Share-Based Compensation

The non-cash compensation expenses for stock options and restricted stock was $130 million, $135 million and $124 million in 2018, 2017 and 2016, respectively, net of $15 million, $18 million and $13 million, respectively, that was capitalized as software development costs. As of December 31, 2018, we had 36.6 million shares in total under various equity plans that are available for future issuance as stock option and restricted stock awards.

Stock Option Plans

Stock options are granted with an exercise price equal to the fair value of our common stock on the grant date. We may grant, under provisions of the plans, both incentive stock options and nonqualified stock options. The options generally vest over three years and may generally be exercised up to ten years after the date of grant, but generally expire either 14 or 60 days after termination of employment. The shares of common stock issued under our stock option plans are made available from authorized and unissued common stock or treasury shares.

The fair value is based on the closing stock price of our stock on the date of grant as well as certain other assumptions. Compensation expense arising from option grants is recognized ratably over the vesting period based on the grant date fair value, net of estimated forfeitures.

The following is a summary of our stock option activity:



	Number of Options (in thousands)		Weighted Average Exercise Price per Option
Outstanding at January 1, 2016	3,873		$	31.93
Granted	752		50.01
Exercised	(746	)	28.73
Outstanding at December 31, 2016	3,879		36.05
Granted	731		57.34
Exercised	(597	)	27.97
Outstanding at December 31, 2017	4,013		41.13
Granted	535		67.23
Exercised	(908	)	34.84
Forfeited	(30	)	58.01
Outstanding at December 31, 2018	3,610		46.44

Details of stock options outstanding as of December 31, 2018 are as follows:



	Number of Options (in thousands)	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value (In millions)
Vested or expected to vest	3,610	$	46.44	6.2	$	104



	Number of Options (in thousands)	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value (In millions)
Exercisable	2,596	$	40.22	5.4	$	91

The total intrinsic value of options exercised during 2018, 2017 and 2016 was $36 million, $22 million and $18 million, respectively. As of December 31, 2018, there were $8 million in total unrecognized compensation costs related to stock options, which are expected to be recognized over a weighted average period of 1.6 years as the stock options vest.

Of the options outstanding at December 31, 2018, 2.6 million were exercisable at a weighted-average exercise price of $40.22. Of the options outstanding at December 31, 2017, 3.0 million were exercisable at a weighted-average exercise price of $36.36. Of the options outstanding at December 31, 2016, 2.8 million were exercisable at a weighted-average exercise price of $31.61.

We use the Black-Scholes option pricing model to value our stock option awards. During 2018, 2017 and 2016, we used the assumptions in the table below to compute the value:



	Year Ended December 31,
Assumptions	2018			2017			2016
Risk-free interest rate	2.67		%	1.84		%	1.51		%
Expected life in years	6.0			5.0			5.0
Expected volatility	20		%	21		%	24		%
Expected dividend yield	1.43		%	1.40		%	1.36		%
Estimated weighted-average fair value of options granted per share	$	14.08		$	10.50		$	9.88

The risk-free interest rate is based on the zero-coupon U.S. Treasury yield curve in effect at the date of grant. The expected life is derived from historical and anticipated future exercise patterns. Expected volatility is based on historical volatility data of our stock.

Restricted Stock Plans

Restricted shares are used as an incentive to attract and retain qualified employees and to increase stockholder returns with actual performance linked to both short and long-term stockholder return as well as retention objectives. The grant date fair value of each award is based on the closing stock price of our stock at the date of grant.

Granted but unvested shares are generally forfeited upon termination of employment, whereby compensation costs previously recognized for unvested shares are reversed. Until the shares vest and are issued, participants have no voting or dividend rights and the shares may not be sold, assigned, transferred, pledged or otherwise encumbered. Unvested restricted stock earns dividend equivalents which are paid in cash on the vesting date.

The grant date fair value of time-based restricted stock units is recognized as expense ratably over the vesting period, which is typically three years, net of forfeitures. Our equity plans include a change in control provision that may accelerate vesting on both the time-based and performance-based restricted shares if the awards are not assumed by an acquirer in the case of a change in control.

