Share-Based Compensation Plans

Northern Trust recognizes expense for the grant-date fair value of share-based compensation granted to employees and non-employee directors.

Total compensation expense for share-based payment arrangements to employees and the associated tax impacts were as follows for the periods presented.

TABLE 104: TOTAL COMPENSATION EXPENSE FOR SHARE-BASED PAYMENT ARRANGEMENTS TO EMPLOYEES



	FOR THE YEAR ENDED DECEMBER 31,
(In Millions)	2016		2015		2014
Restricted Stock Unit Awards	$	60.2	$	51.5	$	52.9
Stock Options	9.0		10.0		12.8
Performance Stock Units	17.6		14.9		12.0

Total Share-Based Compensation Expense	$	86.8	$	76.4	$	77.7
Tax Benefits Recognized	$	32.8	$	28.8	$	29.1

As of December 31, 2016, there was $138.6 million of unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Corporation’s share-based compensation plans. That cost is expected to be recognized as expense over a weighted-average period of approximately two years.

The Northern Trust Corporation 2012 Stock Plan (2012 Plan) is administered by the Compensation and Benefits Committee (Committee) of the Board of Directors. All employees of the Corporation and its subsidiaries and all directors of the Corporation are eligible to receive awards under the 2012 Plan. The 2012 Plan provides for the grant of nonqualified stock options, incentive stock options, stock appreciation rights, stock awards, stock units and performance stock units. Grants are outstanding under the 2012 Plan and the Amended and Restated Northern Trust Corporation 2002 Stock Plan (2002 Plan), a predecessor plan. The total number of shares of the Corporation’s common stock authorized for issuance under the 2012 Plan is 30,000,000 plus shares forfeited under the 2002 Plan. As of December 31, 2016, shares available for future grant under the 2012 Plan, including shares forfeited under the 2002 Plan, totaled 20,022,297.

The following describes Northern Trust’s share-based payment arrangements and applies to awards under the 2012 Plan and the 2002 Plan, as applicable.

Stock Options. Stock options consist of options to purchase common stock at prices not less than 100% of the fair value thereof on the date the options are granted. Options have a maximum 10 year life and generally vest and become exercisable in 1 year to 4 years after the date of grant. All options terminate at such time as determined by the Committee and as provided in the terms and conditions of the respective option grants.

The weighted-average assumptions used for options granted during the years ended December 31, 2016, 2015, and 2014 are as follows:

TABLE 105: WEIGHTED-AVERAGE ASSUMPTIONS USED FOR OPTIONS GRANTED



	2016		2015		2014
Expected Term (in Years)	7.0		7.1		7.3
Dividend Yield	2.57	%	2.07	%	2.16	%
Expected Volatility	32.3		30.4		30.1
Risk-Free Interest Rate	1.45		1.83		2.02

The expected term of options represents the period of time options granted are expected to be outstanding based primarily on the historical exercise behavior attributable to previous option grants. Dividend yield represents the estimated yield from dividends paid on the Corporation’s common stock over the expected term of the options. Expected volatility is determined based on a combination of the historical volatility of Northern Trust’s stock price and the implied volatility of traded options on Northern Trust stock. The risk-free interest rate is based on the U.S. Treasury yield curve at the time of grant for a period equal to the expected term of the options granted.

The following table provides information about stock options granted, vested, and exercised in the years ended December 31, 2016, 2015, and 2014.

TABLE 106: STOCK OPTIONS GRANTED, VESTED, AND EXERCISED



	FOR THE YEAR ENDED DECEMBER 31,
(In Millions, Except Per Share Information)	2016		2015		2014
Weighted Average Grant-Date Per Share Fair Value of Stock Options Granted	$	14.84	$	18.72	$	16.22
Grant-Date Fair Value of Stock Options Vested	9.6		16.0		21.9
Stock Options Exercised
Intrinsic Value as of Exercise Date	83.9		32.1		35.3
Cash Received	233.8		94.0		127.5
Tax Deduction Benefits Realized	80.0		30.1		12.9

The following is a summary of changes in nonvested stock options for the year ended December 31, 2016.

TABLE 107: CHANGES IN NONVESTED STOCK OPTIONS



NONVESTED OPTIONS	SHARES		WEIGHTED- AVERAGE GRANT- DATE FAIR VALUE PER SHARE
Nonvested at December 31, 2015	1,340,886		$	15.12
Granted	633,224		14.84
Vested	(709,652	)	13.48
Forfeited or Cancelled	(5,298	)	16.30

Nonvested at December 31, 2016	1,259,160		$	15.89

A summary of the status of stock options under the 2012 Plan and the 2002 Plan at December 31, 2016, and changes during the year then ended, are presented in the table below.

