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SHARE-BASED AND OTHER COMPENSATION PLANS
 12 Months Ended
Dec. 31, 2014
SHARE-BASED AND OTHER COMPENSATION PLANS  
SHARE-BASED AND OTHER COMPENSATION PLANS

21. SHARE-BASED AND OTHER COMPENSATION PLANS

The following table presents our share-based compensation expense:

Years Ended December 31,
(in millions)201420132012
Share-based compensation expense - pre-tax*$349$457$286
Share-based compensation expense - after tax227297186

* For the years ended December 31, 2014, 2013 and 2012, $86 million, $315 million and $286 million of pre-tax compensation expense was attributed to unsettled liability-classified awards, the values of which are based on our share price at the reporting date. Our share price was $56.01, $51.05 and $35.30 at December 31, 2014, 2013 and 2012, respectively. In addition, we recognized $120 million and $101 million for immediately vested stock-settled awards issued to retirement eligible employees in 2014 and 2013, respectively.

Employee Plans

During 2014 and 2013, our employees were issued awards under the 2013 Long Term Incentive Plan, which is governed by the AIG 2013 Omnibus Incentive Plan (2013 Plan). The 2013 Plan replaced the AIG 2010 Stock Incentive Plan (2010 Plan) as of May 15, 2013, but does not affect the terms or conditions of any award issued under the 2010 Plan. The 2013 Plan is currently the only plan under which share-based awards can be made.

As of December 31, 2014, the Starr International Company, Inc. Deferred Compensation Profit Participation Plans (the SICO Plans) are the only legacy plans for which share-settled awards remain unvested.

Our share-settled awards are settled with previously acquired shares held in AIG’s treasury. Share awards made by SICO are settled by SICO.

AIG 2013 Omnibus Incentive Plan

The 2013 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 2013 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 2013 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 2013 Plan became effective that subsequently are forfeited, expired, terminated or otherwise lapse or are settled in cash. Each share-based unit granted under the 2013 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 (SARs) awards) are returned to the reserve.

During 2014, performance share units (PSUs) and deferred stock units (DSUs) were granted under the 2013 Plan and 50,206,557 shares are available for future grants as of December 31, 2014. PSUs were issued for off-cycle grants, which are made from time to time during the year as sign-on awards to new hires or as a result of a change in employee status.

AIG 2010 Stock Incentive Plan

The 2010 Plan was adopted at the 2010 Annual Meeting of Shareholders. The total number of shares of AIG Common Stock that could be granted under the 2010 Plan was 60 million. During 2013 and 2012, we granted PSUs, DSUs, and restricted stock units (RSUs), under the 2010 Plan. Each PSU, DSU, and RSU, awarded reduced the number of shares available for future grants by one share. Subsequent to the adoption of the 2013 Plan in May 2013, no additional grants were made under the 2010 Plan.

Share-settled Awards

AIG 2013 Long Term Incentive Plan

The 2013 Long Term Incentive Plan (2013 LTIP), adopted in March 2013, provides for the annual grant of PSUs to certain employees, including our senior executive officers and other highly compensated employees. Each recipient of an award is granted a number of PSUs (the target) that provides the opportunity 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 for each annual grant and may differ from year to year. The actual number of PSUs earned can vary from zero to 150 percent of the target depending on AIG’s performance relative to a specified peer group. 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. Dividends do not accrue on unvested PSUs or underlying shares. 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, or retirement during the vesting period.

SICO Plans

The SICO Plans provide that shares of AIG Common Stock currently held by SICO are set aside for the benefit of the participant and distributed upon retirement. The SICO Board of Directors currently may permit an early payout of shares under certain circumstances. Prior to payout, the participant is not entitled to vote, dispose of or receive dividends with respect to such shares, and shares are subject to forfeiture under certain conditions, including but not limited to the participant’s termination of employment with us prior to normal retirement age. A significant portion of the awards under the SICO Plans vest the year after the participant reaches age 65, provided that the participant remains employed by us through age 65. The portion of the awards for which early payout is available vests on the applicable payout date.

