![]() 2004 Alcoa Stock Incentive Plan Equity Choice Program (Performance Equity Award Participants) Exhibit 10.6 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * |
![]() Contents Introduction & Overview What is Equity Choice? ....................................................................3 How Equity Choice Works. ………………………………… ………….3 Election Alternatives Election Alternatives for Performance-Based Awards…….…………4 Election Alternatives for Time-Vested Awards…………….………….4 Exchange Ratio………………………………… …………….………….4 Examples ………………………………… ………………………….…..5 Performance-Based Award and Time-Vested Award The Equity Choice Process Step 1: Reviewing Your Election Alternatives ...................................6 Stock Incentives Website Factors to Consider When Making Your Decision Step 2: Making Your Equity Choice Elections……………………..…7 The Election Period Making Your Elections on the Stock Incentives Website Applicability of Elections Sample Website View of Election Alternatives Step 3: Determining Actual and Final Grants……………….……..…8 Frequently Asked Questions……………………………… …….……….…9 Glossary………………………………… …………………………………….10 This booklet describes features of the 2004 Alcoa Stock Incentive Plan (Plan). The Plan document, award certificates, and terms and conditions of each award control the Plan’s operation. If there are any differences between this booklet and the official Plan document and terms and conditions of each award, the Plan document and terms and conditions of each award will control. Alcoa reserves the right to change or terminate the Plan or the terms of existing stock incentive awards at any time for any reason. Participation in the Plan does not give anyone the right to continued employment with Alcoa. You are encouraged to read the prospectus and consult a personal tax advisor or financial planner about individual stock incentive award strategies and tax planning issues. This document constitutes part of a prospectus covering securities that have been registered under the Securities Act of 1933. As of November, 2005 |
![]() Introduction and Overview What is Equity Choice? Alcoa’s 2004 Stock Incentive Plan (Plan) is designed to provide senior leaders with financial rewards based on both individual and company performance. The Equity Choice program enhances the value of the Plan’s long-term stock-based incentives by providing greater individual flexibility - as requested by senior leaders - and makes Alcoa’s long-term incentive compensation more competitive in the global marketplace. Equity Choice allows you to choose between different combinations of equity vehicles for your annual grants under the Plan to better suit your personal needs. Prior to the end of each year, you will make an election that will apply to the annual grant issued early in the following year. This annual process gives you more control over how you receive your stock-based incentive compensation and greater ability to tailor the rewards to your own personal preferences. (Note that the ability to make an election does not guarantee that you will receive an actual grant.) How Equity Choice Works As an eligible performance equity award participant, your baseline grant (as planned each year by your manager) is comprised of two components: Performance-Based Award: This component of the grant is made up of performance share awards (PSAs) which represent a commitment by the Company to issue, on the third anniversary date of the date of the grant of the award, from 0 to 200% of the number of shares of Alcoa common stock indicated on your award certificate relating to the grant based on Alcoa’s return on capital (“ROC”) relative to the median return on capital of the Company’s selected external comparator group during the performance period (the first year of the three-year vesting period). The final number of PSAs earned can change based on Alcoa’s corporate performance. Time-Vested Award: This component of the grant is made up of stock options, which gives you the right to purchase shares of Alcoa common stock in the future (once the options vest and prior to their expiration date) at a preset price. Stock options are not performance based, which means they are not subject to any adjustment based on corporate performance once they are granted. Therefore, the number of stock options you are granted will not change. Equity Choice: Enhances the value of the long-term stock-based incentive plan Increases flexibility within the plan Responds to input from senior leaders The foundation of Equity Choice is the opportunity to elect a different “mix” of equity vehicles than what is provided in your baseline grant. In addition to PSAs and stock options, you will also be able to receive: Performance-Based Award: Performance Stock Options - A PSO represents the right to purchase shares of stock in the future at a preset price once vested, provided that Alcoa achieves certain financial performance levels (based on the same measure used for PSAs). A PSO vests 14 months after the grant date as to one-third of the options granted, two years after the grant date as to one-third of the options granted, and three years from the grant date as to one-third of the options granted (unless the Committee specifies a different vesting period). If you elect to receive PSOs, you will have the opportunity to earn from 0% to 200% of the number of options indicated on your award certificate, except as indicated in the next sentence. If performance results in a payout in excess of 100%, the additional payout will be made in the form of a stock award grant instead of stock options, based on an exchange ratio of one stock award for every four additional PSOs earned. Such stock award would vest, in whole, on the third anniversary of the grant date of the PSOs to which it relates. If performance results in a payout below 100%, the number of PSOs below the earned payout percentage will be automatically cancelled. Time-Vested Award: Stock Awards - A commitment by the company to issue shares of Alcoa stock, upon vesting (the third anniversary date of the date of grant). |
