Air Canada 2011 Annual Report Download - page 114

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2011 Air Canada Annual Report
114
15. SHARE-BASED COMPENSATION
Air Canada Long-Term Incentive Plan
Certain of the Corporation’s employees participate in the Air Canada Long-term Incentive Plan (the “Long-term Incentive
Plan”). The Long-term Incentive Plan provides for the grant of options and performance share units to senior management and
officers of Air Canada. 19,470,294 shares are authorized for issuance under the Long-term Incentive Plan in respect of either of
stock options or performance share units.
Stock Options
The options to purchase shares granted under the Long-term Incentive Plan have a maximum term of 10 years and an exercise
price based on the fair market value of the shares at the time of the grant of the options. Fifty percent of options are time-
based and vest over four years. The remaining options will vest based upon performance conditions. The performance vesting
conditions are based on operating margin (operating income over operating revenues) and net income targets established by
the Air Canada Board over the same time period. Each option entitles the employee to purchase one ordinary share at the
stated exercise price. The terms of the Long-term Incentive Plan specify that following retirement an employee may exercise
options granted with the rights to exercise accruing within three years from the retirement date.
The number of Air Canada stock options granted to employees, the related compensation expense recorded and the
assumptions used to determine stock-based compensation expense, using the Black-Scholes option valuation model are as
follows:
2011 2010
Compensation expense ($ millions) $ 2 $ 1
Number of stock options granted to Air Canada employees 3,439,471 50,000
Weighted average fair value per option granted ($) $ 1.13 $ 1.06
Aggregated fair value of options granted ($ millions) $ 4 $ –
Weighted average assumptions:
Share price $ 2.33 $ 2.02
Risk-free interest rate 2.48%-3.18% 2.55%-3.23%
Expected volatility 73.9%-85.1% 80.0%-83.6%
Dividend yield 0% 0%
Expected option life (years) 4.50 4.50
Expected volatility was determined using the Air Canada share price on a historical basis. It reflects the assumption that the
historical volatility is indicative of future trends, which may not necessarily be the actual outcome.
A summary of the Long-term Incentive Plan option activity is as follows:
2011 2010
Options Weighted Average
Exercise Price/Share Options Weighted Average
Exercise Price/Share
Beginning of year 3,287,931 $6.17 3,963,474 $ 8.66
Granted 3,439,471 2.39 50,000 1.85
Exercised (625) 1.59 (5,625) 1.59
Forfeited (145,535) 11.85 (719,918) 19.63
Outstanding options, end of year 6,581,242 $4.07 3,287,931 $ 6.17
Options exercisable, end of year 1,644,809 $10.07 1,038,986 $ 14.42