vest over a five year period with approximately 20% of the award vesting at each anniversary date of the grant. The entire grant is expensed on a straight-line basis over the requisite service period. All Restricted Units granted are subject to earlier cancellation or vesting under certain conditions. Dividends earned on Restricted Units are reinvested in additional Restricted Units at each dividend payable date.
Long-Term Incentive Performance Award
We also award Restricted Units in conjunction with our Long-Term Incentive Performance Awards program to certain eligible employees. The Restricted Units ultimately granted under the Long-Term Incentive Performance Awards program will be based upon the achievement of certain performance measures, including growth in consolidated revenue and operating return on invested capital, each year during the performance award cycle, and other measures, including growth in consolidated earnings per share, over the entire three year performance award cycle. The Restricted Units granted under this program vest at the end of the three year performance award cycle.

As of December 31, 2012, we had the following Restricted Units outstanding, including reinvested dividends:
 
Shares
(in thousands)
 
Weighted
Average
Grant Date
Fair Value
 
Weighted Average Remaining
Contractual Term
(in years)
 
Aggregate Intrinsic
Value (in millions)
Nonvested at January 1, 2012
15,839

 
$
62.98

 
 
 
 
Vested
(8,914
)
 
63.99

 
 
 
 
Granted
7,423

 
77.21

 
 
 
 
Reinvested Dividends
568

 
N/A

 
 
 
 
Forfeited / Expired
(272
)
 
67.51

 
 
 
 
Nonvested at December 31, 2012
14,644

 
$
68.71

 
1.57
 
$
1,080

Restricted Units Expected to Vest
14,172

 
$
68.61

 
1.55
 
$
1,045


The fair value of each Restricted Unit is the NYSE closing price of class B common stock on the date of grant. The weighted-average grant date fair value of Restricted Units granted during 2012, 2011 and 2010 was $77.21, $69.53 and $66.36, respectively. The total fair value of Restricted Units vested was $627, $557 and $523 million in 2012, 2011 and 2010, respectively. As of December 31, 2012, there was $571 million of total unrecognized compensation cost related to nonvested Restricted Units. That cost is expected to be recognized over a weighted average period of 3 years and 1 month.
Nonqualified Stock Options
We maintain fixed stock option plans, under which options are granted to purchase shares of UPS class A common stock. Stock options granted in connection with the Incentive Compensation Plan must have an exercise price at least equal to the NYSE closing price of UPS class B common stock on the date the option is granted.
Executive officers and certain senior managers annually receive non-qualified stock options of which the value is determined as a percentage of salary. Options granted generally vest over a five year period with approximately 20% of the award vesting at each anniversary date of the grant. All options granted are subject to earlier cancellation or vesting under certain conditions. Option holders may exercise their options via the tender of cash or class A common stock, and new class A shares are issued upon exercise. Options granted to eligible employees will be granted annually during the first quarter of each year.
The following is an analysis of options to purchase shares of class A common stock issued and outstanding:
 
 
Shares
(in thousands)
 
Weighted
Average
Exercise
Price
 
Weighted Average Remaining
Contractual Term
(in years)
 
Aggregate Intrinsic
Value (in millions)
Outstanding at January 1, 2012
13,199

 
$
70.18

 
 
 
 
Exercised
(2,778
)
 
63.50

 
 
 
 
Granted
187

 
76.94

 
 
 
 
Forfeited / Expired
(13
)
 
82.74

 
 
 
 
Outstanding at December 31, 2012
10,595

 
$
72.04

 
3.03
 
$
34

Options Vested and Expected to Vest
10,595

 
$
72.04

 
3.03
 
$
34

Exercisable at December 31, 2012
10,115

 
$
72.09

 
2.79
 
$
32



The fair value of each option grant is estimated using the Black-Scholes option pricing model. The weighted average assumptions used, by year, and the calculated weighted average fair values of options, are as follows:
 
2012
 
2011
 
2010
Expected dividend yield
2.77
%
 
2.77
%
 
2.70
%
Risk-free interest rate
1.63
%
 
2.90
%
 
3.30
%
Expected life in years
7.5

 
7.5

 
7.5

Expected volatility
25.06
%
 
24.26
%
 
23.59
%
Weighted average fair value of options granted
$
14.88

 
$
15.92

 
$
14.83


Expected volatilities are based on the historical returns on our stock and the implied volatility of our publicly-traded options. The expected dividend yield is based on the recent historical dividend yields for our stock, taking into account changes in dividend policy. The risk-free interest rate is based on the term structure of interest rates at the time of the option grant. The expected life represents an estimate of the period of time options are expected to remain outstanding, and we have relied upon a combination of the observed exercise behavior of our prior grants with similar characteristics, the vesting schedule of the grants, and an index of peer companies with similar grant characteristics in estimating this variable.
We received cash of $122, $92 and $60 million during 2012, 2011 and 2010, respectively, from option holders resulting from the exercise of stock options. We received a tax benefit of $3, $6 and $4 million during 2012, 2011 and 2010, respectively, from the exercise of stock options, which is reported as cash from financing activities in the cash flow statement.
The total intrinsic value of options exercised during 2012, 2011 and 2010 was $39, $31 and $18 million, respectively. As of December 31, 2012, there was $2 million of total unrecognized compensation cost related to nonvested options. That cost is expected to be recognized over a weighted average period of 3 years and 4 months.
The following table summarizes information about stock options outstanding and exercisable at December 31, 2012:
 
Options Outstanding
 
Options Exercisable
Exercise Price Range
Shares
(in thousands)
 
Average Life
(in years)
 
Average
Exercise
Price
 
Shares
(in thousands)
 
Average
Exercise
Price
$50.01 - $60.00
211

 
6.35
 
$
55.83

 
133

 
$
55.83

$60.01 - $70.00
1,337

 
1.20
 
62.98

 
1,257

 
62.72

$70.01 - $80.00
6,858

 
3.19
 
71.47

 
6,536

 
71.27

$80.01 - $90.00
2,189

 
3.33
 
80.92

 
2,189

 
80.92

 
10,595

 
3.03
 
$
72.04

 
10,115

 
$
72.09


Discounted Employee Stock Purchase Plan
We maintain an employee stock purchase plan for all eligible employees. Under this plan, shares of UPS class A common stock may be purchased at quarterly intervals at 95% of the NYSE closing price of UPS class B common stock on the last day of each quarterly period. Employees purchased 1.2, 1.3 and 1.5 million shares at average prices of $72.17, $66.86 and $57.98 per share during 2012, 2011, and 2010, respectively. This plan is not considered to be compensatory, and therefore no compensation cost is measured for the employees’ purchase rights.