SICO Plan awards issued in the form of restricted stock were valued based on the closing price of AIG’s Common Stock on the grant date. Although none of the costs of the various benefits provided under the SICO Plans have been paid by us, we have recorded compensation expense for the deferred compensation amounts payable to our employees by SICO, with an offsetting amount credited to Additional paid-in capital reflecting amounts deemed contributed by SICO.

Non-Employee Plans

Our non-employee directors, who serve on our Board of Directors, receive share-based compensation in the form of fully vested deferred stock units (DSUs) with delivery deferred until retirement from the Board. In 2014 and 2013, we granted to non-employee directors 28,477 and 25,735 DSUs, respectively, under the 2013 Plan and recognized expense of $1.5 million and $1.2 million, respectively; in 2012, we granted 19,434 DSUs, under the 2010 Plan and recognized $0.6 million of expense.

Performance Share Unit Valuation

The performance goals for long-term incentive awards granted in 2014 are AIG’s total shareholder return (TSR) and change in credit default swap (CDS) spread, weighted 75 percent and 25 percent, respectively, in each case relative to a specified peer group. The goals for the 2013 awards are AIG’s growth in tangible book value per share (TBVPS) (excluding accumulated other comprehensive income) and TSR, weighted 50 percent each, in each case relative to a specified peer group. The fair value of PSUs to be earned based on AIG’s achieving growth in TBVPS and change in CDS spreads was based on the closing price of AIG Common Stock on the grant date, discounted by the present value of estimated dividends to be paid during the respective vesting periods. The fair value of PSUs to be earned based on AIG’s TSR relative to a specified peer group 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 based on AIG’s TSR:

20142013
Expected dividend yield(a)1.13%0.38%
Expected volatility(b)23.66%30.79%
Risk-free interest rate(c)0.76%0.50%

(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 volatilities of actively traded stock options from the valuation date through the end of the PSU performance period as 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

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

Weighted Average
Number of PSUs(b)/Shares Grant-Date Fair Value
As of or for the YearAIG SICOAIGSICO
Ended December 31, 2014PlansPlansPlansPlans
Unvested, beginning of year5,195,40885,949$36.92$1,195.05
Granted6,882,136-48.50-
Vested(3,566,014)(23,494)45.2185.60
Forfeited(408,821)(4,143)41.591,181.04
Unvested, end of year8,102,70958,312$42.89$1,191.01

(a) Excludes DSUs and options, which are discussed under the Non-Employee Plans and Stock Options sections, respectively.

(b) Represents target number of PSUs granted, and does not reflect potential increases or decreases that could result from the final outcome of the performance goals to be determined after the applicable performance period ends.

At December 31, 2014, the total unrecognized compensation cost (net of expected forfeitures) for the unvested PSUs and unvested restricted stock was $185 million and $19 million, respectively, and the weighted-average and expected period of years over which those costs are expected to be recognized are 1.28 years and 4 years for the PSUs, and 5.28 years and 25 years for the restricted stock, respectively.

Stock Options

Options granted under the AIG 2007 Stock Incentive Plan and the 1999 Stock Option Plan generally vested over four years (25 percent vesting per year) and expire 10 years from the date of grant. All outstanding options are vested and out of the money at December 31, 2014. There were no stock options granted since 2008. The aggregate intrinsic value for all unexercised options is zero.

The following table provides a roll forward of stock option activity:

Weighted
Average
Remaining
Weighted AverageContractual
As of or for the Year Ended December 31, 2014SharesExercise PriceLife
Options:
Exercisable at beginning of year289,790$1,113.992.58
Expired(87,515)$1,290.22
Exercisable at end of year202,275$1,037.742.17

Cash-settled Awards

Share-based cash-settled awards are recorded as liabilities until the final payout is made or the award is replaced with a stock-settled award. Compensation expense is recognized over the vesting periods, unless the award is fully vested on the grant date in which case the entire award value is immediately recognized as expense.

