Alcoa 2012 Annual Report Download - page 142

In addition to the stock options described above, Alcoa grants stock awards that vest three years from the date of grant.
In 2010, certain of these stock awards were granted with the same performance conditions described above for
performance stock options. In 2012 and 2011, the final number of performance stock awards earned will be based on
the achievement of sales and profitability targets over a three-year period. One-third of the award will be earned each
year based on the performance against pre-established targets for that year. The performance stock awards earned over
the three-year period vest at the end of the third year.
Most 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 2012, 2011, or 2010):
2012 2011 2010
Compensation expense recognized:
Stock option grants $27 $34 $44
Stock award grants 40 49 40
Total compensation expense before income taxes 67 83 84
Benefit for income taxes 21 27 27
Total compensation expense, net of income taxes $46 $56 $57
As part of Alcoa’s stock-based compensation plan design, individuals who are retirement-eligible have a six-month
requisite service period in the year of grant. As a result, a larger portion of expense will be recognized in the first half
of each year for these retirement-eligible employees. Of the total compensation expense before income taxes included
in the table above, $13, $18, and $19 in 2012, 2011, and 2010, respectively, pertains to the acceleration of expense
related to retirement-eligible employees.
The fair value of new options was estimated on the date of grant using a lattice-pricing model with the following
assumptions:
2012 2011 2010
Weighted average fair value per option $ 3.11 $ 4.96 $ 4.67
Average risk-free interest rate 0.06-1.89% 0.19-3.44% 0.14-3.62%
Dividend yield 0.9% 0.9% 1.1%
Volatility 39-45% 36-43% 47-51%
Annual forfeiture rate 5% 5% 4%
Exercise behavior 45% 45% 35%
Life (years) 5.8 5.8 5.6
The range of average risk-free interest rates was based on a yield curve of interest rates at the time of the grant based
on the contractual life of the option. The dividend yield was based on a one-year average. Volatility was based on
historical and implied volatilities over the term of the option. Alcoa utilized historical option forfeiture data to estimate
annual pre- and post-vesting forfeitures. Exercise behavior was based on a weighted average exercise ratio (exercise
patterns for grants issued over the number of years in the contractual option term) of an option’s intrinsic value
resulting from historical employee exercise behavior. Based upon the other assumptions used in the determination of
the fair value, the life of an option was an output of the lattice-pricing model.
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