MJN 2009 Stock Award and Incentive Plan—The MJN 2009 Stock Award and Incentive Plan (MJN 2009 Plan) provides for the grant of stock options, performance share awards, restricted stock units and other stock-based awards. Executive officers and other key employees of MJN, and non-employee directors and others who provide substantial services to MJN, are eligible to be granted awards under the MJN 2009 Plan. Twenty-five million shares of stock were approved and registered with the Securities and Exchange Commission for grants to participants under the MJN 2009 Plan. Shares used for awards assumed in an acquisition or combination will not count against the shares reserved under the MJN 2009 Plan. The shares reserved may be used for any type of award under the MJN 2009 Plan. Stock-based compensation expense is based on awards ultimately expected to vest. Forfeitures are estimated based on the historical experience of participants in the stock-based compensation plans of our former parent, BMS.

MJN may grant options to purchase common stock at no less than 100% of the market price on the date the option is granted. Stock options generally become exercisable in installments of either 25% per year on each of the first through the fourth anniversaries of the grant date or 33% per year on each of the first through the third anniversaries of the grant date. Stock options have a maximum term of 10 years. Generally, MJN will issue shares for the stock option exercises from treasury stock, if available, or will issue new shares.

MJN may also grant performance share awards, which are delivered in the form of a target number of performance shares and have a three-year performance cycle. The performance share awards have annual goals set at the beginning of each year, at which time the awards are considered granted. The maximum payout is 200%. If targets are not met for a performance period, no payment is made under the plan for that annual period.

MJN may also grant restricted stock units to Executive officers, key employees and non-employee directors. Restrictions generally expire over a one- to five-year period from the date of grant. Stock-based compensation expense is recognized over the restricted period. A restricted stock unit is a right to receive stock at the end of the specified vesting period. A restricted stock unit has non-forfeitable rights to dividends and has no voting rights.

MJN Stock Options—The fair value of stock options granted in 2011 and 2010 was estimated on the date of grant using the Black-Scholes option pricing model. No stock options with market conditions were granted in 2011 or 2010. The fair value of stock options granted in 2009 was estimated on the date of grant using the Black-Scholes option pricing model for stock options with a service condition, and the Monte Carlo simulation model for options with service and market conditions. The following assumptions were used in the valuations:

	2011		2010		2009

	Black-Scholes Model		Black-Scholes Model		Black-Scholes Model		Monte Carlo Model
Expected volatility		26.7%		23.2%		23.8%		28.7%
Risk-free interest rate		2.6%		2.7%		2.3%		3.0%
Dividend yield		1.7%		1.8%		2.9%		2.9%
Expected life		6.0 years		6.0 years		6.3 years		6.8 years

The 2011 expected volatility assumption required in the Black-Scholes model was calculated based on an equal weighting between the Company's historical volatility and implied volatility from publicly-traded options on the Company's stock with a 6.0-year look back period ending on the grant date. The 2010 expected volatility assumption required in the Black-Scholes model was calculated based on a combination of peer group analysis of stock price volatility and implied volatility from publicly-traded options on the Company's stock with a 6.0-year look back period ending on the grant date. The 2009 expected volatility assumption required in the Black-Scholes model and Monte Carlo model was calculated based on peer group analysis of stock price volatility with a 6.3-year and 10-year look back period ending on the grant date, respectively.

The risk-free interest rate assumption in the Black-Scholes model is based upon the U.S. Treasury yield curve in effect at the time of grant. The risk-free interest rate assumption in the Monte Carlo model is based upon the 10-year U.S. Treasury yield curve. The dividend yield assumption is based on MJN's expectation of dividend payouts. The expected life is based on the vesting period and the contractual term for each grant, or for each vesting tranche for awards with graded vesting. The selection of this approach was based on MJN's assessment that this simplified method is appropriate given the terms of the stock option granted and given that there is not sufficient historical stock option exercise experience upon which to estimate expected terms.

			Weighted Average Exercise Price of Shares			Aggregate Intrinsic Value (in millions)

Outstanding—January 1, 2009	—		$	—
Granted	1,030			26.80
Exercised	—			—
Forfeited or expired	(33	)		27.24

Balance—December 31, 2009	997			26.79	9.2	$	26.7
Granted	550			46.71
Exercised	(80	)		26.96		$	2.1
Forfeited or expired	(63	)		31.82

Balance—December 31, 2010	1,404			34.36	8.6	$	48.2
Granted	558			59.18
Exercised	(140	)		31.65		$	5.2
Forfeited or expired	(33	)		45.03

Balance—December 31, 2011	1,789			42.12	8.1	$	47.6

Vested—December 31, 2011	480			33.02	7.5	$	17.1
Vested and expected to vest—December 31, 2011	1,695			42.12	8.1	$	45.1

The weighted-average grant date fair value of stock options granted is $14.73, $10.31 and $6.13 for 2011, 2010 and 2009 respectively.

