NOTE 11 — STOCK COMPENSATION PLANS

At December 31, 2011, we have two share-based compensation plans, which are described below. The compensation cost that has been charged against income for those plans was $15.9 million, $15.5 million and $12.2 million in 2011, 2010 and 2009, respectively, which primarily was recorded in Selling, general and administrative expenses in the Statements of Consolidated Operations. The total income tax benefit recognized in the Statements of Consolidated Operations for share-based compensation arrangements was $5.6 million, $5.4 million and $4.3 million for 2011, 2010 and 2009, respectively. Cash flows resulting from the tax benefits for tax deductions in excess of the compensation expense are classified as financing cash flows. Accordingly, we classified $4.5 million, $3.3 million and $3.5 million in excess tax benefits as cash from financing activities rather than cash from operating activities on our Statements of Consolidated Cash Flows for the years ended December 31, 2011, 2010 and 2009, respectively.

Employees' Plans

On May 11, 2010, our shareholders approved and adopted an amendment and restatement of the ICE Plan to increase the authorized number of shares available for issuance under the plan and to provide an annual limitation on the number of shares available to grant to any one participant in any fiscal year of 500,000 common shares. As of December 31, 2011, our ICE Plan authorized up to 11,000,000 of our common shares to be issued as stock options, SARs, restricted shares, restricted share units, retention units, deferred shares and performance shares or performance units. Any of the foregoing awards may be made subject to attainment of performance goals over a performance period of one or more years. Each stock option and SAR will reduce the common shares available under the ICE Plan by one common share. Each other award will reduce the common shares available under the ICE Plan by two common shares. The performance shares and performance share units are intended to meet the requirements of section 162(m) of the Internal Revenue Code for deduction.

 

For the outstanding plan year agreements, each performance share or performance share unit, if earned, entitles the holder to receive a number of common shares, or cash based on Cliffs' common share price on the date of vesting, within the range between a threshold and maximum number of shares, with the actual number of common shares earned dependent upon whether the Company achieves certain objectives and performance goals as established by the Compensation Committee of the Board of Directors. The restricted share units and retention units are subject to continued employment, will vest at the end of the performance period for the performance shares and performance share units, or at a different vesting period specified by the Compensation Committee, and are payable in shares or cash for the 2009, 2010 and 2011 plan years at a time determined by the Compensation Committee at its discretion.

The performance share grants vest over a period of three years and are intended to be paid out in common shares. Performance is measured on the basis of two factors: 1) relative TSR for the period, as measured against a predetermined peer group of mining and metals companies, and 2) three-year cumulative free cash flow. The final payout for the 2011 to 2013 performance period varies from zero to 200 percent of the original grant, compared to the 2009 and 2010 plan year agreements where the maximum payout is 150 percent of the performance shares awarded.

Upon the occurrence of a change in control, all performance shares, restricted share units, restricted stock and retention units granted to a participant will vest and become nonforfeitable and will be paid out in cash.

Following is a summary of our Performance Share Award Agreements currently outstanding:

 

Performance Share Plan Year		Performance Shares Outstanding				Forfeitures (1)				Grant Date				Performance Period
2011			169,632				18,848				March 8, 2011				1/1/2011-12/31/2013
2011			2,090				—				April 14, 2011				1/1/2011-12/31/2013
2011			1,290				—				May 2, 2011				1/1/2011-12/31/2013
2010			209,853				23,317				March 8, 2010				1/1/2010-12/31/2012
2010			12,480	(2)			—				March 8, 2010				1/1/2010-12/31/2012
2010			480				—				April 6, 2010				1/1/2010-12/31/2012
2010			590				—				April 12, 2010				1/1/2010-12/31/2012
2010			2,130				—				April 26, 2010				1/1/2010-12/31/2012
2010			12,080				—				May 3, 2010				1/1/2010-12/31/2012
2010			550				—				June 14, 2010				1/1/2010-12/31/2012
2010			670				—				August 16, 2010				1/1/2010-12/31/2012
2009			372,881				22,089				March 9, 2009				1/1/2009-12/31/2011
2009			3,825				—				August 31, 2009				1/1/2009-12/31/2011
2009			44,673	(2)			—				December 17, 2009				1/1/2009-12/31/2011

(1)	The 2011 and 2010 awards are based on assumed forfeitures. The 2009 awards reflect actual forfeitures.

