16. Stock-Based Compensation

Employee Stock Purchase Plan

We have an Employee Stock Purchase Plan (“ESPP”) under which employees that have been employed for at least 30 days may purchase shares of our common stock at a discount. The plan provides for two offering periods for purchases: January through June and July through December. At the end of each offering period, enrolled employees purchase shares of our common stock at a price equal to 85% of the lesser of the market value of the stock on the first and last day of such offering period. The purchases are made at the end of an offering period with funds accumulated through payroll deductions over the course of the offering period, and the number of shares that may be purchased is limited by IRS regulations. The total number of shares issued under the plan for the offering periods in each of 2016, 2015 and 2014 was approximately 647,000, 786,000 and 774,000, respectively. Including the impact of the January 2017 issuance of shares associated with the July to December 2016 offering period, approximately 2.5 million shares remain available for issuance under the plan.

Accounting for our ESPP increased annual compensation expense by approximately $7 million, or $4 million net of tax provision, for 2016 and $6 million, or $4 million net of tax provision, for 2015 and 2014.

Employee Stock Incentive Plans

In May 2014, our stockholders approved our 2014 Stock Incentive Plan (the “2014 Plan”) to replace our 2009 Stock Incentive Plan (the “2009 Plan”). The 2014 Plan authorized 23.8 million shares of our common stock for issuance pursuant to the 2014 Plan, plus the approximately 1.1 million shares that then remained available for issuance under the 2009 Plan, and any shares subject to outstanding awards under the 2009 Plan that are subsequently cancelled, forfeited, terminate, expire or lapse. As of December 31, 2016, approximately 23.2 million shares were available for future grants under the 2014 Plan. All of our stock-based compensation awards described herein have been made pursuant to either our 2009 Plan or our 2014 Plan, collectively referred to as the “Incentive Plans.” We currently utilize treasury shares to meet the needs of our equity-based compensation programs.

Pursuant to the Incentive Plans, we have the ability to issue stock options, stock appreciation rights and stock awards, including restricted stock, restricted stock units (“RSUs”) and performance share units (“PSUs”). The terms and conditions of equity awards granted under the Incentive Plans are determined by the Management Development and Compensation Committee of our Board of Directors.

The 2016 annual Incentive Plan awards granted to the Company’s senior leadership team, which generally includes the Company’s executive officers, included a combination of PSUs and stock options. The annual Incentive Plan awards granted to certain key employees included a combination of PSUs, RSUs and stock options in 2016. The Company has also periodically granted RSUs and stock options to employees working on key initiatives, in connection with new hires and promotions and to field-based managers.

Restricted Stock Units — A summary of our RSUs is presented in the table below (units in thousands):


	Units			Weighted Average Per Share Fair Value
Unvested at January 1, 2016		524		$	43.76
Granted		186		$	57.38
Vested		(205	)	$	37.45
Forfeited		(15	)	$	51.17

Unvested at December 31, 2016		490		$	51.32

The total fair market value of RSUs that vested during the years ended December 31, 2016, 2015 and 2014 was $12 million, $13 million and $3 million, respectively. During the year ended December 31, 2016, we issued approximately 136,000 shares of common stock for these vested RSUs, net of approximately 69,000 units deferred or used for payment of associated taxes.

RSUs may not be voted or sold by award recipients until time-based vesting restrictions have lapsed. RSUs primarily provide for three-year cliff vesting and include dividend equivalents accumulated during the vesting period. Unvested units are subject to forfeiture in the event of voluntary or for-cause termination. RSUs are subject to pro-rata vesting upon an employee’s retirement or involuntary termination other than for cause and become immediately vested in the event of an employee’s death or disability.

Compensation expense associated with RSUs is measured based on the grant-date fair value of our common stock and is recognized on a straight-line basis over the required employment period, which is generally the vesting period. Compensation expense is only recognized for those awards that we expect to vest, which we estimate based upon an assessment of expected forfeitures.

