Share-based and Deferred Compensation Plans

12 Months Ended

Dec. 31, 2018

Share-based and Deferred Compensation Plans

Overview

At year end 2018, we had one stock award plan in effect: the YUM! Brands, Inc. Long-Term Incentive Plan (the “LTIP”). Under the LTIP, the exercise price of stock options and SARs granted must be equal to or greater than the average market price or the ending market price of the Company’s stock on the date of grant.

Potential awards to employees and non-employee directors under the LTIP include stock options, incentive stock options, SARs, restricted stock, restricted stock units (“RSUs”), performance restricted stock units, performance share units (“PSUs”) and performance units. We have issued only stock options, SARs, RSUs and PSUs under the LTIP. While awards under the LTIP can have varying vesting provisions and exercise periods, outstanding awards under the LTIP vest in periods ranging from immediate to five years. Stock options and SARs generally expire ten years after grant.

At year end 2018, approximately 28 million shares were available for future share-based compensation grants under the LTIP.

Our EID Plan allows participants to defer receipt of a portion of their annual salary and all or a portion of their incentive compensation. As defined by the EID Plan, we credit the amounts deferred with earnings based on the investment options selected by the participants. These investment options are limited to cash, phantom shares of our Common Stock, phantom shares of a Stock Index Fund and phantom shares of a Bond Index Fund. Investments in cash and phantom shares of both index funds will be distributed in cash at a date as elected by the employee and therefore are classified as a liability on our Consolidated Balance Sheets. We recognize compensation expense for the appreciation or the depreciation, if any, of investments in cash and both of the index funds. Deferrals into the phantom shares of our Common Stock will be distributed in shares of our Common Stock, under the LTIP, at a date as elected by the employee and therefore are classified in Common Stock on our Consolidated Balance Sheets. We do not recognize compensation expense for the appreciation or the depreciation, if any, of investments in phantom shares of our Common Stock. Our EID plan also allows certain participants to defer incentive compensation to purchase phantom shares of our Common Stock and receive a 33% Company match on the amount deferred. Deferrals receiving a match are similar to a RSU award in that participants will generally forfeit both the match and incentive compensation amounts deferred if they voluntarily separate from employment during a vesting period that is two years from the date of deferral. We expense the intrinsic value of the match and the incentive compensation amount over the requisite service period which includes the vesting period.

Historically, the Company has repurchased shares on the open market in excess of the amount necessary to satisfy award exercises and expects to continue to do so in 2019.

In connection with the Separation of our China business in the prior year, under the provisions of our LTIP, employee stock options, SARs, RSUs and PSUs were adjusted to maintain the pre-spin intrinsic value of the awards. Depending on the tax laws of the country of employment, awards were modified using either the shareholder method or the employer method. The modifications to the outstanding equity awards resulted in an insignificant amount of additional compensation expense in the year ended December 31, 2016. Share-based compensation as recorded in Income from continuing operations is based on the amortization of the fair value for both YUM and Yum China awards held by YUM employees. Share issuances for Yum China awards held by YUM employees will be satisfied by Yum China. Share issuances for YUM awards held by Yum China employees are being satisfied by YUM.

Under the shareholder method, investments in phantom shares of our Common Stock held within our EID Plan were partially converted into phantom investments in Yum China. Through October 31, 2018, distributions of investments in phantom shares of Yum China could be settled in cash, as opposed to stock, at a date as elected by the employee and, therefore, were classified as a liability and remeasured to fair value at each reporting period in our Consolidated Balance Sheet. During 2018, 2017 and 2016, we recorded a $3 million credit, a $18 million charge and a $30 million charge, respectively, within G&A related to these awards (See Note 5).

As of October 31, 2018, deferrals in phantom shares of Yum China common stock are no longer an investment option within our EID Plan and any balances relating to these shares were moved to another available EID Plan investment option as selected by the participants. Amounts directed into cash or phantom shares of a Stock Index Fund or a Bond Index Fund remained classified as a liability and any appreciation or depreciation in these investments from the transfer date forward will be recognized as compensation expense. Any amounts directed into phantom shares of YUM Common Stock were reclassified to Common Stock on our Consolidated Balance Sheet. We do not recognize compensation expense for the appreciation or depreciation, if any, of investments in phantom shares of our Common Stock.