Cash proceeds received from options exercised during the years ended December 31, 2011 and 2010 were $4.5 million and $2.2 million, respectively. No options were exercised during the year ended December 31, 2009. The tax benefit realized from stock options exercised was $1.8 million in 2011 and $0.8 million in 2010.

At December 31, 2011, total unrecognized compensation cost related to stock options of $6.9 million is expected to be recognized over a weighted average period of 1.8 years.

MJN Performance Share Awards—The fair value of performance share awards is based on the closing trading price of MJN's stock on the date of the grant, discounted using the risk-free interest rate as the awards do not participate in dividends. Information related to performance share awards activity is summarized as follows:

Grant Date	Performance Cycle Measurement Date		Weighted- Average Grant- Date Fair Value

March 2, 2011	Annually on 12/31	275	$	57.03	271
February 24, 2010	Annually on 12/31	237	$	44.38	219
March 11, 2009	Annually on 12/31	153	$	26.58	141

Shares granted and earned in the table above assumes 100% plan performance adjusted for the actual plan achievement level for completed performance periods. At December 31, 2011, total unrecognized compensation cost related to the performance share awards granted of $10.0 million is expected to be recognized over a weighted average period of 1.5 years.

MJN Restricted Stock Units—The fair value of restricted stock units is determined based on the closing trading price of MJN's common stock on the grant date. A summary of restricted stock unit activity is as follows:

			Weighted- Average Grant Date Fair Value

Nonvested restricted stock units—January 1, 2009	—		$	—
Granted	677			34.09
Vested	(4	)		44.12
Forfeited	(11	)		25.02

Nonvested restricted stock units—December 31, 2009	662			34.18
Granted	150			47.53
Vested	(172	)		42.16
Forfeited	(52	)		35.37

Nonvested restricted stock units—December 31, 2010	588			35.15
Granted	134			59.40
Vested	(170	)		44.44
Forfeited	(19	)		40.39

Nonvested restricted stock units—December 31, 2011	533			38.09

At December 31, 2011, total unrecognized compensation cost related to nonvested restricted stock units was $12.4 million and is expected to be recognized over a weighted average period of 2.6 years.

BMS Employee Stock Benefit Plans—Prior to the separation, BMS sponsored employee stock plans in which certain MJN employees participated. Expense recognized for these stock-based compensation plans resulted in an increase of equity (deficit). As part of the separation from BMS, all participation in the BMS employee stock benefit plans by MJN employees was terminated. All outstanding BMS stock options, BMS long-term performance share awards and BMS restricted stock units held by MJN employees were either accelerated vested, pro-rata vested or forfeited based on the type of award. For the year ended December 31, 2009, the accelerated and pro-rata vesting increased expense by $3.3 million. Non-retirement eligible MJN employees had a limited time to exercise the BMS stock options that had accelerated vesting. To compensate for the lost value in the BMS-sponsored employee stock plans, these employees were awarded MJN restricted stock units totaling 0.3 million units included in the table above.

Stock-Based Compensation Expense—The following table summarizes stock-based compensation expense related to MJN stock options, MJN performance share awards, MJN restricted stock units, and BMS stock benefit plan awards for the years ended December 31, 2011, 2010, and 2009:

	Years Ended December 31,

(In millions)	2011			2010			2009
MJN stock options	$	5.9		$	3.8		$	2.6
MJN performance share awards		22.8			5.6			1.3
MJN restricted stock units		11.2			10.3			1.4
BMS stock benefit plans		—			—			12.4

Total pretax stock-based compensation expense	$	39.9		$	19.7		$	17.7

Net tax benefit related to stock-based compensation expense	$	(14.1	)	$	(6.8	)	$	(5.6	)

Stock-based compensation expense was recognized in the consolidated statements of earnings as follows:

	Years Ended December 31,

(Dollars in millions)	2011		2010		2009
Cost of products sold	$	4.0	$	2.0	$	1.8
Selling, general and administrative		31.9		15.7		14.1
Research and development		4.0		2.0		1.8

Total stock-based compensation expense	$	39.9	$	19.7	$	17.7

The Company's determination of fair value of stock-based compensation awards on the date of grant using an option pricing model is affected by the Company's stock price, as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company's estimated stock price volatility over the term of the awards and estimated employee stock option exercise behaviors. Option pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because the Company's employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can affect the estimated value, the value may not be indicative of the fair value observed in an orderly transaction between market participants.