NOTES TO FINANCIAL STATEMENTS
NOTE 18 EMPLOYEE STOCK AND SAVINGS PLANS
Stock-based compensation and related income tax benefits were as follows:
| (In millions) | 2008 | 2007 | 2006 |
|---|---|---|---|
| Total stock-based compensation | $1,479 | $1,550 | $1,715 |
| Income tax benefits related to stock-based compensation | $ 518 | $ 542 | $ 600 |
Employee Stock Purchase Plan. We have an employee stock purchase plan for all eligible employees. Compensation expense for the employee stock purchase plan is recognized in accordance with SFAS No. 123(R). Shares of our common stock may be purchased by employees at three-month intervals at 90% of the fair market value on the last day of each three-month period. Employees may purchase shares having a value not exceeding 15% of their gross compensation during an offering period. Employees purchased the following shares:
| (Shares in millions) | 2008 | 2007 | 2006 |
|---|---|---|---|
| Shares purchased | 18 | 17 | 17 |
| Average price per share | $26.78 | $25.36 | $23.02 |
At June 30, 2008, 107 million shares were reserved for future issuance.
Savings Plan. We have a savings plan in the United States that qualifies under Section 401(k) of the Internal Revenue Code, and a number of savings plans in international locations. Participating U.S. employees may contribute up to 50% of their salary, but not more than statutory limits. We contribute fifty cents for each dollar a participant contributes in this plan, with a maximum contribution of 3% of a participant’s earnings. Matching contributions for all plans were $238 million, $218 million, and $178 million in fiscal years 2008, 2007, and 2006, respectively. Matching contributions are invested proportionate to each participant’s voluntary contributions in the investment options provided under the plan. Investment options in the U.S. plan include Microsoft common stock, but neither participant nor our matching contributions are required to be invested in Microsoft common stock.
Stock Plans. We have stock plans for directors and for officers, employees, consultants, and advisors. At June 30, 2008, an aggregate of 786 million shares were authorized for future grant under our stock plans, which cover stock options, stock awards, and shared performance stock awards. Awards that expire or are canceled without delivery of shares generally become available for issuance under the plans. We issue new shares to satisfy stock option exercises.
Stock Awards and Shared Performance Stock Awards. Stock awards (SAs) are grants that entitle the holder to shares of common stock as the award vests. Our SAs generally vest over a five-year period.
Shared performance stock awards (SPSAs) are a form of SA in which the number of shares ultimately received depends on our business performance against specified performance targets. The performance period for SPSAs issued in fiscal years 2004, 2005, and 2006 was July 1, 2003 through June 30, 2006 (January 1, 2004 through June 30, 2006 for certain executive officers). Following the end of the performance period, the Compensation Committee of the Board of Directors determined that the number of shares of SAs to be issued was 37 million, based on the actual performance against metrics established for the performance period. One-third of the awards vested in each of the fiscal years 2007 and 2008. An additional one-third of the awards will vest in fiscal year 2009. Because the SPSAs covered a three-year period, SPSAs issued in fiscal year 2006 were given only to newly hired and promoted employees eligible to receive SPSAs.
The Company granted SPSAs for fiscal years 2007 and 2008 with performance periods of July 1, 2006 through June 30, 2007 and July 1, 2007 through June 30, 2008, respectively. At the end of the fiscal year performance period, the number of shares of stock subject to the award is determined by multiplying the target award by a percentage ranging from 0% to 150%. The percentage is based on performance metrics for the performance period, as determined by the Compensation Committee of the Board of Directors in its sole discretion. An additional number of shares, approximately 15% of the total target SPSAs, are available as additional awards to participants based on individual performance. One-quarter of the shares of stock subject to each award vest following the end of the performance period, and an additional one-quarter of the shares vest over each of the following three years. Following the end of the fiscal year 2007 performance period, the Compensation Committee of the Board of Directors determined that the number of shares of SAs to be issued was 11 million, based on the actual performance against metrics established for the performance period. The number of shares of SAs to be issued for the fiscal year 2008 performance period will be determined in the first quarter of fiscal year 2009.
