Share-based Compensation

Plan Summary

In 2011, the Company's shareholders approved the 2011 Stock Option and Performance Incentive Plan. The plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, performance-based restricted stock, performance units and unrestricted shares. The Company grants stock options at a price equal to the fair market value of the stock on the date of grant. Stock options have a maximum term of ten years. Stock options generally vest ratably over 3 to 4 years. Restricted stock generally vests (the restrictions lapse) at the end of a three year period.

The Limited Brands, Inc. Stock Award and Deferred Compensation Plan for Non-Associate Directors provides for an annual stock retainer for non-associate directors. The stock issued in conjunction with this plan has no restrictions.

Under the Company’s plans, approximately 144 million options, restricted and unrestricted shares have been authorized to be granted to employees and directors. Approximately 17 million options and shares were available for grant as of February 2, 2013.

In 2012 and 2011, the Company’s Board of Directors declared special dividends of $4 and $3 per share, respectively. For additional information, see Note 19, "Shareholders' Equity." In accordance with the anti-dilutive provisions of the stock plans, the Company adjusted both the exercise price and the number of share-based awards outstanding as of the record date of the special dividends. The aggregate fair value, the aggregate intrinsic value and the ratio of the exercise price to the market price were approximately equal immediately before and after the adjustments. Therefore, no compensation expense was recognized.

Stock Options

The following table provides the Company’s stock option activity for the fiscal year ended February 2, 2013:



	Number of Shares		Weighted Average Option Price Per Share		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
	(in thousands)				(in years)	(in thousands)
Outstanding as of January 28, 2012	9,383		$	17.26
Granted	1,385		44.72
Exercised	(4,271	)	12.61
Cancelled	(240	)	29.24
Adjustment for Special Dividends	778
Outstanding as of February 2, 2013	7,035		$	23.16	6.17	$	169,574
Vested and Expected to Vest as of February 2, 2013 (a)	6,798		22.60		6.08	167,707
Options Exercisable as of February 2, 2013	4,022		14.69		4.40	130,969

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(a)	The number of options expected to vest includes an estimate of expected forfeitures.

Intrinsic value for stock options is the difference between the current market value of the Company’s stock and the option strike price. The total intrinsic value of options exercised was $133 million for 2012, $100 million for 2011 and $57 million for 2010.

The total fair value at grant date of option awards vested was $10 million for 2012, $8 million for 2011 and $8 million for 2010.

The Company’s total unrecognized compensation cost, net of estimated forfeitures, related to nonvested options was $19 million as of February 2, 2013. This cost is expected to be recognized over a weighted-average period of 2.8 years.

The weighted-average estimated fair value of stock options granted was $13.89 per share for 2012, $9.35 per share for 2011 and $7.51 per share for 2010.

Cash received from stock options exercised was $53 million for 2012, $75 million for 2011 and $88 million for 2010. Tax benefits realized from tax deductions associated with stock options exercised were $42 million for 2012, $34 million for 2011 and $20 million for 2010.

The Company uses the Black-Scholes option-pricing model for valuation of options granted to employees and directors. The Company’s determination of the fair value of options 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 expected stock price volatility over the term of the awards and projected employee stock option exercise behaviors.

The following table contains the weighted-average assumptions used during 2012, 2011 and 2010:



	2012		2011		2010
Expected Volatility	47	%	48	%	49	%
Risk-free Interest Rate	1.0	%	1.9	%	2.3	%
Dividend Yield	2.7	%	4.1	%	3.3	%
Expected Life (in years)	4.8		5.0		4.5

The majority of the Company’s stock-based compensation awards are granted on an annual basis in the first quarter of each year. The expected volatility assumption is based on the Company’s analysis of historical volatility. The risk-free interest rate assumption is based upon the average daily closing rates during the period for U.S. treasury notes that have a life which approximates the expected life of the option. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts in relation to the stock price at the grant date. The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding.

Restricted Stock

The following table provides the Company’s restricted stock activity for the fiscal year ended February 2, 2013:



	Number of Shares		Weighted Average Grant Date Fair Value
	(in thousands)
Unvested as of January 28, 2012	10,432		$	14.68
Granted	3,018		40.92
Vested	(5,797	)	6.31
Cancelled	(427	)	27.57
Adjustment for Special Dividends	868		NA
Unvested as of February 2, 2013	8,094		28.13

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NA	Not applicable

The Company’s total intrinsic value of restricted stock vested was $257 million for 2012, $83 million for 2011 and $40 million for 2010.

The Company’s total fair value at grant date of awards vested was $37 million for 2012, $32 million for 2011 and $29 million for 2010. Fair value of restricted stock awards is based on the market value of an unrestricted share on the grant date adjusted for anticipated dividend yields.

As of February 2, 2013, there was $104 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested restricted stock. That cost is expected to be recognized over a weighted-average period of 2.7 years.

Tax benefits realized from tax deductions associated with restricted stock vested were $90 million for 2012, $31 million for 2011 and $15 million for 2010.

Income Statement Impact

The following table provides share-based compensation expense included in the Consolidated Statements of Income for 2012, 2011 and 2010:



	2012		2011		2010
	(in millions)
Costs of Goods Sold, Buying and Occupancy	$	19	$	14	$	17
General, Administrative and Store Operating Expenses	54		37		47
Total Share-based Compensation Expense	$	73	$	51	$	64

Share-based compensation expense is based on awards that are ultimately expected to vest. The Company estimates forfeitures at the time of grant and adjusts, if necessary, in subsequent periods based on historical experience and expected future termination rates.

The tax benefit associated with recognized share-based compensation expense was $25 million for 2012, $17 million for 2011 and $21 million for 2010