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Stock-based Compensation
 12 Months Ended
Dec. 31, 2019
Share-based Payment Arrangement [Abstract]  
Stock-based compensation Stock-based compensation

The Company has various stock-based compensation plans for eligible employees. A description of the major plans is provided herein.
The following table provides the stock-based compensation expense for awards under all plans, as well as the related tax benefit and excess tax benefit recognized in income, for the years ended December 31, 2019, 2018 and 2017:
In millions
Year ended December 31,
2019

 
2018

 
2017

Share Units Plan
 
$
26

 
$
38

 
$
55

Voluntary Incentive Deferral Plan (VIDP)
 
4

 
—

 
7

Stock option awards
 
12

 
12

 
13

Employee Share Investment Plan (ESIP)
 
15

 
40

 
36

Total stock-based compensation expense
 
$
57

 
$
90

 
$
111

Income tax impacts of stock-based compensation
 
 
 
 
 
 
Tax benefit recognized in income
 
$
12

 
$
21

 
$
29

Excess tax benefit recognized in income
 
$
23

 
$
13

 
$
13



Share Units Plan
The objective of the Share Units Plan is to enhance the Company's ability to attract and retain talented employees and to provide alignment of interests between such employees and the shareholders of the Company. Under the Share Units Plan, the Company grants performance share unit (PSU) awards.
PSU-ROIC awards vest dependent upon the attainment of a target level of return on invested capital (ROIC), as defined by the award agreement, over the plan period of three years. Such performance vesting criteria results in a performance vesting factor that ranges from 0% to 200% depending on the level of ROIC attained. Payout is conditional upon the attainment of a minimum share price, calculated using the average of the last three months of the plan period.
PSU-TSR awards vest dependent upon the attainment of a total shareholder return (TSR) market condition over the plan period of three years. Such performance vesting criteria result in a performance vesting factor that ranges from 0% to 200% depending on the Company's TSR relative to a Class I Railways peer group and components of the S&P/TSX 60 Index.
PSUs are settled in common shares of the Company, subject to the attainment of their respective vesting conditions, by way of disbursement from the Share Trusts (see Note 16 – Share capital). The number of shares remitted to the participant upon settlement is equal to the number of PSUs awarded multiplied by the performance vesting factor less shares withheld to satisfy the participant's withholding tax requirement.
For the 2017 grant, the level of ROIC attained resulted in a performance vesting factor of 169%, and the level of TSR attained resulted in a performance vesting factor of 100% for the plan period ended December 31, 2019. The total fair value of the equity settled PSU awards that vested in 2019 was $45 million (2018 - $42 million; 2017 - $43 million). As the respective vesting conditions under each plan and the minimum share price condition for the PSU-ROIC awards were met at December 31, 2019, settlement of approximately 0.4 million shares, net of withholding taxes, is expected to occur in the first quarter of 2020.

The following table provides a summary of the activity related to PSU awards:
 
PSUs-ROIC (1)
 
PSUs-TSR (2)
 
Units

Weighted-average
grant date fair value
 
 
Units

Weighted-average
grant date fair value
 
 
In millions

 
 
 
In millions

 
 
Outstanding at December 31, 2018
1.1

 
$
46.10

 
0.4

 
$
100.93

Granted
0.4

 
$
70.76

 
0.1

 
$
128.20

Settled (3)
(0.4
)
 
$
35.11

 
(0.2
)
 
$
95.31

Forfeited
(0.1
)
 
$
61.12

 
—

 
$
116.24

Outstanding at December 31, 2019
1.0

 
$
58.35

 
0.3

 
$
112.08

Nonvested at December 31, 2018
0.7

 
$
52.18

 
0.3

 
$
104.14

Granted
0.4

 
$
70.76

 
0.1

 
$
128.20

Vested (4)
(0.4
)
 
$
53.19

 
(0.2
)
 
$
103.36

Forfeited
(0.1
)
 
