2. Dear Clients and Friends
PwC is pleased to share with
you our Stock
Compensation 2015
Assumption and
Disclosure Study. This
study presents our analysis of
the 2014 calendar year-end
assumptions and disclosures
separately for large, non-high
tech US public companies and
for high tech US public
companies.
In preparing this year’s study,
we considered only companies
with a late December fiscal
year-end that reported stock
compensation expense in their
2014 10-K. Our “large
company group” is comprised
of the top 100 non-high tech
companies based on market
capitalization in the S&P 500
meeting the reporting criteria.
We also looked at a “high tech”
company group, consisting of
the top 100 companies on the
NASDAQ technology, biotech,
and pharmaceutical industry
lists (nearly equally
distributed) also meeting our
reporting criteria. Some side-
by-side comparative
information for the two groups
is also provided.
To obtain the financial
information for the stock-
based compensation plans
included in the study, we
reviewed the publicly available
annual reports for the
companies selected. We also
included 2010 through 2013
data as well as 2006 data
(when ASC 718 stock
compensation rules were
implemented) for historical
comparison and perspective.
Please note that all historical
data is for companies in the
large and high tech company
groups that meet the above
criteria for 2014, which may
differ from the data for
companies in past year’s
studies.
The study highlights are
summarized in the first
section, followed by more
detailed comparative
information and discussion.
Comparatives relative to 2006
are summarized at the end of
the report.
We hope you will find the
results of our Stock
Compensation 2015
Assumption and
Disclosure Study useful in
benchmarking your company’s
assumptions and other data
points associated with your
stock compensation plans.
Ken Stoler
Partner
3. June 2015
Table of contents
Summary 2
Award types and value 5
Mix of awards granted 8
Option pricing model 9
Option pricing model assumptions —Expected term 12
Option pricing model assumptions —Volatility 14
Option pricing model assumptions —Risk-free rate and dividend
yield 16
Stock compensation expense 18
Comparison to year of ASC 718 (Formerly FAS 123R) adoption 20
For more information contact: 22
4. 2 Stock Compensation
We performed an analysis of the
stock compensation disclosures
made by 100 Large1 non-high tech
companies and 100 High Tech2
companies. All information in this
analysis is based on published
annual reports and other publicly
available information of the selected
companies. Due to changes in
market capitalization, corporate
transactions or plan design changes,
some of the companies within our
Large and High Tech groups included
in our study in prior years are not
included in this 2015 study. Also, as
companies may not have issued stock-
based compensation awards in all
prior years, data for some years may
consist of less than 100 companies3.
The following highlights the results of
our study and compares the 2014 data
to 2013 data.
Highlights
Large Companies High Tech Companies
2014 2013 2014 2013
Stock Compensation as a
Percentage of Income (Median)4 3.12% 3.43% 10.3% 12.01%
Types of Equity Awards Granted – By Value of Awards (Median)
Stock Options5 21% 23% 37% 33%
Restricted Stock6 79% 77% 63% 67%
Use of the Black-Scholes
Valuation Model (by Company)
77% Not collected 95% Not collected
Assumptions Used for Black-Scholes Model (Median)
Expected Term (years) 6.00 6.00 5.70 5.70
Volatility 28.20% 30.02% 45.00% 50.89%
Risk-free Rate 1.80% 1.14% 1.73% 1.20%
Dividend Yield 2.10% 2.40% 1.85% 2.01%
1
“Large” refers to the top 100 companies in the S&P 500 by market capitalization with stock
compensation expense in 2014 and a fiscal year-end in late December that are not in the
technology, pharmaceutical, or biotechnology sectors.
2
“High Tech” refers to the top 100 companies on the NASDAQ technology, biotechnology, and
pharmaceutical industry lists, evenly distributed, with stock compensation expense in 2014 and a
fiscal year-end of late December.
