EMPLOYEE STOCK BENEFIT PLANS

Long Term Incentive Plan—The Company’s Long Term Incentive Plan (“LTIP”) provides for the grant of stock options, performance share awards, restricted stock units and other stock-based awards. Executive officers and other key employees of MJN, and non-employee directors and others who provide substantial services to MJN, are eligible to be granted awards under the LTIP. Twenty-five million shares of stock were approved and registered with the Securities and Exchange Commission (the “SEC”) for grants to participants under the LTIP. The shares reserved may be used for any type of award under the LTIP. Stock-based compensation expense is based on awards ultimately expected to vest. Forfeitures are estimated based on the historical experience of participants in the LTIP since its inception in February 2009.

MJN may grant options to purchase common stock at no less than 100% of the closing market price on the date the option is granted. Stock options generally become exercisable in installments of either 25% per year on each of the first through the fourth anniversaries of the grant date or 33% per year on each of the first through the third anniversaries of the grant date. Stock options have a maximum term of 10 years. Generally, MJN will issue shares for the stock option exercises from treasury stock, if available, or will issue new shares.

MJN may also grant performance share awards, which are granted in the form of a target number of performance shares to be earned and have a three-year performance cycle consisting of three one-year performance periods. The performance share awards have annual goals set at the beginning of each performance period, at which time the awards are considered granted. The maximum payout is 200%. If a certain threshold is not met for a performance period, no payment is made under the plan for that annual period.

MJN may also grant restricted stock units under the LTIP. Restrictions generally expire over a 1 to 4-year period from the date of grant. Stock-based compensation expense is recognized over the restricted period. A restricted stock unit is a right to receive stock at the end of the specified vesting period. A restricted stock unit has non-forfeitable rights to dividend equivalent payments and has no voting rights.

Stock Options—The fair value of stock options granted in 2015, 2014, and 2013 was estimated on the date of grant using the Black-Scholes option pricing model. No stock options with market conditions were granted in 2015, 2014, or 2013. The following assumptions were used in the valuations:



	2015		2014		2013
Expected volatility	24.7	%	26.3	%	27.0	%
Risk-free interest rate	1.5	%	1.7	%	0.9	%
Dividend yield	1.6	%	1.8	%	1.9	%
Expected life	4.9 years		5.5 years		5.3 years

The expected volatility assumption required in the Black-Scholes model was calculated based principally on the Company’s historical volatility, and to a lesser extent, on implied volatility from publicly-traded options on the Company’s stock. The historical volatility was calculated over a period of time commensurate with the expected term of the options being valued.

The risk-free interest rate assumption in the Black-Scholes model is based upon the U.S. Treasury yield curve in effect at the time of grant. The dividend yield assumption is based on MJN’s expectation of dividend payouts. The Company has determined that it has enough historical option exercise information to be able to accurately compute an expected term for use as an assumption in the Black-Scholes option pricing model. As such, its computation of expected term was calculated using the Company’s historical data.

Stock option activities were as follows:



	Shares (in thousands)	Weighted Average Exercise Price of Shares		Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Balance—January 1, 2013	1,902	$	52.11	7.7	$	99.2
Granted	485	74.76
Exercised	(377)	36.06			$	17.6
Forfeited or expired	(51)	73.57
Balance—December 31, 2013	1,959	60.12		7.4	$	46.3
Granted	463	82.31
Exercised	(652)	56.79			$	23.5
Forfeited or expired	(46)	72.55
Balance—December 31, 2014	1,724	67.01		7.3	$	57.8
Granted	431	102.47
Exercised	(272)	59.54			$	9.5
Forfeited or expired	(100)	84.74
Balance—December 31, 2015	1,783	75.73		7.0	$	16.6
Vested—December 31, 2015	1,010	63.53		5.8	$	16.1
Vested and expected to vest—December 31, 2015	1,767	$	75.54	7.0	$	16.6

The weighted-average grant date fair value of stock options granted is $20.21, $17.71 and $15.08 for 2015, 2014 and 2013 respectively.

Cash proceeds received from options exercised during the years ended December 31, 2015, 2014 and 2013 were $16.2 million, $37.0 million and $13.6 million, respectively. The tax benefit realized from stock options exercised was $3.4 million in 2015, $8.3 million in 2014 and $5.9 million in 2013.

At December 31, 2015, total unrecognized compensation cost related to stock options of $7.4 million is expected to be recognized over a weighted average period of 1.7 years.

Performance Share Awards—The fair value of performance share awards is based on the closing market price of MJN’s stock on the date of the grant, discounted using the risk-free interest rate as the awards do not participate in dividends. Information related to performance share awards activity is summarized as follows:



Grant Year	Performance Cycle Measurement Date	Shares Granted and Earned (in thousands)	Weighted- Average Grant- Date Fair Value		Performance Shares Outstanding at December 31, 2015 (in thousands)
2015	Annually on 12/31	148	$	100.99	0
2014	Annually on 12/31	157	$	78.65	124
2013	Annually on 12/31	176	$	72.24	67

Shares granted and earned in the table above assumes 100% plan performance adjusted for forfeitures. Performance shares outstanding at December 31, 2015 is adjusted for actual plan achievement level for each completed performance period. Company performance in 2015 was below the minimum threshhold for shares to be earned. At December 31, 2015, total unrecognized compensation cost related to the performance share awards outstanding of $1.2 million is expected to be recognized over a weighted average period of 1.0 years.

Restricted Stock Units—The fair value of restricted stock units is determined based on the closing market price of MJN’s common stock on the grant date. A summary of restricted stock unit activity is as follows:



	Shares (in thousands)		Weighted- Average Grant Date Fair Value
Nonvested restricted stock units—January 1, 2013	514		$	50.24
Granted	133		74.85
Vested (includes cash settled)	(189	)	39.14
Forfeited	(35	)	62.68
Nonvested restricted stock units—December 31, 2013	423		61.59
Granted	235		83.91
Vested (includes cash settled)	(153	)	44.36
Forfeited	(17	)	76.11
Nonvested restricted stock units—December 31, 2014	488		77.21
Granted	205		101.11
Vested (includes cash settled)	(149	)	69.55
Forfeited	(47	)	83.97
Nonvested restricted stock units—December 31, 2015	497		88.81

At December 31, 2015, total unrecognized compensation cost related to nonvested restricted stock units was $24.3 million and is expected to be recognized over a weighted average period of 2.2 years.

Stock-Based Compensation Expense
—The following table summarizes stock-based compensation expense related to stock options, performance share awards and restricted stock units for the years ended December 31, 2015, 2014 and 2013:



	Years Ended December 31,
(Dollars in millions)	2015			2014			2013
Stock options	$	7.6		$	7.0		$	6.5
Performance share awards	5.8			12.7			16.1
Restricted stock units	13.0			10.7			10.0
Total pre-tax stock-based compensation expense	$	26.4		$	30.4		$	32.6
Net tax benefit related to stock-based compensation expense	$	(8.8	)	$	(10.5	)	$	(11.4	)

Stock-based compensation expense was recognized in the consolidated statements of earnings as follows:



	Years Ended December 31,
(Dollars in millions)	2015		2014		2013
Cost of products sold	$	2.7	$	3.0	$	3.0
Selling, general and administrative	21.3		24.4		26.6
Research and development	2.4		3.0		3.0
Total stock-based compensation expense	$	26.4	$	30.4	$	32.6

There were
no costs related to stock-based compensation that were capitalized.