27. Stock-Based Compensation
The company has seven stock-based compensation plans, which are described below. The compensation cost charged against income for those plans in 2007 was $84.0 (2006 – $44.3; 2005 – $37.3).
Stock Option Plans
The company has five stock option plans.
Under the Officers and Employees Plan, the company could, after February 3, 1998, issue up to 41,556,750 common shares pursuant to the exercise of options. Under the Directors Plan, the company could, after January 24, 1995, issue up to 2,736,000 common shares pursuant to the exercise of options. Under both plans, the exercise price is the quoted market closing price of the company's common shares on the last trading day immediately preceding the date of the grant and an option's maximum term is 10 years. All options granted to date under these plans have provided that one-half of the options granted in a year will vest one year from the date of the grant, with the other half vesting the following year. No stock options have been granted under the Directors Plan or the Officers and Employees Plan since November 2002 and November 2003, respectively, and the PCS Board of Directors determined in 2003 to discontinue granting stock options to directors. Effective November 2006, the PCS Board of Directors formally terminated these plans in respect of any future option grants.
Under the 2005 Performance Option Plan, the company could, after February 28, 2005 and before January 1, 2006, issue options to acquire up to 3,600,000 common shares. Under the 2006 Performance Option Plan, the company could, after February 27, 2006 and before January 1, 2007, issue options to acquire up to 4,200,000 common shares. Under the 2007 Performance Option Plan, which was approved on May 3, 2007, the company could, after February 20, 2007 and before January 1, 2008, issue options to acquire up to 3,000,000 common shares. Under the performance plans, the exercise price shall not be less than the quoted market closing price of the company's common shares on the last trading day immediately preceding the date of the grant and an option's maximum term is 10 years. The key design difference between the 2005, 2006 and 2007 Performance Option Plans and the company's other stock option plans is the performance-based vesting feature. In general, options granted under the Performance Option Plans will vest, if at all, according to a schedule based on the three-year average excess of the company's consolidated cash flow return on investment over weighted average cost of capital.
The company issues new common shares to satisfy stock option exercises.
A summary of the status of the plans as of December 31, 2007, 2006 and 2005 and changes during the years ending on those dates is presented as follows:
Number of Shares Subject to Option
| Performance Option Plans | Officers, Employees and Directors Plans | |||||
| 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | |
| Outstanding, beginning of year | 6,199,800 | 3,558,000 | – | 8,105,844 | 11,687,268 | 19,202,190 |
| Granted | 1,730,550 | 2,684,700 | 3,565,500 | – | – | – |
| Exercised | – | – | – | (1,995,460) | (3,581,424) | (7,378,782) |
| Forfeited | (33,750) | (42,900) | (7,500) | – | – | – |
| Expired | – | – | – | – | – | (136,140) |
| Outstanding, end of year | 7,896,600 | 6,199,800 | 3,558,000 | 6,110,384 | 8,105,844 | 11,687,268 |
Weighted Average Exercise Price
| Performance Option Plans | Officers, Employees and Directors Plans | |||||||||||
| 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | |||||||
| Outstanding, beginning of year | $ | 31.38 | $ | 30.03 | $ | – | $ | 12.68 | $ | 12.80 | $ | 12.71 |
| Granted | 62.75 | 33.67 | 29.42 | – | – | – | ||||||
| Exercised | – | – | – | 13.31 | 13.31 | 12.71 | ||||||
| Forfeited | 39.26 | 30.30 | 30.13 | – | – | – | ||||||
| Expired | – | – | – | – | – | 13.68 | ||||||
| Outstanding, end of year | $ | 40.08 | $ | 31.38 | $ | 30.03 | $ | 13.48 | $ | 12.68 | $ | 12.80 |
The aggregate grant-date fair value of all options granted during the year was $39.2 (2006 – $34.5; 2005 – $35.4).