![]() Election Alternatives Election Alternatives for Performance-Based Awards You have the following three choices: You decide what is best for you. Choice 1: Exchange 100% of the PSAs in your baseline grant for performance stock options (PSOs) which are described further below. Choice 2: Exchange 50% of the PSAs in your baseline grant for PSOs. Choice 3A (default) : No change. Baseline grant allocation. If you elect to exchange PSAs for PSOs, the exchange ratio will be one PSA to four PSOs. PSOs are subject to the same performance criteria as PSAs and the final number of PSOs earned will be adjusted after the end of the performance period (the first year of the entire three-year vesting period). Election Alternatives You will need to make separate elections for the two components of your baseline grant: one election for your performance-based award and one for your time-vested award. For each election, you have three alternatives from which to choose, offering a range of combinations and potential values. Election Alternatives for Time-Vested Awards You have the following three choices: Choice 3B (default) : No change. Baseline grant allocation. Choice 4: Exchange 50% of the stock options in your baseline grant for stock awards which are described further below. Choice 5: Exchange 100% of the stock options in your baseline grant for stock awards. If you elect to exchange stock options for stock awards, the exchange ratio will be four stock options to one stock award. Stock awards received in exchange for stock options are not subject to performance criteria and will not be adjusted once granted. Exchange Ratio The exchange ratio of 4 stock options/PSOs to 1 stock award/PSA takes into consideration: Black-Scholes option valuation methodology Binomial option valuation methodology Comparisons to exchange ratios used by other companies implementing similar programs Employee responses from the Equity Compensation Survey |
![]() Election Alternatives EXAMPLES The following examples illustrate how the exchange ratio is used to determine the number of awards granted under each election alternative, using a hypothetical baseline grant of 4,250 performance shares (Choice #3A) and 19,000 stock options (Choice #3B). Remember that the exchange ratio is four stock options/PSOs to one stock award/PSA. Performance-Based Award Time-Vested Award If you select … Then you are transferring from the Baseline Grant (Choice #3A ) . . . Exchange Computation Performance Stock Options Performance Shares - 4,250 4,250 x 4 = 17,000 17,000 (4,250) 17,000 - 4,250 x 50% = 2,125 - 4,250 2,125 x 4 = 8,500 8,500 (2,125) 8,500 2,125 Baseline Grant allocation - 4,250 No Change - - - 4,250 If you select … Then you are transferring from the Baseline Grant (Choice #3B ) . . . Exchange Computation Stock Options Stock Awards Baseline Grant allocation 19,000 - No Change - - 19,000 - 19,000 x 50% = 9,500 19,000 - 9,500 / 4 = 2,375 (9,500) 2,375 9,500 2,375 19,000 - 19,000 / 4 = 4,750 (19,000) 4,750 - 4,750 * Approximate allocation of expected value of total equity incentive award 60% stock options* 50% of stock options to stock awards 100% of stock options to stock awards Choice #3B (default) Choice #4 Choice #5 Choice #1 Choice #2 Choice #3A (default) 100% of performance shares to performance stock options 50% of performance shares to performance stock options 40% performance shares* |
![]() The Equity Choice Process The Equity Choice process involves three steps: participants review their election alternatives, participants make their elections, and the actual and final grants are determined and communicated. Below are the details of each step. Step 1: Reviewing Your Election Alternatives To help you make your Equity Choice elections, Alcoa provides information, tools and training materials. Before you make your elections it is important to be fully informed about the program and to consider key factors related to your personal situation and financial goals. Stock Incentives Website The Stock Incentives website at www.alcoastockincentives.com is your main resource for important information, a modeling tool and training materials that will help in your decision making. The Library Section provides the following materials: Brochures describing the benefits and provisions of Stock Options, Stock Awards, Performance Share Awards and Equity Choice WebEx training presentations on Equity Choice The Equity Choice Section provides specific program information, personalized information, and modeling tools: Background: detailed descriptions and examples for each Equity Choice election alternative. Modeling: Tool that allows you to compare the possible future economic value of the