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, of which 8,774,768 remain available for future grants as of December 31, 2017. 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, we have no further obligation to make any dividend equivalent payments unless employment of the participant is terminated as a result of qualifying retirement or disability. Should an employee terminate employment, they are not required to forfeit dividend equivalent payments already received. Outstanding PSUs do not receive dividend equivalent payments. The Committee granted stock options, RSUs and PSUs pursuant to the LTIP and granted stock options pursuant to the TSOP for the last three years as follows: 2017 2016 2015 Granted Weighted Average Grant-Date Fair Value Granted Weighted Average Grant-Date Fair Value Granted Weighted Average Grant-Date Fair Value Stock options: LTIP 341,120 $ 37.73 694,290 $ 19.92 643,890 $ 30.35 TSOP 144,440 31.33 302,320 14.75 181,320 24.71 Total 485,560 996,610 825,210 Restricted stock units 83,330 120.16 136,250 70.44 101,470 104.23 Performance share units 300,334 88.56 1,042,628 52.75 413,770 71.66 Receipt of an LTIP award is contingent on the recipient having executed a non-compete agreement with the company. 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 and tax benefits during the year were: 2017 2016 2015 ($ in millions) Stock-based compensation expense $ 45 $ 42 $ 42 Total tax benefit 54 31 13 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. 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 2017 , 2016 , and 2015 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 term 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 2017 , 2016 , and 2015 , a dividend yield of 2.04% , 3.37% , and 2.27% , 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: 2017 2016 2015 Average expected volatility 26 % 27 % 25 % Average risk-free interest rate 2.51 % 2.00 % 1.83 % Average expected option term LTIP 8.6 years 8.9 years 9.3 years Average expected option term TSOP 8.3 years 8.6 years 9.1 years A summary of changes in stock options is presented below: Stock Options Weighted Avg. Exercise Price Outstanding at December 31, 2016 5,554,054 $ 72.57 Granted 485,560 120.25 Exercised (1,789,939 ) 60.28 Forfeited (15,608 ) 90.05 Outstanding at December 31, 2017 4,234,067 83.17 The aggregate intrinsic value of options outstanding at December 31, 2017 , was $261 million with a weighted average remaining contractual term of 6.2 years. Of these options outstanding, 2,221,577 were exercisable and had an aggregate intrinsic value of $157 million with a weighted average exercise price of $74.06 and a weighted average remaining contractual term of 4.8 years. The following table provides information related to options exercised for the last three years: 2017 2016 2015 ($ in millions) Options exercised 1,789,939 1,466,721 589,081 Total intrinsic value $ 114 $ 60 $ 27 Cash received upon exercise 104 74 29 Related tax benefits realized 35 13 7 At December 31, 2017 , total unrecognized compensation related to options granted under the LTIP and the TSOP was $10 million , and is expected to be recognized over a weighted-average period of approximately 2.2 years. Tax benefits realized in both 2017 and 2016 are recognized in “Income taxes.” Tax benefits realized in 2015 were recognized as “Additional paid-in capital.” Restricted Stock Units RSUs granted in all three years have a five -year restriction period and will be settled through the issuance of shares of Common Stock. The RSU grants include cash dividend equivalent payments during the restriction period in an amount equal to regular quarterly dividends paid on Common Stock. 2017 2016 2015 ($ in millions) RSUs vested 137,200 175,500 166,750 Common Stock issued net of tax witholding 81,318 103,936 99,337 Related tax benefit realized $ 3 $ 1 $ 4 Tax benefits realized in both 2017 and 2016 are recognized in “Income taxes.” Tax benefits realized in 2015 were recognized as “Additional paid-in capital.” A summary of changes in RSUs is presented below: RSUs Weighted- Average Grant-Date Fair Value Nonvested at December 31, 2016 645,645 $ 80.68 Granted 83,330 120.16 Vested (137,200 ) 75.14 Forfeited (3,370 ) 108.47 Nonvested at December 31, 2017 588,405 87.40 At December 31, 2017 , total unrecognized compensation related to RSUs was $8 million , and is expected to be recognized over a weighted-average period of approximately 3.2 years. Performance Share Units PSUs provide for awards based on the achievement of certain predetermined corporate performance goals at the end of a three-year cycle and are settled through the issuance of shares of Common Stock. All PSUs will earn out based on the achievement of performance conditions and some will also earn out based on a market condition. The market condition fair value was measured on the date of grant using a Monte Carlo simulation model. 2017 2016 2015 ($ in millions) PSUs earned 171,080 406,038 236,601 Common Stock issued net of tax witholding 99,805 241,757 141,386 Related tax benefit realized $ 1 $ 3 $ 3 Tax benefits realized in both 2017 and 2016 are recognized in “Income taxes.” Tax benefits realized in 2015 were recognized as “Additional paid-in capital.” A summary of changes in PSUs is presented below: PSUs Weighted- Average Grant-Date Fair Value Balance at December 31, 2016 1,849,008 $ 61.17 Granted 300,334 88.56 Earned (171,080 ) 68.67 Unearned (226,780 ) 74.93 Forfeited (2,730 ) 58.09 Balance at December 31, 2017 1,748,752 63.36 At December 31, 2017 , total unrecognized compensation related to PSUs granted under the LTIP was $6 million , and is expected to be recognized over a weighted-average period of approximately 1.8 years. 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: 2017 2016 2015 Available for future grants: LTIP 8,774,768 9,385,674 11,769,796 TSOP 410,895 544,217 832,676 Issued: LTIP 1,679,547 1,511,645 708,059 TSOP 291,515 300,769 121,745 |