Note 20 — Employee Incentive Plans
The People Resources Committee (“the Committee”) of the Board of Directors awards stock options, restricted stock, deferred stock and strategic performance shares to certain employees. The Committee has issued common stock instead of cash compensation and dividend equivalent rights to a very limited extent, as part of restricted and deferred stock units. The Company issues shares from Treasury stock for option exercises, awards of restricted stock grants and payment of strategic performance shares, deferred stock units and restricted stock units.
As explained further in Note 3, in connection with the HealthSpring acquisition on January 31, 2012, HealthSpring employees' awards of options and restricted shares of HealthSpring stock were rolled over to Cigna stock options and restricted stock. Unless otherwise indicated, information in this footnote includes the effect of the HealthSpring rollover awards.
Compensation cost and related tax benefits for these awards were as follows:
| (In millions) | 2013 | 2012 | 2011 | |||
| Compensation cost | $ | 88 | $ | 98 | $ | 61 |
| Tax benefits | $ | 25 | $ | 26 | $ | 14 |
The Company had the following number of common stock shares available for award at December 31: 13.2 million in 2013, 8.4 million in 2012 and 11.7 million in 2011.
Stock options. The Company awards options to purchase the Company's common stock at the market price of the stock on the grant date. Options vest over periods ranging from one to five years and expire no later than 10 years from grant date.
The table below shows the status of, and changes in, common stock options during the last three years:
| (Options in thousands) | 2013 | 2012 | 2011 | |||||||||
| Weighted | Weighted | Weighted | ||||||||||
| Average | Average | Average | ||||||||||
| Options | Exercise Price | Options | Exercise Price | Options | Exercise Price | |||||||
| Outstanding - January 1 | 8,951 | $ | 36.29 | 9,581 | $ | 33.92 | 12,093 | $ | 31.10 | |||
| Granted | 1,890 | $ | 58.84 | 3,446 | $ | 28.29 | 1,546 | $ | 42.36 | |||
| Exercised | (3,107) | $ | 34.99 | (3,740) | $ | 22.72 | (3,480) | $ | 27.93 | |||
| Expired or canceled | (384) | $ | 43.86 | (336) | $ | 37.85 | (578) | $ | 33.61 | |||
| Outstanding - December 31 | 7,350 | $ | 42.24 | 8,951 | $ | 36.29 | 9,581 | $ | 33.92 | |||
| Options exercisable at year-end | 4,217 | $ | 35.84 | 5,731 | $ | 34.93 | 6,147 | $ | 34.94 | |||
Compensation expense of $25 million related to unvested stock options at December 31, 2013 will be recognized over the next two years (weighted average period).
The table below summarizes information for stock options exercised during the last three years:
| (In millions) | 2013 | 2012 | 2011 | |||
| Intrinsic value of options exercised | $ | 105 | $ | 95 | $ | 53 |
| Cash received for options exercised | $ | 109 | $ | 85 | $ | 97 |
| Excess tax benefits realized from options exercised | $ | 23 | $ | 15 | $ | 10 |
The following table summarizes information for outstanding common stock options at December 31, 2013:
| (Dollars in millions, except per share | Options | Options | ||
| amounts) | Outstanding | Exercisable | ||
| Number (in thousands) | 7,350 | 4,217 | ||
| Total intrinsic value | $ | 333 | $ | 218 |
| Weighted average exercise price | $ | 42.24 | $ | 35.84 |
| Weighted average remaining | ||||
| contractual life | 6.5 | 5.0 |
Excluding the HealthSpring rollover options issued in 2012, the weighted average fair value of options granted under employee incentive plans was $19.81 for 2013, $14.99 for 2012 and $13.96 for 2011, using the Black-Scholes option-pricing model and the assumptions presented in the following table. See Note 3 for additional information regarding the valuation of the HealthSpring rollover awards.
| 2013 | 2012 | 2011 | |
| Dividend yield | 0.1% | 0.1% | 0.1% |
| Expected volatility | 40.0% | 40.0% | 40.0% |
| Risk-free interest rate | 0.7% | 0.8% | 1.7% |
| Expected option life | 4.5 years | 4.5 years | 4 years |
The expected volatility reflects the Company's past daily stock price volatility. The Company does not consider volatility implied in the market prices of traded options to be a good indicator of future volatility because remaining maturities of traded options are less than one year. The risk-free interest rate is derived using the four-year U.S. Treasury bond yield rate as of the award date for the primary grant. Expected option life reflects the Company's historical experience.
