Stock-Based Compensation Future Change in Accounting Policy Pro forma net income and earnings per share Other Stock-Based Compensation Plans Deferred Bonus Plans Mid-Term Incentive Program Stock Option Plan We maintain a Stock Option Plan for designated officers and employees. The options granted under the plan from 1995 to 1999 vest five fiscal years from November 1 of the year in which the options were granted to the officer or employee, if we have met  certain performance targets. The options granted in 2000, 2001 and The following table summarizes information about our stock option pl an: 2002 vest 25% per year over a four-year period starting from their grant date. A portion of the options granted in 2000 and 2001 are subject to performance targets. All options expire ten years from the date they are granted.  When stock options are granted, no compensation expense is recognized. When stock options are exercised, we include the amount of the proceeds in share- holdersGLYPH<213> equity. We account for our contribution as employee compensation expense when it is contributed to the plan.  Beginning on November 1, 2002, we will change our accounting policy for stock options granted on or after that date. We will recognize the fair value of stock options on their grant date as compensation expense over the period that the stock options vest. We expect employee compensation expense to increase and net income to decrease by $10 to $20 in fiscal 2003 as a result of this change in accounting policy. We determine the fair value of options granted using the Rolle-Geske Option Pricing Model. The weighted average fair value of options granted during the years ended October 31, 2002, 2001 and 2000 was $7.02, $8.17 and $4.79, respectively. The following weighted average assumptions were used to determine the fair value of options on the date of grant. Employee compensation expense related to this plan for the years ended October 31, 2002, 2001 and 2000 was $26, $26 and $17, respectively. We offer a mid-term incentive program for executives and certain senior employees. Under this program, a cash bonus is paid at  the end of each three-year period based on performance targets driven by annualized total shareholder return compared with that of our competitors.  Employee compensation expense for this program is recorded over the three-year performance cycle for the program. The amount of compensation expense is adjusted over the three-year performance cycle to reflect the current market value of our common shares and those of our competitors.  During the year we entered into an agreement with a third party to assume our obligation related to the mid-term incentive program for fiscal 2002 in exchange for a cash payment of $58.  This amount will be recorded as employee compensation expense over the three- year performance cycle of the plan on a straight-line basis. Employee compensation expense related to this program for the years ended October 31, 2002, 2001 and 2000 was $47, $51 and nil, respectively. We offer deferred bonus plans for certain senior executives and cer - tain key employees in our Investment Banking and Private Client Groups. Under these plans, payment of annual bonuses can be deferred as stock units of our common shares. The amount of deferred bonus is adjusted to reflect dividends and changes in the market value of our common shares.  Depending on the plan, deferred bonuses can be paid upon retirement, resignation, evenly at the end of each year over the We offer our employees the option of contributing a portion of their gross salary toward the purchase of our common shares. For employee contributions up to 6% of gross pay, we match 50% of  the contribution. Share Purchase Plan The following table illustrates the impact on our net income and on  our earnings per share if we had recorded employee compensation expense in the current and prior years based on the fair value of all of our outstanding stock options on their grant date: 2002 2001 2000 Weighted Weighted Weighted Number of average Number of  average Number of average st ock options exercise price stock options exercise price stock options exercise price Outstanding at beginning of year 32,997,743 $ 28.31 33,548,918 $ 18.64 27,615,900 $ 23.55 Granted 7,485,500 35.70 6,774,750 38.45 8,493,200 25.64 Exercised 1,923,115 18.87 6,177,235 17.72 1,915,282 18.12 Forfeited/cancelled 185,501 31.63 1,148,690 28.31 644,900 26.08 Outstanding at end of year 38,374,627 30.21 32,997,743 28.31 33,548,918 24.34 Exercisable at end of year 11,955,097 23.95 7,443,288 21.92 5,828,718 18.64 Available for grant 3,097,341 10,342,140 2,023,400 Outstanding stock options as a % of outstanding shares 7.79% 6.75% 6.42% No stock options expired during 2002, 2001 and 2000. Options outstanding Options exercisable Weighted  average remaining Weighted Weighted Number of contractual life  average Number of average Range of exercise prices stock options (years) exercise price stock options exercise price $20 and less 5,652,082 3.4 $ 17.65 5,652,082 $ 17.65 $20.01 to $30.00 7,278,182 7.0 25.60 3,102,242 25.60 $30.01 to $36.40 18,740,300 7.0 32.82 2,215,600 31.27 $36.41 to $40.00 6,552,763 8.0 38.45 965,899 38.46 $40.01 and over 151,300 6.0 41.98 19,274 41.29 2002 2001 200 0 Expected dividend yield 3.6% 2.9% 3.9% Expected share price volatility 23.4% 22.1% 21.5% Risk-free rate of return 5.5% 6.1% 6.3% Expected period until exercise 7.0 years 7.0 years 7.0 year s 2002 2001 200 0 Pro forma net income $ 1,370 $ 1,431 1,825 Pro forma earnings per share  — Basic $ 2.63 $ 2.64 3.24 Pro forma earnings per share  — Diluted $ 2.59 $ 2.59 3.19 BMO FINANCIAL GROUP ANNUAL REPORT 2002 83