UPS 2015 Annual Report Download - page 119

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
107
Nonqualified Stock Options
We maintain fixed stock option plans, under which options are granted to purchase shares of UPS class A common stock.
Stock options granted in connection with the Incentive Compensation Plan must have an exercise price at least equal to the
NYSE closing price of UPS class B common stock on the date the option is granted.
Executive officers and certain senior managers receive a non-qualified stock option grant annually, in which the value
granted is determined as a percentage of salary. Options granted generally vest over a five year period with approximately 20%
of the award vesting at each anniversary date of the grant. All options granted are subject to earlier cancellation or vesting under
certain conditions. Option holders may exercise their options via the tender of cash or class A common stock, and new class A
shares are issued upon exercise.
The following is an analysis of options to purchase shares of class A common stock issued and outstanding:
Shares
(in thousands)
Weighted Average
Exercise
Price
Weighted Average Remaining
Contractual Term
(in years)
Aggregate Intrinsic
Value (in millions)
Outstanding at January 1, 2015 3,691 $ 75.07
Exercised (1,060) 73.25
Granted 160 101.93
Forfeited / Expired (20) 72.47
Outstanding at December 31, 2015 2,771 $ 77.33 2.94 $ 53
Options Vested and Expected to Vest 2,771 $ 77.33 2.94 $ 53
Exercisable at December 31, 2015 2,451 $ 75.31 2.27 $ 51
The fair value of each option grant is estimated using the Black-Scholes option pricing model. The weighted average
assumptions used, by year, and the calculated weighted average fair values of options, are as follows:
2015 2014 2013
Expected dividend yield 2.63% 2.56% 2.75%
Risk-free interest rate 2.07% 2.40% 1.38%
Expected life in years 7.5 7.5 7.5
Expected volatility 20.61% 24.26% 24.85%
Weighted average fair value of options granted $ 18.07 $ 20.48 $ 15.50
Expected volatilities are based on the historical returns on our stock and the implied volatility of our publicly-traded
options. The expected dividend yield is based on the recent historical dividend yields for our stock, taking into account changes
in dividend policy. The risk-free interest rate is based on the term structure of interest rates at the time of the option grant. The
expected life represents an estimate of the period of time options are expected to remain outstanding, and we have relied upon a
combination of the observed exercise behavior of our prior grants with similar characteristics, the vesting schedule of the
grants, and an index of peer companies with similar grant characteristics in estimating this variable.
We received cash of $56, $85 and $292 million during 2015, 2014 and 2013, respectively, from option holders resulting
from the exercise of stock options. The total intrinsic value of options exercised during 2015, 2014 and 2013 was $31, $47 and
$92 million, respectively. As of December 31, 2015, there was $1 million of total unrecognized compensation cost related to
nonvested options. That cost is expected to be recognized over a weighted average period of 3 years and 3 months.