Long-Term Incentive Employee Compensation

6 Months Ended

Jun. 30, 2011

Long-Term Incentive Employee Compensation [Abstract]

LONG-TERM INCENTIVE EMPLOYEE COMPENSATION

NOTE 16
LONG-TERM INCENTIVE EMPLOYEE COMPENSATION

Our long-term incentive awards program (LTIP) comprises three components: non-qualified stock options (NQOs), restricted stock (RS) and a target cash award (TSR). We account for NQOs and RS as equity-based compensation awards. TSR awards are cash settled and accounted for as liability-based compensation. LTIP employee compensation costs are primarily recorded within Selling, General and Administrative (SG&A) expenses, and are reduced by an estimated forfeiture rate. The following table provides the impact of these costs in our consolidated condensed results of operations for the three and six month periods ended June 30, 2011 and 2010.

	Three Months					Six Months
For the Periods Ended June 30	2011		2010			2011		2010
Compensation costs on equity-based awards	$	7	$	8		$	15	$	16
Compensation costs on liability-based awards		2		(3	)		4		—
Total compensation costs, pre-tax	$	9	$	5		$	19	$	16
Future tax benefit	$	3	$	2		$	6	$	5

At June 30, 2011, there was $64 of unrecognized compensation cost related to non-vested NQOs and RS. This cost is expected to be recognized ratably over a weighted-average period of 2.0 years. Unrecognized compensation cost of $14 is projected to be incurred under the TSR based on performance measurements as of June 30, 2011. The TSR unamortized expense is expected to be recognized over a weighted average period of 2.3 years. Actual performance measurements in future periods may differ from current estimates and positively or negatively impact the TSR compensation cost recognized, as well as create volatility between periods.

Year-to-Date 2011 LTIP Activity

The majority of our LTIP activity occurs during the first quarter of each year. On March 3, 2011, we granted the 2011 LTIP awards. The grants comprised 0.7 NQOs, 0.5 units of RS and 10.8 TSR units with respective grant date fair values of $14.86, $57.68 and $1.00, respectively. The NQOs vest either on the completion of a three-year service period or annually in three equal installments, as determined by employee level, and have a ten-year expiration period. RS and TSR units vest on the completion of a three-year service period.

The fair value of RS corresponds to the closing price of ITT common stock on the date of grant. The fair value of each NQO grant was estimated on the date of grant, using a binomial lattice pricing model that incorporates multiple and variable assumptions over time, including assumptions such as employee exercise patterns, stock price volatility and changes in dividends. The following table details the assumptions utilized to measure fair value.

Dividend yield		1.73	%
Expected volatility		24.75	%
Expected life (in years)		7.0
Risk-free rates		3.06	%
Weighted-average grant date fair value	$	14.86

Expected volatilities are based on ITT’s historical stock price volatility and implied volatility derived from traded options on our stock. ITT uses historical data to estimate employee option exercise behavior within the valuation model. Employee groups and option characteristics are considered separately for valuation purposes. The expected life represents an estimate of the period of time options are expected to remain outstanding. The expected life provided above represents the weighted average of expected behavior for certain groups of employees who have historically exhibited different behavior. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of option grant.

The fair value of TSR units is measured on a quarterly basis and corresponds to ITT’s total shareholder return as compared to the total shareholder return of other industrial companies within the S&P 500 composite, subject to a multiplier which includes a 200% maximum and 0% minimum payout. The relative performance ranking calculated is adjusted to reflect expected volatility over the remaining term of the award using a Monte Carlo simulation.

During the first six months of 2011, 1.0 stock options were exercised resulting in proceeds of $41. Restrictions on 0.3 shares of RS lapsed during the first six months of 2011 resulting in the issuance of 0.2 shares from our treasury account. Typically, during the first quarter of each year, cash payments are made to settle TSR awards that vested on December 31st of the preceding year. However, no payments were made during the first quarter of 2011 as the TSR performance metric for the 2008 to 2010 performance period was less than the minimum stipulated in the TSR Award Agreement. During the first quarter of 2010, payments totaling $18 were made to settle the vested 2007 TSR award.