TD Bank 2011 Annual Report Download - page 132

TD BANK GROUP ANNUAL REPORT 2011 FINANCIAL RESULTS130
STOCK-BASED COMPENSATION
NOTE 22
The Bank operates various stock-based compensation plans. The Bank
uses the fair value method of accounting for all stock option awards.
Under the fair value method, the Bank recognizes compensation
expense based on the fair value of the options, which is determined by
using an option pricing model. The fair value of the options is recog-
nized as compensation expense and contributed surplus over the
service period required for employees to become fully entitled to the
award. The contributed surplus balance is reduced as the options are
exercised and the amount initially recorded for the options in contrib-
uted surplus is credited to capital stock.
STOCK OPTION PLAN
The Bank maintains a stock option program for certain key employees
and non-employee directors. Non-employee directors have not been
granted stock options since December 2001. Options on common
shares are periodically granted to eligible employees of the Bank under
the plan for terms of seven or ten years and vest over a four-year
period. These options provide holders with the right to purchase
common shares of the Bank at a fixed price equal to the closing
market price of the shares on the day prior to the date the options
were issued. Under this plan, 2.3 million common shares have been
reserved for future issuance (2010 – 4.0 million; 2009 – 5.7 million).
The outstanding options expire on various dates to December 13,
2020. A summary of the Bank’s stock option activity and related infor-
mation for the years ended October 31 is as follows:
Stock Option Activity
(millions of shares, except as noted) 2011 2010 2009
Weighted- Weighted- Weighted-
Number average Number average Number average
of shares exercise price of shares exercise price of shares exercise price
Number outstanding, beginning of year 19.2 $ 57.68 25.9 $ 53.25 27.5 $ 55.37
Granted 1.7 73.25 1.7 65.98 4.0 41.50
Exercised (4.9) 49.14 (8.1) 47.60 (4.6) 39.26
Forfeited/cancelled (0.1) 57.79 (0.3) 65.68 (1.0) 61.58
Number outstanding, end of year 15.9 $ 58.05 19.2 $ 57.68 25.9 $ 53.25
Exercisable, end of year 10.3 $ 56.32 13.4 $ 58.63 19.6 $ 53.41
The following table summarizes information relating to stock options
outstanding and exercisable as at October 31, 2011.
Range of Exercise Prices
Options outstanding Options exercisable
Weighted-
Number average Number
outstanding remaining Weighted- exercisable Weighted-
(millions contractual average (millions average
of shares) life (years) exercise price of shares) exercise price
$32.95 – $42.77 4.7 3.75 $ 39.87 3.0 $ 39.02
$43.52 – $50.96 0.2 0.85 47.59 0.2 47.59
$52.53 – $57.75 1.2 3.28 54.39 1.2 54.39
$58.39 – $61.65 2.0 2.54 59.78 2.0 59.78
$63.29 – $73.25 7.8 5.74 69.44 3.9 68.91
The fair value of options granted was estimated at the date of grant
using a binomial tree-based valuation model. The following assump-
tions were used: (i) risk-free interest rate of 2.73% (2010 – 2.72%;
2009 – 2.17%); (ii) expected option life of 6.2 years (2010 – 6.2 years;
2009 – 5.6 years); iii) expected volatility of 26.6% (2010 – 26.6%;
2009 – 23.9%); and (iv) expected dividend yield of 3.3% (2010 –
3.2%; 2009 – 3.0%).
During the year, 1.7 million (2010 – 1.7 million; 2009 – 4.0 million)
options were granted with a weighted-average fair value of $15.47 per
option (2010 – $14.09 per option; 2009 – $7.62 per option). During
the year, the Bank recognized compensation expense in the Consoli-
dated Statement of Income of $27 million (2010 – $28 million; 2009 –
$30 mil lion) for the stock option awards granted.
OTHER STOCK-BASED COMPENSATION PLANS
The Bank operates restricted share unit and performance share unit
plans which are offered to certain employees of the Bank. Under these
plans, participants are awarded share units equivalent to the Bank’s
common shares that generally vest over three years. A liability is accrued
by the Bank related to such share units awarded and an incentive
compensation expense is recognized in the Consolidated Statement of
Income over the service period required for employees to become fully
entitled to the award. At the maturity date, the participant receives cash
representing the value of the share units. The final number of perfor-
mance share units will vary from 80% to 120% of the initial number
awarded based on the Bank’s total shareholder return relative to the
average of the North American peer group. Beginning with units granted
in December 2009, the Human Resources Committee of the Board
(HRC) has the discretion to adjust the number of restricted share units
and performance share units within a +/- 20% range at maturity at the
plan or individual level based on a review of the risk taken to achieve
business results over the life of the award; and, dividends will be
re-invested in additional units that will be paid at maturity. The number
of such share units outstanding under these plans as at October 31,
2011 is 14 million (2010 – 12 million; 2009 – 11 million).