ABB Annual Report 2012 PDF - ABB Group Annual Report 2012

Note 18Share-based paymentarrangements, continuedMIPUnder the MIP, the Company offers options and cash-settled WARs (and prior to the 2010 launch offered also physicallysettledwarrants) to key employees for no consideration.The warrants and options granted under the MIP allow participants to purchase shares of ABB Ltd at predeterminedprices. Participants may sell the warrants and options rather than exercise the right to purchase shares. Equivalent warrantsare listed by a third-party bank on the SIX Swiss Exchange, which facilitates pricing and transferability of warrantsgranted under this plan. The options entitle the holder to request that the third-party bank purchase such options atthe market price of equivalent listed warrants related to that MIP launch. If the participant elects to sell the warrants oroptions, the instruments will thereafter be held by a third party and, consequently, the Company’s obligation to delivershares will be toward this third party. Each WAR gives the participant the right to receive, in cash, the market price of anequivalent listed warrant on the date of exercise of the WAR. The WARs are non-transferable.Participants may exercise or sell warrants and options and exercise WARs after the vesting period, which is three yearsfrom the date of grant. Vesting restrictions can be waived in certain circumstances such as death or disability. Allwarrants, options and WARs expire six years from the date of grant.Warrants and optionsThe fair value of each warrant and option is estimated on the date of grant using a lattice model that uses the weightedaverageassumptions noted in the table below. Expected volatilities are based on implied volatilities from equivalentlisted warrants on ABB Ltd shares. The expected term of the warrants and options granted has been assumed to bethe contractual six-year life of each warrant and option, based on the fact that after the vesting period, a participantcan elect to sell the warrant or option rather than exercise the right to purchase shares, thereby realizing the time valueof the warrants and options. The risk-free rate is based on a six-year Swiss franc interest rate, reflecting the six-yearcontractual life of the warrants and options. In estimating forfeitures, the Company has used the data from previouscomparable MIP launches.2012 2011 2010Expected volatility 27% 26% 30%Dividend yield 3.60% 2.44% 2.35%Expected term 6 years 6 years 6 yearsRisk-free interest rate 0.30% 1.59% 1.20%Presented below is a summary of the activity related to warrants and options under the MIP:Numberof instruments(in millions)Numberof shares(in millions) (1)Weightedaverageexerciseprice (inSwiss francs) (2)Weighted-averageremainingcontractualterm (in years)Aggregateintrinsic value(in millions ofSwiss francs) (3)Outstanding at January 1, 2012 165.6 33.1 25.56Granted 86.8 17.4 16.07Exercised (4) (4.1) (0.8) 15.30Forfeited (4.5) (0.9) 21.36Expired (1.3) (0.3) 31.58Outstanding at December 31, 2012 242.5 48.5 22.38 3.7 45.8(1)(2)(3)(4)Vested and expected to vest at December 31, 2012 228.6 45.7 22.46 3.6 42.8Exercisable at December 31, 2012 84.2 16.8 27.05 1.6 0.8Information presented reflects the number of shares of ABB Ltd that can be received upon exercise, as warrants and options have a conversion ratio of 5:1.Information presented reflects the exercise price per share of ABB Ltd.Computed using the closing price, in Swiss francs, of ABB Ltd shares on the SIX Swiss Exchange and the exercise price per share of ABB Ltd.The cash received upon exercise amounted to approximately $14 million. The shares were delivered out of treasury stock.At December 31, 2012, there was $64 million of total unrecognized compensation cost related to non-vested warrantsand options granted under the MIP. That cost is expected to be recognized over a weighted-average period of 2.0 years.The weighted-average grant-date fair value (per instrument) of warrants and options granted during 2012, 2011 and2010 was 0.59 Swiss francs, 0.83 Swiss francs and 0.81 Swiss francs, respectively. In 2011 and 2010, the aggregateintrinsic value (on the dates of exercise) of instruments exercised was 11 million Swiss francs and 9 million Swiss francs,respectively. The amount in 2012 was not significant.122 Financial review | ABB Annual Report 2012