Air Canada 2006 Annual Report Download - page 102

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11. STOCK-BASED COMPENSATION
ACE Stock Option Plan
Certain of the Corporation's employees participate in the ACE stock option plan. Plan participation is limited to
employees holding positions that, in ACE Board's view (or a committee selected by the Board), have a
significant impact on ACE's long term results. The stock option plan provides that the options will have an
exercise price of not less than 100% of the market price of the underlying shares at the time of grant. Fifty
percent of all options vest over four years. The remaining options vest upon performance conditions that are
based on net income targets established by the ACE Board over the same time period. All options expire after
seven years. The terms of ACE's stock option plan specify that upon the retirement of the employee, options
granted to that employee may be exercised as the options vest.
The number of ACE stock options granted to employees, the related compensation expense recorded and the
assumptions used to determine stock-based compensation expense, using the Black-Scholes option valuation
model were as follows:
2006
2005
Compensation expense ($ millions) $ 3 $ 2
Number of stock options granted to Air Canada employees 186,006 320,000
Weighted average fair value per option granted ($) $ 10.39 $ 9.76
Aggregated fair value of options granted ($ millions) $ 2 $ 3
Weighted average assumptions:
Risk-free interest rate 4.02% 3.40%
Expected volatility 35% 35%
Dividend yield 0% 0%
Expected option life (years) 4.5 4.5
A summary of the activity related to Corporation employees participating in the ACE stock options' plan is as
follows:
2006 2005
Options
(000)
Weighted Average
Exercise Price/Share
Options
(000)
Weighted Average
Exercise Price/Share
Beginning of year 1,550 $ 24.37 1,460 $ 20.00
Granted 26 34.78 320 41.15
Exercised (80) 20.00 (142) 20.00
Forfeited (30) 20.00 (88) 20.00
Outstanding options, prior to special
distribution 1,466 24.88 1,550 24.37
Adjustment – ACE special distribution (a) 101 n/a
Outstanding options, after special
distribution (a) 1,567 23.26
Granted 160 32.08
Exercised (96) 19.07
Forfeited (21) 20.73
Outstanding options, end of year 1,610 $ 24.42 1,550 $ 24.37
Options exercisable, end of year 291 $ 24.27 233 $ 22.90
(a) In accordance with the terms of the ACE stock option plan, the special distribution by ACE in March 2006
triggered an adjustment to the weighted average exercise price of options and the number of options
outstanding. Effective March 22, 2006, the adjustment was applied to all unexercised ACE stock options as
of March 1, 2006, whether vested or not. As at the adjustment date, the weighted average option exercise
price and number of options outstanding had been amended from $24.88 and 1,465,480 options to $23.26
and 1,567,612 options.
102