3
When non-zero data exists for less than 100 companies, results are for only those companies
reporting data (i.e., proportional distribution will add up to 100% even when there are less than
100 companies in the analysis).
4
Excludes companies with a net operating loss.
5
For purposes of this study “stock options” is used to refer to both employee stock option and
stock appreciation right (“SAR”) awards granted by a company, unless separately presented and
identified.
6
For purposes of this study “restricted stock” is used to refer to restricted stock, restricted stock
unit and unvested unit awards granted by a company.
Summary
5. 2015 Assumption and Disclosure Study | PwC 3
Large companies
When valuing stock options, compa-
nies continue to rely heavily on the
Black-Scholes option pricing model,
with 77% of Large companies
relying solely on the use of that
model in valuing their stock
compensation awards. However,
23% of Large companies employ
other models such as a lattice model
or a Monte
Carlo simulation in valuing either
options or restricted stock.
Median Black-Scholes option
pricing model assumptions in 2014
generally reflected changes in
observed market conditions
compared with those reported at
December 31, 2013 for Large
companies. While the expected
term remained at the prior year’s
level, the volatility assumption
continued a pattern of decreases
experienced over recent years. The
risk-free rate of interest increased
significantly, reflecting a rise in
Treasury rates over the past two
years. The dividend yield
assumption decreased somewhat
from assumed yields in the past
several years, which is consistent
with observed reported dividend
yields not having increased as much
as stock price percentage increases
since 2013.
Equity awards granted by Large
companies showed a small shift in
the mix (by median share volume)
to 56% stock options and 44%
restricted stock in 2014, compared
to a 58%/42% mix in 2013 and a
74%/26% mix in 2006. However,
consistent with prior years, the total
granted in 2014, with restricted
stock making up 79% of the total
grant value.
We noted that a number of banking
and financial services companies
issued significant amounts in only
restricted stock and that generally
when companies issued both stock
options and restricted stock, the
value of the restricted stock grants
were greater than the stock option
grants.
Median stock compensation as a
percentage of income before taxes
for Large companies decreased
again over the past year, going from
3.63% in 2012 and 3.43% in 2013 to
3.12% in 2014, due to more scrutiny
relative to executive compensation
and higher earnings as the economy
improved.
High tech companies
High Tech companies continue to
rely heavily on the Black-Scholes
option pricing model with 95% of
the study group using this model
only in valuing stock compensation
awards.
Overall, median Black-Scholes
option pricing model assumptions
for High Tech companies moved
similarly to those of the Large
company group, from 2013 to 2014.
The assumed expected term was
unchanged, while the stock price
volatility assumption continued a
pattern of decreases experienced
over recent years.
Like with Large companies, the
assumed risk-free rate of interest
for High Tech companies increased
significantly from the lower levels of
the past two years and the
dividend yield assumption
decreased somewhat from assumed
yields in the past several years.
Stock option awards continue to be
a popular type of equity award
granted (by median share volume)
for these companies, with 61% of
awards being stock options in 2014
vs. 53% in 2013, but lower since
2006 when 76% of stock
compensation awards granted by
this group were stock options.
However, similar to the Large
companies, the median value of
restricted stock granted by the
group far outpaced that of stock
options for 2014, where 63% of the
granted value was in restricted stock
awards.
Also similar to the Large companies,
the median stock compensation as a
percentage of income before taxes
for High Tech companies also
decreased again over the past year,
going from 13.28% in 2012 and
12.01% in 2013 to 10.30% in 2014.
6. 2015 Assumption and Disclosure Study | PwC 4
value of restricted stock awards far
exceeded the value of stock options
7. 5 Stock Compensation
Large companies
Over the last 5 years, the shift from
stock options to restricted stock
awards has been consistent. In terms
of group median number of awards
granted, in 2010 the number of stock
options granted compared to the
number of restricted stock awards
was almost to 2 to 1, while by 2014 it
had dropped to about 1.25 to 1.
