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SHARE-BASED COMPENSATION PLANS
12 Months Ended
Dec. 31, 2019
SHARE-BASED COMPENSATION PLANS  
SHARE-BASED COMPENSATION PLANS

21. Share-Based Compensation Plans

The following table presents our total share-based compensation expense:

Years Ended December 31,

 

 

 

 

 

 

 

(in millions)

 

 

2019

 

2018

 

2017

Share-based compensation expense - pre-tax(a)

 

$

314

$

337

$

353

Share-based compensation expense - after tax(b)

 

 

248

 

266

 

229

(a)As a result of accelerated vesting events, such as retirement eligibility in the year of grant and involuntary terminations, we recognized $82 million, $104 million and $196 million in 2019, 2018 and 2017, respectively, prior to the end of the specified vesting periods. It is our policy to reverse compensation expense for forfeited awards when they occur.

(b)We also recognized $27 million of additional tax expense due to share settlements occurring in 2019.

Employee Plans

The Company sponsors several stock compensation programs under the AIG Long Term Incentive Plan and its predecessor plan, the AIG 2013 Long Term Incentive Plan (each as applicable, the LTIP), which are governed by the AIG 2013 Omnibus Incentive Plan (Omnibus Plan). Our share-settled awards are settled with previously acquired shares held in AIG’s treasury.

AIG 2013 Omnibus Incentive Plan

The Omnibus Plan, which replaced the AIG 2010 Stock Incentive Plan (2010 Plan), was adopted at the 2013 Annual Meeting of Shareholders and provides for the grants of share-based awards to our employees and non-employee directors. The total number of shares that may be granted under the Omnibus Plan (the reserve) is the sum of 1) 45 million shares of AIG Common Stock, plus 2) the number of authorized shares that remained available for issuance under the 2010 Plan when the Omnibus Plan became effective, plus 3) the number of shares of AIG Common Stock relating to outstanding awards under the 2010 Plan at the time the Omnibus Plan became effective that subsequently are forfeited, expired, terminated or otherwise lapse or are settled in cash. Each share-based unit granted under the Omnibus Plan reduces the number of shares available for future grants by one share. However, shares with respect to awards that are forfeited, expired or settled for cash, and shares withheld for taxes on awards (other than options and stock appreciation rights awards) are returned to the reserve.

During 2019, performance share units (PSUs), restricted stock units (RSUs), stock options and deferred stock units (DSUs) (collectively, units) were granted under the Omnibus Plan and 31,537,171 shares are available for future grants as of December 31, 2019. Units are issued to employees as part of our long-term incentive program, generally in March of any given year, and are also issued for off-cycle grants, which are made from time to time during the year generally as sign-on awards to new hires or as a result of a change in employee status.

AIG Long Term Incentive Plan

Long-Term Incentive Awards

The LTIP provides for an annual award to certain employees, including our senior executive officers and other highly compensated employees that may be comprised of PSUs, RSUs and/or stock options.

The number of PSUs issued on the grant date (the target) provides the opportunity for the LTIP participant to receive shares of AIG Common Stock based on AIG achieving specified performance goals at the end of a three-year performance period. These performance goals are pre-established by AIG’s Compensation and Management Resources Committee (CMRC) for each annual grant and may differ from year to year. The actual number of PSUs earned can vary from zero to 200 percent of the target for the 2019, 2018 and 2017 awards, depending on AIG’s performance relative to a specified peer group or against pre-established financial goals, as applicable.

RSUs and stock options are earned based solely on continued service by the participant.

Vesting occurs on January 1 of the year immediately following the end of the three-year performance period. For awards granted prior to 2017, vesting occurs in three equal installments beginning on January 1 of the year immediately following the end of a performance period and January 1 of each of the next two years. Recipients must be employed at each vesting date to be entitled to share delivery, except upon the occurrence of an accelerated vesting event, such as an involuntary termination without cause, disability, retirement eligibility or death during the vesting period.

LTI awards accrue dividend equivalent units (DEUs) in the form of additional PSUs and/or RSUs whenever a cash dividend is declared on shares of AIG Common Stock; the DEUs are subject to the same vesting terms and conditions as the underlying unit.

