Honeywell 2007 Annual Report Download - page 110

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 Honeywell 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 replaced 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 was 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 common 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.
Compensation cost on a pre-tax basis related to stock options recognized in operating results (included in
selling, general and administrative expenses) under SFAS No. 123R in 2007 and 2006 was $65 and $77 million,
respectively. The associated future income tax benefit recognized in 2007 and 2006 was $25 and $28 million,
respectively. Compensation cost related to stock options recognized in our Consolidated Statement of
Operations in 2007 and 2006 includes (1) compensation cost for stock option awards granted prior to, but not yet
vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with the pro forma
provisions of SFAS No. 123 and (2) compensation cost for stock option awards granted subsequent to December
31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R.
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