7. Share-Based Compensation

Stock Options:

Under the Company’s stock incentive plan, stock options are granted at exercise prices that equal the market value of the underlying common stock on the date of grant. The options have a 10-year term and are exercisable upon vesting, which occurs over a three-year period at the anniversary dates of the date of grant. Compensation expense is generally recognized on a straight-line basis for all awards over the employee’s vesting period or over a one-year required service period for certain retirement eligible executive level employees. The Company estimates a forfeiture rate at the time of grant and updates the estimate within the amount of compensation costs recognized in each period. As of March 31, 2017, certain of these nonqualified options have been forfeited due to termination of employees.

The Company granted non-qualified options to purchase 268 thousand shares and 329 thousand shares during the three months ended March 31, 2017 and 2016, respectively. The fair value of each option grant was estimated using the Black-Scholes option-pricing model with the following assumptions:


	For the Three Months Ended
	March 31,
	2017		2016
Expected life (in years)	5.5		5.5
Risk-free interest rate	1.93	%	1.36	%
Expected volatility	22.50	%	23.40	%
Expected dividend yield	1.68	%	1.80	%

The expected life of options represents the weighted-average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise patterns. The risk-free interest rate is based on the US Treasury yield curve in effect at the grant date for the period corresponding to the expected life of the options. Expected volatility is based on historical volatilities of the Company’s common stock. Dividend yields are based on current dividend payments.

Stock option activity for the three months ended March 31, 2017 was as follows:


		Weighted
	Number of	Average		Average	Aggregate
	Options	Exercise		Remaining	Intrinsic
	(in	Price per		Contractual	Value
	thousands)	Share		Term (Years)	(in millions)
Outstanding at December 31, 2016	2,281	$	61.39	5.93	$	145
Granted	278		119.08
Exercised	(79)		37.38
Cancelled	(16)		80.47
Outstanding at March 31, 2017	2,464	$	68.53	6.26	$	128
Exercisable at March 31, 2017	1,880	$	56.86	6.20		120

For the three months ended March 31, 2017, cash received from the exercise of stock options was $3 million. At March 31, 2017, the total remaining unrecognized compensation cost related to stock options was $8 million, which will be amortized over a weighted-average period of approximately 1.6 years.

Additional information pertaining to stock option activity is as follows:


	Three Months Ended
	March 31,
(dollars in thousands, except per share)	2017		2016
Weighted average grant date fair value of stock options granted (per share)	$	23.90	$	18.73
Total intrinsic value of stock options exercised	$	6,849	$	12,665

Restricted Stock Units:

The Company has granted restricted stock units (“RSUs”) to certain key employees. The RSUs are subject to cliff vesting, generally after three years provided the employee remains in the service of the Company. Compensation expense is generally recognized on a straight-line basis for all awards over the employee’s vesting period or over a one-year required service period for certain retirement eligible executive level employees. The Company estimates a forfeiture rate at the time of grant and updates the estimate within the amount of compensation costs recognized in each period. The fair value of the RSUs is determined based upon the number of shares granted and the quoted market price of the Company’s common stock at the date of the grant.

The following table summarizes RSU activity for the three months ended March 31, 2017:


		Weighted
		Average
	Number of	Fair Value
(RSUs in thousands)	RSUs	per Share
Non-vested at December 31, 2016	429	$	81.04
Granted	112		119.13
Vested	(124)		62.18
Cancelled	(5)		87.96
Non-vested at March 31, 2017	412	$	98.13

At March 31, 2017, the total remaining unrecognized compensation cost related to RSUs was $23 million, which will be amortized over a weighted-average period of approximately 2.1 years.

Performance Shares:

The Company has a long-term incentive plan for senior management in the form of performance shares. The ultimate payments for performance shares awarded and eventually paid will be based solely on the Company’s stock performance as compared to the stock performance of a peer group. The final payments will be calculated at the end of the three year period and are subject to approval by management and the Compensation Committee. Compensation expense is based on the fair value of the performance shares at the grant date, established using a Monte Carlo simulation model. The total compensation expense for these awards is amortized over a three-year graded vesting schedule.

For the three months ended March 31, 2017, the Company awarded 38 thousand share units at a weighted average fair value of $114.08 per share unit. The number of shares that ultimately vest can range from zero to 200 percent of the awarded grant depending on the Company’s stock performance as compared to the stock performance of the peer group.

The 2014 performance share award vested in the first quarter of 2017, achieving a 200 percent pay out of the grant, or 115 thousand total vested shares. There were no performance share cancellations during the first quarter of 2017.

At March 31, 2017, the unrecognized compensation cost related to these awards was $6 million, which will be amortized over the remaining requisite service periods of 2.1 years.

The following table summarizes the components of the Company’s share-based compensation expense:


	Three Months Ended
	March 31,
(in millions)	2017		2016
Stock options:
Pre-tax compensation expense	$	2	$	2
Income tax (benefit)		(1)		(1)
Stock option expense, net of income taxes		1		1

RSUs:
Pre-tax compensation expense		3		3
Income tax (benefit)		(1)		(1)
RSUs, net of income taxes		2		2

Performance shares and other share-based awards:
Pre-tax compensation expense		2		2
Income tax (benefit)		(1)		(1)
Performance shares and other share-based compensation expense, net of income taxes		1		1

Total share-based compensation:
Pre-tax compensation expense		7		7
Income tax (benefit)		(3)		(3)
Total share-based compensation expense, net of income taxes	$	4	$	4