Note O — Stock-based Compensation

VF is authorized to grant nonqualified stock options, restricted stock units (“RSUs”) and restricted stock to officers, key employees and nonemployee members of VF’s Board of Directors under the amended and restated 1996 Stock Compensation Plan approved by stockholders. All stock-based compensation awards are classified as equity awards, which are accounted for in stockholders’ equity in the Consolidated Balance Sheets. Compensation cost for all awards expected to vest is recognized over the shorter of the requisite service period or the vesting period. Awards that do not vest are forfeited. VF has elected to compute income tax benefits associated with stock option awards under the short cut method as allowed by the applicable accounting literature. Total stock-based compensation cost and the related income tax benefits recognized in the Consolidated Statements of Income were $92.8 million and $34.2 million in 2012, $76.7 million and $28.2 million in 2011 and $63.5 million and $23.4 million in 2010, respectively. Stock-based compensation cost capitalized as part of inventory was $0.2 million in December 2012 and $0.3 million at December 2011. At the end of 2012, there was $46.5 million of total unrecognized compensation cost related to all stock-based compensation arrangements that will be recognized over a weighted average period of one year.

At the end of 2012, there were 9,388,241 shares available for future grants of stock options and stock awards under the 1996 Stock Compensation Plan. Shares for option exercises are issued from VF’s authorized but unissued Common Stock. VF has a practice of repurchasing shares of Common Stock in the open market to offset, on a long-term basis, dilution caused by awards under equity compensation plans.

Stock Options

Stock options are granted with an exercise price equal to the fair market value of VF Common Stock on the date of grant. Employee stock options vest in equal annual installments over three years, and compensation cost is recognized ratably over the vesting period. Stock options granted to members of the Board of Directors become exercisable one year from the date of grant. All options have ten year terms. The grant date fair value of each option award is calculated using a lattice option-pricing valuation model, which incorporates a range of assumptions for inputs as follows:

Expected volatility over the contractual term of an option was based on a combination of the implied volatility from publicly traded options on VF Common Stock and the historical volatility of VF Common Stock.

The expected term represents the period of time over which options that vest are expected to be outstanding before exercise. VF used historical data to estimate option exercise behaviors and to estimate the number of options that would vest. Groups of employees that have historically exhibited similar option exercise behaviors were considered separately in estimating the expected term for each employee group. Dividend yield represents expected dividends on VF Common Stock for the contractual life of the options. Risk-free interest rates for the periods during the contractual life of the option were the implied yields at the date of grant from the U.S. Treasury zero coupon yield curve.

Stock option activity for 2012 is summarized as follows:

The total fair value of stock options vested during 2012, 2011 and 2010 was $20.4 million, $20.6 million and $22.7 million, respectively. The total intrinsic value of stock options exercised during 2012, 2011 and 2010 was $112.9 million, $113.5 million and $61.6 million, respectively.

Restricted Stock Units

VF has granted performance-based RSUs to key employees as a long-term incentive. These RSUs enable the recipients to receive shares of VF Common Stock at the end of a three year period. Each RSU has a potential final value ranging from zero to two shares of VF Common Stock. The number of shares earned by participants, if any, is based on achievement of a three year baseline profitability goal and annually established performance goals set by the Compensation Committee of the Board of Directors. Beginning with grants made in 2012, the actual number of shares earned may also be adjusted upward or downward by 25% of the target award, based on how VF’s total shareholder return (“TSR”) over the three year period compares to the TSR for companies included in the Standard & Poor’s 500 index. Shares are issued to participants in the year following the conclusion of each three year performance period.

VF has also granted nonperformance-based RSUs to a smaller group of key employees and members of the Board of Directors. Each RSU entitles the holder to one share of VF Common Stock. The employee RSUs generally vest four years after the date of grant. The RSUs granted to members of the Board of Directors vest upon grant and will be settled in shares of VF common stock one year from the date of grant.

Dividend equivalents, payable in additional shares of VF Common Stock, accrue without compounding on the RSUs and are subject to the same risks of forfeiture as the RSUs.

RSU activity for 2012 is summarized as follows:

The weighted average fair value of performance-based RSUs granted during 2012, 2011 and 2010 was $145.47, $95.76 and $72.11, respectively, which was equal to the market value of the underlying VF Common Stock on the grant date. The total market value of awards outstanding at the end of 2012 was $101.9 million. Awards earned and vested for the three year performance period ended in 2012 and distributable in early 2013 totaled 540,217 shares of VF Common Stock having a value of $82.1 million, as approved by the Compensation Committee of the Board of Directors. Similarly, 526,164 shares of VF Common Stock with a value of $74.6 million were earned for the performance period ended in 2011, and 314,705 shares of VF Common Stock with a value of $27.2 million were earned for the performance period ended in 2010.

The weighted average grant date fair value of each nonperformance-based RSU granted during 2012, 2011 and 2010 was $142.09, $114.31 and $84.01, respectively, which was equal to the market value of the underlying VF Common Stock. The total market value of awards outstanding at the end of 2012 was $20.7 million.

Restricted Stock

VF has granted restricted shares of VF Common Stock to certain members of management. The fair value of the restricted shares, equal to the market value of VF Common Stock at the grant date, is recognized ratably over the vesting period. Restricted shares are issued in the name of the employee but generally do not vest until four years after the date of grant. Dividends are payable in additional restricted shares when the restricted stock vests and are subject to the same risk of forfeiture as the restricted stock.

Restricted stock activity for 2012 is summarized below:

Nonvested shares of restricted stock had a market value of $25.2 million at the end of 2012. The market value of the shares vested during 2012 was $2.5 million.