Shared-Based Compensation

9 Months Ended

Sep. 30, 2020

We currently sponsor employee and director stock option, restricted stock and employee stock purchase plans. Stock options and restricted stock are granted at the discretion of the Compensation Committee of our Board of Directors, or Board, based on the estimated fair value on the date of grant. The fair value of the stock options and restricted stock on the date of grant is recognized as expense over the vesting period, net of forfeitures. The non-cash compensation expenses recognized in our consolidated statements of income for stock options, restricted stock and under our employee stock purchase plan, net of amounts classified as capitalized software, were $105 million and $100 million for the nine months ended September 30, 2020 and 2019, respectively, and $32 million and $36 million for the three months ended September 30, 2020 and 2019, respectively. This includes the expense related to the Bakkt Incentive Units, described below.

Stock Option Plans

The following is a summary of our stock option activity:


	Number of Options (in thousands)	Weighted Average Exercise Price per Option
Outstanding at December 31, 2019	3,501	$	51.87
Granted	413	92.63
Exercised	(592)	43.11
Forfeited	(13)	67.00
Outstanding at September 30, 2020	3,309	58.48

Details of stock options outstanding as of September 30, 2020 were as follows:


	Number of Options (in thousands)	Weighted Average Exercise Price	Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value (In millions)
Vested or expected to vest	3,309	$58.48	6.1	$138
Exercisable	2,407	$49.62	5.1	$121

Details of stock options exercised are as follows:


	Nine Months Ended September 30,				Three Months Ended September 30,
Options exercised:	2020		2019		2020		2019
Total intrinsic value of options exercised (in millions)	$	29	$	25	$	7	$	7

As of September 30, 2020, there were $10 million in total unrecognized compensation costs related to stock options, which are expected to be recognized over a weighted average period of 1.6 years as the stock options vest.

We use the Black-Scholes option pricing model to value our stock option awards. During the nine months ended September 30, 2020 and 2019, we used the assumptions in the table below to compute the value:


	Nine Months Ended September 30,
Assumptions:	2020	2019
Risk-free interest rate	1.46%	2.49%
Expected life in years	5.8	5.9
Expected volatility	20%	20%
Expected dividend yield	1.30%	1.44%
Estimated weighted-average fair value of options granted per share	$16.65	$15.45

The risk-free interest rate is based on the zero-coupon U.S. Treasury yield curve in effect at the date of grant. The expected life is derived from historical and anticipated future exercise patterns. Expected volatility is based on historical volatility data of our stock.

Restricted Stock Plans

Restricted shares are used as an incentive to attract and retain qualified employees and to increase stockholder returns with actual performance linked to both short and long-term stockholder return as well as retention objectives. We issue awards which may contain a combination of time, performance and/or market conditions. The grant date fair value of each award is based on the closing stock price of our stock at the date of grant. For time-based restricted stock, we recognize expense ratably over the vesting period, which is typically three years, net of forfeitures.

In February 2020, we reserved a maximum of 0.9 million restricted shares for potential issuance as performance-based restricted shares to certain of our employees. The number of shares ultimately granted under this award will be based on our actual financial performance as compared to financial performance targets set by our Board and the Compensation Committee for the year ending December 31, 2020, and will also be subject to a market condition reduction based on how our 2020 total stockholder return, or TSR, compares to that of the S&P 500 Index. The maximum compensation expense to be recognized under these performance-based restricted shares is $82 million if the maximum financial performance target is met and all 0.9 million shares vest. The compensation expense to be recognized under these performance-based restricted shares will be $41 million if the target financial performance is met, which would result in 0.5 million shares vesting. For these awards with performance conditions, we recognize expense on an accelerated basis over the three-year vesting period based on our quarterly assessment of the probable 2020 actual financial performance as compared to the 2020 financial performance targets. As of September 30, 2020, our best estimate is that the financial performance level will be above target for 2020. Based on this assessment, we recorded non-cash compensation expense of $21 million and $8 million for the nine and three months ended September 30, 2020, respectively, related to these awards and the remaining $33 million in non-cash compensation expense will be recorded on an accelerated basis over the remaining vesting period, including $8 million which will be recorded over the remainder of 2020.

We also issue awards with a market condition but no performance condition. The fair value of these awards is estimated based on a simulation of various outcomes and includes inputs such as our stock price on the grant date, the valuation of historical awards with market conditions, the relatively low likelihood that the market condition will affect the number of shares granted (as the market condition only affects shares granted in excess of certain financial performance targets), and our expectation of achieving the financial performance targets.

The following is a summary of nonvested restricted shares under all plans discussed above for the nine months ended September 30, 2020:


	Number of Restricted Shares (in thousands)	Weighted Average Grant-Date Fair Value per Share
Nonvested at December 31, 2019	3,728	$	68.87
Granted	1,464	93.18
Vested	(1,986)	64.94
Forfeited	(83)	77.04
Nonvested at September 30, 2020	3,123	82.55

Performance-based restricted shares have been presented in the table above to reflect the actual shares issued based on the achievement of past performance targets, also considering the impact of any market conditions. Nonvested performance-based restricted shares granted are presented in the table above at the target number of restricted shares that would vest if the performance targets are met.


	Nine Months Ended September 30,
	2020		2019
Time-based restricted stock units granted (in thousands) (1)	891		975
Total fair value of restricted stock vested under all restricted stock plans (in millions)	$	180	$	166

(1) The remaining shares granted are performance-based.

As of September 30, 2020, there were $143 million in total unrecognized compensation costs related to time-based and performance-based restricted stock. These costs are expected to be recognized over a weighted-average period of 1.5 years as the restricted stock vests. These unrecognized compensation costs assume that a target performance level will be met on the performance-based restricted shares granted in February 2020.

Bakkt Incentive Units

We sponsor the Bakkt Equity Incentive Plan under which Bakkt issues various Bakkt preferred, common and phantom, or participation, equity unit awards. These awards were made to certain employees and board members of Bakkt. The units are unvested at the issuance date, are subject to the vesting terms in the award agreements and upon vesting are converted into Bakkt equity or cash. During the nine months ended September 30, 2020, we issued additional preferred, common and participation unit awards as well as converted certain existing participation unit awards into common unit awards.

During the nine months ended September 30, 2020, the $300 million capital call related to the acquisition of Bridge2 Solutions triggered a market condition of certain of these Bakkt equity incentive awards. The market condition is based on numerous possible Bakkt transaction or event scenarios established on the original date of grant, each of which have a fixed fair market value. Over the life of these awards, we are required to estimate the most likely outcome and reflect the cumulative financial statement impact of any changes between outcomes. As a result, during the nine months ended September 30, 2020, we incurred a $10 million compensation expense related to these awards that has been recorded as an acquisition-related cost.