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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
from stock options vesting subsequent to April 2004. Activity in the deferred compensation program for the
years ended December 31, 2006, 2005, and 2004 is as follows (in millions):
2006 2005 2004
Shares Dollars Shares Dollars Shares Dollars
Deferred Compensation Obligations
Balance at beginning of year ....................... $161 $169 $136
Reinvested dividends ............................. 4 4 2
Option exercise deferrals .......................... — — 39
Benefit payments ................................ (18) (12) (8)
Balance at end of year ............................ $147 $161 $169
Treasury Stock
Balance at beginning of year ....................... (3) $(161) (3) $(169) (2) $(136)
Reinvested dividends ............................. — (4) — (4) — (2)
Option exercise deferrals .......................... — — — — — (39)
Benefit payments ................................ — 18 — 12 (1) 8
Balance at end of year ............................ (3) $(147) (3) $(161) (3) $(169)
NOTE 11. STOCK-BASED COMPENSATION
Incentive Compensation Plan
The UPS Incentive Compensation Plan permits the grant of nonqualified stock options, incentive stock
options, stock appreciation rights, restricted stock, performance shares, performance units, and management
incentive awards to eligible employees. The number of shares reserved for issuance under the Plan is
112 million, with the number of shares reserved for issuance as restricted stock limited to 34 million. As of
December 31, 2006, management incentive awards, stock options, restricted performance units, and restricted
stock units had been granted under the Incentive Compensation Plan.
Management Incentive Awards & Restricted Stock Units
Persons earning the right to receive management incentive awards are determined annually by the
Compensation Committee of the UPS Board of Directors. Our management incentive awards program provides
that half of the annual management incentive award, with certain exceptions, be made in restricted stock units
(“RSUs”), which generally vest over a five-year period. The other half of the award is in the form of cash or
unrestricted shares of class A common stock and is fully vested at the time of grant. These management incentive
awards are generally granted in the fourth quarter of each year.
Upon vesting, RSUs result in the issuance of the equivalent number of UPS class A common shares after
required tax withholdings. Except in the case of death, disability, or retirement, RSUs granted for our
management incentive awards generally vest over a five year period with approximately 20% of the award
vesting at each anniversary date of the grant. The entire grant is expensed on a straight-line basis over the
requisite service period. All RSUs granted are subject to earlier cancellation or vesting under certain conditions.
Dividends earned on management incentive award RSUs are reinvested in additional RSUs at each dividend
payable date.
We also award RSUs in conjunction with our long-term incentive performance awards program to certain
eligible employees. The RSUs ultimately granted under the long-term incentive performance award will be based
upon the achievement of certain performance measures, including growth in consolidated revenue and operating
return on invested capital, each year during the performance award cycle, and other measures, including growth
in consolidated earnings, over the entire three year performance award cycle.
F-33