Stock-Based Compensation | Stock-Based Compensation Under the stockholder-approved Long-Term Incentive Plan (LTIP), the Compensation Committee (Committee), which is made up of nonemployee members of the Board of Directors, or the Chief Executive Officer (when delegated authority by such Committee) may grant stock options, stock appreciation rights (SARs), restricted stock units (RSUs), restricted shares, performance share units (PSUs), and performance shares, up to a maximum of 104,125,000 shares of our Common Stock. The number of shares remaining for issuance under the LTIP is reduced (i) by 1 for each award granted as a stock option or stock-settled SAR, or (ii) by 1.61 for an award made in the form other than a stock option or stock-settled SAR. Under the Board-approved Thoroughbred Stock Option Plan (TSOP), the Committee may grant stock options up to a maximum of 6,000,000 shares of Common Stock. We use newly issued shares to satisfy any exercises and awards under the LTIP and the TSOP. The LTIP also permits the payment, on a current or a deferred basis and in cash or in stock, of dividend equivalents on shares of Common Stock covered by stock options, RSUs, or PSUs in an amount commensurate with regular quarterly dividends paid on Common Stock. With respect to stock options, if employment of the participant is terminated for any reason, including retirement, disability, or death, we have no further obligation to make any dividend equivalent payments. Regarding RSUs, if employment of the participant is terminated for any reason other than retirement, disability, or death, we have no further obligation to make any dividend equivalent payments. Should an employee terminate employment, they are not required to forfeit dividend equivalent payments already received. Outstanding PSUs do not currently receive dividend equivalent payments. During 2016 , the Committee granted stock options, RSUs and PSUs pursuant to the LTIP and granted stock options pursuant to the TSOP. Receipt of an award under the LTIP was made contingent upon the awardee’s execution of a non-compete agreement, and all awards under the LTIP were made subject to forfeiture in the event the awardee “engages in competing employment” for a period of time following retirement. Accounting Method We account for our grants of stock options, RSUs, PSUs, and dividend equivalent payments in accordance with ASC 718, “Compensation-Stock Compensation.” Accordingly, all awards result in charges to net income while dividend equivalent payments, which are all related to equity classified awards, are charged to retained income. Related compensation costs were $42 million in both 2016 and 2015 , and $44 million in 2014 . The total tax effects recognized in income in relation to stock-based compensation expense were net benefits of $31 million (including $17 million of excess tax benefits) in 2016 , $13 million in 2015 , and $14 million in 2014 . Stock Options Option exercise prices will be at least the higher of (i) the average of the high and low prices at which Common Stock is traded on the grant date, or (ii) the closing price of Common Stock on the grant date. All options are subject to a vesting period of at least one year, and the term of the option will not exceed ten years. Holders of the options granted under the LTIP who remain actively employed receive cash dividend equivalent payments for four years in an amount equal to the regular quarterly dividends paid on Common Stock. Dividend equivalent payments are not made on the TSOP options. The options granted under the LTIP and TSOP for the last three years are shown in the following table: 2016 2015 2014 Options Granted Weighted Avg. Exercise Price Options Granted Weighted Avg. Exercise Price Options Granted Weighted Avg. Exercise Price LTIP 694,290 $ 70.40 643,890 $ 101.86 515,240 $ 94.17 TSOP 302,320 70.32 181,320 104.23 181,070 94.17 Total 996,610 70.38 825,210 102.38 696,310 94.17 For all years, options granted under the LTIP and the TSOP may not be exercised prior to the fourth and third anniversaries of the date of grant, respectively, or if the optionee retires or dies before that anniversary date, may not be exercised before the later of one year after the grant date or the date of the optionee’s retirement or death. The fair value of each option awarded in 2016 , 2015 , and 2014 was measured on the date of grant using a binomial lattice-based option valuation model. Expected volatility is based on implied volatility from traded options on, and historical volatility of, Common Stock. Historical data is used to estimate option exercises and employee terminations within the valuation model. The average expected option life is derived from the output of the valuation model and represents the period of time that all options granted are expected to be outstanding, including the branches of the model that result in options expiring unexercised. The average risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. A dividend yield of zero was used for the LTIP options during the vesting period. For 2016 , 2015 , and 2014 , a dividend yield of 3.37% , 2.27% , and 