Siemens 2006 Annual Report Download - page 218

Notes to Consolidated Financial Statements
(in millions of €, except where otherwise stated and per share amounts)
214
Fair value information
The Company’s determination of the fair value of grants is based on a Black-Scholes option
pricing model, which was developed for use in estimating the fair values of options that have
no vesting restrictions. Option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Assumptions made in estimating the
fair value of grants made during the years ended September 30, 2006 and 2005 are as follows:
In fiscal 2006, the expected volatility is based on historical volatility of Siemens shares,
implied volatility for traded Siemens options with similar terms and features, and certain oth-
er factors. The expected term is derived by applying the simplified method and is determined
as the average of the vesting term and the contractual term. The risk-free interest rate is based
on applicable governmental bonds. Changes in subjective assumptions can materially affect
the fair value of the option.
Stock awards
In the first quarter of fiscal 2005, the Company introduced stock awards and phantom stock
as another means for providing stock-based compensation to members of the Managing Board
and other eligible employees. Stock awards are subject to a four year vesting period. Upon
expiration of the vesting period, the recipient receives Siemens shares without payment of
consideration. Stock awards are forfeited if the grantee’s employment with the Company ter-
minates prior to the expiration of the vesting period. During the vesting period, grantees are
not entitled to dividends. Stock awards may not be transferred, sold, pledged or otherwise
encumbered. Stock awards may be settled in newly issued shares of common stock of Siemens
AG, treasury stock or in cash. The settlement method will be determined by the Managing
Board and the Supervisory Board.
Each fiscal year, the Company decides whether or not to grant Siemens stock awards.
Siemens stock awards may be granted only once a year within thirty days following the date of
publication of the business results for the previous fiscal year. The Supervisory Board decides
annually after the end of each fiscal year how many stock awards to grant to the Managing
Board and the Managing Board decides annually how many stock awards to grant to members
of the top management of domestic and foreign subsidiaries and eligible employees.
Assumptions at grant date
2006 2005
Risk-free interest rate 2.99% 2.72%
Expected dividend yield 2.41% 2.07%
Expected volatility 18.30% 20.38%
Expected option life 3.5 yrs.3 yrs.
Estimated weighted average fair value per option €4.06 €4.54
Fair value of total options granted during fiscal year €11 €12