Share-Based Compensation

12 Months Ended

Dec. 31, 2019

The non-cash compensation expenses for stock options and restricted stock were $139 million, $130 million and $135 million in 2019, 2018 and 2017, respectively, net of $14 million, $15 million and $18 million, respectively, that was capitalized as software development costs. As of December 31, 2019, we had 34.2 million shares in total under various equity plans 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 our closing stock price 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, 2017	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
Granted	493		76.16
Exercised	(598	)	38.96
Forfeited	(4	)	77.58
Outstanding at December 31, 2019	3,501		51.87

Details of stock options outstanding as of December 31, 2019 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	3,501	$	51.87	5.9	$	142
Exercisable	2,445	$	44.35	4.9	$	118

Details of stock options exercised during 2019, 2018 and 2017 are as follows:



	Year Ended December 31,
Options exercised:	2019		2018		2017
Total intrinsic value of options exercised (in millions)	$	26	$	36	$	22



	As of December 31,
Options outstanding:	2019		2018		2017
Number of options exercisable (in millions)	2.4		2.6		3.0
Weighted-average exercise price	$	44.35	$	40.22	$	36.36

As of December 31, 2019, 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 1.4 years as the stock options vest.

We use the Black-Scholes option pricing model to value our stock option awards. During 2019, 2018 and 2017, we used the assumptions in the table below to compute the value:



	Year Ended December 31,
Assumptions:	2019			2018			2017
Risk-free interest rate	2.49		%	2.67		%	1.84		%
Expected life in years	5.9			6.0			5.0
Expected volatility	20		%	20		%	21		%
Expected dividend yield	1.44		%	1.43		%	1.40		%
Estimated weighted-average fair value of options granted per share	$	15.45		$	14.08		$	10.50

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.

In February 2019, we reserved a maximum of 1.1 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 is based on our actual financial performance as compared to financial performance targets set by our Board of Directors and its Compensation Committee for the year ending December 31, 2019, and is also subject to a market condition reduction based on how our 2019 total stockholder return, or TSR, compared to that of the S&P 500 Index. In 2019, no TSR share reduction was required. Based on our actual 2019 financial performance as compared to the 2019 financial performance level thresholds, 0.5 million restricted shares were awarded, which resulted in $39 million in compensation expenses that will be expensed over the three-year accelerated vesting period, including $20 million expensed during 2019.

The fair value of awards with a market condition is estimated based on a simulation of various outcomes and includes inputs such as 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 following is a summary of nonvested restricted shares under all plans discussed above:



	Number of Restricted Stock Shares (in thousands)	Weighted Average Grant-Date Fair Value per Share
Nonvested at January 1, 2017	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	1,994	67.88



	Number of Restricted Stock Shares (in thousands)	Weighted Average Grant-Date Fair Value per Share
Vested	(2,819)	50.21
Forfeited	(453)	58.42
Nonvested at December 31, 2018	4,470	60.56
Granted	1,697	76.85
Vested	(2,269)	57.92
Forfeited	(231)	67.66
Nonvested at December 31, 2019	3,667	69.29



	Year Ended December 31,
	2019		2018		2017
Time-based restricted stock units granted (in thousands) ⁽¹⁾	997		1,153		2,364
Total fair value of restricted stock vested under all restricted stock plans (in millions)	$	173	$	206	$	206

⁽¹⁾ The remaining shares granted are performance-based.

Performance-based restricted 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 in the table above at the target number of restricted shares that would vest if the performance targets are met. As of December 31, 2019, there were $106 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 1.1 years as the restricted stock vests.

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 are two offering periods each year, 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 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. We recorded compensation expenses of $7 million and $4 million during 2019 and 2018, respectively, related to the 15% discount given to our participating employees.

Bakkt Incentive Units

In February 2019, our Board approved the adoption of the Bakkt Equity Incentive Plan to issue various Bakkt equity unit awards. Under this plan, as of December 31, 2019, Bakkt has 82 million, 4 million and 9 million of its preferred, common and phantom incentive units, respectively, outstanding. These awards were made to certain employees and Board members. The units are unvested at the issuance date, are subject to the vesting terms in the award agreements and upon vesting are converted into Bakkt equity or cash.