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Stock-Based Compensation
 12 Months Ended
Dec. 31, 2019
Share-based Payment Arrangement [Abstract]  
Stock-Based Compensation Plans Stock-Based Compensation Plans
Our stock-based compensation program is a broad-based program designed to attract and retain employees while also aligning employees’ interests with the interests of our shareholders. In addition, members of our Board of Directors participate in our stock-based compensation program in connection with their service on our board. Share-based awards issued to employees include non-qualified stock options, restricted stock unit awards and performance share unit awards. Under the 2011 Omnibus Incentive Plan, the number of shares initially available for awards was 18 million. As of December 31, 2019, there were approximately 6 million shares of common stock available for future grants.
Total share-based compensation costs recognized for 2019, 2018 and 2017 were $29 million, $30 million, and $21 million, respectively. The unamortized compensation expense at December 31, 2019 related to our stock options, restricted share units and performance share units was $6 million, $22 million and $10 million, respectively, and is expected to be recognized over a weighted average period of 1.8, 1.8 and 1.3 years, respectively.
The amount of cash received from the exercise of stock options was $13 million for 2019 with a tax benefit of $13 million realized associated with stock option exercises and vesting of restricted stock units. We classify as an operating activity the cash flows attributable to excess tax benefits arising from stock option exercises and restricted stock unit vestings.
Stock Option Grants
Options are awarded with a contractual term of ten years and generally vest over a three-year period and are exercisable within the contractual term, except in certain instances of death, retirement or disability. The exercise price per share is the fair market value of the underlying common stock on the date each option is granted. At December 31, 2019, there were options to purchase an aggregate of 2.0 million shares of common stock. The following is a summary of the changes in outstanding stock options for 2019:
 
Share units             (in thousands)
 
Weighted
Average
Exercise
Price / Share
 
Weighted Average
Remaining
Contractual
Term (Years)
 
Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2019
2,125

 
$
43.08

 
6.5
 
 
Granted
334

 
$
74.08

 
 
 
 
Exercised
(348
)
 
$
35.56

 
 
 
 
Forfeited and expired
(71
)
 
$
67.97

 
 
 
 
Outstanding at December 31, 2019
2,040

 
$
48.56

 
6.3
 
$
62

Options exercisable at December 31, 2019
1,432

 
$
39.83

 
5.3
 
$
56

Vested and non-vested expected to vest as of December 31, 2019
1,996

 
$
48.00

 
6.2
 
$
61


The amount of non-vested options outstanding was 0.6 million, 0.7 million and 0.9 million at a weighted average fair value of $69.30, $58.00 and $42.84 as of December 31, 2019, 2018 and 2017, respectively. The total intrinsic value of options exercised (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) during 2019, 2018 and 2017 was $15 million, $9 million and $14 million, respectively.
The fair value of each option grant was estimated on the date of grant using the binomial lattice pricing model which incorporates multiple and variable assumptions over time, including assumptions such as employee exercise patterns, stock price volatility and changes in dividends. The following are weighted-average assumptions used for 2019, 2018, and 2017:
 
2019
 
2018
 
2017
Dividend yield
1.30
%
 
1.12
%
 
1.49
%
Volatility
24.10
%
 
23.41
%
 
25.39
%
Risk-free interest rate
2.55
%
 
2.76
%
 
2.07
%
Expected term (in years)
5.4

 
5.1

 
5.1

Weighted-average fair value per option
$
17.04

 
$
17.80

 
$
10.66


Expected volatility is calculated based on a weighted analysis of historic and implied volatility measures for a set of peer companies and Xylem. We use historical data to estimate option exercise and employee termination behavior within the valuation model. Employee groups and option characteristics are considered separately for valuation purposes. The expected term represents an estimate of the period of time options are expected to remain outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of option grant.
Restricted Stock Unit Grants
Restricted shares granted to employees in 2019, 2018 and 2017 vest over a three-year period. Restricted shares granted to employees prior to 2017 generally become fully vested upon the third anniversary of the date of grant. Prior to the time a restricted share becomes fully vested, the awardees cannot transfer, pledge, hypothecate or encumber such shares. Prior to the time a restricted share is fully vested, the awardees do not have certain rights of a stockholder, such as the right to vote and receive dividends; however, dividends accrue during the vesting period and are paid upon vesting. If an employee leaves prior to vesting, whether through resignation or termination for cause, the restricted stock unit and related accrued dividends are forfeited. If an employee retires, a pro rata portion of the restricted stock unit may vest in accordance with the terms of the grant agreements. Restricted stock units granted to Board members become fully vested upon the day prior to the next annual meeting. The fair value of the restricted share unit awards is determined using the closing price of our common stock on date of grant.
Our restricted stock units activity was as follows for 2019:
 
Share Units (in thousands)
 
Weighted Average
Grant Date Fair
Value / Share
Outstanding at January 1, 2019
537

 
$
59.41

Granted
287

 
74.36

Vested
(257
)
 
55.09

Forfeited
(55
)
 
67.80

Outstanding at December 31, 2019
512

 
68.95


Performance Share Units
Performance share units granted under the long-term incentive plan vest based upon performance by the Company over a three-year period against targets approved by the Compensation Committee of the Company's Board of Directors prior to the grant date. For the performance periods, the performance share units were granted at a target of 100% with actual payout contingent upon the achievement of a pre-set, three-year adjusted Return on Invested Capital and cumulative adjusted net income performance target for ROIC performance share units and a relative TSR performance for TSR performance share units. The calculated compensation cost for ROIC performance share units is adjusted based on an estimate of awards ultimately expected to vest and our assessment of the probable outcome of the performance condition.
ROIC Performance Share Unit Grants
The fair value of the ROIC performance share unit awards is determined using the closing price of our common stock on date of grant.
Our ROIC performance share unit activity was as follows for 2019:
 
Share units (in thousands)
 
Weighted Average
Grant Date Fair
Value / Share
Outstanding at January 1, 2019
274

 
$
52.11

Granted
77

 
74.07

Adjustment for Performance Condition Achieved (a)
74

 
37.86

Vested
(174
)
 
37.86

Forfeited
(26
)
 
63.89

Outstanding at December 31, 2019
225

 
64.51


(a) Represents an increase in the number of original ROIC performance share units awarded based on the final performance criteria achievement at the end of the performance period of such awards.
TSR Performance Share Unit Grants
The following is a summary of our TSR performance share unit grants for 2019:
 
Share units (in thousands)
 
Weighted Average
Grant Date Fair
Value / Share
Outstanding at January 1, 2019
274

 
$
61.04

Granted
77

 
89.62

Adjustment for Performance Condition Achieved (a)
74

 
37.86

Vested
(174
)
 
37.86

Forfeited
(26
)
 
63.89

Outstanding at December 31, 2019
225

 
75.80


(a) Represents an increase in the number of original TSR performance share units awarded based on the final market condition achievement at the end of the performance period of such awards.
The fair value of TSR performance share units were calculated on the date of grant using a Monte Carlo simulation model utilizing several key assumptions, including expected Company and peer company share price volatility, correlation coefficients between peers, the risk-free rate of return, the expected dividend yield and other award design features. The following are weighted-average key assumptions for 2019 grants.
Volatility
20.90
%
Risk-free interest rate
2.52
%