Common Stock, Stock Option Plans and Stock Compensation Agreements

At December 31, 2017, the Company had 2 stock-based compensation plans. The shares outstanding are for contracts under the Company's 2005 Long-Term Incentive Plan and the 2012 Long-Term Incentive Plan. The 2005 Long-Term Incentive Plan expired April 26, 2012. All options and restricted shares granted subsequent to that date were under the 2012 Long-Term Incentive Plan. Under the 2012 Long-Term Incentive Plan, the Company may issue up to 650 million shares of common stock, plus any shares canceled, expired, forfeited, or not issued from the 2005 Long-Term Incentive Plan subsequent to April 26, 2012. Shares available for future grants under the 2012 Long-Term Incentive Plan were 389 million at the end of 2017.

The compensation cost that has been charged against income for these plans was $962 million, $878 million and $874 million for 2017, 2016 and 2015, respectively. The total income tax benefit recognized in the income statement for share-based compensation costs was $275 million, $256 million and $253 million for 2017, 2016 and 2015, respectively. An additional tax benefit of $353 million was recognized in 2016 due to the adoption of a new accounting standard for the reporting of additional tax benefits on share-based compensation. The total unrecognized compensation cost was $798 million, $749 million and $744 million for 2017, 2016 and 2015, respectively. The weighted average period for this cost to be recognized was 1.76 years, 1.09 years and 0.98 years for 2017, 2016, and 2015, respectively. Share-based compensation costs capitalized as part of inventory were insignificant in all periods.

The Company settles employee benefit equity issuances with treasury shares. Treasury shares are replenished throughout the year for the number of shares used to settle employee benefit equity issuances.

Stock Options

Stock options expire 10 years from the date of grant and vest over service periods that range from 6 months to 4 years. All options are granted at the average of the high and low prices of the Company’s Common Stock on the New York Stock Exchange on the date of grant.

The fair value of each option award was estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. For 2017, 2016 and 2015 grants, expected volatility represents a blended rate of 10-year weekly historical overall volatility rate, and a 5-week average implied volatility rate based on at-the-money traded Johnson & Johnson options with a life of 2 years. For all grants, historical data is used to determine the expected life of the option. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant.

The average fair value of options granted was $13.38, $10.01 and $10.68, in 2017, 2016 and 2015, respectively. The fair value was estimated based on the weighted average assumptions of:



	2017		2016		2015
Risk-free rate	2.25	%	1.51	%	1.77	%
Expected volatility	15.30	%	15.76	%	15.48	%
Expected life (in years)	7.0		7.0		7.0
Expected dividend yield	2.90	%	3.10	%	2.90	%

A summary of option activity under the Plan as of December 31, 2017, January 1, 2017 and January 3, 2016, and changes during the years ending on those dates is presented below:



(Shares in Thousands)	Outstanding Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value (Dollars in Millions)
Shares at December 28, 2014	115,712		$	70.37	$	4,014
Options granted	20,484		100.06
Options exercised	(16,683	)	62.53
Options canceled/forfeited	(2,996	)	82.22
Shares at January 3, 2016	116,517		76.41		3,065
Options granted	22,491		101.87
Options exercised	(22,547	)	65.66
Options canceled/forfeited	(3,006	)	92.83
Shares at January 1, 2017	113,455		83.16		3,636
Options granted	19,287		115.67
Options exercised	(18,975	)	70.87
Options canceled/forfeited	(2,461	)	101.40
Shares at December 31, 2017	111,306		$	90.48	$	5,480

The total intrinsic value of options exercised was $1,060 million, $980 million and $644 million in 2017, 2016 and 2015, respectively.

The following table summarizes stock options outstanding and exercisable at December 31, 2017:



(Shares in Thousands)	Outstanding			Exercisable
Exercise Price Range	Options	Average Life⁽¹⁾	Average Exercise Price	Options	Average Exercise Price
$52.13-$62.20	12,148	1.7	$60.37	12,148	$60.37
$62.62-$65.62	9,548	3.0	$63.91	9,547	$63.91
$66.07-$72.54	14,816	5.0	$72.53	14,816	$72.53
$90.44-$100.48	35,035	6.6	$95.48	15,843	$90.49
$101.87-$115.67	39,759	8.6	$108.35	67	$105.91
	111,306	6.3	$90.48	52,421	$73.61

⁽¹⁾ Average contractual life remaining in years.

Stock options outstanding at January 1, 2017 and January 3, 2016 were 113,455 and an average life of 6.2 years and 116,517 and an average life of 5.9 years, respectively. Stock options exercisable at January 1, 2017 and January 3, 2016 were 50,414 at an average price of $65.77 and 48,345 at an average price of $62.26, respectively.

Restricted Share Units and Performance Share Units

The Company grants restricted share units which vest over service periods that range from 6 months to 3 years. The Company also grants performance share units, which are paid in shares of Johnson & Johnson Common Stock after the end of a three-year performance period. Whether any performance share units vest, and the amount that does vest, is tied to the completion of service periods that range from 6 months to 3 years and the achievement, over a three-year period, of three equally-weighted goals that directly align with or help drive long-term total shareholder return: operational sales, adjusted operational earnings per share, and relative total shareholder return. The number of shares actually earned at the end of the three-year period will vary, based only on actual performance, from 0% to 200% of the target number of performance share units granted. In the fourth quarter of 2017, the Company modified the restricted share units that are scheduled to vest between January 1, 2018 and March 15, 2018. This modification guaranteed a minimum aggregate value, below the market value of the total expected payout amount, for all awards expected to vest during this period. The amount that was committed was not material to the Company’s overall financial position.

A summary of the restricted share units and performance share units activity under the Plans as of December 31, 2017 is presented below:



(Shares in Thousands)	Outstanding Restricted Share Units		Outstanding Performance Share Units
Shares at January 1, 2017	21,061		2,415
Granted	7,248		1,276
Issued	(7,205	)	(1,361	)
Canceled/forfeited/adjusted	(943	)	295
Shares at December 31, 2017	20,161		2,625

The average fair value of the restricted share units granted was $107.69, $92.45 and $91.65 in 2017, 2016 and 2015, respectively, using the fair market value at the date of grant. The fair value of restricted share units was discounted for dividends, which are not paid on the restricted share units during the vesting period. The fair value of restricted share units issued was $596.5 million, $587.7 million and $597.6 million in 2017, 2016 and 2015, respectively.

The weighted average fair value of the performance share units granted was $114.13, $105.30 and $93.54 in 2017, 2016 and 2015, calculated using the weighted average fair market value for each of the three component goals at the date of grant.

The fair values for the sales and earnings per share goals of each performance share unit were estimated on the date of grant using the fair market value of the shares at the time of the award discounted for dividends, which are not paid on the performance share units during the vesting period. The fair value for the relative total shareholder return goal of each performance share unit was estimated on the date of grant using the Monte Carlo valuation model. The fair value of performance share units issued was $132.5 million, $127.7 million and $16.7 million in 2017, 2016 and 2015, respectively.