We measure the fair value of SAs and SPSAs based upon the market price of the underlying common stock as of the date of grant, reduced by the present value of estimated future dividends. SAs and SPSAs are amortized over their applicable vesting period (generally three to five years) using the straight-line method. The fair value of each award grant is estimated on the date of grant using the following assumptions:
| (In millions) | 2008 | 2007 | 2006 |
|---|---|---|---|
| Dividend per share (quarterly amounts) | $0.10 - $0.11 | $0.09 - $0.10 | $0.08 - $0.09 |
| Interest rates range | 2.5% - 4.9% | 4.3% - 5.3% | 3.2% - 5.3% |
During fiscal year 2008, the following activity occurred under our existing plans:
| Shares (in millions) | Weighted Average Grant-Date Fair Value |
|
|---|---|---|
| Year Ended June 30, 2008 | ||
| Stock awards: | ||
| Nonvested balance, beginning of year | 124 | $24.67 |
| Granted | 71 | 27.83 |
| Vested | (33) | 24.49 |
| Forfeited | (9) | 25.61 |
| Nonvested balance, end of year | 153 | $26.12 |
| Shared performance stock awards: | ||
| Nonvested balance, beginning of year | 33 | $24.11 |
| Granted | 19 | 27.82 |
| Vested | (14) | 24.07 |
| Forfeited | (2) | 24.44 |
| Nonvested balance, end of year | 36 | $26.14 |
As of June 30, 2008, there was $3.2 billion and $586 million of total unrecognized compensation costs related to SAs and SPSAs, respectively. These costs are expected to be recognized over a weighted average period of 3.4 years and 2.8 years, respectively.
SPSAs granted in fiscal year 2008 include adjustments for estimated performance against performance targets.
During fiscal year 2007 and 2006, the following activity occurred under our plans:
| (In millions, except fair values) | 2007 | 2006 |
|---|---|---|
| Stock awards granted | 57 | 47 |
| Weighted average grant-date fair value | $25.15 | $24.70 |
| Shared performance stock awards granted | 11 | 3 |
| Weighted average grant-date fair value | $25.18 | $24.80 |
Stock Options. In fiscal year 2004, we began granting employees SAs rather than stock options as part of our equity compensation plans. Since then, stock options issued to employees have been issued primarily in conjunction with business acquisitions. Nonqualified stock options were granted to our directors under our non-employee director stock plan. Nonqualified and incentive stock options were granted to certain officers and employees under our employee stock plans. Options granted between 1995 and 2001 generally vest over four and one-half years and expire seven years from the date of grant, while certain options vest either over four and one-half years or over seven and one-half years and expire ten years from the date of grant. Options granted after 2001 vest over four and one-half years and expire ten years from the date of grant. Approximately ten million, two million, and one million stock options were granted in conjunction with business acquisitions during fiscal years 2008, 2007, and 2006, respectively.
Employee stock options outstanding were as follows:
| Shares (in millions) | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term (years) |
Aggregate Intrinsic Value (in millions) |
|
|---|---|---|---|---|
| Balance, June 30, 2007 | 524 | $27.86 | ||
| Granted | 10 | 8.63 | ||
| Exercised | (121) | 25.06 | ||
| Canceled | (48) | 32.05 | ||
| Forfeited | (1) | 15.58 | ||
| Balance, June 30, 2008 | 364 | $28.12 | 3.01 | $1,029 |
| Exercisable, June 30, 2008 | 357 | $28.12 | 2.95 | $ 899 |
Options outstanding as of June 30, 2008 include approximately 12 million options that were granted in conjunction with business acquisitions. While these options are included in the options outstanding balance, they are excluded from the weighted average exercise price of $28.12 presented. These options have an exercise price range of $0 to $150.93 and a weighted average exercise price of $9.03.
During fiscal years 2008, 2007, and 2006 the following activity occurred under our plans:
| (In millions) | 2008 | 2007 | 2006 |
|---|---|---|---|
| Total intrinsic value of stock options exercised | $1,042 | $ 818 | $ 491 |
| Total fair value of stock awards vested | $ ,804 | $ 566 | $ 377 |
| Total fair value of shared performance stock awards vested | $ ,336 | $ 292 | $ – |
Cash received and income tax benefits from stock option exercises were $3.0 billion and $365 million, respectively, for fiscal year 2008.