STOCK-BASED COMPENSATION

12 Months Ended

Dec. 31, 2019

Share-based Payment Arrangement [Abstract]

STOCK-BASED COMPENSATION PLANS

Under the 1998 Plan, 33 million shares of the Company’s common stock have been reserved for issuance. The 2001 Plan, which is shareholder approved, permits the granting of up to 50.6 million shares, of which not more than 14.0 million shares are available for grants of awards other than stock options. The Stock Plans also provide for the granting of restricted stock. The Stock Plans provide that options are exercisable not later than ten years from the grant date. The vesting period for awards under the Stock Plans is generally determined by the Board at the date of the grant and has been four years except for employees who are at or near retirement eligibility, as defined, for which vesting is between one and four years. Additionally, the vesting period is three years for certain performance-based restricted stock that contain a condition whereby the number of shares that ultimately vest are based on the achievement of certain non-market based performance metrics of the Company. Options may not be granted at less than the fair market value of the Company’s common stock at the date of grant.

The Company maintains the Directors’ Plan for its Board, which permits the granting of awards in the form of non-qualified stock options, restricted stock or performance shares. The Directors’ Plan provides that options are exercisable not later than ten years from the grant date. The vesting period is determined by the Board at the date of the grant and is generally one year for both options and restricted stock. Under the Directors’ Plan, 1.7 million shares of common stock were reserved for issuance. Any director of the Company who is not an employee of the Company or any of its subsidiaries as of the date that an award is granted is eligible to participate in the Directors’ Plan.

Presented below is a summary of the stock-based compensation expense and associated tax benefit in the accompanying Consolidated Statements of Operations:


	Year Ended December 31,
	2019		2018		2017
Stock-based compensation expense	$	136	$	130	$	123
Tax benefit	$	29	$	32	$	13	^'(1)

⁽¹⁾The 2017 Amount includes a decrease in deferred tax assets resulting from a future reduction in the U.S. federal corporate income tax rate in accordance with the Tax Act.

The fair value of each employee stock option award is estimated on the date of grant using the Black-Scholes option-pricing model that uses the assumptions noted below. The expected dividend yield is derived from the annual dividend rate on the date of grant. The expected stock volatility is based on an assessment of historical weekly stock prices of the Company as well as implied volatility from Moody’s traded options. The risk-free interest rate is based on U.S. government zero coupon bonds with maturities similar to the expected holding period. The expected holding period was determined by examining historical and projected post-vesting exercise behavior activity.

The following weighted average assumptions were used for options granted:


	Year Ended December 31,
	2019			2018			2017
Expected dividend yield	1.14		%	1.05		%	1.34		%
Expected stock volatility	24		%	26		%	27		%
Risk-free interest rate	2.56		%	2.82		%	2.19		%
Expected holding period -in years	6.2			6.2			6.5
Grant date fair value	$	43.29		$	45.73		$	30.00

A summary of option activity as of December 31, 2019 and changes during the year then ended is presented below:


Options	Shares	Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding, December 31, 2018	2.2	$	69.86
Granted	0.2	175.30
Exercised	(0.8)	44.59
Outstanding, December 31, 2019	1.6	93.51		5.2 years	$	227
Vested and expected to vest, December 31, 2019	1.5	92.14		5.1 years	$	224
Exercisable, December 31, 2019	1.1	$	71.64	4.0 years	$	176

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between Moody’s closing stock price on the last trading day of the year ended December 31, 2019 and the exercise prices, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options as of December 31, 2019. This amount varies based on the fair value of Moody’s stock. As of December 31, 2019, there was $6 million of total unrecognized compensation expense related to options. The expense is expected to be recognized over a weighted average period of 2.2 years.

The following table summarizes information relating to stock option exercises:


	Year Ended December 31,
	2019	2018	2017
Proceeds from stock option exercises	36	38	49
Aggregate intrinsic value	114	99	88
Tax benefit realized upon exercise	27	24	31

A summary of nonvested restricted stock activity for the year ended December 31, 2019 is presented below:


Nonvested Restricted Stock	Shares	Weighted Average Grant Date Fair Value Per Share
Balance, December 31, 2018	2.0	$	123.13
Granted	0.8	174.07
Vested	(0.9)	113.21
Forfeited	(0.1)	144.18
Balance, December 31, 2019	1.8	$	124.63

As of December 31, 2019, there was $147 million of total unrecognized compensation expense related to nonvested restricted stock. The expense is expected to be recognized over a weighted average period of 2.4 years.

The following table summarizes information relating to the vesting of restricted stock awards:


	Year Ended December 31,
	2019	2018	2017
Fair value of shares vested	156	151	111
Tax benefit realized upon vesting	36	35	35

A summary of performance-based restricted stock activity for the year ended December 31, 2019 is presented below:


Performance-based restricted stock	Shares	Weighted Average Grant Date Fair Value Per Share
Balance, December 31, 2018	0.7	$	103.74
Granted	0.1	169.68
Vested	(0.3)	76.68
Balance, December 31, 2019	0.5	$	134.35

The following table summarizes information relating to the vesting of the Company’s performance-based restricted stock awards:


	Year Ended December 31,
	2019	2018	2017
Fair value of shares vested	47	23	20
Tax benefit realized upon vesting	11	6	7

As of December 31, 2019, there was $24 million of total unrecognized compensation expense related to this plan. The expense is expected to be recognized over a weighted average period of 1.8 years.

The Company has a policy of issuing treasury stock to satisfy shares issued under stock-based compensation plans.

In addition, the Company also sponsors the ESPP. Under the ESPP, 6 million shares of common stock were reserved for issuance. The ESPP allows eligible employees to purchase common stock of the Company on a monthly basis at a discount to the average of the high and the low trading prices on the New York Stock Exchange on the last trading day of each month. This discount was 5% in 2019, 2018, and 2017 resulting in the ESPP qualifying for non-compensatory status under Topic 718 of the ASC. Accordingly, no compensation expense was recognized for the ESPP in 2019, 2018, and 2017. The employee purchases are funded through after-tax payroll deductions, which plan participants can elect from one percent to ten percent of compensation, subject to the annual federal limit.