The Hartford 2015 Annual Report Download - page 225

Table of Contents THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Stock Compensation Plans
F-94
The Company's stock-based compensation plans are described below. Shares issued in satisfaction of stock-based compensation may be
made available from authorized but unissued shares, shares held by the Company in treasury or from shares purchased in the open
market. In 2015, 2014 and 2013, the Company issued shares from treasury in satisfaction of stock-based compensation.
The Company recognized stock-based compensation expense as follows:
For the years ended December 31,
2015 2014 2013
Stock-based compensation plans expense $ 78 $ 98 $ 69
Income tax benefit (27)(34) (24)
Total stock-based compensation plans expense, after-tax $ 51 $ 64 $ 45
In 2014, the Company modified a former executive’s awards to receive retirement treatment. The incremental compensation cost
resulting from the modifications totaled $16 of which $11 was recognized at the modification date. The remainder is recognized over
the remaining service period.
The Company did not capitalize any cost of stock-based compensation. As of December 31, 2015, the total compensation cost related to
non-vested awards not yet recognized was $90, which is expected to be recognized over a weighted average period of 1.8 years.
Stock Plan
On May 21, 2014, at the Company’s Annual Meeting of Shareholders, the shareholders approved The Hartford 2014 Incentive Stock
Plan (the “Incentive Stock Plan”) which supersedes and replaces earlier incentive stock plans and as a result is currently the only plan
pursuant to which future stock-based awards may be granted (other than the Subsidiary Stock Plan and the Employee Stock Purchase
Plan described below). The terms of the Incentive Stock Plan are substantially similar to the terms of the earlier incentive stock plans,
with changes primarily to ensure alignment with market practices and simplify administration. These changes did not result in
incremental compensation cost for outstanding awards. The Incentive Stock Plan provides for awards to be granted in the form of non-
qualified or incentive stock options qualifying under Section 422 of the Internal Revenue Code, stock appreciation rights, performance
shares, restricted stock or restricted stock units, or any other form of stock-based award. The maximum number of shares, subject to
adjustments set forth in the Incentive Stock Plan, that may be issued to Company employees and third party service providers during the
10-year duration of the Incentive Stock Plan is 12,000,000 shares. If any award under an earlier incentive stock plan is forfeited,
terminated, surrendered, exchanged, expires unexercised, or is settled in cash in lieu of stock (including to effect tax withholding) or for
the net issuance of a lesser number of shares than the number subject to the award, the shares of stock subject to such award (or the
relevant portion thereof) shall be available for awards under the Incentive Stock Plan and such shares shall be added to the maximum
limit. As of December 31, 2015, there were 12,086,260 shares available for future issuance.
The fair values of awards granted under the Incentive Stock Plan are measured as of the grant date and expensed ratably over the awards’
vesting periods, generally 3 years. For stock option awards to retirement-eligible employees the Company recognizes the expense over a
period shorter than the stated vesting period because the employees receive accelerated vesting upon retirement and therefore the vesting
period is considered non-substantive.
Stock Option Awards
Under the Incentive Stock Plan, options granted have an exercise price at least equal to the market price of the Company’s common
stock on the date of grant, and an option’s maximum term is not to exceed 10 years. Options generally become exercisable over a three
year period commencing one year from the date of grant. Certain other options become exercisable at the later of three years from the
date of grant or upon specified market appreciation of the Company's common shares.
The Company uses a hybrid lattice/Monte-Carlo based option valuation model (the “valuation model”) that incorporates the possibility
of early exercise of options into the valuation. The valuation model also incorporates the Company’s historical termination and exercise
experience to determine the option value.
The valuation model incorporates ranges of assumptions for inputs, and those ranges are disclosed below. The term structure of volatility
is generally constructed utilizing implied volatilities from exchange-traded options, CPP warrants related to the Company’s stock,
historical volatility of the Company’s stock and other factors. The Company uses historical data to estimate option exercise and
employee termination within the valuation model, and accommodates variations in employee preference and risk-tolerance by
segregating the grantee pool into a series of behavioral cohorts and conducting a fair valuation for each cohort individually. The
expected term of options granted is derived from the output of the option valuation model and represents, in a mathematical sense, the
period of time that options are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based
on the U.S. Constant Maturity Treasury yield curve in effect at the time of grant.