8. Share-Based Compensation

Stock Options: Under the Company’s stock incentive plan (“SIP”), 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 throughout the vesting of the stock options within the amount of compensation costs recognized in each period.

The Company granted non-qualified options to purchase 215 thousand shares and 278 thousand shares for the three months ended March 31, 2018 and 2017, respectively. The fair value of each option grant was estimated using the Black-Scholes option-pricing model with the following assumptions:



	2018		2017
Expected life (in years)	5.5		5.5
Risk-free interest rate	2.5	%	1.9	%
Expected volatility	19.8	%	22.5	%
Expected dividend yield	1.8	%	1.7	%

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 U.S. 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, 2018 was as follows:


	Number of Options (in thousands)	Weighted Average Exercise Price per Share		Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Outstanding as of December 31, 2017	2,095	$	71.81	5.87	$	142
Granted	215		133.61
Exercised	(93)		50.08
Cancelled	(5)		34.36
Outstanding as of March 31, 2018	2,212	$	78.81	6.14	$	112
Exercisable as of March 31, 2018	1,716	$	66.53	5.57	$	107

For the three months ended March 31, 2018, cash received from the exercise of stock options was $5 million. As of March 31, 2018, the unrecognized compensation cost related to non-vested stock options totaled $7 million, which is expected to be amortized over the weighted-average period of approximately 1.9 years.

Additional information pertaining to stock option activity is as follows:


	Three Months Ended
	March 31,
(dollars in millions, except per share)	2018		2017
Weighted average grant date fair value of stock options granted (per share)	$	24.01	$	23.90
Total intrinsic value of stock options exercised		8		7

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 throughout the vesting of the RSUs 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 market price of the Company’s common stock on the date of the grant.

The following table summarizes RSU activity for the three months ended March 31, 2018:


(RSUs in thousands)	Number of RSUs	Weighted Average Fair Value per Share
Non-vested as of December 31, 2017	387	$	100.13
Granted	104		131.14
Vested	(123)		83.44
Cancelled	(5)		115.51
Non-vested as of March 31, 2018	363	$	114.34

As of March 31, 2018, the total remaining unrecognized compensation cost related to RSUs was $23 million, which will be amortized over a weighted average period of approximately 2.2 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 vested will be based solely on the Company’s total shareholder return as compared to the total shareholder return of its peer group. The number of shares that ultimately vest can range from zero to 200 percent of the awarded grant depending on the Company’s total shareholder return as compared to the total shareholder return of the peer group. The share award vesting will be calculated at the end of the three-year period and is 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, 2018 the Company awarded 27 thousand performance shares at a weighted average fair value of $141.91 per share, respectively.

The 2015 performance share awards vested in the first quarter of 2018, achieving a 200 percent pay out of the grant, or 92 thousand total vested shares. There were four thousand performance share cancellations during the three months ended March 31, 2018.

As of March 31, 2018, the unrecognized compensation cost related to these awards was $5 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)	2018		2017
Stock options:
Pre-tax compensation expense	$	1	$	2
Income tax benefit		—		(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		1		2
Income tax benefit		—		(1)
Performance shares and other share-based compensation expense, net of income taxes		1		1

Total share-based compensation:
Pre-tax compensation expense		5		7
Income tax benefit		(1)		(3)
Total share-based compensation expense, net of income taxes	$	4	$	4