Common Stock, Stock Option Plans and Stock Compensation Agreements

12 Months Ended

Dec. 29, 2019

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Common Stock, Stock Option Plans and Stock Compensation Agreements

At December 29, 2019, 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 315 million at the end of 2019.

The compensation cost that has been charged against income for these plans was $977 million, $978 million and $962 million for 2019, 2018 and 2017, respectively. The total income tax benefit recognized in the income statement for share-based compensation costs was $227 million, $192 million and $275 million for 2019, 2018 and 2017, respectively. The total unrecognized compensation cost was $823 million, $827 million and $798 million for 2019, 2018 and 2017, respectively. The weighted average period for this cost to be recognized was 1.71 years, 1.73 years and 1.76 years for 2019, 2018, and 2017, 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 2019, 2018 and 2017 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 $17.80, $17.98 and $13.38, in 2019, 2018 and 2017, respectively. The fair value was estimated based on the weighted average assumptions of:



	2019		2018		2017
Risk-free rate	2.56	%	2.77	%	2.25	%
Expected volatility	16.27	%	15.77	%	15.30	%
Expected life (in years)	7.0		7.0		7.0
Expected dividend yield	2.80	%	2.70	%	2.90	%

A summary of option activity under the Plan as of December 29, 2019, December 30, 2018 and December 31, 2017, 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 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
Options granted	17,115		129.51
Options exercised	(16,228	)	75.44
Options canceled/forfeited	(2,541	)	112.90
Shares at December 30, 2018	109,652		98.29		3,214
Options granted	19,745		131.94
Options exercised	(14,785	)	82.43
Options canceled/forfeited	(2,975	)	125.11
Shares at December 29, 2019	111,637		$	105.63	$	4,478

The total intrinsic value of options exercised was $807 million, $1,028 million and $1,060 million in 2019, 2018 and 2017, respectively.

The following table summarizes stock options outstanding and exercisable at December 29, 2019:



(Shares in Thousands)	Outstanding			Exercisable
Exercise Price Range	Options	Average Life⁽¹⁾	Average Exercise Price	Options	Average Exercise Price
$58.65-$66.07	7,752	1.3	$63.71	7,752	$63.71
$72.54-$90.44	23,837	3.6	$82.08	23,837	$82.08
$100.06-$101.87	29,586	5.6	$101.07	29,083	$101.05
$115.67-$129.51	31,810	7.6	$122.32	84	$120.76
$131.94-$141.06	18,652	9.1	$131.94	5	$131.94
	111,637	6.0	$105.63	60,761	$88.88

⁽¹⁾ Average contractual life remaining in years.

Stock options outstanding at December 30, 2018 and December 31, 2017 were 109,652 and an average life of 6.2 years and 111,306 and an average life of 6.3 years, respectively. Stock options exercisable at December 30, 2018 and December 31, 2017 were 54,862 at an average price of $82.03 and 52,421 at an average price of $73.61, 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 were 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 29, 2019 is presented below:



(Shares in Thousands)	Outstanding Restricted Share Units		Outstanding Performance Share Units
Shares at December 30, 2018	18,460		2,494
Granted	5,769		932
Issued	(6,261	)	(996	)
Canceled/forfeited/adjusted	(1,199	)	(256	)
Shares at December 29, 2019	16,769		2,174

The average fair value of the restricted share units granted was $121.31, $119.67 and $107.69 in 2019, 2018 and 2017, 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 $585.9 million, $613.7 million and $596.5 million in 2019, 2018 and 2017, respectively.

The weighted average fair value of the performance share units granted was $124.67, $120.64 and $114.13 in 2019, 2018 and 2017, 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 $119.1 million, $128.8 million and $132.5 million in 2019, 2018 and 2017, respectively.