Performance Share Units — Two types of PSUs are currently outstanding: (i) PSUs for which payout is dependent on total shareholder return relative to the S&P 500 (“TSR PSUs”) and (ii) PSUs for which payout is dependent on the Company’s performance against pre-established adjusted cash flow metrics (“Cash Flow PSUs”). Both types of PSUs are payable in shares of common stock after the end of a three-year performance period, when the Company’s financial performance for the entire performance period is reported, typically in mid- to late-February of the succeeding year. At the end of the performance period, the number of shares awarded can range from 0% to 200% of the targeted amount, depending on the performance against the pre-established targets. A summary of our PSUs, at 100% of the targeted amount, is presented in the table below (units in thousands):


	Units			Weighted Average Per Share Fair Value
Unvested at January 1, 2016		1,762		$	52.90
Granted		555		$	79.27
Vested		(664	)	$	48.38
Forfeited		(148	)	$	76.01

Unvested at December 31, 2016		1,505		$	68.98

The determination of achievement of performance results and corresponding vesting of PSUs for the three-year performance period ended December 31, 2016 was performed by the Management Development and Compensation Committee in February 2017. Accordingly, vesting information for such awards is not included in the table above as of December 31, 2016. The “vested” PSUs are for the three-year performance period ended December 31, 2015, as achievement of performance results and corresponding vesting was determined in February 2016. The Company’s financial results, as measured for purposes of these awards, were higher than the target levels established but not in excess of the maximum performance criteria. Accordingly, recipients of these PSU awards were entitled to receive a payout of 132.88% of the vested TSR PSUs and 196.15% of the vested PSUs for which payout was dependent on the Company’s performance against a pre-established return on invested capital metric. In February 2016, approximately 1,093,000 PSUs vested and we issued approximately 547,000 shares of common stock for these vested PSUs, net of units deferred or used for payment of associated taxes.

The shares of common stock that were issued or deferred during the years ended December 31, 2016, 2015 and 2014 for prior PSU award grants had a fair market value of $50 million, $35 million and $8 million, respectively. PSUs have no voting rights. PSUs receive dividend equivalents that are paid out in cash based on the number of shares that vest at the end of the awards’ performance period. PSUs are payable to an employee (or his beneficiary) upon death or disability as if that employee had remained employed until the end of the performance period, are subject to pro-rata vesting upon an employee’s retirement or involuntary termination other than for cause and are subject to forfeiture in the event of voluntary or for-cause termination.

Compensation expense associated with our Cash Flow PSUs that continue to vest based on future performance is measured based on the fair value of our common stock at the end of each reporting period until the performance period ends. Compensation expense is recognized ratably over the performance period based on our estimated achievement of the established performance criteria. Compensation expense is only recognized for those awards that we expect to vest, which we estimate based upon an assessment of both the probability that the performance criteria will be achieved and expected forfeitures.

The grant-date fair value of our TSR PSUs is based on a Monte Carlo valuation and compensation expense is recognized on a straight-line basis over the vesting period. Compensation expense is recognized for all TSR PSUs whether or not the market conditions are achieved less expected forfeitures.

Deferred Units — Recipients can elect to defer some or all of the vested RSU or PSU awards until a specified date or dates they choose. Deferred units are not invested, nor do they earn interest, but deferred amounts do receive dividend equivalents paid in cash during deferral at the same time and at the same rate as dividends on the Company’s common stock. Deferred amounts are paid out in shares of common stock at the end of the deferral period. At December 31, 2016, we had approximately 698,000 vested deferred units outstanding.

Stock Options — Stock options granted primarily vest in 25% increments on the first two anniversaries of the date of grant with the remaining 50% vesting on the third anniversary. The exercise price of the options is the average of the high and low market value of our common stock on the date of grant, and the options have a term of 10 years. A summary of our stock options is presented in the table below (options in thousands):


	Options			Weighted Average Per Share Exercise Price
Outstanding at January 1, 2016		7,507		$	40.80
Granted		1,387		$	56.24
Exercised		(2,645	)	$	37.20
Forfeited or expired		(606	)	$	51.70

Outstanding at December 31, 2016(a)		5,643		$	45.12

Exercisable at December 31, 2016(b)		2,921		$	38.84

(a)	Stock options outstanding as of December 31, 2016 have a weighted average remaining contractual term of 6.9 years and an aggregate intrinsic value of $146 million based on the market value of our common stock on December 31, 2016.