For awards with performance conditions, we recognize compensation costs, net of forfeitures, using an accelerated attribution method over the vesting period. Compensation costs are recognized only if it is probable that the performance condition will be satisfied. If we initially determine that it is not probable of being satisfied and later determine that it is, or vice versa, a cumulative catch-up adjustment is retroactively recorded in the period of change based on the new estimate. We recognize the remaining compensation costs over the remaining vesting period. Our Compensation Committee, pursuant to the terms of the equity plans and the authority delegated to it by our Board, can make equitable adjustments to the performance condition in recognition of unusual or non-recurring events.

In February 2018, we reserved a maximum of 1.3 million restricted shares for potential issuance as performance-based restricted shares to certain of our employees. The number of shares ultimately granted under this award was based on our actual financial performance as compared to financial performance targets set by our Board for the year ending December 31, 2018, and was also subject to a market condition reduction based on how our 2018 total stockholder return, or TSR, compared to that of the S&P 500 Index. Our 2018 TSR was higher than the 2018 return of the S&P 500 Index. Therefore, no share reduction was required. Based on our actual 2018 financial performance as compared to the 2018 financial performance level thresholds, 0.7 million restricted shares were awarded, which resulted in $44 million in compensation expenses that will be expensed over the three-year accelerated vesting period, including $26 million that was expensed during 2018.

The fair value of awards with a market condition is estimated based on our stock price on the grant date, the valuation of historical awards with market conditions, the relatively low likelihood that the market condition will affect the number of shares granted (as the market condition only affects shares granted in excess of certain financial performance targets), and our expectation of achieving the financial performance targets. The grant date fair value of the awards, when considering the impact of the market condition on fair value, was determined to not be materially different from our stock price on the respective grant dates.

The following is a summary of the nonvested restricted shares under all plans discussed above in 2018, 2017 and 2016:



	Number of Restricted Stock Shares (in thousands)	Weighted Average Grant-Date Fair Value per Share
Nonvested at January 1, 2016	6,271	$	39.99
Granted	3,251	50.06
Vested	(2,640)	38.05
Forfeited	(446)	45.51
Nonvested at December 31, 2016	6,436	45.86
Granted	3,274	57.61
Vested	(3,509)	44.64
Forfeited	(453)	52.38
Nonvested at December 31, 2017	5,748	52.78
Granted	1,921	67.92
Vested	(2,819)	50.21
Forfeited	(453)	58.42
Nonvested at December 31, 2018	4,397	60.45

The shares granted include 1.2 million, 2.4 million and 2.3 million time-based restricted stock units during 2018, 2017 and 2016, respectively, and the remainder are performance-based. Performance-based shares have been presented to reflect the actual shares to be issued based on the achievement of past performance targets, also considering the impact of any market conditions. Non-vested performance-based restricted shares granted are presented at the target number of restricted shares that would vest if the target performance targets are met. As of December 31, 2018, there were $116 million in total unrecognized compensation costs related to time-based and performance-based restricted stock. These costs are expected to be recognized over a weighted-average period of 1.2 years as the restricted stock vests. During 2018, 2017 and 2016, the total fair value of restricted stock vested under all restricted stock plans was $206 million, $206 million and $130 million, respectively.

Employee Stock Purchase Plan

In May 2018, our stockholders approved our ESPP, under which we have reserved and may sell up to 25 million shares of our common stock to employees. The ESPP grants participating employees the right to acquire our stock in increments of 1% of eligible pay, with a maximum contribution of 25% of eligible pay, subject to applicable annual Internal Revenue Service, or IRS, limitations. Under our ESPP, participating employees are limited to $25,000 of common stock annually, and a maximum of 1,250 shares of common stock each offering period. There will be two offering periods each year, which will run from January 1^st (or the first trading day thereafter) through June 30^th (or the last trading day prior to such date) and from July 1^st (or the first trading day thereafter) through December 31^st (or the last trading day prior to such date). The first offering period began on July 2, 2018 and ended on December 31, 2018. The purchase price per share of common stock is 85% of the lesser of the fair market value of the stock on the first or the last trading day of each offering period. The prices on the first day and last day of our first trading period were $73.73 and $75.33 per share, respectively. We recorded compensation expenses of $4 million during 2018 related to the 15% discount given to our participating employees.