Award Valuation

We estimated the fair value of each stock option and SAR award as of the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:



	2018		2017		2016
Risk-free interest rate	2.5	%	1.9	%	1.4	%
Expected term (years)	6.5 years		6.4 years		6.4 years
Expected volatility	22.0	%	22.9	%	27.0	%
Expected dividend yield	1.8	%	1.8	%	2.6	%

We believe it is appropriate to group our stock option and SAR awards into two homogeneous groups when estimating expected term. These groups consist of grants made primarily to restaurant-level employees, which cliff-vest after 4 years and expire 10 years after grant, and grants made to executives, which typically have a graded vesting schedule of 25% per year over 4 years and expire 10 years after grant. We use a single weighted-average term for our awards that have a graded vesting schedule. Based on analysis of our historical exercise and post-vesting termination behavior, we have determined that our restaurant-level employees and our executives exercised the awards on average after 5 years and 6.5 years, respectively.

When determining expected volatility, we consider both historical volatility of our stock as well as implied volatility associated with our publicly traded options. The expected dividend yield is based on the annual dividend yield at the time of grant.

The fair values of RSU and PSU awards are based on the closing price of our Common Stock on the date of grant.

Award Activity

Stock Options and SARs



	Shares (in thousands)			Weighted-Average Exercise Price		Weighted- Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (in millions)
Outstanding at the beginning of the year	18,285			$	44.85
Granted	2,580			78.35
Exercised	(3,832	)		34.05
Forfeited or expired	(842	)		71.72
Outstanding at the end of the year	16,191		^(a)	51.84		5.50	$	626
Exercisable at the end of the year	10,297			$	43.23	4.02	$	501


(a)	Outstanding awards include 753 options and 15,438 SARs with weighted average exercise prices of $42.40 and $52.30, respectively. Outstanding awards represent YUM awards held by employees of both YUM and Yum China.

The weighted-average grant-date fair value of stock options and SARs granted during 2018, 2017 and 2016 was $16.45, $14.08 and $14.40, respectively. The total intrinsic value of stock options and SARs exercised during the years ended December 31, 2018, December 31, 2017 and December 31, 2016, was $195 million, $154 million and $263 million, respectively.

As of December 31, 2018, $48 million of unrecognized compensation cost related to unvested stock options and SARs, which will be reduced by any forfeitures that occur, is expected to be recognized over a remaining weighted-average period of approximately 1.6 years. This reflects unrecognized cost for both YUM and Yum China awards held by YUM employees. The

total fair value at grant date of awards for both YUM and Yum China awards held by YUM employees that vested during 2018, 2017 and 2016 was $28 million, $33 million and $41 million, respectively.

RSUs and PSUs

As of December 31, 2018, there was $21 million of unrecognized compensation cost related to 1.0 million unvested RSUs and PSUs, none of which related to Yum China common stock. The total fair value at grant date of awards that vested during 2018, 2017 and 2016 was $16 million, $10 million and $7 million, respectively.

Impact on Net Income

The components of share-based compensation expense and the related income tax benefits are shown in the following table:



	2018				2017			2016
Options and SARs	$	37			$	30		$	38
Restricted Stock Units	6				26			38
Performance Share Units	7				9			4
Total Share-based Compensation Expense	$	50		^(a)	$	65	^(a)	$	80	^(b)
Deferred Tax Benefit recognized	$	9			$	22	^(c)	$	26	^(c)

EID compensation expense not share-based	$	(2	)		$	12		$	5


(a)	Includes $3 million of appreciation and $18 million of depreciation in the market price of Yum China's stock in 2018 and 2017, respectively. See Note 5.


(b)	Includes $30 million due to modifications of awards in connection with the Separation that was not allocated to any of our operating segments for performance purposes. See Note 5.

Cash received from stock option exercises for 2018, 2017 and 2016, was $5.5 million, $12 million and $5 million, respectively. Tax benefits realized on our tax returns from tax deductions associated with share-based compensation for 2018, 2017 and 2016 totaled $60 million, $153 million and $109 million, respectively.