STOCK-BASED COMPENSATION

We currently have three stock-based compensation plans: the 2010 Equity Incentive Plan (“2010 Plan”), the Employee Stock Purchase Plan (“ESPP”) and the 2002 Nonemployee Director Stock Incentive Plan. Additionally, as part of our acquisitions of HauteLook in 2011 and Trunk Club in 2014, we replaced and/or granted awards from shares available that were not allocated to a specific plan, as well as created an additional long-term incentive plan for certain Trunk Club employees.

In 2010, our shareholders approved the adoption of the 2010 Plan, which replaced the 2004 Equity Incentive Plan (“2004 Plan”). The 2010 Plan authorizes the grant of stock options, performance share units, restricted stock units, stock appreciation rights and both restricted and unrestricted shares of common stock to employees. The aggregate number of shares to be issued under the 2010 Plan may not exceed 27.6 plus any shares currently outstanding under the 2004 Plan which are forfeited or which expire during the term of the 2010 Plan. No future grants will be made under the 2004 Plan. As of January 31, 2015, we have 70.4 shares authorized, 40.4 shares issued and outstanding and 16.7 shares remaining available for future grants under the 2010 Plan.

Under the ESPP, employees may make payroll deductions of up to 10% of their base and bonus compensation. At the end of each six-month offering period, participants may apply their accumulated payroll deductions toward the purchase of shares of our common stock at 90% of the fair market value on the last day of the offer period. As of January 31, 2015, we had 12.6 shares authorized and 3.3 shares available for issuance under the ESPP. We issued 0.3 shares under the ESPP during 2014. At the end of both 2014 and 2013, we had current liabilities of $6 for future purchases of shares under the ESPP.

The 2002 Nonemployee Director Stock Incentive Plan authorizes the grant of stock awards to our nonemployee directors. These awards may be deferred or issued in the form of restricted or unrestricted stock, non-qualified stock options or stock appreciation rights. As of January 31, 2015, we had 0.9 shares authorized and 0.5 shares available for issuance under this plan. In 2014, we deferred shares with a total expense of less than $1.

The following table summarizes our stock-based compensation expense:



Fiscal year	2014			2013			2012
Stock options		$37			$44			$36
Acquisition-related stock compensation	11			8			9
Restricted stock units	10			—			—
Performance share units	6			—			3
Other	4			6			5
Total stock-based compensation expense, before income tax benefit	68			58			53
Income tax benefit	(23		)	(19		)	(17		)
Total stock-based compensation expense, net of income tax benefit		$45			$39			$36

The stock-based compensation expense before income tax benefit was recorded in our Consolidated Statements of Earnings as follows:



Fiscal year	2014		2013		2012
Cost of sales and related buying and occupancy costs		$17		$15		$14
Selling, general and administrative expenses	51		43		39
Total stock-based compensation expense, before income tax benefit		$68		$58		$53

The benefit of tax deductions in excess of the compensation cost recognized for stock-based awards is classified as financing cash inflows and are reflected as “Excess tax benefit from stock-based compensation” in the Consolidated Statements of Cash Flows.

Stock Options

We used the following assumptions to estimate the fair value for stock options at grant date:



Fiscal year	2014		2013		2012
Risk-free interest rate: Represents the yield on U.S. Treasury zero-coupon securities that mature over the 10-year life of the stock options.	0.2% – 2.6%		0.2% – 1.8%		0.3% – 2.0%
Weighted-average volatility: Based on a combination of the historical volatility of our common stock and the implied volatility of exchange-traded options for our common stock.	30.1	%	31.8	%	36.5	%
Weighted-average expected dividend yield: Our forecasted dividend yield for the next 10 years.	2.2	%	2.0	%	2.1	%
Expected life in years: Represents the estimated period of time until option exercise. The expected term of options granted was derived from the output of the Binomial Lattice option valuation model and was based on our historical exercise behavior, taking into consideration the contractual term of the option and our employees’ expected exercise and post-vesting employment termination behavior.	6.8		6.7		6.1

The weighted-average fair value per option at the grant date was $16, $14 and $15 in 2014, 2013 and 2012. In 2014, 2013 and 2012, stock option awards to employees were approved by the Compensation Committee of our Board of Directors and their exercise price was set at $61, $54 and $53, the closing price of our common stock on March 3, 2014, March 4, 2013 and February 22, 2012 (the dates of grant). The awards are determined based upon a percentage of the recipients’ base salaries’ and the fair value of the stock options. Options vest over four years, and expire 10 years after the date of grant. In 2014, we awarded stock options to 1,799 employees, compared with 1,625 and 1,477 employees in 2013 and 2012.

A summary of stock option activity (excluding Trunk Club) for 2014 is presented below:



Fiscal year	2014
	Shares		Weighted- average exercise price		Weighted-average remaining contractual life (years)	Aggregate intrinsic value
Outstanding, beginning of year	13.8			$43
Granted	1.9		61
Exercised	(3.1	)	40
Forfeited or cancelled	(0.3	)	55
Outstanding, end of year	12.3			$47	6		$362
Options exercisable at end of year	6.2			$39	5		$232
Options vested or expected to vest at end of year	11.9			$46	6		$353

The aggregate intrinsic value of options exercised during 2014, 2013 and 2012 was $89, $89 and $90. The total fair value of stock options vested during 2014, 2013 and 2012 was $39, $34 and $32. As of January 31, 2015, the total unrecognized stock-based compensation expense related to nonvested stock options was $49, which is expected to be recognized over a weighted-average period of 27 months.

Restricted Stock Units

Beginning in the quarter ended May 3, 2014, we grant our employees a combination of restricted stock units and stock options. In 2014, restricted stock units granted to employees were approved by the Compensation Committee of our Board of Directors, and are determined based upon a percentage of the recipients’ base salaries’ and the fair value of the restricted stock units. Restricted stock units typically vest over four years.

