Boeing 2005 Annual Report Download - page 73

Notes to Consolidated Financial Statements
shares are available for issuance as restricted stock awards.
This authorization for issuance under the 1997 Plan will termi-
nate on April 30, 2007.
Shares issued as a result of stock option exercise or conver-
sion of stock unit awards will be funded out of treasury shares
except to the extent there are insufficient treasury shares in
which case new shares will be issued. We believe we currently
have adequate treasury shares to meet any requirements to
issue shares during 2006.
Share-based plans expense is included in general and adminis-
trative expense since it is incentive compensation issued prima-
rily to our executives. The share-based plans expense and
related income tax benefit follow:
2005 2004 2003
Performance Shares $723 $449 $316
Stock options, other 50 53 69
ShareValue Trust 79 74 71
Share-based plans expense $852 $576 $456
Income tax benefit $253 $209 $168
Adoption of SFAS No. 123R
We early adopted the provisions of SFAS No. 123R as of
January 1, 2005 using the modified prospective method. Upon
adoption of SFAS No. 123R, we recorded an increase in net
earnings of $21, net of taxes of $12, as a cumulative effect of
accounting change due to SFAS No. 123R’s requirement to
apply an estimated forfeiture rate to unvested awards.
Previously we expensed forfeitures as incurred. SFAS No. 123R
also resulted in changes in our methods of measuring and
amortizing compensation cost of our Performance Shares.
For Performance Shares granted prior to 2005, share-based
expense was measured based on the market price of our stock
on date of the award and was generally amortized over a five-
year period. For Performance Shares granted in 2005, the fair
value of each award was measured on the date of grant using
a Monte Carlo simulation model. The Monte Carlo model also
computed an expected term for each Performance Share. We
changed our valuation method based on further clarification
provided in SFAS No. 123R and the fact that our Performance
Shares contain a market condition, which should be reflected in
the grant date fair value of an award. The Monte Carlo simula-
tion model utilizes multiple input variables that determine the
probability of satisfying each market condition stipulated in the
award grant.
Additionally, prior to the adoption of SFAS No. 123R, we amor-
tized compensation cost for share-based awards over the
stated vesting period for retirement eligible employees and, if
an employee retired before the end of the vesting period, we
recognized any remaining unrecognized compensation cost at
the date of retirement. As a result of adopting SFAS No. 123R,
for all share-based awards granted after January 1, 2005, we
recognize compensation cost for retirement eligible employees
over the greater of one year from the date of grant or the
period from the date of grant to the employee’s retirement eligi-
bility date (non-substantive vesting approach). Had we also
applied the non-substantive vesting approach to awards
granted prior to 2005, compensation expense would have
been $96 lower, $59 higher and $12 lower for the years ended
December 31, 2005, 2004 and 2003.
Performance Shares
Performance Shares are stock units that are convertible to
common stock, on a one-to-one basis, contingent upon stock
price performance. If, at any time up to five years after award,
the stock price reaches and maintains for twenty consecutive
days a price equal to stated price growth targets, a stated per-
centage (up to 125%) of the Performance Shares awarded are
vested and convertible to common stock. The following table
shows the cumulative vesting percentages based on the cumu-
lative growth rate of the stock above the stock price at the
grant date for performance shares awarded in 2001 and 2002:
Cumulative Growth 61.0% 68.5% 76.2% 84.2% 92.5% 101.1%
Cumulative Vesting 25% 40% 55% 75% 100% 125%
Cumulative stock price growth targets and vesting percentages for 2003, 2004 and 2005 awards follow:
Cumulative Growth 40% 50% 60% 70% 80% 90% 100% 110% 120% 125%
Cumulative Vesting 15% 30% 45% 60% 75% 90% 100% 110% 120% 125%
Performance Shares not converted to common stock expire
five years after the date of the award. Awards may vest based
on total shareholder return as follows:
� For 2001 and 2002 awards, up to 100% of the award may
vest if our total shareholder return (stock price appreciation
plus dividends) during the five-year period exceeds the
average total shareholder return of the S&P 500 over the
same period.
� For 2003 and 2004 awards, up to 125% of the award may
vest based on an award formula using the total shareholder
return performance relative to the S&P 500.
� For 2005 award, up to 125% of the award may vest based
on an award formula using the total shareholder return per-
formance relative to the S&P 100 and the five-year Treasury
Bill rate.
In the event a participant’s employment terminates due to
retirement, layoff, disability, or death, the participant (or benefi-
ciary) continues to participate in Performance Shares awards
that have been outstanding for at least one year. In all other
cases, participants forfeit unvested awards if their employment
terminates.
The Boeing Company and Subsidiaries 71