AIG 2006 Annual Report Download - page 200

American International Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements Continued
14. Stock Compensation Plans Valuation Methodology
Continued In 2004, AIG developed a binomial lattice model to calculate the
fair value of stock option grants. In prior years, a Black-Scholes
Included in share-based compensation expense of $353 million
model was used. A more detailed description of the valuation
for 2006 was a one-time compensation cost of approximately
methodology is provided below.
$54 million related to the Starr tender offer and various out of
period adjustments totalling $61 million, primarily relating to The following weighted average assumptions were used
stock-splits and other miscellaneous items for the SICO Plans, for stock options granted in 2006 and 2005:
offset by a $46 million pre-tax adjustment for the cumulative
2006 2005
effect of the adoption of FAS 123R. See Note 16 herein for a
discussion of the Starr tender offer. Expected annual dividend yield(a) 0.92% 0.71%
If AIG had adopted the FAS 123 provisions for recognizing Expected volatility(b) 23.50% 27.3%
Risk-free interest rate(c) 4.61% 4.17%
compensation expense commencing at the date of grant of the
Expected term(d) 7 years 7 years
awards, the effect would not have been material to net income or
basic or diluted earnings per share for 2005. (a) The dividend yield is based on the dividend yield over the twelve month
period prior to the grant date.
1999 Stock Option Plan (b) In 2006, expected volatility is the average of historical volatility (based
on seven years of daily stock price changes) and the implied volatility
The 1999 Plan provides that options to purchase a maximum of of actively traded options on AIG shares and in 2005, expected
volatility is the historical volatility based on five years of daily stock
45,000,000 shares of common stock can be granted to certain
price changes.
key employees and members of the Board of Directors at prices
(c) The interest rate cur ves used in the valuation model were the
not less than fair market value at the date of grant. U.S. Treasury STRIP rates with terms from 3 months to 10 years.
The 1999 Plan was approved by the shareholders at the 2000
(d) The contractual term of the option is generally 10 years with an
Annual Meeting of Shareholders, with certain amendments ap- expected term of 7 years calculated based on an analysis of historical
proved at the 2003 Annual Meeting of Shareholders. The 1999 employee exercise behavior and employee turnover (post-vesting termi-
nations). The early exercise rate is a function of time elapsed since the
Plan superseded the 1991 Employee Stock Option Plan (the 1991
grant. Fifteen years of historical data were used to estimate the early
Plan), although outstanding options granted under the 1991 Plan exercise rate.
continue in-force until exercise or expiration. The maximum
number of shares that may be granted to any employee in any Additional information with respect to AIG’s stock option
one year under the 1999 Plan is 900,000. Options granted under plans at December 31, 2006, and changes for the year
the 1999 Plan generally vest over four years (25 percent vesting then ended, were as follows:
per year) and expire 10 years from the date of grant. Weighted Average
At December 31, 2006, there were 19,615,911 shares Shares Exercise Price
reserved for future grants under the 1999 Plan and Options:
28,021,943 shares reserved for issuance under the 1999 and Outstanding at beginning of year 52,545,425 $ 54.84
1991 Plans.
Granted 1,621,910 $70.51
Exercised* (5,329,026) $27.97
Deferrals
Forfeited or expired (1,182,589) $70.76
At December 31, 2006, AIG was obligated to issue Outstanding at end of year 47,655,720 $57.99
8,382,632 shares in connection with previous exercises of Options exercisable at end of
options with delivery deferred. year 39,383,670 $56.81
Weighted average fair value per
share of options granted $23.41
* Includes options with respect to 2,067,643 shares exercised with
delivery deferred, resulting in obligations to issue 1,527,613 shares.
150 AIG 2006 Form 10-K