9. share-based compensation
(a) Details of share-based compensation expense
Reflected in the Consolidated Statements of Income as Operations expense are the following share-based compensation amounts:
(b) Share options
Effective January 1, 2004, for purposes of Canadian generally accepted accounting principles, the Company applies the fair value based method of accounting for share-based compensation awards granted to employees. As only share options granted after 2001 are included, the compensation expense arising from share options is not likely to be representative of the effects on reported net income for future years. Share options typically vest over a three-year period (the requisite service period), but may vest over periods of up to five years. The vesting method of share options, which is determined at the date of grant, may be either cliff or graded.
The weighted average fair value of options granted, and the weighted average assumptions used in the fair value estimation at the time of grant, using the Black-Scholes model (a closed-form option pricing model), are as follows:
The risk free interest rate used in determining the fair value of the share options is based on a Government of Canada yield curve that is current at the time of grant. The expected lives of the share options are based on historical share option exercise data of the Company. Similarly, expected volatility is based on historical volatility of the Company’s Non-Voting Shares. The dividend yield is the annualized dividend current at the date of grant divided by the share option exercise price. Dividends are not paid on unexercised share options and are not subject to vesting.
Had weighted average assumptions for grants of share options that are reflected in the expense disclosures above been varied by 10% and 20% changes, the compensation cost arising from share options for the year ended December 31, 2005, would have varied as follows:
(c) Restricted stock units
The Company uses restricted stock units as a form of incentive compensation. Each restricted stock unit is equal in value to one Non-Voting Share and the dividends that would have arisen thereon had it been an issued and outstanding Non-Voting Share are recorded as additional restricted stock units during the life of the restricted stock unit. The restricted stock units become payable as they vest over their lives. Typically, the restricted stock units vest over a period of 33 months. The vesting method, which is determined at the date of grant, may be either cliff or graded. The following table presents a summary of the activity related to the Company’s restricted stock units.
With respect to certain issuances of restricted stock units, the Company entered into cash-settled equity forward agreements that fix the cost to the Company, as set out in the following table:
The following is a schedule of vesting of the Company’s non-vested restricted stock units outstanding as at December 31, 2005:
(d) Employee share purchase plan
The Company has an employee share purchase plan under which eligible employees can purchase Common Shares through regular payroll deductions by contributing between 1% and 10% of their pay. The Company contributes 45%, for the employee population up to a certain job classification, for every dollar contributed by an employee, to a maximum of 6% of employee pay; for more highly compensated job classifications, the Company contributes 40%. Commencing July 25, 2005, and concluding November 19, 2005, the Company increased its contribution to 100% for all plan participants, other than the executive leadership team, up to 6% of participants’ eligible pay. There are no vesting requirements and the Company records its contributions as a component of operating expenses.
Under this plan, the Company has the option of offering shares from Treasury or having the trustee acquire shares in the stock market. Prior to February 2001 and subsequent to November 1, 2004, all Common Shares issued to employees under the plan were purchased on the market at normal trading prices; in the intervening period, shares were also issued from Treasury.
(e) Unrecognized, non-vested share-based compensation
As at December 31, 2005, compensation cost related to non-vested share-based compensation that has not yet been recognized is set out in the following table and is expected to be recognized over a weighted average period of 2.8 years (2004 – 1.6 years).
These disclosures are not likely to be representative of the effects on reported net income for future years for the following reasons:
- these amounts reflect an estimate of forfeitures;
- these amounts do not reflect any provision for future awards;
- these amounts do not reflect any provision changes in the intrinsic value for vested restricted stock units; and
- for non-vested restricted stock units, these amounts reflect intrinsic values as at the balance sheet dates.
