Share-Based Compensation

12 Months Ended

Dec. 28, 2019

Share-based Payment Arrangement [Abstract]

Share-Based Compensation:

Overview

We grant share-based compensation awards to our Team Members and members of our Board of Directors as provided for under our 2014 Long-Term Incentive Plan (“2014 LTIP”), which was approved by our shareholders on May 14, 2014. In 2019, 2018 and 2017, we granted share-based compensation in the form of restricted stock units (“RSUs”) or deferred stock units (“DSUs”). No share-based compensation was granted in the form of stock appreciation rights (“SARs”) in 2019, 2018 and 2017. Our grants, which have three methods of measuring fair value, generally include a time-based service, a performance-based or a market-based portion, which collectively represent the target award.

As of December 28, 2019, the aggregate intrinsic value of outstanding and exercisable time-based and performance-based SARs was insignificant. In 2019, 2018 and 2017, all related activity related to SARs, including grants, exercises and forfeitures, was insignificant.

At December 28, 2019, there were 4.9 million shares of common stock available for future issuance under the 2014 LTIP based on management’s current estimate of the probable vesting outcome for performance-based awards. We issue new shares of common stock upon exercise of SARs. Shares forfeited and shares withheld for payment of taxes due become available for reissuance and are included in availability. Availability also includes shares that became available for reissuance in connection with the exercise of SARs.

Restricted Stock Units

For time-based RSUs, the fair value of each award was determined based on the market price of our common stock on the date of grant. Time-based RSUs generally vest over a three-year period in equal annual installments beginning on the first anniversary of the grant date. During the vesting period, holders of RSUs are entitled to receive dividend equivalents, but are not entitled to voting rights.

For performance-based RSUs, the fair value of each award was determined based on the market price of our common stock on the date of grant. Performance-based awards generally may vest following a three-year period subject to our achievement of certain financial goals as specified in the grant agreements. Depending on our results during the three-year performance period, the actual number of awards vesting at the end of the period generally ranges from 0% to 200% of the performance award. Performance-based RSUs generally do not have dividend equivalent rights and do not have voting rights until the shares are earned and issued following the applicable performance period. The number of performance-based awards outstanding is based on the number of awards that we believed were probable of vesting at December 28, 2019. Performance-based RSU’s granted during 2019 are presented as grants in the table at their respective target levels. The change in units based on performance represents the change in the number of granted awards expected to vest based on the updated probability assessment as of December 28, 2019. Compensation expense for performance-based awards of $7.8 million, $5.4 million, and $13.6 million in 2019, 2018 and 2017, was determined based on management’s estimate of the probable vesting outcome.

For market-based RSUs, the fair value of each award was determined using a Monte Carlo simulation model. The model uses multiple input variables that determined the probability of satisfying the market condition requirements as follows:



Monte Carlo Simulation Model Assumptions	2019		2018		2017
Risk-free interest rate⁽¹⁾	2.5	%	2.4	%	1.6	%
Expected dividend yield	0.2	%	0.2	%	0.2	%
Expected stock price volatility ⁽²⁾	33.5	%	34.0	%	26.2	%


⁽¹⁾	The risk-free interest rate is based on the U.S. Treasury constant maturity interest rate having term consistent with the vesting period of the award.


⁽²⁾	Expected volatility is determined based on historical volatility over a matching look-back period and is consistent with the correlation coefficients between our stock prices and our peer group.

Additionally, we estimated a liquidity discount of 10.5% using the Chaffe Protective Put Method to adjust the fair value for the post-vest restrictions. Market-based RSU’s vesting depends on our relative total shareholder return among a designated group of peer companies during a three-year period and will be subject to a one-year holding period after vesting.

The following table summarizes activity for time-based, performance-based and market-based RSUs in 2019:



	Time-Based				Performance-Based				Market-Based
(in thousands, except per share data)	Number of Awards		Weighted-Average Grant Date Fair Value		Number of Awards		Weighted-Average Grant Date Fair Value		Number of Awards		Weighted-Average Grant Date Fair Value
Nonvested at December 29, 2018	410		$	132.49	125		$	126.19	53		$	133.78
Granted	279		157.31		39		159.80		28		165.70
Change in units based on performance	—		—		(6	)	120.72		—		—
Vested	(164	)	133.97		(17	)	160.94		—		—
Forfeited	(65	)	140.11		(14	)	128.10		(8	)	142.01
Nonvested at December 28, 2019	460		$	145.95	127		$	132.03	73		145.08

The following table summarizes certain information concerning activity for time-based, performance-based and market-based RSUs:



	Year Ended
(in thousands, except per share data)	December 28, 2019		December 29, 2018		December 30, 2017
Time-based:
Weighted average fair value of RSUs granted	$	157.31	$	130.12	$	131.01
Total grant date fair value of RSUs vested	$	21,955	$	17,527	$	13,578
Performance-based:
Weighted average fair value of RSUs granted	$	159.80	$	119.08	$	146.42
Total grant date fair value of RSUs vested	$	2,666	$	9,224	$	7,823
Market-based:
Weighted average fair value of RSUs granted	$	165.70	$	131.48	$	139.33
Total grant date fair value of RSUs vested	$	—	$	—	$	—

As of December 28, 2019, the maximum potential payout under our currently outstanding performance-based and market-based RSUs were 289 thousand and 146 thousand units.

Other Considerations

Total income tax benefit related to share-based compensation expense for 2019, 2018 and 2017 was $9.4 million, $6.8 million and $15.3 million.

As of December 28, 2019, there was $59.8 million of unrecognized compensation expense related to all share-based awards that was expected to be recognized over a weighted average period of 1.5 years.

Deferred Stock Units (“DSUs”)

We grant share-based awards annually to our Board of Directors in connection with its annual meeting of stockholders. These awards are granted in the form of DSUs as provided for in the Advance Auto Parts, Inc. Deferred Stock Unit Plan for Non-Employee Directors and Selected Executives (“DSU Plan”). Each DSU is equivalent to one share of our common stock and will be distributed in common shares after the director’s service on the Board ends. DSUs granted vest over a one year service period. Additionally, the DSU Plan provides for the deferral of compensation earned in the form of (i) an annual retainer for directors, and (ii) wages for certain highly compensated Team Members. These DSUs are settled in common stock with the participants at a future date, or over a specified time period, as elected by the participants in accordance with the DSU Plan.

We granted 12 thousand DSUs in 2019. The weighted average fair value of DSUs granted during 2019, 2018 and 2017 was $156.47, $127.14, and $125.34. The DSUs are awarded at a price equal to the market price of our underlying common stock on the date of the grant. For 2019, 2018 and 2017, we recognized $1.9 million, $1.9 million and $1.5 million of share-based compensation expense for these DSU grants.

Employee Stock Purchase Plan

We also offer an employee stock purchase plan (“ESPP”). Under the ESPP, eligible Team Members may elect salary deferrals to purchase our common stock at a discount of 10% from its fair market value on the date of purchase. There are annual limitations on the amounts a Team Member may elect of either $25 thousand per Team Member or 10% of compensation, whichever is less. As of December 28, 2019, there were 1.0 million shares available to be issued under the ESPP.