KeyBank 2007 Annual Report Download - page 91

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89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
LONG-TERM INCENTIVE COMPENSATION PROGRAM
Key’s Long-Term Incentive Compensation Program rewards senior executives
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 in stock.
However, performance awards are presented to certain executive officers in
the form of cash. The time-lapsed restricted stock generally vests after the
end of the three-year cycle. Performance-based restricted stock and
performance shares will not vest unless Key attains defined performance
levels. During 2007, Key paid cash awards of $3 million in connection with
vested performance shares. There were no vested performance shares that
resulted in cash payments in either 2006 or 2005.
The following table summarizes activity and pricing information for the
nonvested shares in the Program for the year ended December 31, 2007:
Management determines the fair value of options granted using the Black-
Scholes option-pricing model. This model was originally developed to
determine 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 a perfect
indicator of the value of an employee stock option, but it is commonly used
for this purpose. The model assumes that the estimated 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. Management’s determination of the fair
value of options is only as accurate as the underlying assumptions.
The assumptions pertaining to options issued during 2007, 2006 and
2005 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 $7.13 for
options granted during 2007, $6.34 for options granted during 2006 and
$6.92 for options granted during 2005. The total intrinsic value of
exercised options was $44 million for 2007, $91 million for 2006 and
$41 million for 2005. As of December 31, 2007, unrecognized
compensation cost related to nonvested options expected to vest under
the plans totaled $24 million. Management expects to recognize this cost
over a weighted-average period of 2.0 years.
Cash received from options exercised was $112 million for 2007, $244
million for 2006 and $129 million for 2005. The actual tax benefit
realized for the tax deductions from options exercised totaled $13
million for 2007, $28 million for 2006 and $12 million for 2005.
The following table summarizes activity, pricing and other information
for Key’s stock options for the year ended December 31, 2007:
Year ended December 31,
2007 2006 2005
Average option life 7.0 years 6.0 years 5.1 years
Future dividend yield 4.04% 3.79% 3.79%
Historical share price volatility .231 .199 .274
Weighted-average risk-free
interest rate 4.9% 5.0% 4.0%
Weighted-Average Weighted-Average Aggregate
Number of Exercise Price Remaining Life Intrinsic
Options Per Option (Years) Value
a
OUTSTANDING AT DECEMBER 31, 2006 33,392,442 $30.25
Granted 3,738,228 36.18
Exercised (4,331,274) 27.57
Lapsed or canceled (1,659,753) 34.57
OUTSTANDING AT DECEMBER 31, 2007 31,139,643 $31.11 5.9 —
Expected to vest 29,563,934 $30.86 5.8 —
Exercisable at December 31, 2007 21,945,294 $29.12 4.7 —
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. At December 31, 2007, the fair value of the
underlying stock was less than the weighted-average exercise price per 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, 2006 641,340 $32.67 1,833,765 $32.00
Granted 190,222 39.36 610,802 37.66
Vested (179,220) 32.29 (346,784) 30.95
Forfeited (83,539) 33.83 (291,632) 30.62
OUTSTANDING AT DECEMBER 31, 2007 568,803 $34.86 1,806,151 $31.49