Siemens 2005 Annual Report Download - page 202

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Description of plans – 2001 Siemens Stock Option Plan
At the Annual Shareholders’ Meeting on February 22, 2001, shareholders authorized Siemens AG
to establish the 2001 Siemens Stock Option Plan, making available up to 55 million options. Com-
pared to the 1999 Plan, the number of eligible recipients is significantly larger. The option grants
are subject to a two-year vesting period, after which they may be exercised for a period of up to
three years. The exercise price is equal to 120% of the reference price, which corresponds to the
average opening market price of Siemens AG during the five trading days preceding the date of
the stock option grant. However, an option may only be exercised if the trading price of the Com-
pany’s shares reaches a performance target which is equal to the exercise price at least once dur-
ing the life of the option. The terms of the plan allow the Company, at its discretion upon exercise
of the option, to offer optionees settlement of the options in either newly issued shares of com-
mon stock of Siemens AG from the Conditional Capital reserved for this purpose, treasury stock
or cash. The alternatives offered to optionees are determined by the Managing Board in each case
as approved by the Supervisory Board. Compensation in cash shall be equal to the difference
between the exercise price and the opening market price of the Company’s stock on the day of
exercising the stock options. As a result of its design, the new plan has no income effect under
APB Opinion No. 25 in the case of settlement in shares due to the fact that the exercise price is also
the performance target. Any settlements in cash would be recorded as compensation expense.
Stock options may be granted within a period of 30 days after publication of the results for
the fiscal year or quarter then ended. The Supervisory Board decides how many options to grant
to the Managing Board, and the Managing Board decides how many options to grant to key
executives and other eligible employees. Option grants to members of the Managing Board may
only be made once annually after the close of the fiscal year.
The issuance of stock options to members of the Managing Board on or after October 1, 2003,
is subject to the proviso that the Supervisory Board may restrict the stock option exercise in the
event of extraordinary, unforeseen changes in the market price of the Siemens share. Those
restrictions may reduce the number of options exercisable by each Board Member, provide for an
exercise in cash for a constricted amount only, or suspend the exercise of the option until the
extraordinary effects on the share price have ceased. The fair value of the awards has not been
adjusted for effects resulting from such restrictions. Reasonable estimates cannot be made until it
is probable that such adverse events will occur. Since it is not possible to reasonably estimate the
fair value of those options at the grant date, compensation costs are determined based on the cur-
rent intrinsic value of the option until the date at which the number of shares to which a Board
member is entitled to and the exercise price are determinable. Upon that date, fair value will be
determined in accordance with the fair value recognition provisions of SFAS 123, Accounting for
Stock-Based Compensation based on an appropriate fair value option pricing model.
Management’s discussion and analysis