OG&E 2012 Annual Report Download - page 65

Performance Units
Under the 2008 Stock Incentive Plan, the Company has issued
performance units which represent the value of one share of the
Company’s common stock. The performance units provide for acceler-
ated vesting if there is a change in control (as defined in the 2008 Stock
Incentive Plan). Each performance unit is subject to forfeiture if the
recipient terminates employment with the Company or a subsidiary
prior to the end of the three-year award cycle for any reason other than
death, disability or retirement. In the event of death, disability or retire-
ment, a participant will receive a prorated payment based on such
participant’s number of full months of service during the award cycle,
further adjusted based on the achievement of the performance goals
during the award cycle.
The performance units granted based on total shareholder return
are contingently awarded and will be payable in shares of the Company’s
common stock subject to the condition that the number of performance
units, if any, earned by the employees upon the expiration of a three-
year award cycle (i.e., three-year cliff vesting period) is dependent on
the Company’s total shareholder return ranking relative to a peer group
of companies. The performance units granted based on earnings per
share are contingently awarded and will be payable in shares of the
Company’s common stock based on the Company’s earnings per share
growth over a three-year award cycle (i.e., three-year cliff vesting period)
compared to a target set at the time of the grant by the Compensation
Committee of the Company’s Board of Directors. All of these perform-
ance units are classified as equity in the Consolidated Balance Sheet.
If there is no or only a partial payout for the performance units at the
end of the award cycle, the unearned performance units are cancelled.
Payout requires approval of the Compensation Committee of the
Company’s Board of Directors. Payouts, if any, are all made in common
stock and are considered made when the payout is approved by the
Compensation Committee.
Performance Units – Total Shareholder Return
The fair value of the performance units based on total shareholder
return was estimated on the grant date using a lattice-based valuation
model that factors in information, including the expected dividend yield,
expected price volatility, risk-free interest rate and the probable outcome
of the market condition, over the expected life of the performance units.
Compensation expense for the performance units is a fixed amount
determined at the grant date fair value and is recognized over the three-
year award cycle regardless of whether performance units are awarded
at the end of the award cycle. Dividends are not accrued or paid during
the performance period and, therefore, are not included in the fair value
calculation. Expected price volatility is based on the historical volatility
of the Company’s common stock for the past three years and was
simulated using the Geometric Brownian Motion process. The risk-free
interest rate for the performance unit grants is based on the three-year
U.S. Treasury yield curve in effect at the time of the grant. The expected
life of the units is based on the non-vested period since inception of
the award cycle. There are no post-vesting restrictions related to the
Company’s performance units based on total shareholder return. The
number of performance units granted based on total shareholder return
and the assumptions used to calculate the grant date fair value of the
performance units based on total shareholder return are shown in the
following table.
2012 2011 2010
Number of units granted 169,339 213,721 214,750
Fair value of units granted $÷÷51.82 $÷÷46.09 $÷÷39.43
Expected dividend yield 3.0% 3.2% 3.9%
Expected price volatility 22.0% 33.0% 34.0%
Risk-free interest rate 0.38% 1.40% 1.42%
Expected life of units (in years) 2.87 2.87 2.87
Performance Units – Earnings Per Share
The fair value of the performance units based on earnings per share is
based on grant date fair value which is equivalent to the price of one
share of the Company’s common stock on the date of grant. The fair
value of performance units based on earnings per share varies as the
number of performance units that will vest is based on the grant date
fair value of the units and the probable outcome of the performance
condition. The Company reassesses at each reporting date whether
achievement of the performance condition is probable and accrues
compensation expense if and when achievement of the performance
condition is probable. As a result, the compensation expense recog-
nized for these performance units can vary from period to period. There
are no post-vesting restrictions related to the Company’s performance
units based on earnings per share. The number of performance units
granted based on earnings per share and the grant date fair value are
shown in the following table.
2012 2011 2010
Number of units granted 40,797 71,238 71,585
Fair value of units granted $÷47.63 $÷41.61 $÷32.44
In 2012, the performance unit grant for Enogex employees that was
previously based on earnings per share was changed to a cash pay-
ment that entitles Enogex employees to receive from 0 percent to 200
percent of the performance units granted based on the growth in
Enogex’s EBITDA over a three-year award cycle (i.e., three-year cliff
vesting period) compared to a growth target set by the Compensation
Committee of the Company’s Board of Directors.
OGE Energy Corp. 63