STOCK-BASED COMPENSATION

9 Months Ended

Sep. 30, 2020

Share-based Payment Arrangement [Abstract]

Stock-Based Compensation. Prior to the Separation and Distribution, Carrier participated in UTC’s long-term incentive plans ("LTIP") which authorized various types of market and performance-based incentive awards, including stock options, stock appreciation rights, performance share units and restricted stock units, which were granted to eligible Carrier officers and employees. All awards granted under the UTC LTIP related to UTC common shares.

As a result of the Separation and Distribution, outstanding and vested awards granted to employees under UTC's LTIP were generally converted into Carrier, Otis and UTC stock-based awards. Unvested awards held by Carrier employees and former employees were converted to Carrier stock-based awards. The ratio used to convert the UTC LTIP awards was intended to preserve the aggregate intrinsic value of each award immediately after the Separation and the Distribution when compared to the aggregate intrinsic value immediately prior to the Separation and the Distribution. All performance share units outstanding on the Distribution Date were converted to restricted stock units using payout metrics based on a combination of actual performance through the Distribution Date and the target for the remainder of the performance period. Subsequent to and due to the conversion, we expect to incur $14 million of incremental stock-based compensation expense to be recognized over the awards' remaining 1.5 year vesting period.

Under Carrier's LTIP, the exercise price of awards, if any, is set on the grant date and, on a per share basis, may not be less than the fair market value of Carrier's common stock on that date on a per share basis. Stock appreciation rights and stock options have a term of ten years and a three-year vesting period, subject to limited exceptions. In the event of retirement, stock appreciation rights, stock options and restricted stock units held for more than one year may vest and become exercisable (if applicable), subject to certain terms and conditions. Performance share units vest based on performance relative to pre-established metrics and generally have a minimum three-year vesting period. In the event of retirement, performance share units held for more than one year remain eligible to vest based on actual performance relative to pre-established metrics.

We measure the cost of stock-based compensation, including stock options, at fair value on the grant date net of expected forfeitures and amortize the cost over the awards vesting period. We recognized $21 million and $18 million of stock-based compensation expense for the three months ended September 30, 2020 and 2019 and $56 million and $40 million for the nine months ended September 30, 2020 and 2019, respectively. In addition, we recognized $5 million and $2 million of stock-based compensation expense for cash settled awards for the three months ended September 30, 2020 and 2019, respectively, and $2 million for each of the nine months ended September 30, 2020 and 2019. The stock-based compensation expense for periods prior to March 31, 2020 represent amounts allocated to us from UTC for our direct employees.

At September 30, 2020, there was $107 million of unrecognized stock-based compensation costs related to non-vested awards granted under the Carrier LTIP, which will be recognized ratably over a weighted-average period of 2.2 years.

Carrier LTIP activity for the nine months ended September 30, 2020 was as follows:


	Stock Options and Stock Appreciation Rights			Performance Share Units			Restricted Share Units
		Average			Average			Average
(shares and units in thousands)	Shares	Price 1		Units	Price 2		Units	Price 2
Outstanding as of April 3, 2020 3	36,015	$	19.90	68	$	21.23	5,622	$	21.37
Granted	3,753	$	16.62	728	$	18.23	443	$	18.98
Exercised	(984)	$	15.52	—	$	—	(116)	$	20.42
Forfeited/Cancelled	(509)	$	22.73	(22)	$	19.25	(108)	$	22.25
Outstanding as of September 30, 2020	38,275	$	19.66	774	$	18.48	5,841	$	21.27



1 Weighted-average exercise price
2 Weighted-average grant date fair value
3 Effective date of conversion upon the Separation

The weighted-average fair value of stock appreciation rights granted during the nine months ended September 30, 2020 was $4.36.

The following table summarizes outstanding Carrier LTIP awards that are vested and expected to vest (adjusted for expected forfeitures) and that are exercisable at September 30, 2020:


	Equity Awards Vested and Expected to Vest						Equity Awards That Are Exercisable
(shares and units in thousands; aggregate intrinsic value in dollars in thousands)	Awards	Average Price 1		Aggregate Intrinsic Value		Remaining Life 2	Awards	Average Price 1		Aggregate Intrinsic Value		Remaining Life 2
Stock Options/ Stock Appreciation Rights	36,868	$	19.61	$	403,105	6.7	16,173	$	16.97	$	219,447	4.2
Performance Share Units/ Restricted Stock Units	6,291	$	20.96	$	192,116	1.8

1 Weighted-average exercise price per share

2 Weighted-average remaining contractual term in years for stock options and stock appreciation rights; weighted-average remaining vesting period in years for performance share units and restricted stock units

The fair value of stock appreciation rights is estimated on the date of grant using a binomial model. The following assumptions were used in the binomial model for the nine months ended September 30, 2020:


	For the Nine Months Ended September 30, 2020
Volatility	35.6	%
Expected life (in years)	7.0

Expected dividend yield	2.0	%
Range of risk-free rate	0.1% - 1.0%

Carrier has limited historical trading data and used peer group data to estimate expected volatility. Carrier used historical Carrier employee data, including data prior to the Separation, to estimate expected life. The expected dividend yield is consistent with Carrier's dividend policy on an annualized basis. The risk-free rate is based on the term structure of interest rates at the time of award grant.