Stock-Based Compensation Plans

6 Months Ended

Jun. 30, 2011

Stock-Based Compensation Plans

Stock-Based Compensation Plans

8.  Stock-Based Compensation Plans

Covance sponsors several employee stock-based compensation plans which are described more fully in Note 10 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010.

In May 2010, Covance’s shareholders approved the 2010 Employee Equity Participation Plan (the “2010 EEPP”) in replacement of the 2007 Employee Equity Participation Plan (the “2007 EEPP”).  Effective upon approval of the 2010 EEPP, no further grants or awards were permitted under the 2007 EEPP.  Shares remaining available for grant under the 2007 EEPP are available for grant under the 2010 EEPP.  The 2010 EEPP became effective on May 6, 2010 and will expire on May 5, 2020. The 2010 EEPP authorizes the Compensation and Organization Committee of the Board of Directors (the “Compensation Committee”), or such committee as is appointed by the Covance Board of Directors, to administer the 2010 EEPP and to grant awards to employees of Covance. The 2010 EEPP authorizes the Compensation Committee to grant the following awards: options to purchase common stock; stock appreciation rights; and other stock awards either singly or in combination. Shares granted, other than options or SARs, shall be counted against the shares available for grant based upon the ratio of 1.74 for every 1 share granted. The exercise period for stock options granted under the 2010 EEPP is determined by the Compensation Committee at the time of grant, and is generally ten years from the date of grant. The vesting period for stock options and stock awards granted under the 2010 EEPP is determined by the Compensation Committee at the time of grant. Beginning in 2009, options are generally granted with a pro rata three year vesting period for all employees.  Prior to 2009, options were generally granted with a pro rata three year vesting period for senior executives and a pro rata two year vesting period for all other optionees. Stock awards generally vest over a three year period for all employees. The number of shares of Covance common stock initially available for grant under the 2010 EEPP totaled approximately 4.3 million plus approximately 1.3 million shares remaining available under the 2007 EEPP at the time the 2010 EEPP was approved.  All grants and awards under the 2007 EEPP remaining outstanding are now administered in accordance with the provisions of the 2007 EEPP out of shares issuable under the 2010 EEPP. The Company may issue authorized but previously unissued shares or treasury shares when options are exercised or for stock awards. There have been no grants of stock appreciation rights under the 2007 EEPP or the 2010 EEPP.  At June 30, 2011 there were approximately 4.2 million shares remaining available for grants under the 2010 EEPP.

The grant-date fair value of stock option awards is estimated using an option pricing model as more fully described in Note 10 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010. The grant-date fair value of options expected to vest is expensed on a straight-line basis over the vesting period of the related awards.

The following table sets forth the weighted-average assumptions used to calculate the fair value of options granted for the three and six month periods ended June 30, 2011 and 2010:

	Three Months Ended June 30		Six Months Ended June 30
	2011	2010	2011	2010
Expected stock price volatility	37%	35%	37%	35%
Range of risk free interest rates	0.1% - 3.6%	0.1% - 3.8%	0.1% - 3.6%	0.1% - 3.8%
Expected life of options (years)	4.8	4.7	4.8	4.7

Restricted stock awards are granted subject to either service conditions (restricted stock) or service and performance conditions (performance-based shares).  The grant-date fair value of restricted stock and performance-based share awards, which has been determined based upon the market value of Covance’s shares on the grant date, is expensed on a straight-line basis over the vesting period of the related awards.

Covance had an employee stock purchase plan (the “ESPP”), pursuant to which Covance made available for sale to employees shares of its common stock at a price equal to 85% of the lower of the market value on the first or last day of each calendar quarter.  The ESPP was intended to give Covance employees the opportunity to purchase shares of Covance common stock through payroll deductions.  Effective January 1, 2011, the ESPP was terminated.

Results of operations for the three month period ended June 30, 2011 include total stock-based compensation expense of $9.8 million ($6.7 million net of tax benefit of $3.1 million), $4.9 million of which has been included in both cost of revenue and selling, general and administrative expenses.  Results of operations for the six month period ended June 30, 2011 include total stock-based compensation expense of $18.9 million ($12.9 million net of tax benefit of $6.0 million), $9.6 million of which has been included in cost of revenue and $9.3 million of which has been included in selling, general and administrative expenses.  Results of operations for the three month period ended June 30, 2010 include total stock-based compensation expense of $8.7 million ($5.9 million net of tax benefit of $2.8 million), $4.5 million of which has been included in cost of revenue and $4.2 million of which has been included in selling, general and administrative expenses. Results of operations for the six month period ended June 30, 2010 include total stock-based compensation expense of $16.2 million ($11.0 million net of tax benefit of $5.2 million), $8.2 million of which has been included in cost of revenue and $8.0 million of which has been included in selling, general and administrative expenses.