Humana 2008 Annual Report Download - page 100

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Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock Options
Stock options are granted with an exercise price equal to the average market value of the underlying
common stock on the date of grant. Our stock plans, as approved by the Board of Directors and stockholders,
define average market value as the average of the highest and lowest stock prices reported by the New York
Stock Exchange on a given date. Exercise provisions vary, but most options vest in whole or in part 1 to 3 years
after grant and expire 7 to 10 years after grant. Upon grant, stock options are assigned a fair value based on the
Black-Scholes valuation model. Compensation expense is recognized on a straight-line basis over the total
requisite service period, generally the total vesting period, for the entire award.
The weighted-average fair value of each option granted during 2008, 2007, and 2006 is provided below. The
fair value was estimated on the date of grant using the Black-Scholes pricing model with the weighted-average
assumptions indicated below:
2008 2007 2006
Weighted-average fair value at grant date ........................ $17.95 $21.07 $19.10
Expected option life (years) ................................... 5.1 4.8 4.8
Expected volatility .......................................... 28.2% 28.9% 31.6%
Risk-free interest rate at grant date ............................. 2.9% 4.5% 4.6%
Dividend yield ............................................. None None None
When valuing employee stock options, we stratify the employee population into three homogenous groups
that historically have exhibited similar exercise behaviors. These groups are executive officers, directors, and all
other employees. We value the stock options based on the unique assumptions for each of these employee
groups.
We calculate the expected term for our employee stock options based on historical employee exercise
behavior and base the risk-free interest rate on a traded zero-coupon U.S. Treasury bond with a term substantially
equal to the option’s expected term.
The volatility used to value employee stock options is based on historical volatility. We calculate historical
volatility using a simple-average calculation methodology based on daily price intervals as measured over the
expected term of the option. We have consistently applied this methodology since our adoption of the disclosure
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, or SFAS 123.
Activity for our option plans was as follows for the year ended December 31, 2008:
Shares Under
Option
Weighted-
Average
Exercise Price
Options outstanding at December 31, 2007 ............... 5,079,429 $36.68
Granted ........................................... 1,336,438 59.10
Exercised .......................................... (534,215) 22.71
Expired ........................................... (7,098) 50.70
Forfeited .......................................... (97,439) 62.53
Options outstanding at December 31, 2008 ............... 5,777,115 $42.70
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