From a value granted perspective, at
the median, stock option grants have
steadily decreased in comparison to
restricted stock awards. In 2010, the
ratio of restricted stock to stock
option award value was just under 2
to 1; by 2014 that ratio had grown to
just over 3.75 to 1.
5-year Summary
Median Values 2014 2013 2012 2011 2010
Number of
stock options
2.0M 2.3M 2.7M 2.4M 3.7M
Grant date
option value
$31.7M $29.9M $36.0M $33.2M $40.4M
Number of
restricted stock
1.6M 1.6M 1.7M 1.6M 1.9M
Grant date
stock value
$119.9M $98.4M $86.0M $82.8M $77.1M
Award Types—Stock Options and Restricted Stock (percent of median # of units awarded)
56% 58%
62% 60%
66%
44% 42%
38% 40%
34%
0%
10%
20%
30%
40%
50%
60%
70%
80%
2014 2013 2012 2011 2010
PercentofCompanies
Stock Options Restricted Stock
Award types
and value
8. 2015 Assumption and Disclosure Study | PwC 6
Award Types—Stock Options and Restricted Stock (percent of median grant value)
High tech companies
Over the last 5 years, at the median,
the High Tech companies have also
shown a shift in the mix from stock
options to restricted stock awards.
The ratio of the number of stock
option awards granted to the number
of restricted stock awards granted
was about 2.5 to 1 in 2010; in 2014 it
had closed to just 1.5 to 1, reflecting
the change in the distribution of
award types that High Tech
companies grant.
From a value granted perspective, at
the median, stock option grants have
increased in value but not at the pace
of restricted stock awards. In 2010,
the ratio of restricted stock value
granted to the value of stock option
awards was about 1.5 to 1. By 2014
that ratio had increased to 1.7 to 1.
5-year Summary
Median Values 2014 2013 2012 2011 2010
Number of
stock options
1.2M 1.1M 1.2M 1.3M 1.4M
Grant date
option value
$14.8M $12.8M $8.7M $8.3M $8.2M
Number of
restricted stock
0.8M 1.0M 0.7M 0.7M 0.6M
Grant date
stock value
$24.8M $26.3M $20.8M $11.8M $12.3M
21% 23%
29% 29%
34%
79% 77%
71% 71%
66%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2014 2013 2012 2011 2010
PercentofCompanies
Stock Options Restricted Stock
9. 7 Stock Compensation
Award Types—Stock Options and Restricted Stock (percent of median # of units awarded)
Award Types—Stock Options and Restricted Stock (percent of median grant value)
61%
53%
63%
66%
70%
39%
47%
37%
34%
30%
0%
10%
20%
30%
40%
50%
60%
70%
80%
2014 2013 2012 2011 2010
PercentofCompanies
Stock Options Restricted Stock
37%
33%
30%
42% 40%
63%
67%
70%
58% 60%
0%
10%
20%
30%
40%
50%
60%
70%
80%
2014 2013 2012 2011 2010
PercentofCompanies
Stock Options Restricted Stock
10. 2015 Assumption and Disclosure Study | PwC 8
Large companies
Of the Large companies in our study,
for 2014 only 19% of companies
granted just one type of equity award
including 1% of companies granting
only stock options.
However, most companies (81%)
provided a mix of equity award
types with 21% of companies
providing SARs with stock options
or restricted stock, 22% of
companies providing both stock
options and restricted stock and
38% of companies providing SARs,
stock options, and restricted stock.
Award Mix (percent of companies)
High tech companies
Of the High Tech companies in
our study, for 2014 only 14% of
companies granted just one type
of equity award (6% granted
stock options only, 7% granted
restricted stock only, and 1%
granted SARs only).
The majority of companies (86%)
provided a mix of equity awards
types with 14% of companies
providing SARs with stock options or
restricted stock, 28% of companies
providing both stock options and
restricted stock and 44% of
companies providing SARs, stock
options, and restricted stock.