Unit Valuation

The fair value of time-vesting RSUs as well as PSUs that are earned based on certain company-specific metrics was based on the closing price of AIG Common Stock on the grant date; while the fair value of PSUs that are earned based on AIG’s relative total shareholder return (TSR) was determined on the grant date using a Monte Carlo simulation.

The following table presents the assumptions used to estimate the fair value of PSUs that vest based on AIG’s TSR:

 

 

 

 

 

2017

 

Expected dividend yield(a)

 

 

 

 

2.37

%

Expected volatility(b)

 

 

 

 

17.58

%

Risk-free interest rate(c)

 

 

 

 

2.00

%

(a)The dividend yield is the projected annualized AIG dividend yield estimated by Bloomberg Professional service as of the valuation date.

(b)The expected volatility is based on the historical volatility of the stock price for the 360 most recent trading days prior to the valuation date estimated by Bloomberg Professional service.

(c)The risk-free interest rate is the continuously compounded interest rate for the term between the valuation date and the end of the performance period that is assumed to be constant and equal to the interpolated value between the closest data points on the U.S. dollar LIBOR-swap curve as of the valuation date.

Modification of LTI awards

During the fourth quarter of 2017, the Company modified the LTI awards by issuing time-vesting RSUs and canceling some performance based units. The modification applied to most recipients who participate in the 2015, 2016 and 2017 LTI awards, excluding the Company’s senior executives. The newly granted RSUs vest in installments over a period of up to three years. We incurred incremental compensation expense of $142 million as a result of these actions. We recognized $71 million in 2017, $48 million in 2018, $12 million in 2019 and the remainder will be recognized through December 2020.

During the third quarter of 2019, we added a modifier to the 2019 performance share units awarded to certain senior executives to cap payout at 100 percent of target if our total shareholder return for the three-year performance period is below peer median. We did not recognize any incremental compensation expense as a result of this modification.

The following table summarizes outstanding share-settled LTI awards(a):

 

 

 

 

 

 

 

Weighted Average

As of or for the Year

Number of Units

 

Grant-Date Fair Value

Ended December 31, 2019(b)

2019 LTI

2018 LTI

2017 LTI

2016 LTI

2015 LTI

 

2019 LTI

2018 LTI

2017 LTI

2016 LTI

2015 LTI

Unvested, beginning of year

-

3,322,028

1,579,995

640,660

272,332

 

$

-

$

55.32

$

62.32

$

61.55

$

60.51

Granted

6,185,729

5,499

-

-

-

 

 

44.81

 

47.57

 

-

 

-

 

-

Vested(c)

(1,445,746)

(529,576)

(540,580)

456,396

(250,708)

 

 

44.39

 

55.72

 

64.22

 

53.85

 

60.51

Forfeited(d)

(216,085)

(140,957)

(1,039,415)

(873,692)

(21,624)

 

 

44.28

 

55.47

 

64.97

 

50.88

 

60.40

Unvested, end of year(e)

4,523,898

2,656,994

-

223,364

-

 

$

44.98

$

55.21

$

-

$

62.14

$

-

(a) Excludes stock options, other RSUs and DSUs, which are discussed under Stock Options, Other RSU Grants and Non-Employee Plan, respectively.

(b)Except for the 2015 LTI, 2016 LTI and 2017 LTI awards, PSUs represent target amount granted, and does not reflect potential increases or decreases that could result from the final outcome of the performance goals for the respective awards, which is determined by the CMRC in the quarter after the applicable performance period ends.

(c)Also reflects units that vest as a result of an accelerated vesting event that occurred prior to the specified vesting date.

(d) Includes PSUs for which the performance metric was not met at the end of the performance period.

(e)At December 31, 2019, the total unrecognized compensation cost for outstanding RSUs and PSUs was $203 million and the weighted-average and expected period of years over which that cost is expected to be recognized are 0.96 year and 2 years.

