Stock-based compensation

At December 31, 2016, the Company had several stock-based compensation plans, including a stock option plan, various cash settled liability plans and an employee stock savings plan. These plans resulted in an expense in 2016 of $51 million (2015 – $66 million; 2014 – $110 million). The information in this note excludes the effects of the subsequent event described in Note 27.

A. Stock Option Plan

Summary of stock options

The following table summarizes the Company’s stock option plan as at December 31, 2016:



	Options outstanding				Nonvested options
	Number of options		Weighted average exercise price		Number of options		Weighted average grant date fair value
Outstanding, January 1, 2016	2,407,973		$	113.01	984,979		$	41.88
New options granted	403,740		161.06		403,740		39.01
Exercised	(269,491	)	74.99		—		—
Vested	—		—		(449,712	)	33.70
Forfeited	(90,340	)	186.95		(88,840	)	42.42
Expired	(1,800	)	60.84		—		—
Outstanding, December 31, 2016	2,450,082		$	121.95	850,167		$	44.49
Vested or expected to vest at December 31, 2016⁽¹⁾	2,437,475		$	121.62	N/A		N/A
Exercisable, December 31, 2016	1,599,915		$	93.79	N/A		N/A

⁽¹⁾As at December 31, 2016, the weighted average remaining term of vested or expected to vest options was 6.9 years with an aggregate intrinsic value of $181 million.

The following table provides the number of stock options outstanding and exercisable as at December 31, 2016 by range of exercise price and their related intrinsic aggregate value, and for options outstanding, the weighted-average years to expiration. The table also provides the aggregate intrinsic value for in-the-money stock options, which represents the amount that would have been received by option holders had they exercised their options on December 31, 2016 at the Company’s closing stock price of $191.56.



	Options outstanding							Options exercisable
Range of exercise prices	Number of options	Weighted average years to expiration	Weighted average exercise price		Aggregate intrinsic value (millions)			Number of options	Weighted average exercise price		Aggregate intrinsic value (millions)
$36.29 – $72.54	304,025	2.3	$	60.59	$	40		304,025	$	60.59	$	40
$72.55 – $86.71	747,445	5.4	73.69		88			747,445	73.69		88
$86.72 – $161.38	678,416	7.0	127.62		44			347,061	111.34		28
$161.39 – $236.50	720,196	8.5	192.56		(1		)	201,384	188.23		—
Total⁽¹⁾	2,450,082	6.2	$	121.94	$	171		1,599,915	$	93.79	$	156

⁽¹⁾ As at December 31, 2016, the total number of in-the-money stock options outstanding was 2,140,692 with a weighted-average exercise price of $107.27. The weighted-average years to expiration of exercisable stock options is 5.1 years.

Pursuant to the employee plan, options may be exercised upon vesting, which is between 12 months and 48 months after the grant date, and will expire after 10 years. Under the fair value method, the fair value of options at the grant date was approximately $16 million for options issued in 2016 (2015 – $18 million; 2014 – $21 million). The weighted average fair value assumptions were approximately:



	2016			2015			2014
Expected option life (years)⁽¹⁾	5.25			5.25			5.98
Risk-free interest rate⁽²⁾	1.21		%	1.10		%	1.66		%
Expected stock price volatility⁽³⁾	27		%	26		%	29		%
Expected annual dividends per share⁽⁴⁾	$	1.40		$	1.40		$	1.40
Estimated forfeiture rate⁽⁵⁾	2.0		%	1.2		%	1.2		%
Weighted average grant date fair value of options granted during the year	$	39.01		$	55.28		$	48.88

⁽¹⁾ Represents the period of time that awards are expected to be outstanding. Historical data on exercise behaviour or, when available, specific expectations regarding future exercise behaviour were used to estimate the expected life of the option.

⁽²⁾ Based on the implied yield available on zero-coupon government issues with an equivalent remaining term at the time of the grant.

⁽³⁾ Based on the historical stock price volatility of the Company’s stock over a period commensurate with the expected term of the option.

⁽⁴⁾ Determined by the current annual dividend at the time of grant. The Company does not employ different dividend yields throughout the contractual term of the option. On April 20, 2016, the Company announced an increase in its quarterly dividend to $0.50 per share, representing $2.00 on an annual basis.

⁽⁵⁾ The Company estimated forfeitures based on past experience. The rate is monitored on a periodic basis.

In 2016, the expense for stock options (regular and performance) was $14 million (2015 – $15 million; 2014 – $18 million). At December 31, 2016, there was $8 million of total unrecognized compensation related to stock options which is expected to be recognized over a weighted-average period of approximately 1.1 years.

The total fair value of shares vested for the stock option plan during 2016 was $15 million (2015 – $17 million; 2014 – $15 million).