The following table summarizes information about stock options outstanding at December 31, 2007:
| Options Outstanding | Options Exercisable | ||||
| Range of Exercise Prices | Number | Weighted Average Remaining Life in Years | Weighted Average Exercise Price | Number | Weighted Average Exercise Price |
| Officers and Employees and Directors Plans |
|||||
| $7.00 to $10.55 | 496,300 | 3 | $ 10.03 | 496,300 | $ 10.03 |
| $10.56 to $14.10 | 3,403,958 | 5 | $ 11.67 | 3,403,958 | $ 11.67 |
| $14.11 to $17.65 | 2,210,126 | 4 | $ 17.04 | 2,210,126 | $ 17.04 |
| 6,110,384 | 4 | $ 13.48 | 6,110,384 | $ 13.48 | |
| Performance Option Plans | |||||
| $29.00 to $39.00 | 6,174,300 | 8 | $ 33.14 | – | – |
| $62.00 to $72.00 | 1,722,300 | 9 | $ 64.93 | – | – |
| 7,896,600 | 8 | $ 40.08 | – | – | |
| 14,006,984 | 6 | $ 28.47 | 6,110,384 | $ 13.48 | |
The foregoing options have expiry dates ranging from November 2008 to May 2017.
The fair value of each option grant was estimated as of the grant date using the Black-Scholes-Merton option-pricing model. The following weighted average assumptions were used in arriving at the grant-date fair values associated with stock options for which compensation cost was recognized during 2005, 2006 and 2007:
| Year of Grant | ||||
| 2007 | 2006 | 2005 | 2003 | |
| Expected dividend | $ 0.40 | $ 0.20 | $ 0.20 | $ 0.17 |
| Expected volatility | 29% | 30% | 28% | 27% |
| Risk-free interest rate | 4.48% | 4.90% | 3.86% | 4.06% |
| Expected life of options in years | 6.4 | 6.5 | 6.5 | 8 |
The expected dividend on the company's stock was based on the current annualized dividend rate as at the date of grant. Expected volatility was based on historical volatility of the company's stock over a period commensurate with the expected term of the stock option. The risk-free interest rate for the expected life of the option was based, as applicable, on the implied yield available on zero-coupon government issues with an equivalent remaining term at the time of the grant. Historical data were used to estimate the expected life of the option.
A summary of the status of the company's non-vested shares subject to option as of December 31, 2007, and changes during the year then ended, is presented below:
| Number of Shares Subject to Option |
Weighted-Average Grant-Date Fair Value | ||
| Non-vested at January 1, 2007 | 6,199,800 | $ | 11.19 |
| Granted | 1,730,550 | 22.68 | |
| Vested | – | – | |
| Forfeited | (33,750) | 14.12 | |
| Non-vested at December 31, 2007 | 7,896,600 | $ | 13.70 |
As of December 31, 2007, 7,896,600 options remained unvested and there was $15.3 of total unrecognized compensation cost related to the company's stock option plans. This cost is expected to be recognized over the period through December 31, 2009.
Cash received from stock option exercises for the year ended December 31, 2007 was $26.6 (2006 – $47.3).
Deferred Share Unit and Other Plans
The company offers a deferred share unit plan to non-employee directors, which allows each director to choose to receive, in the form of deferred share units ("DSUs"), all or a percentage of the director's fees, which would otherwise be payable in cash. The plan also provides for discretionary grants of additional DSUs by the PCS Board of Directors, a practice which the Board discontinued on January 24, 2007 in connection with an increase in the annual retainer. Each DSU fully vests upon award, but is distributed only when the director has ceased to be a member of the Board of Directors of the company. Vested units are settled in cash based on the common share price at that time. As of December 31, 2007, the total DSUs held by participating directors was 206,251 (2006 – 213,849; 2005 – 190,905).
The company offers a performance unit incentive plan to senior executives and other key employees. The performance objectives under the plan are designed to further align the interests of executives and key employees with those of shareholders by linking the vesting of awards to the total return to shareholders over the three-year performance period ending December 31, 2008. Total shareholder return measures the capital appreciation in the company's common shares, including dividends paid over the performance period. Vesting of one-half of the awards is based on increases in the total shareholder return over the three-year performance period. Vesting of the remaining one-half of the awards is based on the extent to which the total shareholder return matches or exceeds the total shareholder return of the common shares of a pre-defined peer group. Vested units are settled in cash based on the common share price generally at the end of the performance period. Compensation expense for this program is recorded over the three-year performance cycle of the program. The amount of compensation expense is adjusted over the three-year performance cycle to reflect the current market value of common shares and the number of shares vested in accordance with the vesting schedule based upon total shareholder return, and such return compared to the company's peer group.
During 2006, cash of $34.5 was used to settle the company's liability in respect of its performance unit incentive plan for the performance period January 1, 2003 to December 31, 2005. Other cash payments made in respect of the company's stock-based compensation plans during 2006 and 2007 were not significant.