Share-based Compensation

Share-based compensation expense associated with the participation of Partnership and its subsidiaries in RBI’s share-based compensation plans is recognized in Partnership’s financial statements.

On January 30, 2015, RBI’s board of directors approved: (i) adoption of the Restaurant Brands International Inc. 2014 Omnibus Incentive Plan, currently the Amended and Restated 2014 Omnibus Incentive Plan, (the “Omnibus Plan”), to provide for the grant of awards to employees, directors, consultants and other persons who provide services to RBI and its subsidiaries; (ii) assumption and amendment of various legacy plans of BK, and assumption of the obligation for all BK stock options and restricted stock units (“RSUs”) outstanding; and (iii) assumption and amendment of various legacy plans of TH, and assumption of the obligation for each vested and unvested TH stock option issued with tandem stock appreciation rights (“SARs”) that was not surrendered in connection with the Tim Hortons transaction on the same terms and conditions of the original awards, as adjusted. No new awards may be granted under these legacy BK plans or legacy TH plans.

RBI is currently issuing awards under the Omnibus Plan and the number of shares available for issuance under such plan as of December 31, 2018 was 16,945,969. The Omnibus Plan permits the grant of several types of awards with respect to RBI common shares, including stock options, time-vested RSUs, and performance-based RSUs, which may include RBI and/or individual performance based-vesting conditions. Under the terms of the Omnibus Plan, RSUs are entitled to dividend equivalents, unless otherwise noted. Dividends are not distributed unless the awards vest. Upon vesting, the amount of the dividend, which is distributed in additional RSUs, except in the case of RSUs awarded to non-management members of RBI's board of directors, is equal to the equivalent of the aggregate dividends declared on common shares during the period from the date of grant of the award compounded until the date the shares underlying the award are delivered.

Stock option awards are granted with an exercise price or market value equal to the closing price of RBI's common shares on the trading day preceding the date of grant. RBI satisfies stock option exercises through the issuance of authorized but previously unissued common shares. New stock option grants generally cliff vest 5 years from the original grant date, provided the employee is continuously employed by RBI or one of our subsidiaries, and the stock options expire 10 years following the grant date. Additionally, if RBI terminates the employment of a stock option holder without cause prior to the vesting date, or if the employee retires or becomes disabled, the employee will become vested in the number of stock options as if the stock options vested 20% on each anniversary of the grant date. If the employee dies, the employee will become vested in the number of stock options as if the stock options vested 20% on the first anniversary of the grant date, 40% on the second anniversary of the grant date and 100% on the third anniversary of the grant date. If an employee is terminated with cause or resigns before vesting, all stock options are forfeited. If there is an event such as a return of capital or dividend that is determined to be dilutive, the exercise price of the awards will be adjusted accordingly.

Share-based compensation expense consists of the following for the periods presented (in millions):



	2018		2017		2016
Stock options, stock options with tandem SARs and RSUs (a)	$	48	$	48	$	35
Accelerated vesting of Popeyes stock options (b)	—		12		—
Total share-based compensation expense (c)	$	48	$	60	$	35


(a)	Includes $2 million, $5 million, and $1 million due to modification of awards in 2018, 2017 and 2016, respectively.


(b)	Represents expense attributed to the post-combination service associated with the accelerated vesting of stock options in connection with the Popeyes Acquisition.


(c)	Generally classified as selling, general and administrative expenses in the consolidated statements of operations.

As of December 31, 2018, total unrecognized compensation cost related to share-based compensation arrangements was $126 million and is expected to be recognized over a weighted-average period of approximately 3.3 years.

