Travelers 2006 Annual Report Download - page 222

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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11. SHARE-BASED INCENTIVE COMPENSATION (Continued)
Share-Based Compensation Recognition
The compensation cost for awards subject to a service condition is based upon the number of equity
instruments for which the requisite service period is expected to be rendered. Awards granted to retiree-
eligible or to employees that become retiree-eligiblebefore an award’s vesting date are considered to have
met the requisite service condition. The compensation cost for awards subject to a performance condition
is based upon the probable outcome that the performance condition will be achieved. The compensation
cost reflects an estimated annual forfeiture rate of 5% over the requisite service period of the awards. That
estimate isrevised if subsequent information indicates that the actual number of instruments expected to
vest is likely to differ from previous estimates. Compensation cost for awards are recognized on a straight-
line basis over the requisite service period. For awards that have a graded vesting schedule, the
compensation cost is recognized on a straight-line basis over the requisite service period for each separate
vestingportion of the award as if the award was, in substance, multiple awards. The total compensation
cost for all share-based incentive compensation awards recognized inearnings for the year ended
December 31, 2006 was $147 million. Included in that amount was approximately $12 million of
compensation costs related to awards granted, prior to the adoption of FAS 123R, to retiree-eligible or to
employees that became retiree-eligible before the awards vestingdate. The related tax benefits recognized
in earnings were $51 million for the yearendedDecember 31, 2006.
As of December 31, 2006, there was $125 million of totalunrecognized compensation cost related to
all nonvested share-based incentive compensation awards. This includes stock options, restricted stock,
deferred stock andperformance shares granted under the Company’s 2004 Incentive Plan and legacy TPC
and legacy SPC share-based incentive compensation plans. The unrecognized compensation cost is
expected tobe recognized over a weighted-averageperiod of 1.7 years.
Upon adoption of FAS 123R, the Company had$9 million of unrecognized pretax compensation cost
related to the portion of awards granted prior to the Company’s adoption of FAS 123 (January 1, 2003)
which remained unvested and outstanding. These compensation costs are being recognized ratably over the
remaining requisite service period of approximately fifteen months. At December 31, 2006, the Company
had approximately $1 million of remaining unrecognized pretax compensation cost related to these awards.
The requirement to report unearned compensation as contra-equity in the consolidated balance sheet
was eliminated by FAS123R. Accordingly, the Company’s unearned compensation balances were
reclassified to common stock for all years presented.
Cash received from theexercise of employee stock options under share-based compensation plans
totaled $216 million in 2006. The tax benefit realizedfor tax deductions from employee stock option
exercises totaled $28 million for 2006.