Unlike stock-settled awards, which generally have a fixed grant-date fair value (unless the award is subsequently modified), the fair value of unsettled or unvested cash-settled awards is remeasured at the end of each reporting period based on the change in fair value of one share of AIG Common Stock. The liability and corresponding expense are adjusted accordingly until the award is settled.

During the period we were subject to Troubled Asset Relief Program (TARP) restrictions, we issued various cash-settled share-based grants, including Stock Salary, TARP RSU awards, and other cash-settled RSU awards, to certain of our most highly compensated employees and executive officers in the form of restricted stock units that were either fully vested with payment deferred, or subject to specified service and performance conditions. After the repayment of our TARP obligations in December 2012, all performance conditions were satisfied; as a result, we no longer issue awards that are subject to TARP restrictions.

Restricted Stock Units

Stock Salary Awards

Stock Salary was earned and accrued at the same time or times as the salary would otherwise be paid in cash and is generally settled in installments on the first, second or third anniversary of grant in accordance with the terms of an employee’s award. Stock Salary grants were generally issued in the form of fully vested RSUs and are settled in cash based on the value of AIG Common Stock on the applicable settlement date. During 2014, 2013 and 2012, we paid $89 million, $180 million and $111 million, respectively, to settle awards. For those awards that were vested and unsettled at the end of each year, we recognized charges of $7 million, $73 million and $173 million in compensation expense for the years ended December 31, 2014, 2013 and 2012, respectively, to reflect fluctuations in the value of AIG Common Stock. At December 31, 2014, the number of vested but unsettled RSUs totaled 742,317.

TARP and Other RSUs

TARP RSUs awarded require the achievement of objective performance metrics as a condition to entitlement. An award would have been settled in 25 percent installments in proportion to the repayment of our TARP obligations. As a result of the repayment of our TARP obligations in December 2012, outstanding awards vest and settle in two 50 percent installments on the second and third anniversary of the date of grant, along with other cash-settled RSUs granted and issued in March 2013 and 2012.

Long Term Incentive Plans

Certain employees were provided the opportunity to receive additional compensation in the form of cash and cash-settled SARs under the 2011 LTIP or 100 percent cash for the 2012 LTIP if certain performance measures were met. The ultimate value of these awards was contingent on AIG achieving performance measures over a two-year performance period and such value could range from zero to twice the target amount. Subsequent to the performance period, the earned awards were subject to an additional time-vesting period. This results in a graded vesting schedule for the cash portion of up to two years, while the SARs portion cliff-vests two years after the end of performance period.

The cash portion of the awards expensed in 2014, 2013 and 2012 totaled approximately $57 million, $249 million, and $189 million, respectively.

The following table presents a roll forward of SARs and cash-settled RSUs (excluding stock salary) as well as the related expenses:

Number of Units
Year Ended December 31, 2014TARP RSUs(a)Other RSUs(b)SARs(d)
Unvested, beginning of year857,5791,563,6878,966,246
Granted---
Vested(c)(529,049)(382,468)(5,521,171)
Forfeited(89,417)(15,687)(160,166)
Unvested, end of year239,1131,165,5323,284,909
Net compensation expense for the year (in millions)$12$31$36

(a) Total unrecognized compensation and the weighted-average period for which it will be recognized is $3 million and 0.55 year, respectively.

(b) Total unrecognized compensation and the weighted-average period for which it will be recognized is $13 million and 0.61 year, respectively.

(c) Also includes SARs for which vesting was accelerated for employees who became retirement eligible or were deceased.

(d) The ending balance represents awards granted under the 2011 LTIP that vested on January 1, 2015 and were automatically exercised. The value of a SAR as of December 31, 2014 was determined based on the excess of the fair value (as defined) of one share of AIG Common Stock over the strike price of $37.40; the fair value was $55.29 based on the average of the closing sale prices on each trading day during the month of December 2014 in accordance with the plan provisions. No SARs are outstanding after January 1, 2015.