The following assumptions were used in the Black-Scholes option-pricing model to determine the fair value of stock option awards at the grant date:



	2018	2017	2016
Risk-free interest rate	2.13%	1.23% - 1.25%	0.85%
Expected term (in years)	6.39	6.74	6.74
Expected volatility	25.2%	24.5%	26.6%
Expected dividend yield	3.08%	1.37%	1.81%

The risk-free interest rate was based on the U.S. Treasury or Canadian Sovereign bond yield with a remaining term equal to the expected option life assumed at the date of grant. The expected term was calculated based on the analysis of a three to five-year vesting period coupled with our expectations of exercise activity. Expected volatility was based on the historical equity volatility of RBI and a review of the equity volatilities of publicly-traded guideline companies. The expected dividend yield is based on the annual dividend yield at the time of grant.

The following is a summary of stock option activity under our plans for the year ended December 31, 2018:



	Total Number of Options (in 000’s)		Weighted Average Exercise Price		Aggregate Intrinsic Value (a) (in 000’s)		Weighted Average Remaining Contractual Term (Years)
Outstanding at January 1, 2018	20,071		$	25.15
Granted	1,548		$	58.19
Exercised	(7,268	)	$	8.37
Forfeited	(748	)	$	48.26
Outstanding at December 31, 2018	13,603		$	36.41	$	231,988	6.2
Exercisable at December 31, 2018	3,118		$	16.32	$	112,215	3.8
Vested or expected to vest at December 31, 2018	12,479		$	35.75	$	220,320	6.1


(a)	The intrinsic value represents the amount by which the fair value of our stock exceeds the option exercise price at December 31, 2018.

The weighted-average grant date fair value per stock option granted was $10.82, $12.57, and $7.53 during 2018, 2017 and 2016, respectively. The total intrinsic value of stock options exercised was $371 million during 2018, $288 million during 2017, and $47 million during 2016.

The fair value of the time-vested RSUs and performance-based RSUs is based on the closing price of RBI’s common shares on the trading day preceding the date of grant. New grants generally cliff vest five years from the original grant date. RBI has awarded a limited number of performance-based RSUs that proportionally vest over a four year period. Time-vested RSUs and performance-based RSUs are expensed over the vesting period, based upon the probability that the performance target will be met. RBI grants fully vested RSUs, with dividend equivalent rights that accrue in cash, to non-employee members of RBI's board of directors in lieu of a cash retainer and committee fees. All such RSUs will settle and common shares of RBI will be issued upon termination of service by the board member.

The time-vested RSUs generally cliff vest five years from December 31^st of the year preceding the grant date and performance-based RSUs generally cliff vest five years from the grant date (in each case, the “Anniversary Date”). If the employee is terminated for any reason within the first two years of the Anniversary Date, 100% of the time-vested RSUs granted will be forfeited. If RBI terminates the employment of a time-vested RSU holder without cause two years after the Anniversary Date, or if the employee retires, the employee will become vested in the number of time-vested RSUs as if the time-vested RSUs vested 20% for each year after the Anniversary Date. If the employee is terminated for any reason within the first three years of the Anniversary Date, 100% of the performance-based RSUs granted will be forfeited. If RBI terminates the employment of a performance-based RSU holder without cause between three and five years after the Anniversary Date, or if the employee retires, the employee will become vested in 50% of the performance-based RSUs on the fourth anniversary date. An alternate ratable vesting schedule applies to the extent the participant ends employment by reason of death or disability.

The following is a summary of time-vested RSUs and performance-based RSUs activity for the year ended December 31, 2018:



	Time-vested RSUs				Performance-based RSUs
	Total Number of Shares (in 000’s)		Weighted Average Grant Date Fair Value		Total Number of Shares (in 000’s)		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2018	1,293		$	38.64	1,590		$	36.31
Granted	329		$	57.68	920		$	58.49
Vested and settled	(43	)	$	41.62	(81	)	$	34.68
Dividend equivalents granted	31		$	—	58		$	—
Forfeited	(110	)	$	51.05	(80	)	$	34.65
Outstanding at December 31, 2018	1,500		$	41.88	2,407		$	45.25

The total intrinsic value, determined as of the date of vesting, of RSUs vested and converted to common shares of RBI during 2018, 2017 and 2016 was $7 million, $6 million and $3 million, respectively.