Alcoa 2009 Annual Report Download - page 129

In addition to the stock options described above, Alcoa granted stock awards that vest in three years from the date of
grant. Certain of these stock awards were granted with the same performance conditions described above for
performance stock options.
Plan participants can choose whether to receive their award in the form of stock options, stock awards, or a
combination of both. This choice is made before the grant is issued and is irrevocable.
The following table summarizes the total compensation expense recognized for all stock options and stock awards
(there was no stock-based compensation expense capitalized in 2009, 2008, or 2007):
2009 2008 2007
Compensation expense recognized:
Stock option grants $53 $15 $31
Stock award grants 34 79 66
Total compensation expense before income taxes 87 94 97
Benefit for income taxes 29 31 34
Total compensation expense, net of income taxes $58 $63 $63
The fair value of new options is estimated on the date of grant using a lattice-pricing model with the following
assumptions:
2009 2008 2007
Weighted average fair value per option $ 3.34 $ 6.41 $ 6.04
Average risk-free interest rate 0.3-2.65% 3.01-3.66% 4.75-5.16%
Dividend yield 1.2% 2.1% 2.2%
Volatility 38-76% 31-34% 22-29%
Annual forfeiture rate 3% 3% 3%
Exercise behavior 43% 39% 35%
Life (years) 4.2 4.0 3.8
The fair value of each reload option grant is estimated on the reload date using the lattice-pricing model. In 2009, there
were no reload option grants. In 2008, the fair value and related assumptions for reload option grants were the same as
the new option grants reflected in the table above. In 2007, the weighted average fair value per reload option grant was
$5.56 based on the following assumptions: an average risk-free interest rate of 4.94-5.11%; dividend yield of 2.2%;
volatility of 22-24%; exercise behavior of 26%; and life of 1.5 years.
The following assumption descriptions are applicable to both new option grants and reload option grants. The range of
average risk-free interest rates is based on a yield curve of interest rates at the time of the grant based on the contractual
life of the option. For 2009, the dividend yield was based on a three-month average as a result of the significant decline
in Alcoa’s stock price in 2008 due to the global economic downturn and the previously mentioned reduction in Alcoa’s
quarterly common stock dividend. In 2008 and 2007, the dividend yield was based on a five-year average. Volatility is
based on historical and implied volatilities over the term of the option. Alcoa utilizes historical option exercise and
forfeiture data to estimate annual pre- and post-vesting forfeitures. The exercise behavior assumption represents a
weighted average exercise ratio of the intrinsic value resulting from historical employee exercise behavior, which is
based on exercise patterns for grants issued in the most recent six years. The life of an option is an output of the lattice-
pricing model based upon the other assumptions used in the determination of the fair value.
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