election alternatives based on your assumptions for: – Stock price at actual grant date; – Stock price on the date you sell your stock; and – Currency exchange rate on the date you sell your stock. For each election alternative, you can model up to three scenarios and display the results in tabular and graphical formats. Your own risk tolerance; Your entire financial picture and how long-term stock-based incentives fit into it; The tax implications of stock options, PSOs, stock awards and PSAs; The vesting and other provisions of stock options, PSOs, stock awards and PSAs; The applicability of dividends and dividend equivalents; and The upside and downside potential for stock options, PSOs, stock awards and PSAs under different scenarios Factors to Consider When Making Your Decision Once you understand your election alternatives, consider personal factors that could affect your decision such as: |
![]() The Equity Choice Process You should consult a personal tax advisor or financial planner with respect to your personal circumstances. Step 2: Making Your Equity Choice Elections Making Your Elections on the Stock Incentives Website Follow these steps to make your elections online: Election Alternatives Performance Based Grants PSOs PSAs O #1 - 100% PSA to PSO 17,000 O #2 - 50% PSA to PSO 8,500 2,125 #3A -Baseline Grant (default) 4,250 Election Alternatives Time Vested Grants Stock Options Stock Awards #3B -Baseline Grant (default) 19,000 O #4 - 50% stock options to stock awards 9,500 2,375 O #5 - 100% stock options to stock awards 4,750 Shown below is a sample of what you will see on the website based on a hypothetical baseline grant of 4,250 performance shares and 19,000 stock options. Go to the Stock Incentives website at www.alcoastockincentives.com and click on the Equity Choice section (from the menu in the left column of the site). The site provides detailed instructions to help you through the process. Select the election alternatives you want by clicking on the applicable radio button. The highlighted rows indicate your current elections, or, if you haven’t yet made an election, the default election. Your election alternatives will be displayed based on the midpoint within the regional grant guidelines established for your specific job grade and region (Note that the midpoint is not an indication of the award you may receive; individual job performance and other factors identified by your business or resource unit determine your actual baseline grant.) Save your election when finished. Your election will be applied to your baseline grant to determine your actual grant. Remember that you can change your election at any time up until the end of the election period. If you do not make an election during the election period, Choice #3A and #3B – baseline grant allocation will apply. The Election Period Each year, you will be notified of the Equity Choice election period which is held for approximately two weeks near the end of the calendar year prior to the year of grant. You must make your election via the Stock Incentives website and are free to change your elections as many times as you like during the election period. Once the election period closes, your final elections recorded in the Stock Incentives website is final and irrevocable and cannot be changed for any reason. If you do not make an election by the close of the election period, the default allocation of the baseline grant will apply. Applicability of Elections Your Equity Choice elections will apply to the upcoming year’s annual grants only. It does not apply to any prior grants or any other future grants including special quarterly grants, new hire grants or future years’ annual grants New elections must be made for each future annual grant. Sample Website View of Election Alternatives In this sample, no election has been made and therefore the default elections (Choices #3A and #3B) are highlighted. When you make your elections by clicking on the applicable radio button, your choices will be highlighted. |
![]() The Equity Choice Process Performance-Based Awards The number of PSOs and/or PSAs you receive will be adjusted based on Alcoa’s performance relative to an external comparator group as set forth in the terms and conditions of the award agreements. Your final grant can be between 0% - 200% of your actual grant and will be determined upon completion of the performance period. For PSOs, if performance results in a payout in excess of 100%, the additional payout will be made in the form of a stock award grant instead of stock options, based on an exchange ratio of one stock award for every four additional PSOs earned. Such stock award would vest, in whole, on the third anniversary of the grant date of the PSOs to which they relate. If performance results in a payout below 100%, the number of PSOs below the earned payout percentage will be automatically cancelled. Final award certificates for the performance-based component of your grant will be available on the Stock Incentives website after the performance period ends and final grants are determined. The ability to make an election does not guarantee that you will receive an actual grant. Step 3: Determining Actual and Final Grants The amount of your baseline grant and actual grant will be communicated to you by your manager after final approval by the Compensation and Benefits Committee. Your actual grant is determined by applying your Equity Choice elections to your baseline grants (default baseline grant allocation applies if no election is made). Your actual grant will be posted on the Stock Incentives website at www.alcoastockincentives.com within five business days of the grant date. The website also allows you to print your award certificates. |
