17. STOCK-BASED COMPENSATION

[a]

Incentive Stock Option Plan

The Company currently has two incentive stock option plans in effect: [a] the 2009 Stock Option Plan, which was adopted by the Company’s shareholders on May 6, 2010; and [b] the Amended and Restated Incentive Stock Option Plan [the “1987 Stock Option Plan”], which was adopted by shareholders on December 10, 1987, and subsequently amended on May 18, 2000 and May 10, 2007.

Upon adoption of the 2009 Plan, new grants under the 1987 Plan were frozen, but all outstanding options were permitted to continue to vest and be exercisable in accordance with their terms.

2009 Stock Option Plan

Under the 2009 Stock Option Plan, the Company may grant options to purchase Common Shares to full-time employees and consultants of the Company and its subsidiaries. The maximum number of shares that can be reserved for issuance under the option plan is 16,000,000 shares. The number of shares available to be granted at December 31, 2012 was 8,457,666 [2011 – 9,770,666]. All options granted are for terms of up to seven years from the grant date. Options issued under the 2009 Option Plan to employees and consultants generally vest as to one-third on each of the first three anniversaries of the date of grant. Options issued to outside directors vest on the first anniversary of the date of grant. All options allow the holder to purchase Common Shares at a price equal to or greater than the closing market price of such shares on the date prior to the date of the grant.

1987 Stock Option Plan

The Company previously granted options to purchase Common Shares to full-time employees, outside directors or consultants of the Company under the 1987 Stock Option Plan. Upon shareholder approval of the Company’s 2009 Stock Option Plan, the 1987 Stock Option Plan was terminated such that no future grants could be made, but previously granted options would continue to vest and be exercisable in accordance with their original terms of grant. All options granted under the 1987 Stock Option Plan are for terms of up to seven years from the grant date, except for the options granted prior to December 2003, which were generally for terms of up to 10 years from the grant date. All options allow the holder to purchase Common Shares at a price equal to or greater than the closing market price of such shares on the date prior to the date of the grant or modification.

The following is a continuity schedule of options outstanding [number of options in the table below are expressed in whole numbers]:


	Options outstanding
	Number of options			Weighted average exercise price		Number of options exercisable

Outstanding at December 31, 2009		7,150,544		Cdn$	34.26		4,988,544
Granted		6,341,000			34.04		—
Exercised		(1,504,616	)		34.31		(1,504,616	)
Cancelled [i]		(844,478	)		33.04		(844,478	)
Vested		—			—		722,666

Outstanding at December 31, 2010		11,142,450		Cdn$	34.22		3,362,116
Exercised [ii]		(2,737,253	)		33.28		(2,737,253	)
Cancelled		(1,537,830	)		48.86		(1,426,164	)
Vested		—			—		2,868,001

Outstanding at December 31, 2011		6,867,367		Cdn$	31.54		2,066,700
Granted		1,389,000			48.22		—
Exercised [iii]		(1,525,159	)		28.46		(1,525,159	)
Cancelled		(107,966	)		53.14		(58,967	)
Vested		—			—		2,745,000

Outstanding at December 31, 2012		6,623,242		Cdn$	35.39		3,227,574

The total intrinsic value of options exercised during 2012 was $6 million [2011 - $19 million; 2010 - $14 million].

[i]

On August 19, 2010, options to acquire 243,000 Common Shares were surrendered for cancellation in exchange for payment of the in-the-money value of such options on such date. The aggregate in-the-money value of the options surrendered was $4 million and was charged to contributed surplus.

On November 8, 2010, options to acquire 386,666 Common Shares were surrendered for cancellation in exchange for payment of the in-the-money value of such options on such date. The aggregate in-the-money value of the options surrendered was $8 million and was charged to contributed surplus.

[ii]

On June 22, 2011, the Company’s Honorary Chairman and Founder, Mr. Stronach, exercised 1,083,333 options on a cashless basis in accordance with applicable stock option plans. On exercise, cash payments totalling $25 million were made to Mr. Stronach.

On July 13, 2011, 200,001 options were exercised on a cashless basis in accordance with applicable stock option plans. On exercise, cash payments totalling $5 million were made to the stock option holder.

[iii]

On February 26, 2012, 200,000 options were exercised on a cashless basis in accordance with applicable stock option plans. On exercise, cash payments totalling $4 million were made to the stock option holder.

On August 16, 2012, Mr. Stronach exercised 900,001 options on a cashless basis in accordance with applicable stock option plans. On exercise, cash payments totalling $15 million were made to Mr. Stronach.

All cash payments were calculated using the difference between the aggregate fair market value of the Option Shares based on the closing price of the Company’s Common Shares on the Toronto Stock Exchange [“TSX”] on the date of exercise and the aggregate Exercise Price of all such options surrendered.

