Share-Based Compensation

We have a stockholder-approved stock incentive plan, the 2008 Stock Incentive Plan (Amended and Restated as of April 15, 2015) (Plan) that provides for the granting of options, RSUs, PSUs and other share-based awards to our employees and officers. The Management Compensation and Development Committee of the Board of Directors (Compensation Committee) may determine the type, amount and terms, including vesting, of any awards made under the Plan.

On June 17, 2015, our stockholders approved an amendment of the Plan, which included the following key modifications: adoption of an aggregate share reserve of 247.8 million shares of Common Stock, which includes 19.8 million new shares of Common Stock; and an extension of the term of the Plan through April 15, 2025.

With respect to options granted under the Plan, the exercise price may not be less than the market closing price of the common stock on the date of grant. In general, options granted under the Plan vest over periods ranging from immediate vesting to four-year vesting and expire ten years from the date of grant, subject to earlier expiration in case of termination of employment unless the participant meets the retirement provision under which the option would have a maximum of three additional years to vest. The vesting period for options granted under the Plan is subject to certain acceleration provisions if a change in control, as defined in the Plan, occurs. Plan participants may elect to exercise options at any time during the option term. However, any shares so purchased which have not vested as of the date of exercise shall be subject to forfeiture, which will lapse in accordance with the established vesting time period.

During 2015, we increased our usage of PSUs and began issuing PSUs to certain executive officers that are payable in shares of our common stock at the end of a three-year performance measurement period. The number of shares to be issued at the end of the measurement period will vary, based on performance, from 0% to 200% of the target number of PSUs granted, depending on the achievement of specified performance and market targets for revenue (37.5% weighting), earnings per share (37.5% weighting), and relative total shareholder return (25% weighting). All shares delivered upon PSU vesting are restricted from trading for one year and one day from the vesting date.

The grant date fair value for the portion of the PSUs related to revenue and earnings per share was estimated using the fair market value of our common stock on the grant date. The grant date fair value for the portion of the PSUs related to relative total shareholder return was estimated using the Monte Carlo valuation model.

Shares of common stock available for future share-based grants under all plans were 38.3 million at December 31, 2015.

The following table summarizes the components of share-based compensation expense in the Consolidated Statements of Income for the years ended December 31, 2015, 2014 and 2013:



	2015		2014		2013
Cost of goods sold	$	31.7	$	26.2	$	18.5
Research and development	250.7		196.5		144.7
Selling, general and administrative	294.2		224.9		162.6
Total share-based compensation expense	576.6		447.6		325.8
Tax benefit related to share-based compensation expense	161.2		129.3		94.5
Reduction in income	$	415.4	$	318.3	$	231.3

Included in share-based compensation expense for the years ended December 31, 2015, 2014 and 2013 was compensation expense related to non-qualified stock options of $346.1 million, $276.3 million and $197.6 million, respectively. Net proceeds received from share-based compensation arrangements for the years ended December 31, 2015, 2014 and 2013 were $251.7 million, $297.2 million and $551.6 million, respectively, and the excess tax benefit recognized was $300.5 million, $250.6 million and $169.4 million, respectively. We do not recognize a deferred tax asset for excess tax benefits that have not been realized and have adopted the tax law method as our accounting policy regarding the ordering of tax benefits to determine whether an excess tax benefit has been realized.

Stock Options: As of December 31, 2015, there was $640.9 million of total unrecognized compensation cost related to stock options granted under the plans. That cost will be recognized over an expected remaining weighted-average period of 2.0 years.

The weighted-average grant date fair value of the stock options granted during the years ended December 31, 2015, 2014 and 2013 was $38.83 per share, $27.92 per share and $20.22 per share, respectively. We estimated the fair value of options granted using a Black-Scholes option pricing model with the following assumptions:



	2015	2014	2013
Risk-free interest rate	1.17% - 1.72%	1.51% - 1.90%	0.68% - 1.70%
Expected volatility	31% - 38%	28% - 37%	27% - 35%
Weighted average expected volatility	34%	33%	31%
Expected term (years)	5.02 - 5.04	5.02 - 5.06	5.03 - 5.50
Expected dividend yield	0%	0%	0%

The risk-free interest rate is based on the U.S. Treasury zero-coupon curve. Expected volatility of stock option awards is estimated based on the implied volatility of our publicly traded options with settlement dates of six months. The use of implied volatility was based upon the availability of actively traded options on our common stock and the assessment that implied volatility is more representative of future stock price trends than historical volatility. The expected term of an employee share option is the period of time for which the option is expected to be outstanding. We made a determination of expected term by analyzing employees' historical exercise experience from its history of grants and exercises in our option database and management estimates. Forfeiture rates are estimated based on historical data.

The following table summarizes all stock option activity for the year ended December 31, 2015:



	Options		Weighted Average Exercise Price Per Option		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (In Millions)
Outstanding at December 31, 2014	77.2		$	49.47	6.9	$	4,823.8
Changes during the Year:
Granted	11.8		118.65
Exercised	(11.5	)	34.39
Forfeited	(1.7	)	74.20
Expired	(0.1	)	39.48
Outstanding at December 31, 2015	75.7		$	61.99	6.6	$	4,411.8
Vested at December 31, 2015 or expected to vest in the future	75.1		$	61.64	6.6	$	4,400.1
Vested at December 31, 2015	41.2		$	41.12	5.3	$	3,238.5

The total fair value of shares vested during the years ended December 31, 2015, 2014 and 2013 was $266.5 million, $211.3 million and $159.3 million, respectively. The total intrinsic value of stock options exercised during the years ended December 31, 2015, 2014 and 2013 was $993.5 million, $946.6 million and $814.7 million, respectively. We primarily utilize newly issued shares to satisfy the exercise of stock options.

Restricted Stock Units: We issue RSUs, under our equity program in order to provide an effective incentive award with a strong retention component. Equity awards may, at the option of employee participants, be divided between stock options and RSUs. The employee may choose between alternate Company defined mixes of stock options and RSUs, with the number of options to be granted reduced by four for every one RSU to be granted. Information regarding the Company's RSUs for the year ended December 31, 2015 is as follows:



Nonvested RSUs	Share Equivalent		Weighted Average Grant Date Fair Value
Nonvested at December 31, 2014	9.4		$	59.02
Changes during the period:
Granted	2.5		112.98
Vested	(3.8	)	37.57
Forfeited	(0.4	)	71.95
Nonvested at December 31, 2015	7.7		$	86.28

As of December 31, 2015, there was $325.0 million of total unrecognized compensation cost related to non-vested RSU awards. That cost is expected to be recognized over a weighted-average period of 1.4 years. The Company primarily utilizes newly issued shares to satisfy the vesting of RSUs.

Performance-Based Restricted Stock Units: We grant performance-based restricted stock units that vest contingent upon the achievement of pre-determined performance-based milestones that are either related to product development or the achievement of specified performance and market targets, including revenue, earnings per share, and relative total shareholder return. The following table summarizes the Company's performance-based restricted stock unit activity for the year ended December 31, 2015 (shares in thousands):



Nonvested Performance-Based RSUs	Share Equivalent		Weighted Average Grant Date Fair Value
Nonvested at December 31, 2014	133		$	69.57
Changes during the period:
Granted	211		112.14
Vested	—		—
Forfeited	(10	)	82.91
Non-vested at December 31, 2015	334		$	96.07

As of December 31, 2015, there was $17.9 million of total unrecognized compensation cost related to non-vested awards of performance-based RSUs that is expected to be recognized over a weighted-average period of 1.6 years.