Award Mix (percent of companies)
1%
18%
0%
22%
6%
15%
38%
0%
10%
20%
30%
40%
Stock Options only Restricted Stock only SARs only Stock Options &
Restricted Stock
Stock Options &
SARs
Restricted Stock &
SARs
Stock Options, SARs
& Restricted Stock
6% 7%
1%
28%
7% 7%
44%
0%
10%
20%
30%
40%
50%
Stock Options only Restricted Stock only SARs only Stock Options &
Restricted Stock
Stock Options &
SARs
Restricted Stock &
SARs
Stock Options, SARs
& Restricted Stock
Mix of
awards granted
11. 9 Stock Compensation
Model choices
Companies generally have a choice of
what option pricing model to use in
valuing stock awards. However, more
complex awards or those with market
conditions (i.e., provisions indexed
to the value of the issuer’s shares)
generally need to be valued using a
more sophisticated approach, such as
a lattice model7.
Large companies
For Large companies, the model of
choice continues to be the Black-
Scholes option pricing model, with
77% of the companies reporting its
use exclusively.
Approximately 23% of companies
used a lattice model (solely or in
addition to the Black-Scholes
model), likely reflecting the
increasing popularity of awards with
market-based vesting criteria, such
as increases in share price or total
shareholder return measures.
High tech companies
For High Tech companies, the
Black-Scholes model is also most
common, with 95% of the companies
reporting its use exclusively. Lattice
models were reported used by only
5% of the High Tech companies.
Large Companies 2014 Valuation Basis8 High Tech 2014 Valuation Basis
7
“Lattice model” for this study refers to lattice models, Monte Carlo simulations, and other complex modeling that is generally required for
valuing options and restricted stock with complex features.
8
For the valuation basis, “Black-Scholes model” is the percentage of companies using solely the Black-Scholes valuation model and “Lattice
model” is all other companies which may use the lattice model alone or in addition to the Black-Scholes model to value either stock options or
market-based vesting restricted stock.
77%
23% Black-Scholes
model
Lattice model
95%
5%
Black-Scholes
model
Lattice model
Option pricing
model
12. 2015 Assumption and Disclosure Study | PwC 10
Basis for expected
term and volatility –
Large companies
Large companies have continued to
rely mostly on historical experience
in developing assumptions for
valuing stock options in 2014. For
Large companies that granted stock
options in 2014 and disclosed its
expected term methodology, 81%
relied solely on historical experience,
6% used the so-called simplified
method9, and another 13% relied
on other methods (e.g., derived
from a lattice model or Monte
Carlo simulation).
Of the Large companies that granted
stock options in 2014 and disclosed
volatility methodology, 46% relied
solely on historical stock price data
for the volatility assumption, 9% of
the companies in the analysis relied
solely on implied volatility10 (i.e., the
volatility inherent in the company’s
market traded options), and 45%
used a blend of historical and
implied volatilities. None of the
Large companies in our study group
disclosed using peer group volatility.
2014 Expected Term Basis 2014 Volatility Basis
9
As described in ASC 718-10-S99; a company should consider their historical data available for awards with similar terms and issued to
employees with similar characteristics, among other criteria to substantiate the lack of credible data and reliance upon the simplified method as
described in SAB Topic 14.
10
As described in ASC 718-10-S99; a company should consider whether they have met the various criteria in the standard (e.g., plain vanilla
option, option contracts of 1-year or longer only, at or near-the-money contracts, sufficient volume, etc.).
81%
6%
13%
Historical
experience
Simplified method
Derived from
valuation model
46%
9%
45%
Historical
experience
Implied volatility
Blended volatility
13. 11 Stock Compensation
Basis for expected
term and volatility—
High tech companies
When setting the expected term or
volatility assumptions for valuing
stock options (the more significant
assumptions for the Black- Scholes
pricing model), the High Tech
companies in our study continued to
rely heavily on historical experience.
