Long-Term Incentive Employee Compensation

6 Months Ended

Jun. 30, 2012

Long-Term Incentive Employee Compensation [Abstract]

LONG-TERM INCENTIVE EMPLOYEE COMPENSATION

NOTE 14

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 general and administrative expenses, and are reduced by an estimated forfeiture rate. The following table provides the components of these costs for the three and six month periods ended June 30, 2012 and 2011.

	Three Months					Six Months
For the Periods Ended June 30	2012			2011		2012		2011
Share-based compensation expense, equity-based awards	$	3.0		$	3.6	$	5.8	$	7.1
Share-based compensation expense, liability-based awards		(0.2	)		1.0		0.4		2.3
Total share-based compensation expense in operating income (loss)		2.8			4.6		6.2		9.4
Less: tax benefit		1.1			1.6		2.2		3.3
Share-based compensation expense, net of tax	$	1.7		$	3.0	$	4.0	$	6.1

At June 30, 2012, there was $25.3 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 2.3 years.

Year-to-Date 2012 LTIP Activity

The majority of our LTIP activity occurs during the first quarter of each year. On March 8, 2012, we granted the 2012 LTIP awards. The grants comprised 0.4 NQOs, 0.3 units of RS and 3.0 TSR units with respective grant date fair values of $6.71, $22.80 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 weighted average assumptions used to measure fair value and the resulting grant date fair value.

Dividend yield		1.60%
Expected volatility		34.10%
Expected life (in years)		6.9
Risk-free rates		1.40%
Grant date fair value	$	6.71

Expected volatilities for option grants were based on a peer average of historical and implied volatility. ITT uses historical data to estimate option exercise and employee termination behavior within the valuation model. Option characteristics, such as vesting terms, 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 options granted with differing vesting terms. 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 companies within the S&P Mid-Cap Capital Goods composite, subject to a multiplier which includes a maximum and 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 six month period ended June 30, 2012, 2.2 stock options were exercised resulting in proceeds of $35.7, and restrictions on 0.4 shares of RS lapsed.