Honeywell 2006 Annual Report Download - page 99

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share amounts)
Note 20—Stock-Based Compensation Plans
We have stock-based compensation plans available to grant non-qualified stock options, incentive stock options, stock
appreciation rights, restricted units and restricted stock to key employees. Under the 2006 Stock Incentive Plan of Honeywell
International Inc. and its Affiliates (the Plan), which was approved by the shareowners at the Annual Meeting of Shareowners and
became effective on April 24, 2006, a maximum of 43 million shares of common stock may be awarded. We expect that common
stock awarded on an annual basis will be between 1.0 and 1.5 percent of total common stock outstanding. Following approval of the
Plan on April 24, 2006, we will not grant any new awards under any previously existing stock-based compensation plans.
Additionally, under the 2006 Stock Plan for Non-Employee Directors of Honeywell International Inc. (the Directors Plan), which was
approved by the shareowners at the Annual Meeting of Shareowners and became effective on April 24, 2006, 500,000 shares of
Honeywell common stock may be awarded. The Directors Plan replaces the 1994 Stock Plan for Non-Employee Directors of
Honeywell International Inc.
Stock Options—The exercise price, term and other conditions applicable to each option granted under our stock plans are
generally determined by the Management Development and Compensation Committee of the Board. The exercise price of stock
options is set on the grant date and may not be less than the fair market value per share of our stock on that date. The fair value is
recognized as an expense over the employee's requisite service period (generally the vesting period of the award). Options have
generally vested over a three-year period and expire after ten years. Starting with 2007 option grants the vesting period will be
extended to four years.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. Expected
volatility is based on implied volatilities from traded options on Honeywell stock. We used a Monte Carlo simulation model to derive
an expected term. Such model uses historical data to estimate option exercise activity and post-vest termination behavior. The
expected term represents an estimate of the time options are expected to remain outstanding. The risk-free rate for periods within the
contractual life of the option is based on the U.S. treasury yield curve in effect at the time of grant.
The fair value of each stock option grant made during 2006 was estimated on the grant-date using the Black-Scholes model using
the following weighted-average assumptions consistent with the requirements of SFAS No. 123R.
Year Ended
December 31, 2006
Expected volatility 22.32%
Expected annual dividend yield 2.15%
Risk-free rate of return 4.63%
Expected option term (years) 5.0
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