$
61.12

 
—

 
$
116.24

Nonvested at December 31, 2019
0.6

 
$
61.29

 
0.2

 
$
117.04

(1)
The grant date fair value of equity settled PSUs-ROIC granted in 2019 of $26 million is calculated using a lattice-based valuation model. As at December 31, 2019, total unrecognized compensation cost related to all outstanding awards was $15 million and is expected to be recognized over a weighted-average period of 1.6 years.
(2)
The grant date fair value of equity settled PSUs-TSR granted in 2019 of $16 million is calculated using a Monte Carlo simulation model. As at December 31, 2019, total unrecognized compensation cost related to all outstanding awards was $9 million and is expected to be recognized over a weighted-average period of 1.6 years.
(3)
Equity settled PSUs-ROIC granted in 2016 met the minimum share price condition for settlement and attained a performance vesting factor of 200%. Equity settled PSUs-TSR granted in 2016 attained a performance vesting factor of 100%. In the first quarter of 2019, these awards were settled, net of the remittance of the participants' withholding tax obligation of $50 million, by way of disbursement from the Share Trusts of 0.5 million common shares.
(4)
These awards are expected to be settled in the first quarter of 2020.

The following table provides the assumptions used in the valuation of PSU-ROIC awards:
 
PSUs-ROIC (1)
Year of grant
2019

 
2018

 
2017

Assumptions
 
 
 
 
 
Stock price ($) (2)
110.41

 
97.77

 
91.91

Expected stock price volatility (%) (3)
17

 
18

 
19

Expected term (years) (4)
3.0

 
3.0

 
3.0

Risk-free interest rate (%) (5)
1.75

 
1.92

 
0.98

Dividend rate ($) (6)
2.15

 
1.82

 
1.65

Weighted-average grant date fair value ($)
70.76

 
50.77

 
53.19

(1)
Assumptions used to determine fair value of the equity settled PSU-ROIC awards are on the grant date.
(2)
Represents the closing share price on the grant date.
(3)
Based on the historical volatility of the Company's stock over a period commensurate with the expected term of the award.
(4)
Represents the period of time that awards are expected to be outstanding.
(5)
Based on the implied yield available on zero-coupon government issues with an equivalent term commensurate with the expected term of the awards.
(6)
Based on the annualized dividend rate.
Voluntary Incentive Deferral Plan
The Company's Voluntary Incentive Deferral Plan (VIDP) provides eligible senior management employees the opportunity to elect to receive their annual incentive bonus payment in deferred share units (DSU) up to specific deferral limits. A DSU is equivalent to a common share of the Company and also earns dividends when normal cash dividends are paid on common shares. The number of DSUs received by each participant is established at the time of deferral. For each participant, the Company will grant a further 25% of the amount elected in DSUs, which will vest over a period of four years. The election to receive eligible incentive payments in DSUs is no longer available to a participant when the value of the participant's vested DSUs is sufficient to meet the Company's stock ownership guidelines.

Equity settled awards
DSUs are settled in common shares of the Company at the time of cessation of employment by way of an open market purchase by the Company. The number of shares remitted to the participant is equal to the number of DSUs awarded less shares withheld to satisfy the participant's withholding tax requirement.

Cash settled awards
The value of each participant's DSUs is payable in cash at the time of cessation of employment.
The following table provides a summary of the activity related to DSU awards:
 
Equity settled
 
Cash settled
 
DSUs (1)
 
DSUs (2)
 
Units

Weighted-average
grant date fair value
 
 
Units

 
In millions

 
 
 
In millions

Outstanding at December 31, 2018
0.8

 
$
79.23

 
0.2

Granted
0.1

 
$
113.59

 
—

Settled (3)
(0.2
)
 