For High Tech companies that
disclosed the expected term
assumption for 2014, 67% of
companies relied solely on historical
experience while 30% used the
simplified method and another 3%
relied on other methods (e.g.,
derived from a lattice model or
Monte Carlo simulation). As many
companies now
have credible historical data they can
track and analyze, a significant
number of companies have switched
from the simplified method to
historical experience over the past
several years.
Of the High Tech companies that
granted stock options in 2014 and
disclosed the volatility
methodology, 53% of the companies
used historical stock price data as the
sole basis for the volatility
assumption, 10% of the companies
relied solely on implied volatility,
25% used a blend of historical and
implied volatilities, and the
remaining 12% relied on peer
group data.
2014 Expected Term Basis 2014 Volatility Basis
67%
30%
3%
Historical
experience
Simplified method
Derived from
valuation model
53%
10%
25%
12%
Historical
experience
Implied
volatility
Blended
volatility
Peer Group
14. 2015 Assumption and Disclosure Study | PwC 12
Large companies
Similar to the 6.00% median
expected term assumption for Large
companies, their average expected
term assumption in 2014 was 5.89
years, reflecting a small increase
from the average in 2013 (5.81 years)
and slightly longer than the average
in 2010 (5.80 years).
For 2014, the expected term
assumption for the 20th to 80th
percentiles ranged from
5.00 years to 6.50 years, somewhat
narrower than the 2010 the range of
5.00 years to 6.75 years. The
percentage of Large companies in
2014 with an expected term of 5 or
more years was 85%, nearly
unchanged since 2010 (83%). There
was also little change in the
percentage of Large companies
assuming an expected term of 7 or
more years, increasing from 15% in
2010 to 17% in 2014. However, the
low end assumed expected term in
2014 was significantly greater than
in prior years.
Expected Term
2014 2013 2012 2011 2010
Low 3.75 0.50 1.50 2.00 2.50
Median (middle) 6.00 6.00 6.00 5.90 6.00
Mean (average) 5.89 5.81 5.94 5.82 5.80
High 8.85 8.95 9.00 8.50 8.30
Expected Term Assumption (in years)
0%
10%
20%
30%
40%
<4 4-5 5-6 6-7 7-8 >8
PercentofCompanies
2014 2013 2012 2011 2010
Option pricing
model assumptions
—Expected term
15. 13 Stock Compensation
High tech companies
Similar to the 5.70%% median
expected term assumption for High
Tech companies, their average
expected, the average expected
term assumption was 5.48 years
in 2014, decreasing from 5.60
years in 2013 and increasing
somewhat from 5.32 years in 2010.
For 2014, the expected term
assumption for the 20th to 80th
percentiles ranged from 4.7 years
to 6.1 years while in 2010 the range
was slightly broader, from 4.6
years to 6.1 years. Additionally, the
percentage of High Tech
companies in 2014 with an
expected term of 6 or more years
was 34% whereas in 2010 it was
just 28%.
Expected Term
2014 2013 2012 2011 2010
Low 2.50 3.60 2.70 1.25 1.25
Median (middle) 5.70 5.70 5.60 5.60 5.40
Mean (average) 5.48 5.60 5.51 5.43 5.32
High 9.10 9.10 9.10 8.60 9.50
Expected Term Assumption (in years)
0%
10%
20%
30%
40%
50%
<4 4-5 5-6 6-7 7-8 >8
PercentofCompanies
2014 2013 2012 2011 2010
16. 2015 Assumption and Disclosure Study | PwC 14
Large companies
Similar to the change in the median
volatility, for Large companies, the
average volatility assumption has
decreased from 33.4% in 2010 to
about 29% in 2014. This decline in
the volatility assumption reflects the
lessening impact of the 2008
financial crisis on stock price
volatility as we continue to put it
further behind us.