 

(2)

Represents the target payout as of December 31, 2011 related to the 67,009 shares awarded on December 17, 2009 and the 18,720 shares awarded on March 8, 2010 based upon the Compensation Committee's ability to exercise negative discretion. For accounting purposes, a grant date has not yet been determined for these awards.

Throughout 2011, the Committee approved grants under our shareholder-approved ICE Plan for the performance period of 2011 to 2013. A total of 307,940 shares were granted, consisting of performance shares, restricted share units, and restricted stock.

The performance shares awarded under the ICE Plan to the Company's Chief Executive Officer on December 17, 2009 and March 8, 2010 of 67,009 shares and 18,720 shares, respectively, met the aggregate value-added performance objective under the award terms as of December 31, 2010. The number of shares paid out under these particular awards at the end of each incentive period will be determined by the Compensation Committee based upon the achievement of certain other performance factors evaluated solely at the Compensation Committee's discretion and may be reduced from the 67,009 shares and 18,720 shares granted. Based on the Compensation Committee's ability to exercise negative discretion, the targeted payout for the awards was 44,673 shares and 12,480 shares, respectively, as of December 31, 2011. These other performance factors are in addition to the aggregate value-added performance objective. As a result of this uncertainty, a grant date has not yet been determined for this award for purposes of measuring and recognizing compensation cost.

Nonemployee Directors

The Directors' Plan authorizes us to issue up to 800,000 common shares to nonemployee Directors. Under the Share Ownership Guidelines in effect for 2011, or Guidelines, a Director is required by the end of five years from date of election or September 1, 2010, whichever is later, to hold common shares with a market value of at least $250,000. If, as of December 1 annually, the nonemployee Director does not meet the Guidelines, the nonemployee Director must take a portion of the annual retainer in common shares with a market value of $24,000 ("Required Retainer") until such time as the nonemployee Director reaches the ownership required by the Guidelines. Once the nonemployee Director meets the Guidelines, the nonemployee Director may elect to receive the Required Retainer in cash.

The Directors' Plan also provides for an Annual Equity Grant or Equity Grant. The Equity Grant is awarded at our annual meeting each year to all nonemployee Directors elected or re-elected by the shareholders. The value of the Equity Grant is payable in restricted shares with a three-year vesting period from the date of grant. The closing market price of our common shares on our annual meeting date is divided into the Equity Grant to determine the number of restricted shares awarded. Effective April 1, 2011, nonemployee Directors receive an annual retainer fee of $60,000 and effective May 17, 2011, an annual equity award of $80,000. In July 2009, the Directors' annual retainer fee was reduced by 10 percent in conjunction with the Company's compensation reductions across the organization. Such reductions were reinstated to their previous levels effective January 1, 2010. The Directors' Plan offers the nonemployee Director the opportunity to defer all or a portion of the Directors' annual retainer, chair retainers, meeting fees, and the Equity Grant into the Directors' Plan. A Director who is 69 or older at the Equity Grant date will receive common shares with no restrictions.

For the last three years, Equity Grant shares have been awarded to elected or re-elected Directors as follows:

 

Year of Grant		Unrestricted Equity Grant Shares				Restricted Equity Grant Shares				Deferred Equity Grant Shares
2009			7,788				15,118				2,596
2010			3,963				7,926				1,321
2011			1,850				6,475				1,850

Other Information

We adopted the fair value recognition provisions of ASC 718 effective January 1, 2006 using the modified prospective transition method. The following table summarizes the share-based compensation expense that we recorded for continuing operations in 2011, 2010 and 2009:

 

		(In Millions, except  per share amount)
		2011				2010				2009
Cost of goods sold and operating expenses		$	2.7			$	2.8			$	1.2
Selling, general and administrative expenses			13.2				12.7				11.0
Reduction of operating income from continuing operations before income taxes and equity income (loss) from ventures			15.9				15.5				12.2
Income tax benefit			(5.6	)			(5.4	)			(4.3	)
Reduction of net income attributable to Cliffs shareholders		$	10.3			$	10.1			$	7.9
Reduction of earnings per share attributable to Cliffs shareholders:
Basic		$	0.07			$	0.07			$	0.06
Diluted		$	0.07			$	0.07			$	0.06

 

Determination of Fair Value

The fair value of each grant is estimated on the date of grant using a Monte Carlo simulation to forecast relative TSR performance. A correlation matrix of historic and projected stock prices was developed for both the Company and its predetermined peer group of mining and metals companies. The fair value assumes that performance goals will be achieved.

