Annual report pursuant to Section 13 and 15(d)

STOCK INCENTIVE AND STOCK OPTION PLANS

v2.4.1.9
STOCK INCENTIVE AND STOCK OPTION PLANS
 12 Months Ended
Dec. 31, 2014
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
STOCK INCENTIVE AND STOCK OPTION PLANS
NOTE 16. STOCK INCENTIVE AND STOCK OPTION PLANS
In May 2012, our shareholders approved the 2012 Omnibus Plan (the Plan), which replaced and succeeded the 2003 Stock Incentive Plan. The Plan allows for the granting of equity awards covering up to 3.5 million shares to executives, employees and non-employee directors. Awards available for grant under the Plan include, but are not limited to, stock options, stock appreciation rights, performance shares and other stock awards. Shares issued under the Plan may be newly issued shares or reissued treasury shares.
Stock options are generally granted with a strike price equal to the fair market value of the stock on the date of grant and a life of 10 years. Stock options granted in 2014 have a three-year vesting period whereas stock options granted prior to 2014 had 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. For every even block of 100 KESIP shares purchased by the employee 50 stock options are granted. 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 0 to 200 percent of the target award based on our actual ROE performance. Shares have a three-year performance period. Employees leaving the company prior to the end of the three-year performance period forfeit shares granted to them. The fair value of the award is equal to the average market price, adjusted for the present value of dividends over the vesting period, of our stock on the grant date. 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. The fair value of the award is equal to the average market price of our stock on the grant date. Compensation expense is determined at the grant date and is recognized over the four-year restriction period on a straight-line basis.
Employee compensation expense (net of estimated forfeitures) related to our share-based plans for the year ended December 31, 2014, 2013 and 2012, was approximately $35 million, $34 million and $35 million, respectively. The excess tax benefit associated with our share-based plans for the years ended December 31, 2014, 2013 and 2012, was $5 million, $13 million and $14 million, respectively. The total unrecognized compensation expense (net of estimated forfeitures) related to nonvested awards was approximately $32 million at December 31, 2014, 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:
 
 
Options
 
Weighted-average
Exercise Price
 
Weighted-average
Remaining
Contractual Life
(in years)
 
Aggregate
Intrinsic Value
(in millions)
Balance at December 31, 2011
 
1,243,037

 
$
59.02

 
 
 
 

Granted
 
321,945

 
119.34

 
 
 
 

Exercised
 
(241,815
)
 
31.73

 
 
 
 

Forfeited
 
(13,999
)
 
67.86

 
 
 
 

Balance at December 31, 2012
 
1,309,168

 
78.80

 
 
 
 

Granted
 
432,370

 
112.07

 
 
 
 

Exercised
 
(265,528
)
 
40.48

 
 
 
 

Forfeited
 
(13,674
)
 
105.19

 
 
 
 

Balance at December 31, 2013
 
1,462,336

 
95.35

 
 
 
 

Granted
 
350,630

 
148.98

 
 
 
 

Exercised
 
(175,526
)
 
82.06

 
 
 
 

Forfeited
 
(10,716
)
 
102.56

 
 
 
 

Balance at December 31, 2014
 
1,626,724

 
$
108.30

 
7.22
 
$
62

 
 
 
 
 
 
 
 
 
Exercisable, December 31, 2012
 
785,869

 
$
51.40

 
6.26
 
$
44

Exercisable, December 31, 2013
 
758,936

 
$
76.85

 
5.94
 
$
48

Exercisable, December 31, 2014
 
903,059

 
$
92.18

 
6.05
 
$
48


The weighted-average grant date fair value of options granted during the years ended December 31, 2014, 2013 and 2012, was $49.16, $48.00 and $54.25, respectively. The total intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012, was approximately $12 million, $22 million and $19 million, respectively.
The weighted-average grant date fair value of performance and restricted shares was as follows:
 
 
Performance Shares
 
Restricted Shares
Nonvested
 
Shares
 
Weighted-average
Fair Value
 
Shares
 
Weighted-average
Fair Value
Balance at December 31, 2011
 
525,391

 
$
62.05

 
81,845

 
$
61.49

Granted
 
325,590

 
89.92

 
3,150

 
91.68

Vested
 
(194,484
)
 
25.46

 
(22,766
)
 
52.16

Forfeited
 
(26,413
)
 
91.94

 
—

 
—

Balance at December 31, 2012
 
630,084

 
86.49

 
62,229

 
66.43

Granted
 
176,649

 
106.40

 
7,506

 
114.56

Vested
 
(303,882
)
 
61.48

 
(26,901
)
 
62.03

Forfeited
 
(26,938
)
 
85.07

 
(10,293
)
 
65.41

Balance at December 31, 2013
 
475,913

 
109.93

 
32,541

 
81.49

Granted
 
206,031

 
130.38

 
—

 
—

Vested
 
(207,093
)
 
107.64

 
(21,266
)
 
65.88

Forfeited
 
(8,158
)
 
121.18

 
—

 
—

Balance at December 31, 2014
 
466,693

 
$
119.78

 
11,275

 
$
110.94


The total vesting date fair value of performance shares vested during the years ended December 31, 2014, 2013 and 2012 was $30 million, $35 million and $24 million, respectively. The total fair value of restricted shares vested was $3 million, $3 million and $3 million for the years ended December 31, 2014, 2013 and 2012, respectively.
The fair value of each option grant was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:
 
 
2014
 
2013
 
2012
Expected life (years)
 
5

 
5

 
5

Risk-free interest rate
 
1.80
%
 
0.79
%
 
1.05
%
Expected volatility
 
41.17
%
 
56.59
%
 
58.98
%
Dividend yield
 
1.61
%
 
1.55
%
 
1.30
%

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.