$
81.22

 
(0.1
)
Outstanding at December 31, 2019 (4)
0.7

 
$
81.91

 
0.1

(1)
The grant date fair value of equity settled DSUs granted in 2019 of $4 million is calculated using the Company's stock price on the grant date. As at December 31, 2019, the aggregate intrinsic value of all equity settled DSUs outstanding amounted to $77 million.
(2)
The fair value of cash settled DSUs as at December 31, 2019 is based on the intrinsic value. As at December 31, 2019, the liability for all cash settled DSUs was $16 million (2018 - $19 million). The closing stock price used to determine the liability was $117.47. The total fair value of cash settled DSU awards vested in 2019, 2018 and 2017 was $nil.
(3)
For the year ended December 31, 2019 the Company purchased 0.1 million common shares for the settlement of equity settled DSUs, net of the remittance of the participants' withholding tax obligation of $11 million.
(4)
The total fair value of equity settled DSU awards vested, the number of units outstanding that were nonvested, unrecognized compensation cost and the remaining recognition period for cash and equity settled DSUs have not been quantified as they relate to a minimal number of units.
Stock option awards
The Company's stock option plan allows for eligible employees to acquire common shares of the Company upon vesting at a price equal to the market value of the common shares at the grant date. The options issued by the Company are conventional options that vest over a period of time. The right to exercise options generally accrues over a period of four years of continuous employment. Options are not generally exercisable during the first 12 months after the date of grant and expire after 10 years. As at December 31, 2019, 14.9 million common shares remained authorized for future issuances under these plans.
During the year ended December 31, 2019, the Company granted 0.9 million (2018 - 1.1 million; 2017 - 1.0 million) stock options.
The following table provides the activity of stock option awards during 2019, and for options outstanding and exercisable at December 31, 2019, the weighted-average exercise price:
 
Options outstanding
 
Nonvested options
 
Number of options

Weighted-average exercise price
 
 
Number of options

Weighted-average grant date fair value
 
 
In millions

 
 
 
In millions

 
 
Outstanding at December 31, 2018 (1)
4.2

 
$
79.73

 
2.3

 
$
13.84

Granted (2)
0.9

 
$
110.94

 
0.9

 
$
16.34

Forfeited/Cancelled
(0.2
)
 
$
102.49

 
(0.2
)
 
$
15.43

Exercised (3)
(1.1
)
 
$
68.15

 
N/A

 
N/A

Vested (4)
N/A

 
N/A

 
(0.9
)
 
$
13.31

Outstanding at December 31, 2019 (1)
3.8

 
$
86.89

 
2.1

 
$
15.00

Exercisable at December 31, 2019 (1)
1.7

 
$
72.22

 
N/A

 
N/A

(1)
Stock options with a US dollar exercise price have been translated to Canadian dollars using the foreign exchange rate in effect at the balance sheet date.
(2)
The grant date fair value of options awarded in 2019 of $15 million ($16.34 per option) is calculated using the Black-Scholes option-pricing model. As at December 31, 2019, total unrecognized compensation cost related to all outstanding awards was $10 million and is expected to be recognized over a weighted-average period of 2.5 years.
(3)
The total intrinsic value of options exercised in 2019 was $53 million (2018 - $78 million; 2017 - $62 million). The cash received upon exercise of options in 2019 was $77 million (2018 - $103 million; 2017 - $58 million) and the related excess tax benefit realized in 2019 was $3 million (2018 - $3 million and 2017 - $ 5 million).
(4)
The grant date fair value of options vested in 2019 was $12 million (2018 - 12 million and 2017 - $10 million).

The following table provides the number of stock options outstanding and exercisable as at December 31, 2019 by range of exercise price and their related intrinsic value, and for options outstanding, the weighted-average years to expiration. The table also provides the aggregate intrinsic value for in-the-money stock options, which represents the value that would have been received by option holders had they exercised their options on December 31, 2019 at the Company's closing stock price of $117.47.
 