Restricted stock. The Company awards restricted stock to its employees or directors with vesting periods ranging from two to five years. These awards are generally in one of two forms: restricted stock grants or restricted stock units. Restricted stock grants are the most widely used form of restricted stock award and are used for substantially all U.S.-based employees receiving such awards. Recipients of restricted stock grants accumulate dividends and can vote during the vesting period, but forfeit their awards and accumulated dividends if their employment terminates before the vesting date. Awards of restricted stock units are generally limited to overseas employees. A restricted stock unit represents a right to receive a common share of stock when the unit vests. Recipients of restricted stock units are entitled to accumulate hypothetical dividends, but cannot vote during the vesting period. They forfeit their units and accumulated dividends if their employment terminates before the vesting date.
The table below shows the status of, and changes in, restricted stock grants and units during the last three years:
| (Awards in thousands) | 2013 | 2012 | 2011 | ||||||
| Weighted | Weighted | Weighted | |||||||
| Average Fair Value | Average Fair Value | Average Fair Value | |||||||
| Grants/Units | at Award Date | Grants/Units | at Award Date | Grants/Units | at Award Date | ||||
| Outstanding - January 1 | 4,064 | $ | 35.00 | 4,246 | $ | 28.88 | 4,306 | $ | 27.70 |
| Awarded | 525 | $ | 59.36 | 1,563 | $ | 44.37 | 945 | $ | 42.62 |
| Vested | (1,480) | $ | 30.24 | (1,485) | $ | 27.60 | (564) | $ | 42.79 |
| Forfeited | (265) | $ | 39.46 | (260) | $ | 33.61 | (441) | $ | 28.99 |
| Outstanding - December 31 | 2,844 | $ | 41.56 | 4,064 | $ | 35.00 | 4,246 | $ | 28.88 |
The fair value of vested restricted stock was: $94 million in 2013, $66 million in 2012 and $24 million in 2011.
At the end of 2013, approximately 3,200 employees held 2.8 million restricted stock grants and units with $58 million of related compensation expense to be recognized over the next three years (weighted average period).
Strategic Performance Shares. The Company awards strategic performance shares to executives and certain other key employees generally with a performance period of three years. Strategic performance shares are divided into two broad groups: 50% are subject to a market condition (total shareholder return relative to industry peer companies) and 50% are subject to performance conditions (revenue growth and cumulative adjusted net income). These targets are set by the Committee. At the end of the performance period, holders of strategic performance shares will be awarded anywhere from 0 to 200% of the original grant of strategic performance shares in Cigna common stock.
The table below shows the status of, and changes in, strategic performance shares during the last three years:
| (Awards in thousands) | 2013 | 2012 | 2011 | ||||||||
| Weighted | Weighted | Weighted | |||||||||
| Grants/ | Average Fair Value | Grants/ | Average Fair Value | Grants/ | Average Fair Value | ||||||
| Units | at Award Date | Units | at Award Date | Units | at Award Date | ||||||
| Outstanding - January 1 | 1,600 | $ | 41.92 | 834 | $ | 39.45 | 430 | $ | 34.73 | ||
| Awarded | 616 | $ | 59.84 | 842 | $ | 44.49 | 529 | $ | 42.92 | ||
| Vested | (448) | $ | 36.88 | - | $ | - | - | $ | - | ||
| Forfeited | (196) | $ | 47.52 | (76) | $ | 43.39 | (125) | $ | 37.92 | ||
| Outstanding - December 31 | 1,572 | $ | 49.67 | 1,600 | $ | 41.92 | 834 | $ | 39.45 | ||
The fair value of vested strategic performance shares was $42 million in 2013. No strategic performance shares vested in 2012 and 2011.
At the end of 2013, approximately 1,100 employees held 1.6 million strategic performance shares and $33 million of related compensation expense was expected to be recognized over the next two years. For strategic performance shares subject to a performance condition, the amount of expense may vary based on actual performance in 2014 and 2015.