Note 9: Stock-Based Compensation

Stock-based compensation expense in the amount of $147.4 million, $231.0 million, and $368.5 million was recognized for the years ended December 31, 2011, 2010, and 2009, respectively, as well as related tax benefits of $51.6 million, $80.8 million, and $128.9 million, respectively. Our stock-based compensation expense consists primarily of performance awards (PAs), shareholder value awards (SVAs), and restricted stock units (RSUs). We recognize the stock-based compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period. We provide newly issued shares and treasury stock to satisfy stock option exercises and for the issuance of PA, SVA, and RSU shares. We classify tax benefits resulting from tax deductions in excess of the compensation cost recognized for exercised stock options as a financing cash flow in the consolidated statements of cash flows.

At December 31, 2011, additional stock-based compensation awards may be granted under the 2002 Lilly Stock Plan for not more than 93.0 million shares.

Performance Award Program

PAs are granted to officers and management and are payable in shares of our common stock. The number of PA shares actually issued, if any, varies depending on the achievement of certain pre-established earnings-per-share targets over a two-year period. In 2009, we granted both a one-year and a two-year award to all global management as a transition to a two-year performance period for all PAs granted beginning in 2010. PA shares are accounted for at fair value based upon the closing stock price on the date of grant and fully vest at the end of the measurement periods. The fair values of PAs granted for the years ended December 31, 2011 and 2010 were $31.90 and $30.88, respectively. The fair values of PAs granted in 2009 were $36.17 for the one-year award and $34.12 for the two-year award. The number of shares ultimately issued for the PA program is dependent upon the earnings achieved during the vesting period. Pursuant to this plan, approximately 3.9 million shares, 3.8 million shares, and 2.8 million shares were issued during the years ended December 31, 2011, 2010, and 2009, respectively. Approximately 1.6 million shares are expected to be issued in 2012. As of December 31, 2011, the total remaining unrecognized compensation cost related to nonvested PAs amounted to $16.7 million, which will be amortized over the weighted-average remaining requisite service period of 12 months.

Shareholder Value Award Program

SVAs are granted to officers and management and are payable in shares of common stock at the end of a three-year period. The number of shares actually issued varies depending on our stock price at the end of the three-year vesting period compared to pre-established target stock prices. We measure the fair value of the SVA unit on the grant date using a Monte Carlo simulation model. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model are based on implied volatilities from traded options on our stock, historical volatility of our stock price, and other factors. Similarly, the dividend yield is based on historical experience and our estimate of future dividend yields. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The weighted-average fair values of the SVA units granted during the years ended December 31, 2011, 2010, and 2009 were $28.33, $25.97, and $33.97, respectively, determined using the following assumptions:

(Percents)	2011	2010	2009
Expected dividend yield	4.90	4.50	4.00
Risk-free interest rate	.20–1.36	.10–1.36	.44–1.48
Range of volatilities	27.61–29.10	28.00–28.69	24.34–24.92

A summary of the SVA activity is presented below:

	Units Attributable to SVAs (in thousands)
Outstanding at January 1, 2009	1,903
Granted	1,416
Forfeited or expired	(559)
Outstanding at December 31, 2009	2,760
Granted	1,987
Issued	(365)
Forfeited or expired	(745)
Outstanding at December 31, 2010	3,637
Granted	1,830
Issued	(428)
Forfeited or expired	(740)
Outstanding at December 31, 2011	4,299

The maximum number of shares that could ultimately be issued upon vesting of the SVA units outstanding at December 31, 2011, is 5.6 million. Approximately 1.0 million shares are expected to be issued in 2012. As of December 31, 2011, the total remaining unrecognized compensation cost related to nonvested SVAs amounted to $45.9 million, which will be amortized over the weighted-average remaining requisite service period of 20 months.

Restricted Stock Units

RSUs are granted to certain employees and are payable in shares of our common stock. RSU shares are accounted for at fair value based upon the closing stock price on the date of grant. The corresponding expense is amortized over the vesting period, typically three years. The fair values of RSU awards granted during the years ended December 31, 2011, 2010, and 2009 were $35.80, $34.78, and $38.12, respectively. The number of shares ultimately issued for the RSU program remains constant with the exception of forfeitures. Pursuant to this plan, 1.5 million, 1.5 million and 0.5 million shares were granted during the years ended December 31, 2011, 2010, and 2009, respectively, and approximately 0.2 million and 0.2 million shares were issued during the years ended December 31, 2011 and 2010, respectively. Approximately 0.3 million shares are expected to be issued in 2012. As of December 31, 2011, the total remaining unrecognized compensation cost related to nonvested RSUs amounted to $52.0 million, which will be amortized over the weighted-average remaining requisite service period of 21 months.

Stock Option Program

Stock options were granted prior to 2007 to officers, management, and board members at exercise prices equal to the fair market value of our stock price at the date of grant. Options fully vest three years from the grant date and have a term of 10 years.

Stock option activity during the year ended December 31, 2011 is summarized below:

	Shares of Common Stock Attributable to Options (in thousands)	Weighted-Average Exercise Price of Options	Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at January 1, 2011	55,507	$69.04
Exercised	(18)	24.33
Forfeited or expired	(18,933)	74.56
Outstanding at December 31, 2011	36,556	66.22	1.8	$1.2
Exercisable at December 31, 2011	36,556	66.22	1.8	1.2

All options were vested as of December 31, 2011.

The intrinsic value of options exercised during the years ended December 31, 2011, 2010, and 2009 amounted to $0.2 million, $0.1 million, and $0.3 million, respectively. The total grant date fair value of options vested during the year ended December 31, 2009 amounted to $68.5 million. We received cash of $0.4 million, $0.1 million, and $0.2 million from exercises of stock options during the years ended December 31, 2011, 2010, and 2009, respectively. The recognized related tax benefits for all three years were not material.