![]() Frequently Asked Questions Elections can be changed up until the close of the election period. After the election period ends, you cannot change your election for any reason. What if I want to change my election? The default baseline grant allocation will apply (Choice #3A and #3B). What if I become eligible for the Plan after the election period closes? The default baseline grant allocation will apply (Choice #3A and #3B). What if I do not make an Equity Choice election during the election period? Contact the plan administrator via e-mail at StockOptionAdmin.pit@alcoa.com or by phone 800-352-8535 within the U.S. or 412-281-1234 outside the U.S. Who do I contact with questions about the Stock Incentives website (including log-on ID and password requests)? Contact the Corporate Compensation group via e-mail at ACCEquityChoice@alcoa.com Who do I contact with questions about my election alternatives or the Equity Choice Program? Contact the plan administrator via e-mail at StockOptionAdmin.pit@alcoa.com or by phone 877-281-2088 within the U.S. or 412- 281-2088 outside the U.S. Who do I contact with questions about the stock options, stock award, performance stock options, or performance share plan provisions? |
![]() Glossary Actual Grant: Number of performance shares, performance stock options, stock options and stock awards granted based on your Baseline Grant and Equity Choice election. Annual Grant: An award given by the Compensatio n and Benefits Committee of the Board of Directors, typically in January. Grant terms are set at the Committee’s discretion. Baseline Grant: Number of stock options and performance shares allocated to you within the Regional Grant Guidelines for your specific job grade and region, prior to Equity Choice, based on management’s recommendations. Board of Directors: Group of individuals elected at an annual meeting by the shareholders of a corporation. The Board of Directors has the authority to elect officers, issue additional shares of stock, and declare dividends, among other authorities. Common Stock: A type of public ownership in a corporation. Owners are usually entitled to vote on the selection of the board of directors and other important matters as well as receive common stock dividends on their shareholdings if they are declared. Compensation and Benefits Committee: Comprised solely of independent directors who have not been Alcoa employees. The Committee discharges the Board of Directors’ responsibilities relating to the compensation of the company’s officers, oversees the administration of the company’s compensation and benefit plans (particularly the incentive compensation and equity- based plans of the company) and prepares the annual report on executive compensation. In addition, the Committee has oversight responsibility for the investment policy of the company’s principal pension and savings plans. Election Alternatives: Different mixes of stock options, stock awards, performance stock options, and/or performance shares from which to choose as part of the Equity Choice Program. Election Period: Time period in which Equity Choice elections can be made. Equity Choice: Program that allows participants to choose between different combinations of equity vehicles for their annual grants under the 2004 Alcoa Stock Incentive Plan to better suit their person al needs. Final Grant: Adjusted number of performance shares or performance stock options granted that are determined upon completion of the performance period. Final Grants can be between 0% - 200% of your Actual Grant. Grant: An award of stock options or other stock-based incentives. Grant Date: The date on which an option or other award is granted. Performance Share Award (PSA): A contractual promise to issue shares of Alcoa common stock, upon vesting, provided that the corporation achieves certain financial performance levels. The same performance metric applies to both performance shares and performance stock options. Performance Stock Option (PSO): The right to purchase shares of stock in the future at a preset price, upon vesting, provided that the corporation achieves certain financial performance levels. The same performance metric applies to both performance shares and performance stock options. Plan: 2004 Alcoa Stock Incentive Plan Regional Grant Guidelines: Range of stock options and performance shares, between 0% and 200% of midpoint, that can be granted as part of the Baseline Grant for each job grade and region. Stock Award: A contractual promise to issue share s of Alcoa stock, upon vesting. Stock Option: The right to purchase shares of stock in the future at a preset price, upon vesting. Time-Vested Grants: Grants of stock awards or stock options that are not subject to performance criteria. Vesting: A specified length of time you must hold a stock option or performance stock option before it can be exercised or length of time before you can receive shares from a stock award or performance share award. Certain employment criteria must be met during this period. |