The following table provides information related to all options exercised in the stock option plan during the years ended December 31:



(in millions of Canadian dollars)	2016		2015		2014
Total intrinsic value	$	30	$	72	$	115
Cash received by the Company upon exercise of options	21		43		62

B. Other Share-based Plans

Performance share units plan

During 2016, the Company issued 147,157 PSUs with a grant date fair value of $25 million. These units attract dividend equivalents in the form of additional units based on the dividends paid on the Company’s Common Shares. PSUs vest and are settled in cash or in CP Common Shares, approximately three years after the grant date, contingent upon CP’s performance (performance factor). Grant recipients who are eligible to retire and have provided six months of service during the performance period are entitled to the full award. The fair value of PSUs is measured periodically until settlement, using a latticed-based valuation model.

The performance period of the PSUs issued in 2016 is January 1, 2016 to December 31, 2018, and the performance period for the PSUs issued in 2015 is January 1, 2015 to December 31, 2017. The performance factors for these PSUs are Operating Ratio, Return on Invested Capital, Total Shareholder Return ("TSR") compared to the S&P/TSX60 index, and TSR compared to Class 1 railways.

The performance period for the PSUs issued in 2014 was January 1, 2014 to December 31, 2016. The performance factors for these PSUs were Operating Ratio, Free cash flow, TSR compared to the S&P/TSX60 index, and TSR compared to Class I railways. The resulting estimated payout was 118% on 134,063 total outstanding awards at December 31, 2016 resulting in a liability of $31 million at December 31, 2016 and was calculated using the Company's average share price using the last 30 trading days preceding December 31, 2016.

The performance period for the PSUs issued in the fourth quarter of 2012 and in 2013 was January 1, 2013 to December 31, 2014. The performance factors for these PSUs were Operating Ratio, Free cash flow, TSR compared to the S&P/TSX60 index, and TSR compared to Class I railways. All performance factors met the 200% payout thresholds, in effect resulting in a target payout of 200% on 300,095 total outstanding awards as at December 31, 2015. A payout of $79 million on 217,179 outstanding awards, occurred on December 31, 2015 and was calculated using the Company's average share price using the last 30 trading days preceding December 31, 2015. In the first quarter of 2016, final payouts occurred on the total outstanding awards, including dividends reinvested, totalling $31 million on 83,466 outstanding awards

The following table summarizes information related to the Company’s PSUs as at December 31:



	2016		2015
Outstanding, January 1	348,276		460,783
Granted	147,157		137,958
Units, in lieu of dividends	4,010		3,570
Settled	(83,466	)	(217,179	)
Forfeited	(42,384	)	(36,856	)
Outstanding, December 31	373,593		348,276

In 2016, the expense for PSUs was $29 million (2015 – $55 million; 2014 – $50 million). At December 31, 2016, there was $15 million of total unrecognized compensation related to PSUs which is expected to be recognized over a weighted-average period of approximately 1.4 years.

Deferred share units plan

The Company established the DSU plan as a means to compensate and assist in attaining share ownership targets set for certain key employees and Directors. A DSU entitles the holder to receive, upon redemption, a cash payment equivalent to the Company's average share price using the 10 trading days prior to redemption. DSUs vest over various periods of up to 48 months and are only redeemable for a specified period after employment is terminated.

Senior managers may elect to receive DSUs in lieu of annual bonus cash payments in the bonus deferral program. In addition, senior managers will be granted a 25% company match of DSUs when deferring cash to DSUs to meet ownership targets. The election to receive eligible payments in DSUs is no longer available to a participant when the value of the participant’s DSUs is sufficient to meet the Company’s stock ownership guidelines. Senior managers have five years to meet their ownership targets.

An expense for DSUs is recognized over the vesting period for both the initial subscription price and the change in value between reporting periods.

The following table summarizes information related to the DSUs as at December 31:



	2016		2015
Outstanding, January 1	318,176		308,447
Granted	31,069		21,690
Units, in lieu of dividends	2,798		2,015
Settled	(87,996	)	(11,784	)
Forfeited	(30,011	)	(2,192	)
Outstanding, December 31	234,036		318,176

During 2016, the Company granted 31,069 DSUs with a grant date fair value of $5 million. In 2016, the expense was $2 million (2015 – $10 million recovery; 2014 – $28 million expense). At December 31, 2016, there was $1 million of total unrecognized compensation related to DSUs which is expected to be recognized over a weighted-average period of approximately 1.2 years.

Summary of share based liabilities paid

The following table summarizes the total share based liabilities paid for each of the years ended December 31:



(in millions of Canadian dollars)	2016		2015		2014
Plan
DSUs	$	17	$	3	$	17
PSUs	31		79		—
Other	—		8		12
Total	$	48	$	90	$	29

C. Employee share purchase plan

The Company has an employee share purchase plan whereby both employee and the Company contributions are used to purchase shares on the open market for employees. The Company’s contributions are expensed over the one year vesting period. Under the plan, the Company matches $1 for every $3 contributed by employees up to a maximum employee contribution of 6% of annual salary.

The total number of shares purchased in 2016 on behalf of participants, including the Company's contributions, was 140,560 (2015 – 131,703; 2014 – 176,906). In 2016, the Company’s contributions totalled $5 million (2015 – $5 million; 2014 – $5 million) and the related expense was $5 million (2015 – $4 million; 2014 – $5 million).