Microsoft Corporation 2012 Annual Report

Employee Stock and Savings Plans


We grant stock-based compensation to directors and employees. At June 30, 2012, an aggregate of 507 million shares were authorized for future grant under our stock plans, covering stock options, stock awards, and shared performance stock awards, and excluding shares reserved for issuance under our employee stock purchase plan. Awards that expire or are canceled without delivery of shares generally become available for issuance under the plans. We issue new shares of Microsoft common stock to satisfy exercises and vestings of awards granted under all of our stock plans.

Stock-based compensation expense and related income tax benefits were as follows:

(In millions)          
Year Ended June 30, 2012   2011   2010
Stock-based compensation expense $ 2,244   $ 2,166   $ 1,891
Income tax benefits related to stock-based compensation $   785   $   758   $   662

Stock Plans (Excluding Stock Options)

Stock awards

Stock awards ("SAs") are grants that entitle the holder to shares of Microsoft common stock as the award vests. Our SAs generally vest over a five-year period.

Shared performance stock awards

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.

We granted SPSAs for fiscal years 2012, 2011, and 2010 with performance periods of July 1, 2011 through June 30, 2012, July 1, 2010 through June 30, 2011, and July 1, 2009 through June 30, 2010, respectively. In August following the end of each 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 12% 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 on each of the following three anniversaries of the grant date.

Executive officer incentive plan

Under the Executive Officer Incentive Plan ("EOIP"), the Compensation Committee awards performance-based compensation to executive officers for specified performance periods. During the periods reported, executive officers were eligible to receive annual awards comprising cash and SAs from an aggregate incentive pool equal to a percentage of consolidated operating income. For fiscal years 2012, 2011, and 2010, the pool was 0.3%, 0.25%, and 0.45% of operating income, respectively.

In September following the end of the fiscal year, each executive officer may receive a combined cash and SA award with a total value equal to a fixed percentage of the aggregate pool. The fixed percentage ranges between 0% and 150% of a target based on an assessment of the executive officer's performance during the prior fiscal year. Following approval of the awards, 20% of the award is payable to the executive officers in cash, and the remaining 80% is converted into an SA for shares of Microsoft common stock. The number of shares subject to the SA portion of the award is determined by dividing the value of 80% of the total award by the closing price of Microsoft common stock on the last business day in August of each year. The SA portion of the award vests one-quarter immediately after the award is approved following fiscal year-end and one-quarter on August 31 of each of the following three years.

Activity for all stock plans

The fair value of each award was estimated on the date of grant using the following assumptions:

Year Ended June 30, 2012   2011 2010
Dividends per share (quarterly amounts) $ 0.16 – $ 0.20   $ 0.13 – $ 0.16 $ 0.13
Interest rates range 0.7% - 1.7%   1.1% - 2.4% 2.1% - 2.9%

During fiscal year 2012, the following activity occurred under our stock plans:

  Shares   Weighted
Fair Value
  (In millions)    
Stock Awards      
Nonvested balance, beginning of year                255   $ 23.59
Granted 90   $ 24.96
Vested (73)   $ 24.20
Forfeited (24)   $ 23.74
Nonvested balance, end of year 248   $ 23.90
Shared Performance Stock Awards      
Nonvested balance, beginning of year 32   $ 23.76
Granted 20   $ 22.88
Vested (15)   $ 24.69
Forfeited (4)   $ 23.82
Nonvested balance, end of year 33   $ 23.93

As of June 30, 2012, there was $4.4 billion and $495 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 2.9 years and 2.5 years, respectively.

During fiscal year 2011 and 2010, the following activity occurred under our stock plans:

(In millions, except fair values) 2011 2010
Stock Awards    
Awards granted 114 100
Weighted average grant-date fair value $ 22.17 $ 23.43
Shared Performance Stock Awards    
Awards granted 18 12
Weighted average grant-date fair value $ 22.56 $ 24.57

Following are the fair values of stock plan awards vested during the periods reported:

(In millions)
  2012   2011   2010
Total vest-date fair value of stock awards vested $ 1,971   $ 1,521   $ 1,358
Total vest-date fair value of shared performance stock awards vested $   388   $   289   $   227

Stock Options

Currently, we grant stock options primarily in conjunction with business acquisitions. We granted six million, zero, and one million stock options in conjunction with business acquisitions during fiscal years 2012, 2011, and 2010, respectively.

Employee stock options activity during 2012 was as follows:


Shares   Weighted
Exercise Price
  (In millions)       (Years)   (In millions)
Balance, July 1, 2011 93   $ 23.21        
Granted 6   $   9.41        
Exercised (64)   $ 22.20        
Canceled (13)   $ 29.44        
Balance, June 30, 2012 22   $ 18.69   2.15   $ 264
Exercisable, June 30, 2012 18   $ 20.77   0.83   $ 178

As of June 30, 2012 approximately six million options that were granted in conjunction with business acquisitions were outstanding. These options have an exercise price range of $0.01 to $29.24 and a weighted average exercise price of $9.33.

During the periods reported, the following stock option exercise activity occurred:

(In millions)          
  2012   2011   2010
Total intrinsic value of stock options exercised $   456   $   222   $   365
Cash received from stock option exercises $ 1,410   $ 1,954   $ 1,839
Tax benefit realized from stock option exercises $   160   $     77   $   126

Employee Stock Purchase Plan

We have an employee stock purchase plan (the "Plan") for all eligible employees. Shares of our common stock may be purchased by employees at three-month intervals at 90% of the fair market value on the last trading day of each three-month period. Employees may purchase shares having a value not exceeding 15% of their gross compensation during an offering period. Under the terms of the Plan that were approved in 2002, the Plan will terminate on December 31, 2012. Microsoft intends to request shareholder approval to renew the Plan and reserve additional shares for issuance under the Plan before December 31, 2012. Employees purchased the following shares during the periods presented:

(Shares in millions)      
Year Ended June 30, 2012 2011 2010
Shares purchased 20 20 20
Average price per share $ 25.03 $ 22.98 $ 23.73

At June 30, 2012, 23 million shares of our common stock were reserved for future issuance through the Plan.

Savings Plan

We have a savings plan in the U.S. 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 $373 million, $282 million, and $275 million in fiscal years 2012, 2011, and 2010, respectively, and were expensed as contributed. 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.