Bank of Montreal 2004 Annual Report Download - page 114

BMO Financial Group Annual Report 2004110
Notes to Consolidated Financial Statements
Notes
Change in Accounting Policy
On November 1, 2002, we changed our accounting policy for
stock options granted on or after that date. Under the new policy,
we determine the fair value of stock options on their grant date
and record this amount as compensation expense over the period
that the stock options vest, with a corresponding increase to
contributed surplus. When these stock options are exercised, we
record the amount of proceeds, together with the amount recorded
in contributed surplus, in share capital.
We determine the fair value of options granted using a
trinomial option pricing model. The weighted-average fair value
of options granted during the years ended October 31, 2004, 2003
and 2002 was $10.63, $7.85 and $7.02, respectively. The following
weighted-average assumptions were used to determine the fair
value of options on the date of grant:
2004 2003 2002
Expected dividend yield 2.6% 3.2% 3.6%
Expected share price volatility 23.2% 23.4% 23.4%
Risk-free rate of return 4.8% 4.8% 5.5%
Expected period until exercise 7.1 years 7.1 years 7.0 years
Changes to the input assumptions can result in materially different fair value estimates.
We do not record any compensation expense for stock options
granted in prior years. When these stock options are exercised, we
include the amount of proceeds in share capital. The impact on
our net income and earnings per share if we had always recorded
stock option expense based on the fair value of all of our outstanding
stock options on their grant date is as follows:
(Canadian $ in millions, except as noted) 2004 2003 2002
Stock option expense included in
employee compensation expense $ 7 $ 3 $ –
Net income, as reported $ 2,351 $ 1,825 $ 1,417
Additional expense that would have been
recorded if we had expensed the fair value
of all outstanding stock options granted
before November 1, 2002 29 43 47
Net income, pro forma $ 2,322 $ 1,782 $ 1,370
Earnings per share (Canadian $)
Basic, as reported $ 4.53 $ 3.51 $ 2.73
Basic, pro forma 4.48 3.43 2.63
Diluted, as reported 4.42 3.44 2.68
Diluted, pro forma 4.36 3.35 2.59
Other Stock-Based Compensation Plans
Share Purchase Plan
We offer our employees the option of contributing a portion of
their gross salary toward the purchase of our common shares. For
employee contributions up to 6% of their individual gross salaries,
we match 50% of their contributions. The shares in the employee
share purchase plan are purchased on the open market and are
considered outstanding for purposes of computing earnings per
share. The dividends earned on Bank common shares held by
the employee share purchase plan are used to purchase additional
common shares on the open market.
We account for our contribution as employee compensation
expense when it is contributed to the plan.
Employee compensation expense related to this plan for the
years ended October 31, 2004, 2003 and 2002 was $32 million,
$29 million and $26 million, respectively. There were 11,746,227,
10,888,080 and 9,567,840 common shares outstanding for the
years ended October 31, 2004, 2003 and 2002, respectively, held
in this plan.
Mid-Term Incentive Programs
We offer mid-term incentive programs for executives and certain
senior employees. Depending on the plan, these programs pay
either a single cash payment at the end of the three-year period
of the plan, or three annual cash payments in each of the three
years of the plan. The amount of the incentive payment is adjusted
to reflect dividends and changes in the market value of our
common shares. For the majority of executives and some senior
employee grants, a portion of the incentive payment also varies
based on performance targets driven by annualized total share-
holder return compared with that of our competitors.
Employee compensation expense for these programs is recorded
over the three-year performance cycle of the programs. The amount
of compensation expense is adjusted over the three-year per-
formance cycle to reflect the current market value of our common
shares and our total shareholder return compared with that
of our competitors.
Beginning with our fiscal 2002 mid-term incentive program,
we entered into agreements with third parties to assume our
obligations related to these programs in exchange for cash payments
of $173 million, $105 million and $58 million in the years ended
October 31, 2004, 2003 and 2002, respectively. Amounts paid under
these agreements were recorded in the Consolidated Balance
Sheet in other assets and are recorded as employee compensation
expense over the three-year performance cycle of the program
on a straight-line basis. We no longer have any liability related
to these programs because any future payments required will
be the responsibility of the third parties.
The amount deferred and recorded in other assets in our
Consolidated Balance Sheet totalled $133 million and $93 million
as at October 31, 2004 and 2003, respectively.
Employee compensation expense related to this program for
the years ended October 31, 2004, 2003 and 2002 was $143 million,
$97 million and $47 million, respectively.
Deferred Bonus Plans
We offer deferred bonus plans for certain senior executives and
certain key employees in our Investment Banking and Private
Client Groups. Under these plans, payment of annual incentive
payments and/or commissions can be deferred as stock units
of our common shares. The amount of deferred incentive payments
and/or commissions is adjusted to reflect dividends and changes
in the market value of our common shares.
Options outstanding and options exercisable as at October 31, 2004 by range of exercise price are as follows:
(Canadian $, except as noted) Options outstanding Options exercisable
Weighted-
average
Number remaining Weighted- Number Weighted-
of stock contractual life average of stock average
Range of exercise prices options (years) exercise price options exercise price
$20.00 and less 1,647,123 1.6 $ 18.39 1,647,123 $ 18.39
$20.01 to $30.00 4,997,301 5.0 $ 25.60 4,997,301 $ 25.60
$30.01 to $40.00 19,860,036 5.5 $ 34.78 14,074,823 $ 34.02
$40.01 to $54.13 3,936,100 8.3 $ 46.30 383,186 $ 41.33
$54.14 and over 1,500 9.0 $ 55.40 – $ –