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Long-term Incentive Fair Value Determinations
A challenging issue for publicly traded companies is how to value long-term incentive awards for grant purposes.
Like many companies, we target and express such awards as a percent of salary. We also seek to balance the
value of stock options with PBRS awarded to executive officers. Of particular concern to the Company is how to
calculate the value of a stock option.
The predominant model used to value stock options is the Black-Scholes-Merton valuation model. This model
considers various assumptions for duration prior to exercise, risk-free interest rate, stock volatility, and employment
termination rates. We segregate groups of option holders within the model by exercise patterns to better estimate
the value of an option. For example, NEOs and executive officers typically hold their options much longer before
exercising them than do non-officer employees.
In reality, the value assigned to long-term incentive awards changes each year as a result of fluctuations in the
current market value of the Company’s Common Stock and changes in pricing assumptions. For example,
when the share price goes up, so do the option grants’ fair value and their strike price, and the number of
awarded shares equal to a designated dollar value decreases. Conversely, if the share price goes down, both the
option’s fair value and its strike price go down, and the number of awarded shares increases. This result seems
counterintuitive from a pay-for-performance perspective in that a lower stock price would lead to more options
being granted at a lower price and a higher stock price would lead to fewer options being granted at a higher
price.
Our solution, for grant purposes only, is to stabilize the deemed present value of a stock option for a three-year
period. We think the use of such a value is more in line with creating long-term shareholder value and pay for
performance, and allows us to better manage our burn rate (number of shares granted each year divided by the
number of common shares outstanding) and budget the number of awarded shares over the life of the share
authorization approved by shareholders.
For grants made in the three-year period of 2016 to 2018, our deemed fair value of a stock option is $6.95.
However, the actual per-share exercise price under each option in any event is the closing price of a Common
Stock share on the day the option is granted.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the preceding CD&A with management and,
based on that review and discussion, has recommended to the Board of Directors to include the CD&A in this
Proxy Statement.
Compensation Committee
Robert B. Johnson, Chairman
Douglas W. Johnson
Joseph L. Moskowitz
Compensation Discussion & Analysis
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Additional Executive Compensation Practices and Procedures
AFLAC INCORPORATED
2017 PROXY STATEMENT
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