 
 
Options outstanding
 
Options exercisable
 
 
 
Number of options

Weighted-average years to expiration
Weighted-average exercise price
 
 
Aggregate intrinsic value

 
Number of options

Weighted-average exercise price
 
 
Aggregate intrinsic value

Range of exercise prices
In millions

 
 
 
 
In millions

 
In millions

 
 
 
In millions

 
$ 27.33 - $ 45.00
0.2

1.5
 
$
35.95

 
$
16

 
0.2

 
$
35.95

 
$
16

 
$ 45.01 - $ 65.00
0.4

3.3
 
$
54.93

 
24

 
0.4

 
$
54.93

 
24

 
$ 65.01 - $ 85.00
0.8

5.7
 
$
74.77

 
35

 
0.6

 
$
76.01

 
24

 
$ 85.01 - $ 105.00
1.5

7.4
 
$
95.00

 
33

 
0.5

 
$
93.17

 
12

 
$ 105.01 - $ 126.35
0.9

9.1
 
$
110.77

 
6

 
—

 
$
115.48

 
—

Balance at December 31, 2019 (1)
3.8

6.7
 
$
86.89

 
$
114

 
1.7

 
$
72.22

 
$
76

(1)
Stock options with a US dollar exercise price have been translated to Canadian dollars using the foreign exchange rate in effect at the balance sheet date. The weighted-average years to expiration of exercisable stock options was 5 years.
The following table provides the assumptions used in the valuation of stock option awards:
Year of grant
2019

 
2018

 
2017

Assumptions
 
 
 
 
 
Grant price ($)
110.94

 
98.05

 
92.16

Expected stock price volatility (%) (1)
18

 
18

 
20

Expected term (years) (2)
5.5

 
5.5

 
5.5

Risk-free interest rate (%) (3)
1.75

 
2.08

 
1.24

Dividend rate ($) (4)
2.15

 
1.82

 
1.65

Weighted-average grant date fair value ($)
16.34

 
15.34

 
14.44

(1)
Based on the historical volatility of the Company's stock over a period commensurate with the expected term of the award.
(2)
Represents the period of time that awards are expected to be outstanding. The Company uses historical data to predict option exercise behavior.
(3)
Based on the implied yield available on zero-coupon government issues with an equivalent term commensurate with the expected term of the awards.
(4)
Based on the annualized dividend rate. 

Stock price volatility
The Company's liability for the cash settled VIDP is marked-to-market at each period-end and varies with the Company's share price. Fluctuations in the Company's share price cause volatility to stock-based compensation expense as recorded in Net income. The Company does not currently hold any derivative financial instruments to manage this exposure.

Employee Share Investment Plan
The Company has an Employee Share Investment Plan (ESIP) giving eligible employees the opportunity to subscribe for up to 10% of their gross salaries to purchase shares of the Company's common stock on the open market and to have the Company invest, on the employees' behalf, a further 35% of the amount invested by the employees, up to 6% of their gross salaries.
Beginning January 1, 2019, Company contributions to the ESIP, which consist of shares purchased on the open market, are subject to a one-year vesting period and are forfeited should certain participant contributions be sold or disposed of prior to vesting. Company contributions to the ESIP are held in Share Trusts until vesting, at which time shares are delivered to the employee.
The following table provides a summary of the activity related to the ESIP for 2019:
 
 
ESIP
 
 
Shares

 
 
In millions

Unvested contributions, December 31, 2018
—

Company contributions (1)
 
0.3

Unvested contributions, December 31, 2019
0.3

(1)
The weighted average fair value of the shares contributed was $118.83.

The following table provides the number of participants holding shares, the total number of ESIP shares purchased on behalf of employees, including the Company's contributions for the years ended December 31, 2019, 2018 and 2017:
Year ended December 31,
2019

 
2018

 
2017

Number of participants holding shares
21,674

 
22,185

 
19,642

Total number of ESIP shares purchased on behalf of employees (millions)
1.5

 
1.8

 
1.7