Share-Based Compensation

9 Months Ended

Sep. 30, 2020

Share-based Payment Arrangement [Abstract]

We have a share-based compensation program for employees and non-employee directors. Share-based awards granted under this program include stock options, restricted stock (consisting of restricted stock units), and PSUs. For accounting purposes, we consider PSUs to be a form of restricted stock.

Summary of Share-Based Compensation Expense

The following table shows the total share-based compensation expense resulting from equity awards and the 15.0% discount for the ESPP for the three and nine months ended September 30, 2020 and 2019 which is included in compensation and benefits expense in the Condensed Consolidated Statements of Income:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(in millions)
Share-based compensation expense before income taxes	$	24	$	21	$	64	$	57
Income tax benefit	(7)		(6)		(17)		(16)
Share-based compensation expense after income taxes	$	17	$	15	$	47	$	41

Common Shares Available Under Our Equity Plan

As of September 30, 2020, we had approximately 9.7 million shares of common stock authorized for future issuance under our Equity Plan.

Restricted Stock

We grant restricted stock to most active employees. The grant date fair value of restricted stock awards is based on the closing stock price at the date of grant less the present value of future cash dividends. Restricted stock awards granted to employees below the manager level vest 25.0% on the second anniversary of the grant date, 25.0% on the third anniversary of the grant date, and 50.0% on the fourth anniversary of the grant date. Restricted stock awards granted to employees at or above the manager level vest 33.3% on the second anniversary of the grant date, 33.3% on the third anniversary of the grant date, and 33.3% on the fourth anniversary of the grant date.

Summary of Restricted Stock Activity

The following table summarizes our restricted stock activity for the nine months ended September 30, 2020:


	Restricted Stock
	Number of Awards	Weighted-Average Grant Date Fair Value









Unvested at January 1, 2020	1,486,756	$	77.38
Granted	729,448	$	89.36
Vested	(446,550)	$	71.91
Forfeited	(67,013)	$	80.40
Unvested at September 30, 2020	1,702,641	$	83.82

As of September 30, 2020, $79 million of total unrecognized compensation cost related to restricted stock is expected to be recognized over a weighted-average period of 1.8 years.

PSUs

PSUs are based on performance measures that impact the amount of shares that each recipient will receive upon vesting. Prior to April 1, 2020, we had two performance-based PSU programs for certain officers, a one-year performance-based program and a three-year cumulative performance-based program that focuses on TSR. Effective with new equity awards issued on April 1, 2020, to better align the equity programs for eligible officers, the one-year performance-based program was eliminated and all eligible officers will participate in the three-year cumulative performance-based program. While the performance periods are complete for all PSUs granted under the one-year performance-based program, some shares underlying these PSUs have not vested.

One-Year PSU Program

The grant date fair value of PSUs under the one-year performance-based program was based on the closing stock price at the date of grant less the present value of future cash dividends. Under this program, an eligible employee received a target grant of PSUs, but could have received from 0.0% to 150.0% of the target amount granted, depending on the achievement of performance measures. These awards vest ratably on an annual basis over a three-year period commencing with the end of the one-year performance period. Compensation cost is recognized over the performance period and the three-year vesting period based on the probability that such performance measures will be achieved, taking into account an estimated forfeiture rate.

During 2019, grants of PSUs with a one-year performance period exceeded the applicable performance parameters. As a result, an additional 26,780 units above the original target were granted in the first quarter of 2020.

Three-Year PSU Program

Under the three-year performance-based program, each eligible individual receives PSUs, subject to market

conditions, with a three-year cumulative performance period that vest at the end of the performance period. Compensation cost is recognized over the three-year performance period, taking into account an estimated forfeiture rate, regardless of whether the market condition is satisfied, provided that the requisite service period has been completed. Performance will be determined by comparing Nasdaq’s TSR to two peer groups, each weighted 50.0%. The first peer group consists of exchange companies, and the second peer group consists of all companies in the S&P 500. Nasdaq’s relative performance ranking against each of these groups will determine the final number of shares delivered to each individual under the program. The payout under this program will be between 0.0% and 200.0% of the number of PSUs granted and will be determined by Nasdaq’s overall performance against both peer groups. However, if Nasdaq’s TSR is negative for the three-year performance period, regardless of TSR ranking, the payout will not exceed 100.0% of the number of PSUs granted. We estimate the fair value of PSUs granted under the three-year PSU program using the Monte Carlo simulation model, as these awards contain a market condition.

