NOTE 14—STOCK-BASED COMPENSATION PLANS

Stock Plans

We have one active stock-based compensation plan available for the issuance of shares to employees, directors and third-party service providers (if applicable). As of December 31, 2017, under the Amended and Restated 2004 Stock Incentive plan (“2004 Plan”), we are authorized to issue 55 million common shares in various forms, including incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards (“RSAs”), share-settled restricted stock units (“RSUs”), performance share awards (“PSAs”) and performance share units (“PSUs”). Of this amount, approximately 15 million shares remain available for future issuance as of December 31, 2017. The 2004 Plan permits the use of newly issued shares or treasury shares upon the settlement of options and stock-based incentive awards, and we generally settle by issuing new shares.

We also issue cash-settled restricted stock units (and in the past issued cash equity units). These cash-settled units are not counted against the common shares authorized for issuance or available for issuance under the 2004 Plan.

Total stock-based compensation expense recognized during 2017, 2016 and 2015 was $244 million, $239 million and $161 million, respectively. The total income tax benefit for stock-based compensation recognized during 2017, 2016 and 2015 was $92 million, $89 million and $61 million, respectively.

Stock Options

Stock options have a maximum contractual term of ten years. Generally, the exercise price of stock options will equal the fair market value of our common stock on the date of grant. Option vesting is determined at the time of grant and may be subject to the achievement of any applicable performance conditions. Options generally become exercisable over three years beginning on the first anniversary of the date of grant; however, some option grants cliff-vest on or shortly after the first or third anniversary of the grant date.

The following table presents a summary of 2017 activity for stock options and the balance of stock options exercisable as of December 31, 2017.

Table 14.1: Summary of Stock Options Activity



(Shares in thousands, and intrinsic value in millions)	Shares Subject to Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding as of January 1, 2017	6,985		$	48.03
Granted	345		86.34
Exercised	(2,431	)	51.04
Forfeited	(133	)	75.48
Expired	0		0.00
Outstanding as of December 31, 2017	4,766		$	48.50	4.1 years	$	243
Exercisable as of December 31, 2017	3,992		$	43.33	3.3 years	$	225

The weighted-average fair value of stock options granted during 2017, 2016 and 2015 was $21.48, $16.36 and $15.11, respectively. The total intrinsic value of stock options exercised during 2017, 2016 and 2015 was $92 million, $31 million and $23 million, respectively. The unrecognized compensation expense related to stock options as of December 31, 2017 was $2 million, which is expected to be amortized over a weighted-average period of nine months.

Effective January 1, 2017, we adopted the new accounting guidance related to employee share-based payments. As a result of the adoption of this new guidance, all excess tax benefits on share-based payment awards are recognized within income tax expense in the consolidated statements of income. The following table presents the cash received from the exercise of stock options under all stock-based incentive arrangements, and the actual income tax benefit for the tax deductions from the exercise of the stock options.

Table 14.2: Stock Options Cash Flow Impact



	Year Ended December 31,
(Dollars in millions)	2017		2016		2015
Cash received for options exercised	$	122	$	135	$	64
Tax benefit	34		12		9

Compensation expense for stock options is based on the grant date fair value, which is estimated using the Black-Scholes option-pricing model. This option pricing model requires the use of numerous assumptions, many of which are subjective. Certain stock options have discretionary vesting conditions and are remeasured at fair value each reporting period.

The following table presents the weighted-average assumptions used to value stock options granted during 2017, 2016 and 2015. Dividend yield represents the expected dividend rate over the life of the option, and expected option lives are calculated based on historical activities.

Table 14.3: Assumptions Used to Value Stock Options Granted



	Year Ended December 31,
	2017		2016		2015
Dividend yield	1.85	%	2.07	%	1.82	%
Volatility⁽¹⁾	27.00		30.00		24.00
Risk-free interest rate (U.S. Treasury yield curve)	2.30		1.64		1.55
Expected option lives	6.6 years		6.6 years		6.3 years

__________


⁽¹⁾	The volatility assumption for 2017 and 2016 grants was based on the implied volatility of exchange-traded options and the historical volatility of common stock. The volatility assumption for 2015 grants was based on the implied volatility of exchange-traded options and warrants.

Restricted Stock Awards and Units

RSAs and RSUs represent share-settled awards that do not contain performance conditions and are granted to certain employees at no cost to the recipient. RSAs and RSUs generally vest over three years from the date of grant; however, some RSAs and RSUs cliff vest on or shortly after the first or third anniversary of the grant date. These awards and units are subject to forfeiture until certain restrictions have lapsed, including continued employment for a specified period of time. A recipient of an RSA is entitled to voting rights and is generally entitled to dividends on the common stock. A recipient of an RSU is entitled to receive a share of common stock after the applicable restrictions lapse. Additionally, a recipient of an RSU is generally entitled to receive cash payments or additional shares of common stock equivalent to any dividends paid on the underlying common stock during the period the RSU is outstanding, but is not entitled to voting rights.

Generally, the value of RSAs and RSUs will equal the fair value of our common stock on the date of grant and the expense is recognized over the vesting period.

The following table presents a summary of 2017 activity for RSAs and RSUs.

