Note 11. Employee Incentive Plans
To align the interests of employees with those of stockholders, Merrill Lynch sponsors several employee compensation plans that provide eligible employees with stock or options to purchase shares. The total compensation cost recognized in earnings for stock-based compensation plans for 2000, 1999, and 1998 was $633 million, $463 million, and $453 million, respectively. Merrill Lynch also sponsors deferred cash compensation plans for eligible employees.Long-Term Incentive Compensation Plans ("LTIC Plans") and Equity Capital Accumulation Plan ("ECAP")
LTIC Plans and ECAP provide for grants of equity and equity-related instruments to certain employees. LTIC Plans provide for the issuance of Restricted Shares, Restricted Units, and Nonqualified Stock Options, as well as Incentive Stock Options, Performance Shares, Performance Units, Performance Options, Stock Appreciation Rights, and other securities of Merrill Lynch. ECAP provides for the issuance of Restricted Shares, as well as Performance Shares. As of December 29, 2000, no instruments other than Restricted Shares, Restricted Units, Nonqualified Stock Options, and Performance Options had been granted.RESTRICTED SHARES AND UNITS
Restricted Shares are shares of ML & Co. common stock carrying voting and dividend rights. A Restricted Unit is deemed equivalent in fair market value to one share of common stock. Awards are settled in shares of common stock. Recipients of Restricted Unit awards receive cash payments equivalent to dividends. Under these plans, such shares and units are restricted from sale, transfer, or assignment until the end of the restricted period, and such shares and units are subject to forfeiture during the vesting period, generally three years, for grants under LTIC Plans or the restricted period for grants under ECAP.The activity for Restricted Shares and Units under these plans during 2000 and 1999 follows:
- Includes shares reserved for issuance upon the exercise of stock options.
- In 2001, 1,094,579 and 8,173,179 Restricted Shares and Units under LTIC Plans, respectively, were granted to eligible employees.
The weighted-average fair value per share or unit for 2000, 1999, and 1998 grants follows:
Merrill Lynch sponsors other plans similar to LTIC Plans in which restricted shares and units are granted to employees and non-employee directors. The table below summarizes information related to restricted shares and units for these other plans:
Nonqualified Stock Options
Nonqualified Stock Options granted under LTIC Plans in 1989 through 1995 generally become exercisable over four years in equal installments commencing one year after the date of grant. Options granted in 1996 through 2000 generally are exercisable over five years. Beginning in 2001, new option grants become exercisable after approximately six months. The exercise price of these options is equal to 100% of the fair market value (as defined in LTIC Plans) of a share of ML & Co. common stock on the date of grant. Nonqualified Stock Options expire ten years after their grant date.The activity for Nonqualified Stock Options under LTIC Plans for 2000, 1999, and 1998 follows:
- In January 2001, 33,835,900 Nonqualified Stock Options were granted to eligible employees.
At year-end 2000, 1999, and 1998, options exercisable under LTIC Plans were 92,776,119, 83,568,708, and 77,621,230 respectively.
The table below summarizes information related to outstanding and exercisable options at year-end 2000.
- Based on original contractual life of ten years.
The weighted-average fair value of options granted in 2000, 1999, and 1998 was $18.05, $12.39, and $10.72 per option, respectively. Fair value is estimated as of the grant date based on a Black-Scholes option pricing model using the following weighted-average assumptions:
See Pro Forma Compensation Expense in the following Employee Stock Purchase Plans section for additional information.
Employee Stock Purchase Plans ("ESPP")
ESPP plans allow eligible employees to invest from 1% to 10% of their eligible compensation to purchase ML & Co. common stock at a price generally equal to 85% of its fair market value. These purchases are made on four quarterly investment dates through payroll deductions. Up to 100,600,000 shares of common stock have been authorized for issuance under ESPP. The activity in ESPP during 2000, 1999, and 1998 follows:
The weighted-average fair value of ESPP stock purchase rights exercised by employees in 2000, 1999, and 1998 was $7.30, $6.25, and $5.66 per right, respectively.
PRO FORMA COMPENSATION EXPENSE
No compensation expense has been recognized for Merrill Lynch's grants of stock options under LTIC Plans or ESPP purchase rights (see Note 1 for accounting policy). Pro forma compensation expense associated with option grants is recognized over the vesting period. Based on the fair value of stock options and purchase rights, Merrill Lynch would have recognized compensation expense, net of taxes, of $348 million, $291 million, and $95 million for 2000, 1999, and 1998, respectively, resulting in pro forma net earnings and earnings per share as follows:
Financial Consultant Capital Accumulation Award Plans ("FCCAAP")
Under FCCAAP, eligible employees in Merrill Lynch's Private Client Group are granted awards generally based upon their prior year's performance. Payment for an award is contingent upon continued employment for a period of time and is subject to forfeiture during that period. The award is generally payable ten years from the date of grant in a fixed number of shares of ML & Co. common stock unless the fair market value of such shares is less than a specified minimum value plus interest, in which case the minimum value is paid in cash. Eligible participants may defer awards beyond the scheduled payment date. FCCAAP may also provide for the issuance of Restricted Shares that vest ten years from the date of the original award and carry voting and dividend rights. Only shares of common stock held as treasury stock may be issued under FCCAAP.At December 29, 2000, shares subject to outstanding awards totaled 55,578,853, while 30,704,809 shares were available for issuance through future awards. The fair value of awards granted under FCCAAP during 2000, 1999, and 1998 was $41.55, $35.72, and $33.97 per award, respectively.
Incentive Equity Purchase Plan ("IEPP")
IEPP allowed selected employees to purchase shares of ML & Co. common stock ("Book Value Shares") at a price equal to book value per common share. Book Value Shares, which otherwise may not be resold, may be sold back to Merrill Lynch at book value or exchanged at any time for a specified number of freely transferable common shares. Book Value Shares outstanding under IEPP were 3,244,000 at December 29, 2000. In 1995, IEPP was amended to reduce the authorized shares to zero and prohibit the reuse of any surrendered shares. No further offerings will be made under this plan.Merrill Lynch Investment Certificate Program ("MLICP")
Under MLICP, eligible employees in Merrill Lynch's Private Client Group are issued investment certificates based on their performance. The certificates mature ten years from the date issued and are payable in cash if certain performance criteria are achieved and the employee is continuously employed for the ten-year period, with certain exceptions. The certificates bear interest commencing with the date on which the performance requirements are achieved. As of year-end 2000 and 1999, $473 million and $409 million, respectively, were accrued under this plan.OTHER DEFERRED COMPENSATION PLANS
Merrill Lynch sponsors other deferred compensation plans in which eligible employees may participate. Generally, contributions to the plans are made on a tax-deferred basis by participants. Contributions are invested by Merrill Lynch in mutual funds and other funds sponsored by Merrill Lynch, and the plans may include a leverage feature. The plans' investments and the amounts accrued by Merrill Lynch under the plans are both included in the Consolidated Balance Sheets. Plan investments totaled $1.1 billion and $1.2 billion, respectively, at December 29, 2000 and December 31, 1999. Accrued liabilities at year-end 2000 and 1999 were $1.0 billion.
