Aetna 2006 Annual Report Download - page 74

401(k) Plan
Substantially all of our employees are eligible to participate in a defined contribution retirement savings plan under
which designated contributions, which may be invested in our common stock or certain other investments, are
matched by us. We provide for a match of up to 50% of the first 6% of eligible pay contributed to the plan. The
matching contributions are made in cash and invested according to each participant’ s investment elections. During
2006, 2005 and 2004, we made $40 million, $36 million and $33 million, respectively, in matching contributions.
The plan trustee held approximately 13 million shares of our common stock for plan participants at December 31,
2006. At December 31, 2006, approximately 34 million shares of our common stock were reserved for issuance
under our 401(k) plan.
Employee Incentive Plans
Stock-Based Compensation Plans - Our stock-based compensation plans (the “Plans”) provide for awards of
stock options, stock appreciation rights (“SARs”), restricted stock units (“RSUs”), deferred contingent common
stock and the ability for employees to purchase common stock at a discount. At December 31, 2006,
approximately 99 million common shares were available for issuance under the Plans.
Executive, middle management and non-management employees may be granted stock options, SARs and RSUs.
Stock options are granted to purchase our common stock at or above the market price on the date of grant. SARs
granted will be settled in stock, net of taxes, based on the appreciation of our stock price on the exercise date over
the market price on the date of grant. SARs and stock options generally become 100% vested three years after the
grant is made, with one-third vesting each year. From time to time, we have issued SARs and stock options with
different vesting provisions. Vested SARs and stock options may be exercised at any time during the 10 years after
grant, except in certain circumstances, generally related to employment termination or retirement. At the end of
the 10-year period, any unexercised SARs and stock options expire. For each RSU granted, employees receive one
share of common stock, net of taxes, at the end of the vesting period. The RSUs granted in 2006 will generally
vest in a single installment on the third anniversary of the grant date.
We estimate the fair value of stock options and awards of SARs using a modified Black-Scholes option pricing
model. The fair value of RSUs is based on the market price of our common stock on the date of grant. Stock
options and SARs granted in 2006, 2005 and 2004 had a weighted average fair value of $16.41, $10.83 and $6.16,
respectively, using the assumptions noted in the following table:
2006 2005 2004
Dividend yield .1% .1% .1%
Expected volatility 30.9% 31.3% 34.0%
Risk-free interest rate 4.6% 3.7% 3.3%
Expected term 4.5 years 4.5 years 4.0 years
We use historical data to estimate the period of time that stock options or SARs are expected to be outstanding.
Expected volatilities are based on a weighted average of the historical volatility of our stock price and implied
volatility from traded options on our stock. The risk-free interest rate for periods within the expected life of the
stock option or SAR is based on the benchmark five-year U.S. Treasury rate in effect on the date of grant. The
dividend yield assumption is based on our historical dividends declared.
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