Table 14.4: Summary of Restricted Stock Awards and Units



	Restricted Stock Awards				Restricted Stock Units
(Shares/units in thousands)	Shares		Weighted-Average Grant Date Fair Value per Share		Units		Weighted-Average Grant Date Fair Value per Unit
Unvested as of January 1, 2017	67		$	63.34	3,258		$	66.72
Granted	0		N/A		1,475		86.20
Vested	(38	)	64.21		(1,223	)	69.03
Forfeited	(13	)	69.39		(131	)	75.22
Unvested as of December 31, 2017	16		$	56.39	3,379		$	74.06

The total fair value of RSAs that vested during 2017, 2016 and 2015 was $3 million, $21 million and $28 million, respectively. There was no unrecognized compensation expense related to unvested RSAs as of December 31, 2017.

The weighted-average grant date fair value of RSUs in 2017, 2016 and 2015 was $86.20, $65.19 and $76.15, respectively. The total fair value of RSUs that vested during 2017, 2016 and 2015 was $110 million, $42 million and $27 million, respectively. The unrecognized compensation expense related to unvested RSUs as of December 31, 2017 was $116 million, which is expected to be amortized over a weighted-average period of approximately 1.7 years.

Performance Share Awards and Units

PSAs and PSUs represent share-settled awards that contain performance conditions and are granted to certain employees at no cost to the recipient. PSAs and PSUs generally vest over three years from the date of grant; however, some PSUs cliff vest on or shortly after the third anniversary of the grant date. Generally, the value of PSAs and PSUs will equal the fair market value of our common stock on the date of grant and the expense is recognized over the vesting period. Certain PSAs and PSUs have discretionary vesting conditions and are remeasured at fair value each reporting period. A recipient of a PSA is entitled to voting rights and is generally entitled to dividends on the common stock. A recipient of a PSU is entitled to receive a share of common stock after the applicable restrictions lapse. Additionally, a recipient of a PSU is generally entitled to receive cash payments or additional shares of common stock equivalent to any dividends paid on the underlying common stock during the period the PSU is outstanding, but is not entitled to voting rights.

The number of PSUs that step vest over three years can be reduced by 50% or 100% depending on whether specific performance goals are met during the vesting period. The number of three-year cliff vesting PSUs that will ultimately vest is contingent upon meeting specific performance goals over a three-year period. These PSUs also include an opportunity to receive from 0% to 150% of the target number of common shares.

The following table presents a summary of 2017 activity for PSAs and PSUs.

Table 14.5: Summary of Performance Share Awards and Units



	Performance Share Awards				Performance Share Units
(Shares/units in thousands)	Shares		Weighted-Average Grant Date Fair Value per Share		Units		Weighted-Average Grant Date Fair Value per Unit
Unvested as of January 1, 2017	6		$	70.96	2,077		$	69.40
Granted⁽¹⁾	0		0.00		985		82.48
Vested⁽¹⁾	(6	)	70.96		(985	)	70.05
Forfeited	0		0.00		(159	)	74.34
Unvested as of December 31, 2017	0		$	0.00	1,918		$	75.38

__________


⁽¹⁾	Granted and vested include adjustments for achievement of specific performance goals for performance share units granted in prior periods.

The total fair value of PSAs that vested during 2017 was less than $1 million, and there was no unrecognized compensation expense related to unvested PSAs as of December 31, 2017. The total fair value of PSAs that vested during 2016 and 2015 was $11 million and $30 million, respectively.

The weighted-average grant date fair value of PSUs granted during 2017, 2016 and 2015 was $82.48, $62.89 and $65.98, respectively. The total fair value of PSUs that vested on the vesting date was $90 million, $54 million and $74 million in 2017, 2016 and 2015, respectively. The unrecognized compensation expense related to unvested PSUs as of December 31, 2017 was $32 million, which is expected to be amortized over a weighted-average period of approximately 1 year.

Cash-Settled Units

Cash-settled units are recorded as liabilities and measured at fair value on a quarterly basis. Cash-settled units are settled with a cash payment for each unit vested that is equal to the average fair market value of our common stock for the 15 or 20 trading days preceding the vesting date. Cash-settled units generally vest over three years beginning on the first anniversary of the date of grant; however, some cash-settled units cliff vest shortly before the one year anniversary of the grant date or on or shortly after the third anniversary of the grant date. Cash-settled units vesting during 2017, 2016 and 2015 resulted in cash payments to associates of $42 million, $36 million and $70 million, respectively. There was no unrecognized compensation cost for unvested cash-settled units as of December 31, 2017.

Associate Stock Purchase Plan

We maintain an Associate Stock Purchase Plan (“Purchase Plan”), which is a compensatory plan under the accounting guidance for stock-based compensation. We recognized $23 million, $18 million and $16 million in compensation expense for 2017, 2016 and 2015, respectively, under the Purchase Plan.

Under the Purchase Plan, eligible associates are permitted to contribute between 1% and 15% of their base salary through payroll deductions and receive a 17.65% Company match on the contributions. Effective January 1, 2018, the Company match on contributions is 15%. Both the associates’ contributions and the Company match are applied to the purchase of our unissued common or treasury stock at the current market price. Shares may also be acquired on the open market. Dividends for active participants are automatically reinvested in additional shares of common stock. Of the 33 million total authorized shares as of December 31, 2017, 18 million shares were available for issuance.

Dividend Reinvestment and Stock Purchase Plan

We maintain a Dividend Reinvestment and Stock Purchase Plan (“DRP”), which allows participating stockholders to purchase additional shares of our common stock through automatic reinvestment of dividends or optional cash investments. Of the 8 million total authorized shares as of December 31, 2017, 7 million shares were available for issuance under the DRP.