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).

In 2012, certain executive officers were granted PepsiCo equity performance units (PEPUnits). These PEPUnits are earned based on achievement of a cumulative net income performance target and provide an opportunity to earn shares of PepsiCo common stock with a value that adjusts based upon absolute changes in PepsiCo’s stock price as well as PepsiCo’s Total Shareholder Return relative to the S&P 500 over a three-year performance period.

The Company may use either authorized and unissued shares or repurchased common stock to meet share requirements resulting from the exercise of stock options and the vesting of restricted stock awards.

At year-end 2012, 124 million shares were available for future stock-based compensation grants.

The following table summarizes our total stock-based compensation expense:



	2012			2011		2010
Stock-based compensation expense	$	278		$	326	$	299
Merger and integration charges	2			13		53
Restructuring and impairment (benefits) / charges	(7		)	4		—
Total ^(a)	$	273		$	343	$	352
Income tax benefits recognized in earnings related to stock-based compensation	$	73		$	101	$	89

(a) $86 million recorded in 2010 was related to the unvested PBG/PAS acquisition-related 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 three 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. In addition, we use the Monte-Carlo simulation option-pricing model to determine the fair value of market-based awards. The Monte-Carlo simulation option-pricing model uses the same input assumptions as the Black-Scholes model, however, it also further incorporates into the fair-value determination the possibility that the market condition may not be satisfied. Compensation costs related to awards with a market-based condition are recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided.

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. Awards to employees eligible for retirement prior to the award becoming fully vested are amortized to expense over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. 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 2012, are granted 50% stock options and 50% performance-based RSUs.

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



	2012		2011		2010
Expected life	6 years		6 years		5 years
Risk-free interest rate	1.3	%	2.5	%	2.3	%
Expected volatility	17	%	16	%	17	%
Expected dividend yield	3.0	%	2.9	%	2.8	%

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 29, 2012 is presented below:



Our Stock Option Activity	Options^(a)		Average Price^(b)		Average Life (years)^(c)	Aggregate Intrinsic Value^(d)
Outstanding at December 31, 2011	91,075		$	55.92
Granted	3,696		$	67.13
Exercised	(23,585	)	$	47.33
Forfeited/expired	(3,041	)	$	63.81
Outstanding at December 29, 2012	68,145		$	59.15	5.04	$	614,322
Exercisable at December 29, 2012	48,366		$	56.44	4.45	$	567,761
Expected to vest as of December 29, 2012	19,432		$	65.79	7.85	$	45,374


(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 31, 2011	12,340		$	62.96
Granted	4,404		$	66.64
Converted	(3,436	)	$	57.76
Forfeited	(1,326	)	$	64.80
Outstanding at December 29, 2012	11,982		$	65.60	1.49	$	815,051
Expected to vest as of December 29, 2012	11,616		$	65.58	1.34	$	790,128


(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.



Our PEPUnit Activity	PEPUnits^(a)		Average Intrinsic Value^(b)		Average Life (years)^(c)	Aggregate Intrinsic Value^(d)
Outstanding at December 31, 2011	—		$	—
Granted	410		$	64.85
Converted	—		$	—
Forfeited	(42	)	$	64.51
Outstanding at December 29, 2012	368		$	64.89	2.26	$	25,031
Expected to vest as of December 29, 2012	334		$	64.85	2.26	$	22,721


(a)	PEPUnits are in thousands.


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


(c)	Weighted-average contractual life remaining.


(d)	In thousands.

Other Stock-Based Compensation Data



	2012		2011		2010
Stock Options
Weighted-average fair value of options granted	$	6.86	$	7.79	$	13.93
Total intrinsic value of options exercised^(a)	$	512,636	$	385,678	$	502,354
RSUs
Total number of RSUs granted^(a)	4,404		5,333		8,326
Weighted-average intrinsic value of RSUs granted	$	66.64	$	63.87	$	65.01
Total intrinsic value of RSUs converted^(a)	$	236,575	$	173,433	$	202,717
PEPUnits
Total number of PEPUnits granted^(a)	410		—
Weighted-average intrinsic value of PEPUnits granted	$	64.85	$	—
Total intrinsic value of PEPUnits converted^(a)	—


(a)	In thousands.

As of December 31, 2012, there was $389 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.