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Stock-Based Compensation Programs

12 Months Ended

Dec. 31, 2019

19. Stock-Based Compensation Programs

The company has shareholder-approved stock plans under which options and stock-settled appreciation rights (SSARs) have been granted to employees at the market value of the company’s stock on the date of grant. In the case of stock options, payment must be made by the employee at the time of exercise in cash or with shares of stock owned by the employee, which are valued at fair market value on the date exercised. For SSARs, the employee receives the share equivalent of the difference between the fair market value on the date exercised and the exercise price of the SSARs exercised. In general, options and SSARs are exercisable in four equal installments commencing one year from the date of grant and terminating 10 years from the date of grant. A summary of outstanding stock option and SSAR activity for the year ended December 31, 2019, follows:



	Number of	Weighted Average
	Shares	Exercise Price
Beginning of year	15,175,811	$	27.45
Granted	1,624,395		51.42
Exercised	(4,173,273)		21.19
Canceled/forfeited	(241,473)		42.13
End of period	12,385,460		32.41

Vested and exercisable, end of year	7,957,900	$	26.82
Reserved for future grants	19,641,712

The weighted average remaining contractual term for all options and SSARs outstanding at December 31, 2019, was 5.5 years and the aggregate intrinsic value (difference in exercise price and closing price at that date) was $400 million. The weighted average remaining contractual term for options and SSARs vested and exercisable at December 31, 2019, was 4.1 years and the aggregate intrinsic value was $301 million. The company received $41 million, $29 million and $21 million from options exercised during 2019, 2018 and 2017, respectively, and the intrinsic value associated with these exercises was $61 million, $30 million and $26 million for the same periods, respectively. The excess tax benefit associated with the company’s stock compensation programs was $35 million for 2019, and was reported as a discrete item in the consolidated tax provision. The total fair value of options and SSARs vested during 2019, 2018 and 2017 was $16 million, $16 million and $14 million, respectively.

These options and SSARs cannot be traded in any equity market. However, based on the Black-Scholes option pricing model, options and SSARs granted in 2019, 2018 and 2017 have estimated weighted average fair values at the date of grant of $12.26 per share, $9.07 per share and $7.82 per share, respectively. The actual value an employee may realize will depend on the excess of the stock price over the exercise price on the date the option or SSAR is exercised. Consequently, there is no assurance that the value realized by an employee will equal the fair value estimated at the grant date. The fair values were estimated using the following weighted average assumptions:


	2019 Grants		2018 Grants		2017 Grants

Expected dividend yield	0.79	%	1.03	%	0.89	%
Expected stock price volatility	20.36	%	21.98	%	19.62	%
Risk-free interest rate	2.59	%	2.47	%	2.00	%
Expected life of options (in years)	6.40	years	6.10	years	5.94	years

In addition to stock options and SSARs, the company issues to certain employees restricted shares and restricted stock units, which vest over various periods. Other than the performance-contingent grants discussed below, such restricted shares and restricted stock units generally vest in equal installments over five years. Compensation cost is recorded based upon the fair value of the shares at the grant date.

Following is a summary of restricted stock activity for the year ended December 31, 2019:


		Weighted
	Number of	Average
	Shares/Units	Grant Price

Beginning of year	2,875,294	$	34.17
Granted	543,384		45.88
Vested	(871,225)		30.83
Canceled/forfeited	(108,717)		39.68
End of year	2,438,736	$	37.73

The company’s Board of Directors has granted performance contingent restricted stock units (PC-RSUs) to key employees. These PC-RSUs vest three years from the date of grant, and the number of shares available at the vesting date is based on the company’s increase in economic valued added (EVA®) dollars compared to the EVA® dollars generated in the calendar year prior to the grant, ranging from zero to 200 percent of each participant’s assigned award opportunity. If the minimum performance goals are not met, the shares will be forfeited. Grants under the plan are being accounted for as equity awards and compensation expense is recorded based upon the most probable outcome using the closing market price of the shares at the grant date. On a quarterly basis, the company reassesses the probability of the goals being met and adjusts compensation expense as appropriate. The expense associated with these performance-contingent grants recognized in selling, general and administrative expenses totaled $5 million in 2019 $21 million in 2018, and $9 million in 2017.

During 2017, the company’s Board of Directors granted 1.1 million PC-RSUs (on a post-stock split basis) to employees related to the Special Acquisition-Related Incentive Plan (SAIP). These awards vested in January 2020 based on the company’s achievement of cumulative EVA® and cash flow performance goals. The expense associated with these performance-contingent grants, as recognized in business consolidation and other activities, totaled $6 million in 2019, $23 million in 2018 and $11 million in 2017.

For the years ended December 31, 2019, 2018 and 2017, the company recognized pretax expense of $37 million ($33 million after tax), $75 million ($61 million after tax) and $46 million ($35 million after tax), respectively, for share-based compensation arrangements. At December 31, 2019, there was $50 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements. This cost is expected to be recognized in earnings over a weighted average period of 2.2 years.