Stock Options

Stock options were issued in 2019 and 2018 as part of the 2019 and 2018 LTI awards, and in 2017 and 2018 to certain newly hired senior executives. Option awards are generally granted with an exercise price equal to the market price of the company’s stock on the grant date. The fair value of the options was estimated on the grant date using the Black-Scholes model for the time-vesting options, and a Monte Carlo simulation for the hurdle-vesting options using the assumptions noted in the following table.

The following weighted-average assumptions were used for stock options granted:

 

2019

 

2018

 

2017

 

Expected annual dividend yield(a)

2.86

%

2.32

%

2.03

%

Expected volatility(b)

23.17

%

23.29

%

20.96

%

Risk-free interest rate(c)

2.47

%

2.83

%

1.94

%

Expected term(d)

6.38

years

4.50 - 6.47

years

4.5

years

(a)The dividend yield is the projected annualized AIG dividend yield estimated by Bloomberg Professional service as of the valuation date.

(b)The expected volatility is based on the implied volatility of 24 months stock option estimated by the Bloomberg Professional service as of the valuation date.

(c)The risk-free interest rate is the continuously compounded interest rate for the term between the valuation date and the expiration date that is assumed to be constant and equal to the interpolated value between the closet data points on the U.S. dollar LIBOR-swap curve as of the valuation date.

(d)The contractual terms are 7 and 10 years from the date of grant.

The following table provides a rollforward of stock option activity:

 

 

 

 

 

Weighted Average

 

 

Aggregate

As of or for the Year

 

 

 

Weighted Average

 

Remaining

 

 

Intrinsic Values

Ended December 31, 2019

Units

 

 

Exercise Price

Contractual Life

 

(in millions)

Outstanding, beginning of year

5,205,799

 

$

58.99

 

7.38

 

 

 

Granted

3,235,290

 

 

44.89

 

 

 

 

 

Exercised

(36,194)

 

 

47.61

 

 

 

 

 

Forfeited or expired

(39,004)

 

 

44.28

 

 

 

 

 

Outstanding, end of year

8,365,891

 

$

53.66

 

7.65

 

$

22

Exercisable, end of year

1,330,226

 

$

57.28

 

3.53

 

$

1

The weighted average grant-date fair value of stock options granted during 2019, 2018 and 2017 was $10.01, $11.08 and $10.54, respectively. As of December 31, 2019, we recognized $28.1 million of expense, while $22 million was unrecognized and is expected to be amortized up to 2.00 years.

Other RSU Grants

The Company may issue time-vesting RSUs for various reasons including, as a sign-on bonus, retention grant or replacement award in an acquisition. Vesting for these awards generally ranges from 1 to 3 years and is contingent on continuous service.

The following table summarizes outstanding share-settled RSU grants.

 

 

 

 

 

Weighted Average

As of or for the Year

Number of Units

 

Grant-Date Fair Value

Ended December 31,

2019

2018

2017

 

 

2019

 

2018

 

2017

Unvested, beginning of year

1,634,610

595,250

-

 

$

56.11

$

62.93

$

-

Granted

399,779

1,385,929

869,241

 

 

52.40

 

54.07

 

63.02

Vested

(774,350)

(342,481)

(273,991)

 

 

57.32

 

59.68

 

63.21

Forfeited

(28,854)

(4,088)

-

 

 

55.23

 

60.31

 

-

Unvested, end of year

1,231,185

1,634,610

595,250

 

$

54.17

$

56.11

$

62.93

We recognized $41.6 million of expense related to these RSU grants in 2019. Total unrecognized compensation cost related to these grants was $35 million and the weighted-average and expected period of years over which that cost is expected to be recognized are 0.88 years and 3.25 years at December 31, 2019.

Non-Employee Plan

Our non-employee directors, who serve on our Board of Directors, receive share-based compensation in the form of fully vested DSUs with delivery deferred until retirement from the Board. DSUs granted in 2019, 2018 and 2017 accrue DEUs equal to the amount of any regular quarterly dividend that would have been paid by AIG if the shares of AIG Common Stock underlying the DSUs had been outstanding. In 2019, 2018 and 2017, we granted to non-employee directors 49,706, 39,092 and 32,067 DSUs, respectively, under the 2013 Plan, and recognized expense of $2.6 million, $2.1 million and $2.0 million, respectively.