There are three kinds of value with respect to stock options: economic value, paper value, and realized value.

Economic Value
Economic value is the present value of the projected gain on the option. Historically, Wells Fargo used the Black-Scholes model to estimate the economic value of an option for granting purposes. Recent changes in accounting requirements have changed the focus of Black-Scholes and binomial valuation models toward expensing and the accounting value used for financial statements. For purposes of converting the dollar value of your long-term incentive recommendation, Wells Fargo recently adopted an economic growth model.

Economic Growth
An economic growth model is simple in comparison to other valuation methods and is driven by the following:

• How much the stock price has grown historically
• What stockholders expect of Wells Fargo going forward
• The estimated economic value of a Wells Fargo stock option to a recipient, using reasonable projections of growth rates

In our case, we use an economic growth model that estimates the value of an option to be 25% of the stock price at grant (for a 10-year option).

In the current environment, Wells Fargo believes that Long-Term Incentive Compensation Plan (LTICP) recipients are best served using an economic growth model.

Paper Value
Paper value is the spread between the exercise price and the fair market value of your shares prior to exercise. This spread is the unrealized value of your option.

Realized Value
Realized value is the spread between the exercise price and the fair market value of your shares once you actually exercise your option.

Maximizing the Value of Your LTICP Grants
As Wells Fargo stock increases in value, you can profit from your stock option when you exercise or purchase the stock. You profit from the option when the value of Wells Fargo stock is greater than the price you pay for the stock.

There are two key elements to maximizing the value of your stock option: the stock price and your long-term participation in the program. Assuming Wells Fargo continues to experience strong stock price growth and performance, your options will increase in value.

You can profit if the share price increases after your stock option is granted to you. When the stock price is less than the exercise price, the option is "underwater". Even when options are underwater, an option has value because of its potential for future appreciation.