International Paper 2015 Annual Report Download - page 96

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NOTE 18 INCENTIVE PLANS
International Paper currently has an Incentive
Compensation Plan (ICP) which, upon the approval by
the Company’s shareholders in May 2009, replaced the
Company’s Long-Term Incentive Compensation Plan
(LTICP). The ICP authorizes grants of restricted stock,
restricted or deferred stock units, performance awards
payable in cash or stock upon the attainment of
specified performance goals, dividend equivalents,
stock options, stock appreciation rights, other stock-
based awards, and cash-based awards at the discretion
of the Management Development and Compensation
Committee of the Board of Directors (the Committee)
that administers the ICP. Additionally, restricted stock,
which may be deferred into RSU’s, may be awarded
under a Restricted Stock and Deferred Compensation
Plan for Non-Employee Directors.
STOCK OPTION PROGRAM
International Paper accounts for stock options in
accordance with guidance under ASC 718,
“Compensation – Stock Compensation.”
Compensation expense is recorded over the related
service period based on the grant-date fair market
value. Since all outstanding options were vested as of
July 14, 2005, only replacement option grants are
expensed.
During each reporting period, diluted earnings per
share is calculated by assuming that “in-the-money”
options are exercised and the exercise proceeds are
used to repurchase shares in the marketplace. When
options are actually exercised, option proceeds are
credited to equity and issued shares are included in the
computation of earnings per common share, with no
effect on reported earnings. Equity is also increased by
the tax benefit that International Paper will receive in its
tax return for income reported by the employees in their
individual tax returns.
Under the program, upon exercise of an option, a
replacement option may be granted under certain
circumstances with an exercise price equal to the
market price at the time of exercise and with a term
extending to the expiration date of the original option.
The Company has discontinued the issuance of stock
options for all eligible U.S. and non-U.S. employees. In
the United States, the stock option program was
replaced with a performance-based restricted share
program to more closely tie long-term incentive
compensation to Company performance on two key
performance drivers: return on invested capital (ROIC)
and total shareholder return (TSR). All outstanding
options expired on March 15, 2015.
The following summarizes the status of the Stock
Option Program and the changes during the three years
ending December 31, 2015:
Options
(a,b)
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Life
(years)
Aggregate
Intrinsic
Value
(thousands)
Outstanding at December 31,
2012 9,136,060 $38.79 1.15 $1,077
Granted 4,744 48.11
Exercised (7,317,825) 38.57
Expired (70,190) 37.15
Outstanding at December 31,
2013 1,752,789 39.80 0.67 16,175
Granted 3,247 49.13
Exercised (1,634,858) 39.80
Expired (49,286) 41.50
Outstanding at December 31,
2014 71,892 39.03 0.18 1,046
Granted ——
Exercised (62,477) 39.05
Expired (9,415) 38.92
Outstanding at December 31,
2015 —$—0.00 $—
(a) The table does not include Continuity Award tandem stock
options described below. No fair market value is assigned to
these options under ASC 718. The tandem restricted shares
accompanying these options are expensed over their vesting
period.
(b) The table includes options outstanding under an acquired
company plan under which options may no longer be granted.
PERFORMANCE SHARE PLAN
Under the Performance Share Plan (PSP), contingent
awards of International Paper common stock are
granted by the Committee. The PSP awards are earned
evenly over a three-year period. PSP awards are
earned based on the achievement of defined
performance rankings of ROIC and TSR compared to
ROIC and TSR peer groups of companies. Awards are
weighted 75% for ROIC and 25% for TSR for all
participants except for officers for whom the awards are
weighted 50% for ROIC and 50% for TSR. The ROIC
component of the PSP awards is valued at the closing
stock price on the day prior to the grant date. As the
ROIC component contains a performance condition,
compensation expense, net of estimated forfeitures, is
recorded over the requisite service period based on the
most probable number of awards expected to vest. The
TSR component of the PSP awards is valued using a
Monte Carlo simulation as the TSR component contains
a market condition. The Monte Carlo simulation
estimates the fair value of the TSR component based
on the expected term of the award, a risk-free rate,
expected dividends, and the expected volatility for the
Company and its competitors. The expected term is
estimated based on the vesting period of the awards,
the risk-free rate is based on the yield on U.S. Treasury
securities matching the vesting period, and the volatility
is based on the Company’s historical volatility over the
expected term.