Stock-Based Compensation
 12 Months Ended
Jan. 28, 2012
Stock-Based Compensation [Abstract]  
Stock-Based Compensation

14) Stock-Based Compensation

The J. C. Penney Company, Inc. 2009 Long-Term Incentive Plan (2009 Plan) was approved by our stockholders in May 2009 and allows for grants of stock options, stock appreciation rights and stock awards (collectively, Equity Awards) and cash incentive awards (together, Awards) to employees (associates) and Equity Awards to our non-employee members of the Board of Directors. Under the 2009 Plan, Awards to associates are subject to such conditions as continued employment, qualifying termination, passage of time and/or satisfaction of performance criteria as specified in the 2009 Plan or set by the Human Resources and Compensation Committee of the Board.As of January 28, 2012, approximately 8 million shares of stock were available for future grant under the 2009 Plan.

Associate stock options and restricted stock awards typically vest over periods ranging from one to three years. The exercise price of stock options and the market value of restricted stock awards are determined based on the closing market price of our common stock on the date of grant. The 2009 Plan does not permit awarding stock options below grant-date market value nor does it allow any repricing subsequent to the date of grant. Associate stock options have a maximum term of 10 years.

In 2011, the Company approved equity inducement awards outside of the 2009 Plan (Inducement Awards) to our new Chief Executive Officer, President, Chief Operating Officer and Chief Talent Officer.

Our stock option and restricted stock award grants have averaged about 2.4% of outstanding stock over the past three years. We issue new shares upon the exercise of stock options, granting of restricted shares and vesting of restricted stock units.

 

Stock-Based Compensation Cost

 

 

 

 

 

($ in millions)

2011

 

2010

 

2009

 

Stock options

$              24

$              28

$              28

Stock awards

                22

                25

                12

 

 

 

 

Total stock-based compensation cost

$              46(1)

$              53

$              40

 

 

 

 

Total income tax benefit recognized for stock-based compensation arrangements

$              18

$              21

$              15

 

 

 

 

(1) Excludes $79 million of stock-based compensation costs reported in restructuring and management transition charges (see Note 17).

Stock Options

On March 15, 2011, we made an annual grant of approximately 2.4 million stock options to associates at an option price of $36.58, with a fair value of $11.40 per option.

If all outstanding options were exercised, common stock outstanding would increase by 6.8%. Additional information regarding options outstanding as of January 28, 2012 is as follows:

(Shares in thousands; price is weighted-average exercise price)

 

 

Exercisable

 

Total Outstanding

 

         Shares

          Price

 

        Shares

           Price

In-the-money

              6,470

$      29

 

         10,362

$      29

Out-of-the-money(1)

              4,305

        58

 

           4,305

        58

Total options outstanding

            10,775

        40

 

         14,667

        38

(1) Out-of-the-money options are those with an exercise price above the closing price of jcpenney common stock of $41.42 as of January 28, 2012.

 

 

 

The following table summarizes stock option activity during the year ended January 28, 2012:

 

 

 

 

 

 

 

Shares

(in thousands)

 

Weighted-
Average
Exercise Price
Per Share

 

Weighted-
Average
Remaining
Contractual
Term 

(in years)

 

Aggregate
Intrinsic
Value 

($ in millions)(1)

 

Outstanding at January 29, 2011

             15,013

$            36

 

 

Granted

               2,523

              36

 

 

Exercised

             (1,849)

              22

 

 

Forfeited/canceled

             (1,020)

              36

 

 

 

 

 

 

 

Outstanding at January 28, 2012

             14,667

              38

                  5.4

$              125

 

 

 

 

 

Exercisable at January 28, 2012

             10,775

              40

                  4.5

$                83

 

 

 

 

 

(1) The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option at year end.

 

Cash proceeds, tax benefits and intrinsic value related to total stock options exercised are provided in the following table:

 

 

 

 

($ in millions)

2011

 

2010

 

2009

 

Proceeds from stock options exercised

$            18

$                8

$                4

Intrinsic value of stock options exercised

              28

                  7

                  1

Tax benefit related to stock-based compensation

                7

                  3

                  2

Excess tax benefits realized on stock-based compensation

              10

                  2

                  -

As of January 28, 2012, we had $23 million of unrecognized and unearned compensation expense, net of estimated forfeitures, for stock options not yet vested, which will be recognized as expense over the remaining weighted-average vesting period of approximately one year.

