Travelers 2015 Annual Report Download - page 228

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. SHARE-BASED INCENTIVE COMPENSATION (Continued)
The 2014 Incentive Plan is currently the only plan pursuant to which future stock-based awards
may be granted. In addition to the 10 million shares initially authorized for issuance under the 2014
Incentive Plan, the following will not be counted towards the 10 million shares available and will be
available for future grants under the 2014 Incentive Plan: (i) shares of common stock subject to awards
that expire unexercised, that are forfeited, terminated or canceled, that are settled in cash or other
forms of property, or otherwise do not result in the issuance of shares of common stock, in whole or in
part; (ii) shares that are used to pay the exercise price of stock options and shares used to pay
withholding taxes on awards generally; and (iii) shares purchased by the Company on the open market
using cash option exercise proceeds; provided, however, that the increase in the number of shares of
common stock available for grant pursuant to such market purchases shall not be greater than the
number that could be repurchased at fair market value on the date of exercise of the stock option
giving rise to such option proceeds. In addition, the 10 million shares initially authorized for issuance
under the 2014 Incentive Plan will be increased by any shares subject to awards under the 2004
Incentive Plan that were outstanding as of May 27, 2014 and subsequently expire, are forfeited,
cancelled, settled in cash or otherwise terminate without the issuance of shares.
The Company also has a compensation program for non-employee directors (the Director
Compensation Program). Under the Director Compensation Program, non-employee directors’
compensation consists of an annual retainer, a deferred stock award, committee chair fees and a lead
director fee. Each non-employee director may choose to receive all or a portion of his or her annual
retainer in the form of cash or deferred stock units which vest upon grant. The annual deferred stock
awards vest in full one day prior to the date of the Company’s annual meeting of shareholders
occurring in the year following the year of the grant date, subject to continued service. The deferred
stock awards, including dividend equivalents, accumulate until distribution either in a lump sum six
months after termination of service as a director or, if the director so elects, in annual installments
beginning at least six months following termination of service as a director. The deferred stock units
issued under the Director Compensation Program are awarded under the 2014 Incentive Plan.
Stock Option Awards
Stock option awards granted to eligible officers and key employees have a ten-year term. Prior to
January 1, 2007, stock options were granted with an exercise price equal to the fair market value of the
Company’s common stock on the day preceding the date of grant. Beginning January 1, 2007, all stock
options are granted with an exercise price equal to the closing price of the Company’s common stock
on the date of grant. The stock options granted generally vest upon meeting certain years of service
criteria. Except as the Compensation Committee of the board of directors may allow in the future,
stock options cannot be sold or transferred by the participant. Stock options outstanding under the
2014 Incentive Plan and the 2004 Incentive Plan vest three years after grant date (cliff vest).
The fair value of each option award is estimated on the date of grant by application of a variation
of the Black-Scholes option pricing model using the assumptions noted in the following table. The
expected term of newly granted stock options is the time to vest plus half the remaining time to
expiration. This considers the vesting restriction and represents an even pattern of exercise behavior
over the remaining term. The expected volatility assumption is based on the historical volatility of the
Company’s common stock for the same period as the estimated option term based on the mid-month
of the option grant. The expected dividend is based upon the Company’s current quarter dividend
annualized and assumed to be constant over the expected option term. The risk-free interest rate for
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