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SHARE-BASED COMPENSATION (Notes)
6 Months Ended
Apr. 30, 2017
Share-based Compensation [Abstract]  
SHARE-BASED COMPENSATION
3.     SHARE-BASED COMPENSATION
 
Agilent accounts for share-based awards in accordance with the provisions of the authoritative accounting guidance which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors including employee stock option awards, restricted stock units, employee stock purchases made under our employee stock purchase plan (“ESPP”) and performance share awards granted to selected members of our senior management under the long-term performance plan (“LTPP”) based on estimated fair values.

Participants in the LTPP are entitled to receive unrestricted shares of the company's stock after the end of a three-year period, if specified performance targets are met. Certain LTPP awards are generally designed to meet the criteria of a performance award with the performance metrics and peer group comparison based on the Total Stockholders’ Return (“TSR”) set at the beginning of the performance period. Effective November 1, 2015, the Compensation Committee of the Board of Directors approved another type of performance stock award, for the company's executive officers and other key employees. Participants in this program are also entitled to receive unrestricted shares of the company's stock after the end of a three-year period, if specified performance targets over the three-year period are met. The performance target for grants made in 2016 and 2017 were based on Operating Margin (“OM”) and Earnings Per Share ("EPS"), respectively. The performance targets for the LTPP-EPS grants for year 2 and year 3 of the performance period will be set in the first quarter of year 2 and year 3, respectively. All LTPP awards granted after November 1, 2015, are subject to a one-year post-vest holding period.

Based on the performance metrics the final LTPP award may vary from zero to 200 percent of the target award. The maximum award value cannot exceed 300 percent of the grant date target value. We consider the dilutive impact of these programs in our diluted net income per share calculation only to the extent that the performance conditions are expected to be met. Restricted stock units generally vest, with some exceptions, at a rate of 25 percent per year over a period of four years from the date of grant.

 
The impact on our results for share-based compensation was as follows:
 

Three Months Ended

Six Months Ended

April 30,

April 30,
 
2017

2016

2017

2016
 
(in millions)
Cost of products and services
$
3


$
3


$
9

 
$
9

Research and development
1


1


3

 
3

Selling, general and administrative
11


10


24

 
25

Total share-based compensation expense
$
15

 
$
14

 
$
36

 
$
37

 
At April 30, 2017 and October 31, 2016, there was no share-based compensation capitalized within inventory.
                                               
The following assumptions were used to estimate the fair value of awards granted.
 
 
Three Months Ended
 
Six Months Ended
 
April 30,
 
April 30,
 
2017
 
2016
 
2017
 
2016
LTPP:
 
 
 
 
 
 
 
Volatility of Agilent shares
23%
 
24%
 
23
%
 
24
%
Volatility of selected peer-company shares
15%-63%
 
14%-50%
 
15%-63%

 
14%-50%

Price-wise correlation with selected peers
36%
 
35%
 
36
%
 
35
%
 
 
 
 
 
 
 
 
Post-vest restriction discount for all executive awards

5.3%
 
5.5%
 
5.3%
 
5.5%
 
Shares granted under the LTPP (TSR) were valued using a Monte Carlo simulations model. The Monte Carlo simulation fair value model requires the use of highly subjective and complex assumptions, including the price volatility of the underlying stock.

For the volatility of our 2015 and 2016 LTPP (TSR) grants, we used the 3-year average historical stock price volatility of a group of our peer companies.  We believed our historical volatility prior to the separation of Keysight in 2015 was no longer relevant to use. For the volatility of our 2017 LTPP (TSR) grants, we used our own historical stock price volatility.  

The ESPP allows eligible employees to purchase shares of our common stock at 85 percent of the price at purchase and uses the purchase date to establish the fair market value.

The estimated fair value of restricted stock units, LTPP (OM) and LTPP (EPS) awards is determined based on the market price of Agilent’s common stock on the date of grant adjusted for expected dividend yield. The compensation cost for LTPP (OM) and LTPP (EPS) reflects the cost of awards that are probable to vest at the end of the performance period.

All awards granted in 2017 and 2016 to our senior management employees have a one-year post-vest holding restriction. The estimated discount associated with post-vest holding restrictions is calculated using the Finnerty model (see table above). The model calculates the potential lost value if the employee were able to sell the shares during the lack of marketability period, instead of being required to hold the shares. The model used the same historical stock price volatility and dividend yield assumption used for the Monte Carlo simulations model and an expected dividend yield to compute the discount.