Share-Based Compensation

The Company grants share-based awards under the 2004 Employee and Director Equity-Based Compensation Plan (“2004 Plan”), which provides long-term incentive compensation to employees and directors consisting of: stock appreciation rights (“SARs”), performance-based restricted stock units, time-vested restricted stock units and other stock awards.

The fair value of share-based payments is recognized as compensation expense in net income. The amounts and location of compensation cost relating to share-based payments included in the consolidated statements of income is as follows:



(Millions of dollars)	2018		2017		2016
Cost of products sold	$	36	$	30	$	29
Selling and administrative expense	136		113		106
Research and development expense	29		24		22
Acquisitions and other restructurings	130		10		39
	$	332	$	177	$	196

Tax benefit associated with share-based compensation costs recognized	$	79	$	61	$	69

Upon the Company's acquisition of Bard in 2018, certain pre-acquisition equity awards of Bard were converted into either BD SARs or BD restricted stock awards, as applicable. These awards have substantially the same terms and conditions as the converted Bard awards immediately prior to the acquisition date. The compensation expense of $126 million associated with these replacement awards was recorded in Acquisitions and other restructurings.

Stock Appreciation Rights

SARs represent the right to receive, upon exercise, shares of common stock having a value equal to the difference between the market price of common stock on the date of exercise and the exercise price on the date of grant. SARs vest over a four-year period and have a ten-year term. The fair value was estimated on the date of grant using a lattice-based binomial option valuation model that uses the following weighted-average assumptions:



	2018	2017	2016
Risk-free interest rate	2.32%	2.33%	2.17%
Expected volatility	19.0%	20.0%	19.0%
Expected dividend yield	1.33%	1.71%	1.76%
Expected life	7.4 years	7.5 years	7.6 years
Fair value derived	$46.10	$33.81	$27.69

Expected volatility is based upon historical volatility for the Company’s common stock and other factors. The expected life of SARs granted is derived from the output of the lattice-based model, using assumed exercise rates based on historical exercise and termination patterns, and represents the period of time that SARs granted are expected to be outstanding. The risk-free interest rate used is based upon the published U.S. Treasury yield curve in effect at the time of grant for instruments with a similar life. The dividend yield is based upon the most recently declared quarterly dividend as of the grant date. The Company issued 1.4 million shares during 2018 to satisfy the SARs exercised.

A summary of SARs outstanding as of September 30, 2018 and changes during the year then ended is as follows:



	SARs (in thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (Millions of dollars)
Balance at October 1	6,466		$	117.94
Granted	4,295		123.97
Exercised	(2,511	)	98.67
Forfeited, canceled or expired	(264	)	163.69
Balance at September 30	7,986		$	125.73	5.88	$	1,080
Vested and expected to vest at September 30	7,732		$	124.10	5.81	$	1,059
Exercisable at September 30	5,450		$	102.66	4.90	$	863

A summary of SARs exercised 2018, 2017 and 2016 is as follows:



(Millions of dollars)	2018		2017		2016
Total intrinsic value of SARs exercised	$	333	$	148	$	148
Tax benefit realized from SAR exercises	$	90	$	53	$	52
Total fair value of SARs vested	$	107	$	30	$	24

Stock Options

The Company has not granted stock options since 2005. Certain pre-acquisition equity awards of CareFusion were converted on March 17, 2015 into BD stock options with accelerated vesting terms and there were 166 thousand of these awards outstanding at September 30, 2018. Amounts recognized or realized in 2018, 2017 and 2016 relative to stock option exercises, including cash received, the tax benefit realized and the total intrinsic value, were immaterial to the Company’s consolidated financial results.

Performance-Based and Time-Vested Restricted Stock Units

Performance-based restricted stock units cliff vest three years after the date of grant. These units are tied to the Company’s performance against pre-established targets over a three-year performance period. The performance measures for fiscal years 2018, 2017 and 2016 were relative total shareholder return (measures the Company’s stock performance during the performance period against that of peer companies) and average annual return on invested capital. Under the Company’s long-term incentive program, the actual payout under these awards may vary from zero to 200% of an employee’s target payout, based on the Company’s actual performance over the three-year performance period. The fair value is based on the market price of the Company’s stock on the date of grant. Compensation cost initially recognized assumes that the target payout level will be achieved and is adjusted for subsequent changes in the expected outcome of performance-related conditions. For units for which the performance conditions are modified after the date of grant, any incremental increase in the fair value of the modified units, over the original units, is recorded as compensation expense on the date of the modification for vested units, or over the remaining performance period for units not yet vested.

Time-vested restricted stock unit awards granted after January 2015 vest on a graded basis over a three-year period. Time-vested restricted stock units granted before January 2015 cliff vest three years after the date of grant, except for certain key executives of the Company, including the executive officers, for which such units generally vest one year following the employee’s retirement. The related share-based compensation expense is recorded over the requisite service period, which is the vesting period or is based on retirement eligibility. The fair value of all time-vested restricted stock units is based on the market value of the Company’s stock on the date of grant.

A summary of restricted stock units outstanding as of September 30, 2018 and changes during the year then ended is as follows:



	Performance-Based					Time-Vested
	Stock Units (in thousands)			Weighted Average Grant Date Fair Value		Stock Units (in thousands)		Weighted Average Grant Date Fair Value
Balance at October 1	1,080			$	161.64	2,136		$	142.06
Granted	338			251.75		2,903		216.06
Distributed	(119	)		156.65		(1,368	)	167.86
Forfeited or canceled	(267	)		173.67		(906	)	178.87
Balance at September 30	1,032		(a)	$	190.57	2,765		$	194.92
Expected to vest at September 30	548		(b)	$	192.35	2,585		$	193.90


(a)	Based on 200% of target payout.


(b)	Net of expected forfeited units and units in excess of the expected performance payout of 64 thousand and 420 thousand shares, respectively.

The weighted average grant date fair value of restricted stock units granted during the years 2018, 2017 and 2016 are as follows:



	Performance-Based						Time-Vested
	2018		2017		2016		2018		2017		2016
Weighted average grant date fair value of units granted	$	251.75	$	174.92	$	153.73	$	216.06	$	165.96	$	145.57

The total fair value of stock units vested during 2018, 2017 and 2016 was as follows:



	Performance-Based						Time-Vested
(Millions of dollars)	2018		2017		2016		2018		2017		2016
Total fair value of units vested	$	31	$	32	$	22	$	362	$	139	$	114

At September 30, 2018, the weighted average remaining vesting term of performance-based and time vested restricted stock units is 0.79 and 1.05 year, respectively.

Unrecognized Compensation Expense and Other Stock Plans

The amount of unrecognized compensation expense for all non-vested share-based awards as of September 30, 2018, is approximately $307 million, which is expected to be recognized over a weighted-average remaining life of approximately 2.04 years. At September 30, 2018, 7.1 million shares were authorized for future grants under the 2004 Plan. The Company has a policy of satisfying share-based payments through either open market purchases or shares held in treasury. At September 30, 2018, the Company has sufficient shares held in treasury to satisfy these payments.

As of September 30, 2018, 135 thousand shares were held in trust relative to a Director's Deferral plan, which provides a means to defer director compensation, from time to time, on a deferred stock or cash basis. Also as of September 30, 2018, 338 thousand shares were issuable under a Deferred Compensation Plan that allows certain highly-compensated employees, including executive officers, to defer salary, annual incentive awards and certain equity-based compensation.