TABLE 108: STATUS OF STOCK OPTIONS AND CHANGES



($ In Millions Except Per Share Information)	SHARES		WEIGHTED AVERAGE EXERCISE PRICE PER SHARE		WEIGHTED AVERAGE REMAINING CONTRACTUAL TERM (YEARS)	AGGREGATE INTRINSIC VALUE
Options Outstanding, December 31, 2015	8,271,270		$	55.51
Granted	633,224		58.25
Exercised	(4,156,728	)	56.24
Forfeited, Expired or Cancelled	(43,997	)	59.99

Options Outstanding, December 31, 2016	4,703,769		$	55.20	5.3	$	158.2

Options Exercisable, December 31, 2016	3,444,609		$	52.96	4.1	$	123.5

Restricted Stock Unit Awards. Restricted stock unit awards may be granted to participants which entitle them to receive a payment in the Corporation’s common stock or cash under the terms of the 2012 Plan and such other terms and conditions as the Committee deems appropriate. Each restricted stock unit provides the recipient the opportunity to receive one share of stock for each stock unit that vests. The restricted stock units granted in 2016 predominately vest at a rate equal to 50% on the third anniversary date of the grant and 50% on the fourth anniversary date. Restricted stock unit grants totaled 1,301,693, 970,317, and 1,086,241, with weighted average grant-date fair values of $59.17, $70.79, and $61.17 per share, for the years ended December 31, 2016, 2015, and 2014, respectively. The total fair value of restricted stock units vested during the years ended December 31, 2016, 2015, and 2014, was $52.3 million, $58.1 million, and $63.9 million, respectively.

A summary of the status of outstanding restricted stock unit awards under the 2012 Plan and the 2002 Plan at December 31, 2016, and changes during the year then ended, is presented in the table below.

TABLE 109: OUTSTANDING RESTRICTED STOCK UNIT AWARDS



($ In Millions)	NUMBER		AGGREGATE INTRINSIC VALUE
Restricted Stock Unit Awards Outstanding, December 31, 2015	3,402,970		$	245.3
Granted	1,301,693
Distributed	(923,776	)
Forfeited	(85,230	)

Restricted Stock Unit Awards Outstanding, December 31, 2016	3,695,657		$	329.1

Units Convertible at December 31, 2016	180,025		$	16.0

The following is a summary of nonvested restricted stock unit awards at December 31, 2016, and changes during the year then ended.

TABLE 110: NONVESTED RESTRICTED STOCK UNIT AWARDS



NONVESTED RESTRICTED STOCK UNITS	NUMBER		WEIGHTED AVERAGE GRANT- DATE FAIR VALUE PER UNIT		WEIGHTED AVERAGE REMAINING VESTING TERM (YEARS)
Nonvested at December 31, 2015	3,222,219		$	59.50	1.9
Granted	1,301,693		59.17
Vested	(923,050	)	50.02
Forfeited	(85,230	)	62.30

Nonvested at December 31, 2016	3,515,632		$	61.80	2.0

Performance Stock Units. Each performance stock unit provides the recipient the opportunity to receive one share of stock for each stock unit that vests over a three-year performance period, subject to satisfaction of specified performance targets that are a function of return on equity and continued employment until the end of the vesting period. For all performance stock units outstanding as of December 31, 2016, the number of such units that may vest ranges from 0% to 125% of the original award granted based on the attainment of the applicable 3-year average annual return on equity target. Distribution of the shares is then made after vesting.

Performance stock unit grants totaled 354,606, 272,319, and 249,618 for the years ended December 31, 2016, 2015, and 2014, respectively, with weighted average grant-date fair values of $62.67, $61.14, and $53.08. Performance stock units outstanding at target level performance totaled 859,502, 787,140, and 724,450 at December 31, 2016, 2015, and 2014, respectively. Performance stock units had aggregate intrinsic values of $76.5 million, $56.7 million, and $48.8 million, and weighted average remaining vesting terms of 1.5 years, 1.8 years, and 2.2 years, at December 31, 2016, 2015, and 2014, respectively.

Non-employee Director Stock Awards. Stock units with total values of $1.3 million (18,001 units), $1.2 million (16,449 units), and $1.0 million (16,770 units) were granted to non-employee directors in 2016, 2015, and 2014, respectively, which vest or vested on the date of the annual meeting of the Corporation’s stockholders in the following years. Total expense recognized on these grants was $1.3 million, $1.1 million, and $1.0 million in 2016, 2015, and 2014, respectively. Stock units granted to non-employee directors do not have voting rights. Each stock unit entitles a director to one share of common stock at vesting, unless a director elects to defer receipt of the shares. Directors may elect to defer the payment of their annual stock unit grant and cash-based compensation until termination of services as director. Deferred cash compensation is converted into stock units representing shares of common stock of the Corporation. Distributions of deferred stock units are made in stock. Distributions of the stock unit accounts that relate to cash-based compensation are made in cash based on the fair value of the stock units at the time of distribution.