KeyBank 2006 Annual Report Download - page 90

90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
LONG-TERM INCENTIVE
COMPENSATION PROGRAM
Key’s Long-Term Incentive Compensation Program rewards senior
executives who are critical to Key’s long-term financial success. The
Program covers three-year performance cycles with a new cycle beginning
each year. Awards under the Program are primarily in the form of
time-lapsed restricted stock, performance-based restricted stock, and
performance shares payable primarily in stock. The time-lapsed restricted
stock generally vests after the end of the three-year cycle. The vesting
of the performance-based restricted stock and performance shares is
contingent upon Key’s attainment of defined performance levels.
The following table summarizes activity and pricing information
for the nonvested shares in the Program for the year ended December
31, 2006:
STOCK OPTION PLANS
Stock options granted to employees generally become exercisable at the
rate of 33-1/3% per year beginning one year from their grant date;
options expire no later than ten years from their grant date. The
exercise price is the average of the high and low price of Key’s common
shares on the date of grant, and cannot be less than the fair market value
of Key’s common shares on the grant date.
Management estimates the fair value of options granted using the
Black-Scholes option-pricing model. This model was originally developed
to estimate the fair value of exchange-traded equity options, which
(unlike employee stock options) have no vesting period or transferability
restrictions. Because of these differences, the Black-Scholes model is not
aperfect indicator of the value of an employee stock option, but it is
commonly used for this purpose. The model assumes that the esti-
mated fair value of an option is amortized as compensation expense over
the option’s vesting period.
The Black-Scholes model requires several assumptions, which
management developed and updates based on historical trends and
current market observations. The accuracy of these assumptions is
critical to the accuracy of management’s estimates of the fair value of
options. The assumptions pertaining to options issued during 2006, 2005
and 2004, are shown in the following table
Key’s annual stock option grant to executives and certain other
employees occurs in July, upon approval by the Compensation and
Organization Committee.
The weighted-average grant-date fair value of options was $6.34 for
options granted during 2006, $6.92 for options granted during 2005 and
$5.67 for options granted during 2004. The total intrinsic value of
exercised options was $91 million for 2006, $41 million for 2005 and
$60 million for 2004. As of December 31, 2006, unrecognized
compensation cost related to nonvested options expected to vest under
the plans totaled $33 million. Management expects to recognize this cost
over a weighted-average period of 2.1 years.
Cash received from options exercised was $244 million for 2006, $129
million for 2005 and $160 million for 2004. The actual tax benefit
realized for the tax deductions from options exercised totaled $28
million for 2006, $12 million for 2005 and $21 million for 2004.
The following table summarizes activity, pricing and other information
for Key’s stock options for the year ended December 31, 2006:
Year ended December 31, 2006 2005 2004
Average option life 6.0 years 5.1 years 5.1 years
Future dividend yield 3.79% 3.79% 4.21%
Historical share price volatility .199 .274 .279
Weighted-average risk-free
interest rate 5.0% 4.0% 3.8%
Weighted-Average Weighted-Average Aggregate
Number of Exercise Price Remaining Life Intrinsic
dollars in millions, except per share amounts Options Per Option (Years) Value
a
OUTSTANDING AT DECEMBER 31, 2005 37,265,859 $28.35
Granted 6,666,614 36.39
Exercised (9,410,635) 26.89
Lapsed or canceled (1,129,396) 31.99
OUTSTANDING AT DECEMBER 31, 2006 33,392,442 $30.25 6.4 $260
Expected to vest 20,423,059 $29.99 6.6 $244
Exercisable at December 31, 2006 20,660,608 $27.89 5.6 $209
a
The intrinsic value of a stock option is the amount by which the fair value of the underlying stock exceeds the exercise price of the option.
Vesting Contingent on
Vesting Contingent on Performance and
Service Conditions Service Conditions
Weighted- Weighted-
Number of Average Number of Average
Nonvested Grant-Date Nonvested Grant-Date
Shares Fair Value Shares Fair Value
OUTSTANDING AT DECEMBER 31, 2005 476,034 $31.43 1,190,458 $31.05
Granted 222,797 35.42 738,002 33.51
Vested (2,768) 33.80 (180) 35.42
Forfeited (54,723) 33.02 (94,515) 31.83
OUTSTANDING AT DECEMBER 31, 2006 641,340 $32.67 1,833,765 $32.00
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