NOTE 17. STOCK INCENTIVE AND STOCK OPTION PLANS

        In September 2003, our shareholders approved the 2003 Stock Incentive Plan (the Plan), which replaced and succeeded the 1993 Stock Incentive Plan. The Plan, as amended most recently in January 2010, allows for the granting of up to 13.5 million stock-based awards to executives and employees, of which one-half must be in the form of stock options or stock appreciation rights. Awards available for grant under the Plan include, but are not limited to, stock options, stock appreciation rights and stock awards.

        Stock options are generally granted with a strike price equal to the fair market value of the stock on the date of grant, a life of 10 years and a two-year vesting period. The strike price may be higher than the fair value of the stock on the date of the grant, but cannot be lower. Compensation expense is recorded on a straight-line basis over the vesting period beginning on the grant date. The compensation expense is based on the fair value of each option grant using the Black-Scholes option pricing model. Options granted to employees eligible for retirement under our retirement plan are fully expensed as of the grant date.

        Stock options are also awarded through the Key Employee Stock Investment Plan (KESIP) which allows certain employees, other than officers, to purchase shares of common stock on an installment basis up to an established credit limit. Fifty stock options are granted for every even block of 100 KESIP shares purchased by the employee. The options granted through the KESIP program are considered awards under the Plan and are vested immediately. Compensation expense for stock options granted through the KESIP program is recorded based on the fair value of each option grant using the Black-Scholes option pricing model.

        Performance shares are granted as target awards and are earned based on our return on equity (ROE) performance. A payout factor has been established ranging from zero to 200 percent of the target award based on our actual ROE performance during a two-year performance period, for grants prior to 2011, and during a three-year performance period, for grants in 2011. Any shares earned under grants prior to 2011 are then restricted for one additional year. Employees leaving the company prior to the end of the restriction period forfeit any shares subject to the restriction period. Shares earned under grants in 2011 are not restricted for one year after they are earned because the performance period is three years. Compensation expense is recorded ratably over the period beginning on the grant date until the shares become unrestricted and is based on the amount of the award that is expected to be earned under the plan formula, adjusted each reporting period based on current information.

        Restricted common stock is awarded from time to time at no cost to certain employees. Participants are entitled to cash dividends and voting rights. Restrictions limit the sale or transfer of the shares during a defined period. Generally, one-third of the shares become vested and free from restrictions after two years and one-third of the shares issued become vested and free from restrictions each year thereafter on the anniversary of the grant date, provided the participant remains an employee. Compensation expense is determined at the grant date and is recognized over the four-year restriction period on a straight-line basis.

        Compensation expense (net of estimated forfeitures) related to our share-based plans for the year ended December 31, 2011, 2010 and 2009 was approximately $40 million, $20 million and $20 million, respectively. The excess tax benefit/(deficiency) associated with our share-based plans for the years ended December 31, 2011, 2010 and 2009, was $5 million, $10 million and $(1) million, respectively. The total unrecognized compensation expense (net of estimated forfeitures) related to nonvested awards was approximately $39 million at December 31, 2011, and is expected to be recognized over a weighted-average period of less than two years.

        The tables below summarize the activity in the Plan:

        The weighted-average grant date fair value of options granted during the years ended December 31, 2011, 2010 and 2009, was $51.23, $27.45 and $10.57, respectively. The total intrinsic value of options exercised during the years ended December 31, 2011, 2010 and 2009, was approximately $12 million, $13 million and $3 million, respectively.

        The weighted-average grant date fair value of performance and restricted shares is as follows:

        The total fair value of performance shares vested during the years ended December 31, 2011, 2010 and 2009 was $9 million, $27 million and $35 million, respectively. The total fair value of restricted shares vested was less than $1 million for the year ended December 31, 2011 and $2 million for each of the years ended December 31, 2010 and 2009.

        The fair value of each option grant was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:

        Expected life—The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding based upon our historical data.

        Risk-free interest rate—The risk-free interest rate assumption is based upon the observed U.S. treasury security rate appropriate for the expected life of our employee stock options.

        Expected volatility—The expected volatility assumption is based upon the weighted-average historical daily price changes of our common stock over the most recent period equal to the expected option life of the grant, adjusted for activity which is not expected to occur in the future.

        Dividend yield—The dividend yield assumption is based on our history and expectation of dividend payouts.