Stock Compensation Plans

9 Months Ended

Sep. 30, 2020

Share-based Payment Arrangement [Abstract]

7. STOCK COMPENSATION PLANS

As of September 30, 2020, the Company’s primary type of stock-based compensation was restricted stock units and stock options. Stock-based compensation expense for the following periods were:


In millions	Three months ended September 30				Nine months ended September 30
	2020		2019		2020		2019
Restricted stock units	$	23	$	25	$	55	$	67
Stock options	6		2		16		6
Employee stock purchase plan	2		1		5		3
Stock-based compensation expense	31		28		76		76
Tax benefit	(4)		(5)		(9)		(12)
Stock-based compensation expense (net of tax)	$	27	$	23	$	67	$	64

Stock-based compensation expense is recognized in the financial statements based upon grant date fair value.

On July 1, 2020, the Company granted market-based restricted stock units with 50% of the award vesting on January 1, 2022 and 50% of the award vesting on January 1, 2023. The number of awards that vest are subject to the performance of the Company's stock price from the date of grant to January 1, 2022. The fair value was determined to be $21.74 based on using a Monte-Carlo simulation model and will be recognized over the requisite service period. The table below details the assumptions used in determining the fair value of the market-based restricted stock units.


	For the nine months ended September 30, 2020
Dividend yield	—	%
Risk-free interest rate	0.16	%
Expected volatility	53.64	%

Expected volatility for the market-based restricted stock units is calculated as the historical volatility of the Company’s stock over a period of three years, as management believes this is the best representation of prospective trends. The risk-free interest rate was determined based on a blend of the one and two years U.S. Treasury yield curves in effect at the time of the grant.

In the nine months ended September 30, 2020, stock options granted were premium-priced stock options with an exercise price equal to either 110% or 115% of the closing stock price on the date of the grant. The weighted average exercise price of the stock options granted in the nine months ended September 30, 2020 was $36.26. The weighted average fair value of the option grants was $7.64 for the nine months ended September 30, 2020 based on using a Monte-Carlo simulation model and will be recognized over the requisite service period. These option grants have a seven year contractual term that vest at the end of 36 months. For the nine months ended September 30, 2019, the weighted average fair value of option grants was $8.07 with a seven year contractual term that vest ratably over four years. The table below details the assumptions used in determining the fair value of the option grants.


	Nine months ended September 30
	2020		2019
Dividend yield	—	%	—	%
Risk-free interest rate	1.34	%	2.50	%
Expected volatility	34.63	%	34.79	%
Expected holding period (years)	3.7		3.9

Expected volatility is calculated as the historical volatility of the Company’s stock over a period equal to the expected term of the options, as management believes this is the best representation of prospective trends. The Company uses historical data to estimate option exercise and employee terminations within the valuation model. The expected holding period represents the period of time that options are expected to be outstanding. For options granted during the nine months ended September 30, 2020, the seven-year U.S. Treasury yield curve was used to determine the risk-free interest rate. For options granted during the nine months ended September 30, 2019, the risk-free interest rate was determined based on a blend of the three and five-year U.S. Treasury yield curves in effect at the time of the grant.

As of September 30, 2020, the total unrecognized compensation cost of $116 million related to unvested restricted stock grants is expected to be recognized over a weighted average period of approximately 0.9 years. As of September 30, 2020, the total unrecognized compensation cost of $54 million related to unvested stock option grants is expected to be recognized over a weighted average period of approximately 1.1 years.

Employee Stock Purchase Plan The Company's Employee Stock Purchase Plan ("ESPP") provides employees a 15% discount on stock purchases using a three-month look-back feature where the discount is applied to the stock price that represents the lower of NCR’s closing stock price on either the first day or the last day of each calendar quarter. Participants can contribute between 1% and 10% of their compensation.

For the three months ended September 30, 2020, employees purchased 0.3 million shares, at a discounted price of $14.43. For the three months ended September 30, 2019, employees purchased 0.2 million shares, at a discounted price of $26.44.