NOTE 12: STOCK-BASED COMPENSATION

We currently grant stock-based awards under our 2010 Plan, 2002 Plan and Trunk Club VCP, and employees may purchase our stock at a discount under our employee stock purchase plan (“ESPP”).

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, restricted stock, performance share units, stock appreciation rights and unrestricted shares of common stock to employees. On May 16, 2017, our shareholders approved an amendment to the 2010 Equity Incentive Plan. The amendment increases common stock available for issuance by 6.2. The aggregate number of shares to be issued under the 2010 Plan may not exceed 30.4 plus any shares currently outstanding under the 2004 Plan that are forfeited or expire during the term of the 2010 Plan. No future grants will be made under the 2004 Plan. As of February 3, 2018, we have 77.5 shares authorized, 52.8 shares issued and outstanding and 8.7 shares remaining available for future grants under the 2010 Plan.

The 2002 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 February 3, 2018, we had 0.9 shares authorized and 0.4 shares available for issuance under this plan. In 2017, total expense on deferred shares was less than $1.

The Trunk Club VCP is a performance-based plan that provides for three payout scenarios based on the results of Trunk Club’s business meeting minimum or exceeding maximum 2018 sales and earnings metrics. As of February 3, 2018, we granted 0.6 of the 1.0 units available for grant. There is no unrecognized stock-based compensation expense related to nonvested VCP units as no payout is expected. 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 payout scenario.

Under the ESPP, employees may make payroll deductions of up to 10% of their base and bonus compensation for the purchase of Nordstrom common stock. At the end of each six-month offering period, participants 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 February 3, 2018, we had 12.6 shares authorized and 2.2 shares available for issuance under the ESPP. We issued 0.4 shares under the ESPP during 2017 and 2016. At the end of 2017 and 2016, we had current liabilities of $6 for future purchases of shares under the ESPP.

The following table summarizes our stock-based compensation expense:



Fiscal year	2017			2016			2015
Stock options		$18			$36			$33
Restricted stock units	51			34			18
Acquisition-related stock compensation	1			15			17
Performance share units	2			1			(3		)
Other	5			5			5
Total stock-based compensation expense, before income tax benefit	77			91			70
Income tax benefit	(20		)	(28		)	(21		)
Total stock-based compensation expense, net of income tax benefit		$57			$63			$49

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



Fiscal year	2017		2016		2015
Cost of sales and related buying and occupancy costs		$25		$25		$20
Selling, general and administrative expenses	52		66		50
Total stock-based compensation expense, before income tax benefit		$77		$91		$70

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

Special Dividend Adjustment

In connection with the closing of our credit card receivable transaction on October 1, 2015, our Board of Directors authorized a special cash dividend of $4.85 per share (see Note 11: Shareholders’ Equity). As required by our equity incentive plan’s non-discretionary anti-dilutive provisions, an adjustment was made to outstanding awards to prevent dilution of their value resulting from the special cash dividend. These adjustments did not result in incremental stock-based compensation expense as the fair value measure of the awards were the same immediately before and after the adjustment. The adjustments to awards included increasing the number of outstanding restricted stock units, stock options and performance shares, as well as reducing the exercise prices of outstanding stock options.

Stock Options

Our Compensation Committee of our Board of Directors approves annual grants of nonqualified stock options to employees. We used the following assumptions to estimate the fair value for stock options at each grant date (excluding options granted in connection with the Trunk Club acquisition):



Fiscal Year		2017			2016			2015
Assumptions
	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.	1.0% – 2.5%			0.7% – 1.9%			0.2% – 2.1%
	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.	40.1		%	36.8		%	29.4		%
	Weighted-average expected dividend yield: Our forecasted dividend yield for the next 10 years.	2.4		%	2.2		%	1.8		%
	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.	7.1			6.9			6.7

Grant Date Information
	Date of grant	February 28, 2017			February 29, 2016			February 24, 2015
	Weighted-average fair value per option		$16			$16			$21
	Exercise price per option		$47			$51			$81

Supplemental nonqualified stock options were also granted to certain company leaders on June 7, 2016, at an exercise price per option of $41. The assumptions used to estimate the fair value for the supplemental stock options were similar to the 2016 annual grant assumptions. The weighted-average fair value per option at the grant date was $13. In 2016, we also granted stock options to certain qualified employees outside of the annual and supplemental grant dates, which were insignificant in aggregate. The number of awards granted to an individual are determined based upon a percentage of the recipient’s base salary and the fair value of the stock options. Options typically vest over four years, and expire 10 years after the date of grant.

A summary of stock option activity for 2017, which includes awards issued as part of the Trunk Club acquisition in 2014, is presented below:



Fiscal year	2017
	Shares		Weighted- average exercise price		Weighted-average remaining contractual life (years)		Aggregate intrinsic value
Outstanding, beginning of year	13.5			$48
Granted	0.3		47
Exercised	(0.7	)	30
Forfeited or cancelled	(0.8	)	54
Outstanding, end of year	12.3			$49	5			$52
Exercisable, end of year	9.1			$47	4			$49
Vested or expected to vest, end of year	11.8			$49	5			$52

Fiscal year			2017		2016		2015
Aggregate intrinsic value of options exercised				$13		$30		$62
Fair value of stock options vested				$34		$40		$44

As of February 3, 2018, the total unrecognized stock-based compensation expense related to nonvested stock options was $22, which is expected to be recognized over a weighted-average period of 21 months.

Restricted Stock

Our Compensation Committee of our Board of Directors approves grants of restricted stock units to employees. The number of units granted to an individual are determined based upon a percentage of the recipient’s base salary and the fair value of the restricted stock. Restricted stock units typically vest over four years.

A summary of restricted stock unit activity for 2017 is presented below:



Fiscal year	2017
	Shares		Weighted-average grant date fair value per unit
Outstanding, beginning of year	2.3			$49
Granted	1.9		42
Vested	(0.5	)	56
Forfeited or cancelled	(0.4	)	63
Outstanding, end of year	3.3			$45

The aggregate fair value of restricted stock units vested during 2017, 2016 and 2015 was $26, $17 and $11. As of February 3, 2018, the total unrecognized stock-based compensation expense related to nonvested restricted stock units was $83, which is expected to be recognized over a weighted-average period of 28 months.

Performance Share Units

We 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 peer group determined by the Compensation Committee of our Board of Directors. 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.

Beginning in 2016, performance share units are payable only in Company stock and are classified as equity awards. We record compensation cost based upon the value of the underlying stock at the date of grant. The provisions of the performance share units are considered a market condition, and therefore the effect of that market condition is reflected in the grant date fair value of the award. We used a Monte-Carlo simulation to account for the market condition in the fair value of the award. Compensation cost is recognized regardless of whether the market condition is actually satisfied; however, the compensation cost is reversed if an employee terminates prior to satisfying the requisite service period. Dividends are not paid during the performance period.

Our 2015 performance share units are liability-based awards due to our ability to settle them in cash or stock as elected by the employee. As liability-based awards, they are 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 or stock settled 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, which assumes performance share units vest at 100% of the number of units granted:



Fiscal year	2017
Outstanding units, beginning of year	0.2
Granted	0.1
Vested	—
Forfeited or cancelled	(0.1	)
Outstanding units, end of year	0.2

No performance share units were earned nor vested in 2017. In both 2016 and 2015, performance share units earned and vested at 75%, there was a stock and cash settlement of $3 and performance share units earned were less than 0.1.

As of February 3, 2018, there were no liabilities recorded for performance share units and there was $4 in remaining unrecognized stock-based compensation expense for unvested performance share units.