Note 17—Share-based Compensation

The Company’s 2007 Equity Incentive Compensation Plan, or the EIP, authorizes the compensation committee of the board of directors to grant non-qualified stock options ("options"), restricted stock awards ("RSAs"), restricted stock units ("RSUs") and performance-based shares to its employees and non-employee directors, for up to 59 million shares of class A common stock. Shares available for award may be either authorized and unissued or previously issued shares subsequently acquired by the Company. The EIP will continue to be in effect until all of the common stock available under the EIP is delivered and all restrictions on those shares have lapsed, unless the EIP is terminated earlier by the Company’s board of directors. No awards may be granted under the plan on or after 10 years from its effective date.

Share-based compensation cost is recorded net of estimated forfeitures on a straight-line basis for awards with service conditions only, and on a graded-vesting basis for awards with service, performance and market conditions. The Company’s estimated forfeiture rate is based on an evaluation of historical, actual and trended forfeiture data. For fiscal 2012, 2011, and 2010, the Company recorded share-based compensation cost of $147 million, $154 million and $135 million, respectively, in personnel on its consolidated statements of operations. The amount of capitalized share-based compensation cost was immaterial during fiscal 2012, 2011, and 2010.

Options

Options issued under the EIP expire 10 years from the date of grant and vest ratably over three years from the date of grant, subject to earlier vesting in full under certain conditions.

During fiscal 2012, 2011 and 2010, the fair value of each stock option was estimated on the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:



	2012			2011			2010⁽¹⁾
Expected term (in years)⁽²⁾	6.02			5.16			3.46
Risk-free rate of return⁽³⁾	1.2		%	1.2		%	1.4		%
Expected volatility⁽⁴⁾	34.9		%	33.4		%	36.4		%
Expected dividend yield⁽⁵⁾	0.9		%	0.8		%	0.7		%
Fair value per option granted	$	29.65		$	27.50		$	29.46


⁽¹⁾	Includes the impact of 1.6 million replacement awards issued to former CyberSource employees as part of the CyberSource acquisition in July 2010. These awards have a weighted-average exercise price of $47.34 per share and vest over a period of less than three years from the replacement grant date.


⁽²⁾	Based on a set of peer companies that management believes is generally comparable to Visa.


⁽³⁾	Based upon the zero coupon U.S. treasury bond rate over the expected term of the awards.


⁽⁴⁾	Based on the average of the Company’s implied and historical volatility. As the Company’s publicly traded stock history is relatively short, historical volatility relies in part on the historical volatility of a group of peer companies that management believes is generally comparable to Visa. The expected volatilities ranged from 31% to 35% in fiscal 2012.


⁽⁵⁾	Based on the Company’s annual dividend rate on the date of grant.

The following table summarizes the Company’s option activity for fiscal 2012:



	Options		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (1) (in millions)
Outstanding at October 1, 2011	8,554,389		$	52.81
Granted	441,191		93.22
Forfeited	(140,590	)	72.90
Exercised	(3,669,315	)	47.50
Outstanding at September 30, 2012	5,185,675		59.46		6.1	$388
Options exercisable at September 30, 2012	3,746,662		51.98		5.6	$308
Options exercisable and expected to be vested at September 30, 2012⁽²⁾	5,039,896		$	58.92	6.1	$380


⁽¹⁾	Calculated using the closing stock price on the last trading day of fiscal 2012 of $134.28, less the option exercise price, multiplied by the number of instruments.


⁽²⁾	Applies a forfeiture rate to unvested options outstanding at September 30, 2012 to estimate the number expected to vest in the future.

For the options exercised during fiscal 2012, 2011 and 2010, the total intrinsic value was $247 million, $77 million and $42 million, respectively, and the tax benefit realized was $86 million, $28 million and $15 million, respectively. As of September 30, 2012, there was $17 million of total unrecognized compensation cost related to unvested options, which is expected to be recognized over a weighted-average period of approximately 0.9 years.