Stock Option Valuation

Valuation Method. We estimate the fair value of stock option awards on the date of grant using a binomial lattice model. We believe that the binomial lattice model is a more accurate model for valuing employee stock options since it better reflects the impact of stock price changes on option exercise behavior.

Expected Term. Our expected option term represents the average period that we expect stock options to be outstanding and is determined based on our historical experience, giving consideration to contractual terms, vesting schedules, anticipated stock prices and expected future behavior of option holders.

Expected Volatility. Our expected volatility is based on a blend of the historical volatility of jcpenney stock combined with an estimate of the implied volatility derived from exchange traded options. Beginning in 2010, we increased the weighting of the implied volatility component of our expected volatility assumption due to implied volatility being a more appropriate indicator of future stock option volatility.

Risk-Free Interest Rate. Our risk-free interest rate is based on zero-coupon U.S. Treasury yields in effect at the date of grant with the same period as the expected option life.

Expected Dividend Yield. The dividend assumption is based on our current expectations about our dividend policy.

Our weighted-average fair value of stock options at grant date was $11.37 in 2011, $9.03 in 2010 and $6.29 in 2009 using the binomial lattice valuation model and the following assumptions:

 

 

 

 

 

 

2011

 

2010

 

2009

 

Weighted-average expected option term

4.5 years

4.5 years

4.5 years

Weighted-average expected volatility

41.2%

38.0%

57.0%

Weighted-average risk-free interest rate

1.75%

2.2%

1.8%

Weighted-average expected dividend yield

2.2%

2.2%

3.3%

Expected dividend yield range

1.8% – 2.2%

1.8% – 2.9%

1.8% – 5.0%

 

Stock Awards

On March 15, 2011, we made our annual grant of approximately 822,000 restricted stock unit awards to associates. These awards consisted of approximately 367,000 time-based restricted stock units and approximately 455,000 performance-based restricted stock units. The time-based restricted stock units vest one-third on each of the first three anniversaries of the grant date provided that the associate remains continuously employed with the Company during that time. The performance-based unit grant is a target award with a payout matrix ranging from 0% to 200% based on 2011 EPS (defined as per common share income from continuing operations, excluding any unusual and/or extraordinary items as determined by the Human Resources and Compensation Committee of the Board). In addition to the performance requirement, this award also includes a time-based vesting requirement, which is the same as the requirement for the time-based restricted stock unit award. Upon vesting, both the time-based restricted stock units and the performance-based restricted stock units will be paid out in shares of Company common stock. For 2011, based on EPS excluding unusual and/or extraordinary items identified by the Committee, no payout was earned for the performance-based restricted stock units and the performance-based restricted stock units were canceled.

 

In the fourth quarter of 2011, we granted approximately 3.9 million of restricted stock units under our Inducement Awards. Also in the fourth quarter, we granted approximately 835,000 restricted stock units to selected senior management under the 2009 Plan.

 

Additional restricted stock units of approximately 192,000 were issued during 2011 consisting of ad-hoc awards to associates, awards to non-employee Board members and dividend equivalents on outstanding awards. Dividend equivalents on outstanding awards are forfeited if vesting conditions are not met.

 

The following table summarizes our non-vested stock awards activity during the year ended January 28, 2012:

 

 

 

 

(shares in thousands)

Stock Awards

 

Weighted-
Average Grant
Date Fair 

Value

 

Non-vested at January 29, 2011

            2,028

$            27

Granted

            5,749

              33

Vested

           (3,691)

              30

Forfeited/canceled

              (398)

              35

 

 

 

Non-vested at January 28, 2012

            3,688

              32

 

 

 

As of January 28, 2012, we had $105 million of unrecognized compensation expense related to unearned associate stock awards, which will be recognized over the remaining weighted-average vesting period of approximately two years. The aggregate market value of shares vested during 2011, 2010 and 2009 was $145 million, $8 million and $10 million, respectively, compared to an aggregate grant date fair value of $111 million, $12 million and $24 million, respectively.