Grants of PSUs that were issued in 2017 with a three-year performance period exceeded the applicable performance parameters. As a result, an additional 43,684 units above the original target were granted in the first quarter of 2020 and were fully vested upon issuance.

The following weighted-average assumptions were used to determine the weighted-average fair values of the PSU awards granted under the three-year PSU program for the nine months ended September 30, 2020:


	Nine Months Ended September 30,
	2020		2019
Weighted-average risk free interest rate(1)	0.27	%	2.26	%
Expected volatility(2)	27.4	%	16.5	%
Weighted-average grant date share price	$92.34		$89.00
Weighted-average fair value at grant date	$111.50		$97.65

____________

(1) The risk-free interest rate for periods within the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.

(2) We use historic volatility for PSU awards issued under the three-year PSU program, as implied volatility data could not be obtained for all the companies in the peer groups used for relative performance measurement within the program.

In addition, the annual dividend assumption utilized in the Monte Carlo simulation model is based on Nasdaq’s dividend yield at the date of grant.

Summary of PSU Activity

The following table summarizes our PSU activity for the nine months ended September 30, 2020:


	PSUs
	One-Year Program			Three-Year Program
	Number of Awards	Weighted-Average Grant Date Fair Value		Number of Awards	Weighted-Average Grant Date Fair Value








Unvested at January 1, 2020	317,251	$	80.87	797,451	$	98.31
Granted(1)	26,780	$	84.17	320,328	$	107.42
Vested	(10,104)	$	75.85	(300,767)	$	81.57
Forfeited	(26,984)	$	82.27	(6,557)	$	97.33
Unvested at September 30, 2020	306,943	$	81.20	810,455	$	108.13

____________

(1) For both the one-year and the three-year PSU programs, includes additional awards granted based on overachievement of performance parameters. For the three-year PSU program, also includes target awards granted.

As of September 30, 2020, $6 million of total unrecognized compensation cost related to the one-year PSU program is expected to be recognized over a weighted-average period of 1.3 years. For the three-year PSU program, $39 million of total unrecognized compensation cost is expected to be recognized over a weighted-average period of 1.5 years.

Stock Options

There were no stock option awards granted during the nine months ended September 30, 2020.

Summary of Stock Option Activity

A summary of stock option activity for the nine months ended September 30, 2020 is as follows:


	Number of Stock Options	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)









Outstanding at January 1, 2020	379,102	$	54.32	5.27	$	20

Exercised	(80,378)	23.82
Forfeited	(435)	19.75
Outstanding and exercisable at September 30, 2020	298,289	$	62.59	5.69	$	18

The net cash proceeds from the exercise of 25,113 stock options for the three months ended September 30, 2020 was $1 million. The net cash proceeds from the exercise of 80,378 stock options for the nine months ended September 30, 2020 was $2 million. The net cash proceeds from the exercise of 9,216 stock options for the three months ended September 30, 2019 was immaterial. The net cash proceeds from the exercise of 62,624 stock options for the nine months ended September 30, 2019 was $1 million.

The aggregate intrinsic value in the above table represents the total pre-tax intrinsic value (i.e., the difference between our closing stock price on September 30, 2020 of $122.71 and the exercise price, times the number of shares), which would have been received by the option holders had the option holders exercised their stock options on that date. This amount can change based on the fair market value of our common stock. The total number of in-the-money stock options exercisable as of September 30, 2020 was 0.3 million and the weighted-average exercise price was $62.59. As of September 30, 2019, 0.3 million outstanding stock options were exercisable and the weighted-average exercise price was $49.76.

The total pre-tax intrinsic value of stock options exercised was $2 million for the three months ended September 30, 2020, $1 million for the three months ended September 30, 2019, $8 million for the nine months ended September 30, 2020, and $5 million for the nine months ended September 30, 2019.

ESPP

We have an ESPP under which approximately 4.5 million shares of our common stock were available for future issuance as of September 30, 2020. Under our ESPP, employees may purchase shares having a value not exceeding 10.0% of their annual compensation, subject to applicable annual Internal Revenue Service limitations. We record compensation expense related to the 15.0% discount that is given to our employees which totaled $1 million for both the three months ended September 30, 2020 and 2019, $4 million for the nine months ended September 30, 2020, and $3 million for the nine months ended September 30, 2019.