Restricted Stock Awards and Restricted Stock Units

RSAs and RSUs issued under the EIP primarily vest ratably over three years from the date of grant, subject to earlier vesting in full under certain conditions.

Upon vesting, the RSAs are settled in class A common stock on a one-for-one basis. During the vesting period, RSA award recipients are eligible to receive dividends and participate in the same voting rights as those granted to the holders of the underlying class A common stock. Upon vesting, RSUs can be settled in class A common stock on a one-for-one basis or in cash, or a combination thereof, at the Company’s option. The Company does not currently intend to settle any RSUs in cash. During the vesting period, RSU award recipients are eligible to receive dividend equivalents but do not participate in the voting rights granted to the holders of the underlying class A common stock.

The fair value and compensation cost before estimated forfeitures for RSAs and RSUs is calculated using the closing price of class A common stock on the date of grant. The weighted-average grant-date fair value of RSAs granted during fiscal 2012, 2011 and 2010 was $96.39, $79.80 and $79.58, respectively. The weighted-average grant-date fair value of RSUs granted during fiscal 2012, 2011 and 2010 was $96.97, $79.97 and $79.59, respectively. The total grant-date fair value of RSAs and RSUs vested during fiscal 2012, 2011 and 2010 was $81 million, $55 million and $32 million, respectively.

The following table summarizes the Company's RSA and RSU activity for fiscal 2012:



	Restricted Stock				Weighted- Average Grant Date Fair Value				Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (1) (in millions)
	Awards		Units		RSA		RSU		RSA	RSU	RSA	RSU
Outstanding at October 1, 2011	1,785,975		467,803		$	75.28	$	76.65
Granted	974,233		432,763		96.39		96.97
Vested	(911,877	)	(224,401	)	71.03		73.24
Forfeited	(111,342	)	(38,520	)	84.44		84.49
Outstanding at September 30, 2012	1,736,989		637,645		$	88.77	$	91.17	1.6	1.4	$233	$86


⁽¹⁾	Calculated by multiplying the closing stock price on the last trading day of fiscal 2012 of $134.28 by the number of instruments.

At September 30, 2012, there was $89 million and $30 million of total unrecognized compensation cost related to unvested RSAs and RSUs, respectively.

Performance-based Shares

The following table summarizes the maximum number of performance-based shares which could be earned and related activity for fiscal 2012:



	Shares		Weighted- Average Grant Date Fair Value		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (1) (in millions)
Outstanding at October 1, 2011	632,786		$	80.69
Granted	132,227		97.84
Vested and earned	(213,801	)	70.41
Unearned	(6,977	)	88.06
Forfeited	(18,008	)	89.75
Outstanding at September 30, 2012	526,227		$	88.56	0.9	$71


⁽¹⁾	Calculated by multiplying the closing stock price on the last trading day of fiscal 2012 of $134.28 by the number of instruments.

For the Company's performance-based shares, in addition to service conditions, the ultimate number of shares to be earned depends on the achievement of both performance and market conditions. The performance condition is based on either (1) the Company's earnings per share target or; (2) the Company's achievement of specified cumulative net income performance targets. The market condition is based on the Company's total shareholder return ranked against that of other companies that are included in the Standard & Poor's 500 Index. The fair value of the performance-based shares, incorporating the market condition, is estimated on the grant date using a Monte Carlo simulation model. The grant-date fair value of performance-based shares in fiscal 2012, 2011 and 2010 was $97.84, $85.05 and $88.06 per share, respectively. Earned performance shares granted in fiscal 2012 vest approximately three years from the initial grant date. Earned performance shares granted in fiscal 2011 and 2010 vest in two equal installments approximately two and three years from their respective grant dates. All performance awards are subject to earlier vesting in full under certain conditions.

Compensation cost for performance-based shares is initially estimated based on target performance. It is recorded net of estimated forfeitures and adjusted as appropriate throughout the performance period. At September 30, 2012, there was $8 million of total unrecognized compensation cost related to unvested performance-based shares, which is expected to be recognized over a weighted-average period of approximately 0.9 years.