The expected term of the grant represents the time from the grant date to the end of the service period for each of the three plan year agreements. We estimated the volatility of our common shares and that of the peer group of mining and metals companies using daily price intervals for all companies. The risk-free interest rate is the rate at the grant date on zero-coupon government bonds, with a term commensurate with the remaining life of the performance plans.

The following assumptions were utilized to estimate the fair value for the 2011 performance share grants:

 

Period (1)		Grant Date Market Price		Average Expected Term (Years)				Expected Volatility				Risk-Free Interest Rate				Dividend Yield				Fair Value		Fair Value (Percent of Grant Date Market Price)
First Quarter		$96.70			2.81				94.4	%			1.17	%			0.58	%		$77.90			80.60	%
Second Quarter		$93.85			2.81				94.4	%			1.17	%			0.58	%		$75.64			80.60	%

(1)	Performance shares were granted during the first quarter of 2011 on March 8, 2011 and during the second quarter of 2011 on April 14, 2011 and May 2, 2011.

The fair value of the restricted share units is determined based on the closing price of the Company's common shares on the grant date. The restricted share units granted under the ICE Plan vest over a period of three years.

 

Stock options, restricted stock, deferred stock allocation and performance share activity under our long-term equity plans and Directors' Plans are as follows:

 

		2011								2010								2009
		Shares				Weighted- Average Exercise Price				Shares				Weighted- Average Exercise Price				Shares				Weighted- Average Exercise Price
Stock options:
Options outstanding at beginning of year			—				—				—				—				2,500			$	5.42
Granted during the year			—								—								—
Exercised			—				—				—				—				(2,500	)			5.42
Cancelled or expired			—								—								—
Options outstanding at end of year			—				—				—				—				—				—
Options exercisable at end of year			—				—				—				—				—				—
Restricted awards:
Outstanding and restricted at beginning of year			371,712								290,702								315,684
Granted during the year			125,059								133,666								184,904
Vested			(61,330	)							(50,156	)							(201,486	)
Cancelled			(10,275	)							(2,500	)							(8,400	)
Outstanding and restricted at end of year			425,166								371,712								290,702
Performance shares:
Outstanding at beginning of year			843,238								823,393								594,115
Granted during the year (1)			263,816								376,524								555,046
Issued (2)			(215,870	)							(343,321	)							(312,336	)
Forfeited/cancelled			(13,749	)							(13,358	)							(13,432	)
Outstanding at end of year			877,435								843,238								823,393
Vested or expected to vest as of December 31, 2011			833,224
Directors' retainer and voluntary shares:
Outstanding at beginning of year			2,509								4,596								2,183
Granted during the year			1,815								2,075								4,602
Vested			(1,713	)							(4,162	)							(2,189	)
Outstanding at end of year			2,611								2,509								4,596
Reserved for future grants or awards at end of year:
Employee plans			6,760,871
Directors' plans			115,189
Total			6,876,060

(1)	The shares granted during the year include 71,956 shares, 114,371 shares and 99,958 shares for each year presented, respectively, related to the 50 percent payout associated with the prior-year pool as actual payout exceeded target.

 

(2)	For each year presented, the shares vested on December 31, 2010, December 31, 2009 and December 31, 2008, respectively, and were valued on February 14, 2011, February 19, 2010 and February 27, 2009, respectively.

 

A summary of our outstanding share-based awards as of December 31, 2011 is shown below:

 

		Shares				Weighted Average Grant Date Fair Value
Outstanding, beginning of year			1,217,459			$	26.03
Granted			390,690			$	88.60
Vested			(278,913	)		$	42.73
Forfeited/expired			(24,024	)		$	61.61
Outstanding, end of year			1,305,212			$	43.19

The total compensation cost related to outstanding awards not yet recognized is $26.0 million at December 31, 2011. The weighted average remaining period for the awards outstanding at December 31, 2011 is approximately 2.0 years.