(b)	Stock options exercisable as of December 31, 2016 have an aggregate intrinsic value of $94 million based on the market value of our common stock on December 31, 2016.

We received cash proceeds of $63 million, $77 million and $93 million during the years ended December 31, 2016, 2015 and 2014, respectively, from employee stock option exercises. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2016, 2015 and 2014 was $67 million, $37 million and $27 million, respectively.

Exercisable stock options at December 31, 2016, were as follows (options in thousands):


Range of Exercise Prices	Options		Weighted Average Per Share Exercise Price		Weighted Average Remaining Years
$32.315-$40.00		2,141	$	36.12		4.9
$40.01-$50.00		491	$	41.36		7.2
$50.01-$54.635		289	$	54.64		8.2

$32.315-$54.635		2,921	$	38.84		5.6

All unvested stock options shall become exercisable upon the award recipient’s death or disability. In the event of a recipient’s retirement, stock options shall continue to vest pursuant to the original schedule set forth in the award agreement. If the recipient is terminated by the Company without cause or voluntarily resigns, the recipient shall be entitled to exercise all stock options outstanding and exercisable within a specified time frame after such termination. All outstanding stock options, whether exercisable or not, are forfeited upon termination for cause.

We account for our employee stock options under the fair value method of accounting using a Black-Scholes valuation model to measure stock option expense at the date of grant. The weighted average grant-date fair value of stock options granted during the years ended December 31, 2016, 2015 and 2014 was $6.31, $5.56 and $4.55, respectively. The fair value of the stock options at the date of grant is amortized to expense over the vesting period less expected forfeitures, except for stock options granted to retirement-eligible employees, for which expense is accelerated over the period that the recipient becomes retirement-eligible. The following table presents the weighted average assumptions used to value employee stock options granted during the years ended December 31 under the Black-Scholes valuation model:


	2016	2015	2014
Expected option life	4.7 years	4.4 years	4.8 years
Expected volatility	18.4%	16.7%	18.4%
Expected dividend yield	2.9%	2.8%	3.6%
Risk-free interest rate	1.3%	1.4%	1.6%

The Company bases its expected option life on the expected exercise and termination behavior of its optionees and an appropriate model of the Company’s future stock price. The expected volatility assumption is derived from the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options, combined with other relevant factors including implied volatility in market-traded options on the Company’s stock. The dividend yield is the annual rate of dividends per share over the exercise price of the option as of the grant date.

For the years ended December 31, 2016, 2015 and 2014, we recognized $81 million, $64 million and $59 million, respectively, of compensation expense associated with RSU, PSU and stock option awards as a component of “Selling, general and administrative” expenses in our Consolidated Statements of Operations. Our “Provision for income taxes,” for the years ended December 31, 2016, 2015 and 2014, includes related deferred income tax benefits of $32 million, $26 million and $23 million, respectively. We also realized excess tax benefits from stock option exercises and the vesting of RSUs and PSUs during the years ended December 31, 2016, 2015 and 2014 of $28 million, $15 million and $5 million, respectively. These amounts have been presented as cash inflows in the “Cash flows from financing activities” section of our Consolidated Statements of Cash Flows. We have not capitalized any equity-based compensation costs during the years ended December 31, 2016, 2015 and 2014.

Compensation expense recognized in 2016 increased when compared to 2015 and 2014, primarily due to increases in the fair values and expected payouts of our PSUs. As of December 31, 2016, we estimate that $51 million of currently unrecognized compensation expense will be recognized over a weighted average period of 1.5 years for our unvested RSU, PSU and stock option awards issued and outstanding.

Non-Employee Director Plan

Our non-employee directors currently receive annual grants of shares of our common stock, generally payable in two equal installments, under the Incentive Plans described above.