A summary of restricted stock unit activity (excluding Trunk Club) for 2014 is presented below:



Fiscal year	2,014
	Shares	Weighted-average grant date fair value per unit
Outstanding, beginning of year	0.0		$56
Granted	0.5	63
Vested	0.0	56
Forfeited	0.0	61
Outstanding, end of year	0.5		$63

The total fair value of restricted stock units vested during 2014 was $1. As of January 31, 2015, the total unrecognized stock-based compensation expense related to nonvested restricted stock units was $25, which is expected to be recognized over a weighted-average period of 38 months.

Trunk Club

As discussed in Note 2: Trunk Club Acquisition, some of the Nordstrom stock issued as consideration for our acquisition includes ongoing vesting requirements for Trunk Club’s employees. These amounts are recorded as compensation expense as the related service is performed over the respective employee vesting periods of up to four years after the acquisition date.

The weighted-average grant date fair value of stock options granted was $59 per share. As of January 31, 2015, the total unrecognized stock-based compensation expense related to Trunk Club options was $13, which is expected to be recognized over a weighted-average period of 32 months. The total intrinsic value of Trunk Club options exercised during 2014 was $8, while the total fair value of Trunk Club stock options vested during 2014 was $2. A summary of the stock option activity related to Trunk Club is as follows:



Fiscal year	2014
	Shares		Weighted- average exercise price		Weighted-average remaining contractual life (years)	Aggregate intrinsic value
Outstanding, beginning of year	—			$—
Granted	0.5		4
Exercised	(0.1	)	3
Forfeited or cancelled	0.0		6
Outstanding, end of year	0.4			$4	8		$24
Options exercisable at end of year	0.1			$4	8		$4
Options vested or expected to vest at end of year	0.3			$4	8		$24

The total unrecognized stock-based compensation expense related to Trunk Club restricted stock was $21, which is expected to be recognized over a weighted-average period of 30 months. A summary of the restricted stock award activity related to Trunk Club is as follows:



Fiscal year	2014
	Shares		Weighted-average grant date fair value per unit
Outstanding, beginning of year	—			$—
Granted	0.5		69
Vested	(0.1	)	69
Forfeited	—		—
Outstanding, end of year	0.4			$69

As part of the acquisition, we created a Value Creation Plan (“VCP”) to incentivize Trunk Club employees to increase the value of the Trunk Club business. The VCP has three payout scenarios that are determined based on the Trunk Club business meeting minimum or exceeding maximum fiscal 2018 sales and earnings metrics. If the minimum is not met, the payout is $0 (“Outcome A”); if the maximum is met, the payout is $100 (“Outcome B”). If the sales and earnings metrics surpass the minimum but do not reach the maximum, the payout is based on the incremental value growth of the Trunk Club business since acquisition, and will be between $0 and $100 (“Outcome C”).

We estimate the grant date fair value for each outcome and recognize expense based upon Outcome C, deemed most probable. If at any time it becomes probable that another outcome will be achieved, compensation expense will be cumulatively adjusted based on the grant date fair value associated with that outcome.

The final payout amount will be determined at the end of fiscal 2018 and settled in fiscal 2019 at our discretion in either cash or stock. We intend to settle the VCP in stock.

As of the fiscal year ended January 31, 2015, based on the payout scenario we believe is probable, we estimated the grant date fair value of $10 per unit using the Black-Scholes valuation model. Stock-based compensation expense will be recognized on an accelerated basis due to the performance criteria and graded vesting features of the VCP. In 2014, we recognized $3 in stock-based compensation expense associated with the VCP.

As of January 31, 2015, we have granted 0.8 of the 1.0 units available for grant. Total unrecognized stock-based compensation expense related to nonvested VCP units was $6, which we expect to recognize over the next 43 months.

Performance Share Units

We generally grant performance share units to executive officers as one of the ways to align compensation with shareholder interests. Performance share units are earned after a three-year performance cycle only when our total shareholder return (reflecting daily stock price appreciation and compounded reinvestment of dividends) outperforms companies in a defined group of competitors determined by the Compensation Committee of our Board of Directors. Performance share units granted in 2012 and 2013 also require the total shareholder return to be positive for any payout. The percentage of units that are earned depends on our relative position at the end of the performance cycle and can range from 0% to 175% of the number of units granted.

Because performance share units are payable in either cash or stock as elected by the employee, they are classified as a liability award. The liability is remeasured, with a corresponding adjustment to earnings, at each fiscal quarter-end during the performance cycle. The performance share unit liability is remeasured using the estimated percentage of units earned multiplied by the closing market price of our common stock on the current period-end date and is pro-rated based on the amount of time that has passed in the vesting period. The price used to determine the amount of cash received for the performance share units upon vesting is the closing market price of our common stock on the last day of the performance cycle.

The following is a summary of performance share unit activity:



Fiscal year	2014¹
Outstanding units, beginning of year	0.2
Granted	0.1
Vested	—
Forfeited or cancelled	(0.1	)
Outstanding units, end of year²	0.2

¹Assumes performance share units at 100% of the number of units granted.

²On February 13, 2015, the Compensation Committee of our Board of Directors approved the vesting of 48,229 performance share units that were granted in 2012 and outstanding as of January 31, 2015. Those units were earned and vested at 75% based on the defined performance criteria above. For purposes of this footnote only, performance share units are stated in exact units instead of millions.

No performance share units were earned and vested in 2014. As of January 31, 2015, our current and non-current other liabilities included a total of $8 for performance share units. As of January 31, 2015, the remaining unrecognized stock-based compensation expense for unvested performance share units was $6, which is expected to be recognized over a weighted-average period of 21 months.