For 2014, the volatility assumption
for the 20th to 80th percentiles
ranged from 22% to 36% while in
2010 the range was 27% to 40%. Also
reflecting the decrease in stock price
volatility over that period, 10% of
Large companies reported a volatility
assumption of 40% or higher in 2014,
whereas in 2010 21% of the
companies reported such a high
volatility assumption.
Volatility
2014 2013 2012 2011 2010
Low 13.41% 15.40% 12.86% 12.54% 14.50%
Median (middle) 28.20% 30.02% 34.00% 32.70% 32.85%
Mean (average) 28.97% 31.53% 34.21% 33.41% 33.40%
High 51.50% 56.59% 60.00% 58.00% 54.23%
Volatility Assumption
0%
10%
20%
30%
<20% 20%-25% 25%-30% 30%-35% 35%-40% >40%
PercentofCompanies
2014 2013 2012 2011 2010
Option pricing
model assumptions
—Volatility
17. 15 Stock Compensation
High tech companies
Like for Large companies and
similar to the change in the median
volatility assumption, for High Tech
companies, the average volatility has
decreased somewhat over the last 5
years, from almost 54% in 2010 to
almost 52% in 2014.
Volatility assumptions for High Tech
companies continue to be
substantially higher than those in
the Large company group, reflecting
the relative youth and risk of
investing in
the companies in the High Tech
group and of their industry sectors
overall.
For 2014, the volatility assumption
for the 20th to 80th percentiles
ranged from 33% to 71% while in
2010 the range was 34% to 73%.
Also reflecting the decrease in stock
price volatility over that period, 28%
of High Tech companies reported a
volatility of 65% or higher in 2014,
whereas in 2010 32% of the
companies reported such a high
volatility assumption.
Volatility
2014 2013 2012 2011 2010
Low 20.53% 22.10% 21.00% 23.50% 25.85%
Median (middle) 45.00% 50.89% 50.00% 51.50% 46.90%
Mean (average) 51.83% 53.47% 54.19% 53.97% 53.77%
High 114.70% 105.90% 111.00% 110.00% 134.66%
Volatility Assumption
0%
10%
20%
30%
<25% 25%-35% 35%-45% 45%-55% 55%-65% 65%-75% 75%-85% >85%
PercentofCompanies
2014 2013 2012 2011 2010
18. 2015 Assumption and Disclosure Study | PwC 16
Large companies
Generally, the risk-free rate and the
dividend yield assumptions will not
have as significant an impact on the
option pricing model results
compared to the expected term and
volatility assumptions, but they are
still important factors in determining
fair market value of employee stock
options.
Similar to the change in the median
assumption for Large companies
over the last 5 years, the average
risk-free interest rate decreased
significantly from 2.47% in 2010 to
1.17% in 2013, but then increased to
1.83% in 2014.
Also, both the median and the
average assumptions for the Large
companies reporting a dividend
yield assumption decreased in 2014
from higher levels since 2010, with
the average showing a decreasing
pattern over the past two years as
stock prices have risen significantly.
Risk-Free Interest Rate
2014 2013 2012 2011 2010
Low 1.00% 0.10% 0.40% 0.58% 0.87%
Median (middle) 1.80% 1.14% 1.10% 2.30% 2.49%
Mean (average) 1.83% 1.17% 1.14% 2.16% 2.47%
High 2.80% 2.50% 2.19% 3.42% 3.89%
Dividend Yield11
2014 2013 2012 2011 2010
Low 0.10% 0.10% 0.10% 0.10% 0.10%
Median (middle) 2.10% 2.40% 2.40% 2.28% 2.50%
Mean (average) 2.24% 2.36% 2.48% 2.36% 2.47%
High 4.90% 4.40% 5.40% 5.96% 6.61%
11
For both Large and High Tech groups, the results for the dividend yield assumption reflect only those companies reporting a non-zero
dividend yield assumption.