At December 31, 2012, the outstanding options consist of [number of options in the table below are expressed in whole numbers]:


	Options outstanding
	Number of options		Remaining contractual life [years]		Number of options exercisable
$15 to $20		986,868		3.2		986,868
$25 to $30		3,050,032		4.2		1,400,032
$35 to $40		60,000		4.0		60,000
$40 to $45		27,342		0.5		27,342
$45 to $50		1,384,000		2.8		10,000
$50 to $55		1,115,000		5.0		743,332

		6,623,242				3,227,574

Weighted average exercise price	Cdn$	35.39			Cdn$	30.93

Weighted average life remaining [years]		4.54				4.00

Aggregate intrinsic value at December 31, 2012	$	93			$	60

The weighted average assumptions used in measuring the fair value of stock options granted or modified are as follows:


	2012			2011		2010

Risk-free interest rate		2.23	%		—		2.26	%
Expected dividend yield		2.00	%		—		2.00	%
Expected volatility		43	%		—		35	%
Expected time until exercise		4.5 years			—		4 years


Weighted average fair value of options granted or modified in year [Cdn$]	$	15.37		$	—	$	10.00

[b]

Long-term retention program

The Company awarded certain executives an entitlement to Common Shares in the form of restricted stock. Such shares become available to the executives, subject to acceleration on death or disability, after an approximate four-year holding period, provided certain conditions are met, and are to be released in equal amounts over a 10-year period, subject to forfeiture under certain circumstances. The stock that has not been released to the executives is reflected as a reduction in the stated value of the Company’s Common Shares.

The following is a continuity of the stock that has not been released to the executives and is reflected as a reduction in the stated value of the Company’s Common Shares [number of Common Shares in the table below are expressed in whole numbers]:


	Number of shares			Stated value

Awarded and not released, December 31, 2009		1,371,978		$	45
Release of restricted stock		(189,242	)		(5	)

Awarded and not released, December 31, 2010		1,182,736			40
Release of restricted stock		(156,432	)		(5	)

Awarded and not released, December 31, 2011		1,026,304			35
Release of restricted stock		(143,316	)		(5	)

Awarded and not released, December 31, 2012		882,988		$	30

[c]

Restricted stock unit program

In a number of different circumstances, the Company awarded restricted stock units [“RSUs”] to certain executives and other employees as part of the Company’s compensation program. These RSUs are notional units, each of which is equivalent to one Magna Common Share. In most cases, the RSUs are redeemable solely at the Company’s option, either by delivery of the specified number of Common Shares or the cash value on the redemption date [based on the 20-day weighted average trading price]. Redemption of the RSUs generally occurs on December 15 of the second year after the date of grant, subject to earlier redemption or cancellation in specified circumstances. In some cases, RSUs are subject to vesting and other conditions and quarterly dividend equivalents are paid to the grantees.

The Company maintains a Non-Employee Director Share-Based Compensation Plan [“DSU”] which governs the portion of the annual retainer payable to Independent Directors which is deferred in the form of DSUs. Pursuant to a Board resolution effective January 1, 2008, 60% of the annual retainer for all of the Independent Directors is automatically payable in the form of DSUs. Additionally, each Independent Director may annually elect to defer up to 100% [in increments of 25%] of his or her total annual cash compensation from Magna [including Board and committee retainers, meeting attendance fees, work and travel day payments and written resolution fees]. The amounts deferred in the DSU Plan are reflected in DSUs allocated under the DSU Plan. These DSUs are notional units, the value of which reflects, and increases or decreases in direct relation to, the New York Stock Exchange [“NYSE”] market price of Magna Common Shares. Dividend equivalents are credited on DSUs at the times and in the amounts of dividends that are declared and paid on Magna’s Common Shares. All DSUs are fully vested on the date allocated to an Independent Director under the DSU Plan.

The following is a continuity schedule of restricted stock unit programs outstanding [number of stock units in the table below are expressed in whole numbers]:


	Equity classified RSUs			Liability classified RSUs			Liability classified DSUs			Total

Outstanding at December 31, 2009		184,084			12,272			153,013			349,369
Granted		20,940			26,000			40,954			87,894
Dividend equivalents		946			391			1,758			3,095
Redeemed		(24,238	)		(4,421	)		(9,377	)		(38,036	)

Outstanding at December 31, 2010		181,732			34,242			186,348			402,322
Granted		208,458			4,150			22,669			235,277
Dividend equivalents		2,022			946			4,696			7,664
Redeemed		(24,486	)		(9,532	)		(15,267	)		(49,285	)

Outstanding at December 31, 2011		367,726			29,806			198,446			595,978
Granted		320,131			15,364			37,456			372,951
Dividend equivalents		1,895			1,133			5,145			8,173
Redeemed		(84,322	)		(26,204	)		(34,124	)		(144,650	)

Outstanding at December 31, 2012		605,430			20,099			206,923			832,452

[d]

Compensation expense related to stock-based compensation

Stock-based compensation expense recorded in selling, general and administrative expenses related to the above programs is as follows:


	2012		2011			2010

Incentive Stock Option Plan [i]	$	19	$	21		$	43
Long-term retention		5		7			9
Restricted stock unit		14		6			1

		38		34			53

Fair value adjustment for liability classified DSUs		4		(3	)		4

Incentive Stock Option Plan	$	42	$	31		$	57

[i]	During 2010, option agreements with three departing executives were modified resulting in a one-time charge to compensation expense of $20 million. These charges represent the fair value of the options at the date of modification net of originally measured compensation cost which was reversed.