2.29% , respectively, was used for all vested LTIP options and all TSOP options. The assumptions for the LTIP and TSOP grants for the last three years are shown in the following table: 2016 2015 2014 Average expected volatility 27 % 25 % 25 % Average risk-free interest rate 2.00 % 1.83 % 2.79 % Average expected option term LTIP 8.9 years 9.3 years 8.9 years Per-share grant-date fair value LTIP $ 19.92 $ 30.35 $ 29.87 Average expected option term TSOP 8.6 years 9.1 years 8.8 years Per-share grant-date fair value TSOP $ 14.75 $ 24.71 $ 24.38 A summary of the status of changes in stock options is presented below: Stock Options Weighted Avg. Exercise Price Outstanding at December 31, 2015 6,048,736 $ 67.90 Granted 996,610 70.38 Exercised (1,466,721 ) 51.65 Forfeited (24,571 ) 82.74 Outstanding at December 31, 2016 5,554,054 72.57 The aggregate intrinsic value of options outstanding at December 31, 2016 , was $197 million with a weighted average remaining contractual term of 6.0 years. Of these options outstanding, 3,195,174 were exercisable and had an aggregate intrinsic value of $136 million with a weighted average exercise price of $65.50 and a weighted average remaining contractual term of 4.4 years. The following table provides information related to options exercised for the last three years: 2016 2015 2014 ($ in millions) Options exercised 1,466,721 589,081 2,009,461 Total intrinsic value $ 60 $ 27 $ 106 Cash received upon exercise 74 29 93 Related tax benefits realized 13 7 26 At December 31, 2016 , total unrecognized compensation related to options granted under the LTIP and the TSOP was $10 million , and is expected to be recognized over a weighted-average period of approximately 2.2 years. Tax benefits realized in 2016 are recognized in the “Provision for income taxes.” Tax benefits realized in 2015 and 2014 were recognized as “Additional paid-in capital.” Restricted Stock Units RSU grants and grant-date fair values were 136,250 and $70.44 in 2016; 101,470 and $104.23 in 2015 ; and 113,505 and $94.17 in 2014 . RSUs granted in all three years have a five -year restriction period and will be settled through the issuance of shares of Common Stock. The RSU grants include cash dividend equivalent payments during the restriction period in an amount equal to regular quarterly dividends paid on Common Stock. During 2016 , 175,500 of the RSUs granted in 2011 vested, with 103,936 shares of Common Stock issued net of minimum withholding taxes. A summary of the status of and changes in RSUs is presented below: RSUs Weighted- Average Grant-Date Fair Value Nonvested at December 31, 2015 688,725 $ 78.14 Granted 136,250 70.44 Vested (175,500 ) 62.75 Forfeited (3,830 ) 82.20 Nonvested at December 31, 2016 645,645 80.68 At December 31, 2016 , total unrecognized compensation related to RSUs was $7 million , and is expected to be recognized over a weighted-average period of approximately 3.1 years. The total related tax benefits realized in 2016 were $1 million and were recognized in the “Provision for income taxes.” The total related tax benefits realized in 2015 and 2014 were $4 million and $6 million , respectively, and were recognized as “Additional paid-in capital.” Performance Share Units PSUs provide for awards based on the achievement of certain predetermined corporate performance goals at the end of a three-year cycle and are settled through the issuance of shares of Common Stock. PSU grants were 1,042,628 in 2016 with a weighted average grant-date fair value of $52.75 . PSU grants were 413,770 and 399,530 in 2015 and 2014 , respectively; with weighted-average grant-date fair values of $71.66 and $72.24 , respectively. All PSUs will earn out based on the achievement of performance conditions and some will also earn out based on a market condition. The market condition fair value was measured on the date of grant using a Monte Carlo simulation model. During 2016 , 406,038 of the PSUs granted in 2013 were earned, with 241,757 shares of Common Stock issued net of minimum withholding taxes. A summary of the status of and changes in PSUs is presented below: PSUs Weighted- Average Grant-Date Fair Value Balance at December 31, 2015 1,361,050 $ 71.09 Granted 1,042,628 52.75 Earned (406,038 ) 69.83 Unearned (142,662 ) 69.83 Forfeited (5,970 ) 56.62 Balance at December 31, 2016 1,849,008 61.17 At December 31, 2016 , total unrecognized compensation related to PSUs granted under the LTIP was $4 million , and is expected to be recognized over a weighted-average period of approximately 1.8 years. The total related tax benefits realized were $3 million in 2016 which were recognized in the “Provision for income taxes.” The total related tax benefits were $3 million in 2015 and $5 million in 2014 which were recognized as “Additional paid-in capital.” Shares Available and Issued Shares of Common Stock available for future grants and issued in connection with all features of the LTIP and the TSOP at December 31, were as follows: 2016 2015 2014 Available for future grants: LTIP 9,385,674 11,769,796 4,899,428 TSOP 544,217 832,676 998,896 Issued: LTIP 1,511,645 708,059 2,168,641 TSOP 300,769 121,745 252,042 |