Option pricing
model assumptions
—Risk-free rate and
dividend yield
19. 17 Stock Compensation
High tech companies
Like for Large companies and similar
to the change in the median
assumption, for High Tech
companies over the last 5 years, the
average risk-free interest rate
assumption decreased significantly
from 2.14% in 2010 to 1.24% in 2013,
but then increased to 1.72% in 2014.
Also like with Large companies, both
the median and average assumptions
for the High Tech companies
reporting a dividend yield
assumption decreased in 2014 from
higher levels since 2010, showing a
decreasing pattern over the past two
years as stock prices have risen
significantly.
Risk-Free Interest Rate
2014 2013 2012 2011 2010
Low 0.90% 0.69% 0.30% 0.25% 0.49%
Median (middle) 1.73% 1.20% 0.95% 1.84% 2.10%
Mean (average) 1.72% 1.24% 0.96% 1.79% 2.14%
High 2.90% 2.20% 2.10% 2.90% 3.30%
Dividend Yield
2014 2013 2012 2011 2010
Low 0.18% 0.20% 0.26% 0.32% 0.37%
Median (middle) 1.85% 2.01% 2.20% 2.16% 2.33%
Mean (average) 1.82% 2.03% 2.33% 2.10% 1.96%
High 3.60% 4.30% 4.10% 4.14% 4.00%
20. 2015 Assumption and Disclosure Study | PwC 18
Large companies
For the Large companies in our study,
the median stock compensation
expense has increased
each year since 2010, with a
similar pattern in the median
company earnings over the last 5
years, except for 2012.
Pre-tax Earnings and Stock Compensation Expense12
Median 2014 2013 2012 2011 2010
Stock Comp. Expense $130M $128M $115M $108M $107M
Earnings $3.9B $3.7B $3.0B $3.5B $3.3B
Stock Compensation Expense as a
percentage of earnings (Expense
Ratio) was highest in 2012 when
earnings were down than at any other
point in the 5-year period.
However, the Expense Ratio has
decreased over the past two years as
there has been more scrutiny relative
to executive compensation while
earnings have increased.
Stock Compensation Expense as % of Income before Taxes13
Median 2014 2013 2012 2011 2010
Expense Ratio 3.12% 3.43% 3.63% 3.22% 3.29%
For 2014, stock compensation as a
percentage of income for the 20th
to 80th percentiles ranged
from about 1.6% to 5.6%, with the 80th
percentile down from 2010 when the
range was about 1.6% to 8.9%.
Stock Compensation Expense as a Percent of Earnings
12
For both Large and High Tech groups, includes companies reporting a negative stock compensation expense or a net operating loss.
13
For both Large and High Tech groups, excludes companies with a negative stock compensation expense or a net operating loss reported in
the year shown; as such, Expense Ratios shown are independent of the stock compensation expense and company earnings shown in the
chart above.
0%
10%
20%
30%
40%
<2% 2%-3% 3%-4% 4%-5% 5%-6% >6%
PercentofCompanies
2014 2013 2012 2011 2010
Stock compensation
expense
21. 19 Stock Compensation
High tech companies
For the High Tech companies in
our study, the median stock
compensation expense has grown
substantially over the last 5 years.
However, the median company
earnings has varied significantly
over the period, reflective of the
volatility of earnings for the
majority/smaller companies in
the grouping.
Stock Compensation Expense and Pre-tax Company Earnings
Median 2014 2013 2012 2011 2010
Stock Comp. Expense $29M $26M $21M $15M $14M
Earnings $46M $76M $57M $43M $61M
Like with Large companies, the High
Tech company median Expense
Ratio was higher in 2012 than at any
point in the 5-year period and
decreased over the past two years.
Still, it remains in the double digits
for 2014 and is higher than in 2010
and 2011.
Stock Compensation Expense as % of Income before Taxes
Median 2014 2013 2012 2011 2010
Expense Ratio 10.30% 12.01% 13.28% 8.61% 8.99%
For 2014, stock compensation as a
percentage of income for the 20th to
80th percentiles ranged from about
4.5% to 26.4%, with the percentile
range now wider from 2010 when the
range was about 5.1% to 21.7%.
Stock Compensation Expense as % of Income before Taxes
0%
10%
20%
30%
40%
<5% 5%-10% 10%-15% 15%-20% 20%-25% >25%
PercentofCompanies
2014 2013 2012 2011 2010
22. 2015 Assumption and Disclosure Study | PwC 20
The following is a comparison of 2014
data to data from 2006, the year
when the current stock compensation
rules were implemented and expense
moved from being simply a disclosure
item to a P&L impact for most stock
compensation awards.
Of note, both High Tech and Large
company groups are moving toward
greater reliance on stock awards and
less on options (in terms of both the
median value of grants awarded as
well as the median number of units
granted). Median stock compensation
as a percentage of income is about the
same in 2006 and 2014 at just above
3% for Large companies, but has
decreased from 18.3%in 2006 to
10.3% in 2014 for High Tech
companies.
Methods/processes established in
2006 remain prevalent in 2014. The
Black-Scholes option valuation model
is still widely used, although we note
there is nothing to stop a company
from using a lattice model with more
refined techniques to value any
option award, such as use
of exercise rates at different
multiples of the original grant date
stock price or varying assumptions
throughout the exercise period.
Reliance on historical data for the
expected term is used by the
majority of companies, although
Large companies are slightly more
likely to use a derived period from a
valuation model. Historical data for
volatility is also a common basis, but
over 40% of companies in both
groups rely on implied volatility
from market traded company
options in combination with
historical volatility or on a stand-
alone basis.
Since 2006, for the two company
groups, median assumptions for the
expected term and dividend yield
have increased, whereas the median
risk-free rate assumption has
followed the up and down trends of
Treasury rates. For High Tech
companies, the median volatility
assumption has decreased slightly in
2014 compared to 2006, while it has
increased slightly for Large
companies.
Comparison to year
of ASC 718
(Formerly FAS 123R)
adoption
23. 21 Stock Compensation
Comparison of 2014 to 2006
Large Companies High Tech Companies
2014 2006 2014 2006
Stock Compensation as a Percentage of
Income (Median)
3.12% 3.14% 10.30% 18.30%
Types of Equity Awards Granted – By
Number of Units (Median)
Stock Options 56% 74% 61% 76%
Restricted Stock 44% 26% 39% 24%
Types of Equity Awards Granted – By Value
of Awards (Median)
Stock Options 21% 48% 37% 55%
Restricted Stock 79% 52% 63% 45%
Methods Used for Valuation or Assumption
Setting Purposes (by Company)
Use of the Black-Scholes Valuation
Model Only
77% 84% 95% 95%
Use of Only Historical Data for
Expected Term
81% 77% 67% 63%
Use of Only Historical Data for Volatility 45% 44% 53% 52%
Assumptions Used for Black-Scholes Model
(Median)
Expected Term (years) 6.00 5.45 5.70 5.00
Volatility 28.20% 26.00% 45.00% 47.75%
Risk-free Rate 1.80% 4.64% 1.73% 4.77%
Divided Yield 2.10% 1.80% 1.85% 1.45%
24. 2015 Assumption and Disclosure Study | PwC 22
If you would like additional details on our
analysis, please contact any of the authors
listed below or your regional Human
Resource Services professional:
Ken Stoler
(213) 270 8933
ken.stoler@us.pwc.com
Kevin Hassan
(203) 539 4049
kevin.hassan@us.pwc.com
Ken Gritzan
(646) 471 4596
ken.gritzan@us.pwc.com
Also, a special thanks to Thien-
Huong Nguyen of PwC’s Human Resource
Services.
For more
information
contact:
