STOCK-BASED COMPENSATION

12 Months Ended

Mar. 31, 2023

STOCK-BASED COMPENSATION

STOCK-BASED COMPENSATION

NOTE 15. STOCK-BASED COMPENSATION

The following table presents stock-based compensation cost which is included in net income (loss).

			Three Months
	Year Ended		Ended
	March 31,		March 31,		Year Ended December 31
(Dollars in millions)	2023		2022		2021		2020
Cost of services	$	21	$	7	$	28	$	26
Selling, general and administrative expense		92		24		44		37
Pretax stock-based compensation cost	$	113	$	31	$	71	$	64
Income tax benefits		(5)		(5)		(13)		(14)
Stock-based compensation cost, net of tax	$	108	$	26	$	58	$	49

The Company’s total unrecognized compensation cost related to non-vested awards at March 31, 2023 was $165 million and is expected to be recognized over a weighted-average period of approximately 2.2 years. Capitalized stock-based compensation cost was not material during any period presented.

Incentive Awards

Stock-based incentive awards were provided to employees under the terms of Kyndryl’s employment and Kyndryl Plan. Awards under the Kyndryl Plan principally include Restricted Stock Units (RSUs), market-conditioned and performance-conditioned stock units and stock options. RSUs and stock options generally vest based on continued passage of time. Market-conditioned and performance-conditioned stock units are cliff-vested at the end of the performance period if the market or performance conditions have been satisfied.

The following table summarizes RSU, market-conditioned stock units, performance-conditioned stock units and stock option activities:

					Market-Conditioned				Performance-Conditioned
	RSUs				Stock Units				Stock Units
			Weighted-				Weighted-				Weighted-
			Average				Average				Average
	Number		Grant-Date		Number		Grant-Date		Number		Grant-Date
	of Units		Fair Value		of Units		Fair Value		of Units		Fair Value
	(in millions)		(per share)		(in millions)		(per share)		(in millions)		(per share)
Nonvested balance at December 31, 2021		10.2	$	26.82		1.8	$	15.14		—	$	—
Awards granted		0.4		17.61		—		—		—		—
Awards vested		(0.5)		28.04		—		—		—		—
Awards canceled/forfeited		(0.2)		28.44		—		—		—		—
Nonvested balance at March 31, 2022		9.8	$	26.36		1.8	$	15.14		—	$	—
Awards granted		5.0	$	10.80		0.7	$	12.51		2.5	$	10.62
Awards vested		(4.9)		26.09		—		—		—		—
Awards canceled/forfeited		(0.5)		23.09		(0.2)		14.46		(0.1)		10.62
Nonvested balance at March 31, 2023		9.4	$	18.43		2.3	$	14.40		2.3	$	10.62

	Stock Options
			Weighted-
	Number		Average
	of Units		Exercise Price
	(in millions)		(per share)
Outstanding balance at December 31, 2021		3.8	$	17.76
Awards granted		—		—
Awards exercised		—		—
Awards canceled/forfeited		—		—
Outstanding balance at March 31, 2022		3.8	$	17.76
Awards granted		—		—
Awards exercised		—		—
Awards canceled/forfeited		(0.2)		17.78
Outstanding balance at March 31, 2023		3.7	$	17.76

The weighted-average grant-date fair value of RSUs granted by Kyndryl for the years ended March 31, 2023, the three months ended March 31, 2022 (transition period) and the post-Separation period in the year ended December 31, 2021 was $10.80, $17.61 and $18.20, respectively. Prior to the Separation, the weighted-average grant-date fair value of RSUs and PSUs granted by our former Parent was $126.01 and $114.70 for the pre-Separation period in the year ended December 31, 2021 and for the year ended December 31, 2020, respectively, which were derived from our former Parent’s stock price at their grant dates. On the Separation date, such awards were converted to Kyndryl awards, resulting in a weighted-average grant-date fair value of $28.78 per share.

The grant date fair value of the market-conditioned stock units issued during the years ended March 31, 2023 and December 31, 2021 were determined using Monte Carlo simulation models which estimate the probability of satisfying market conditions. The significant assumptions used to calculate the Monte Carlo simulation for the awards issued during the year ended March 31, 2023 were a share price of $10.89, a risk-free rate of 2.85%, no dividend yield, and a volatility of 39%. The significant assumptions used to calculate the Monte Carlo simulation for the awards issued during the year ended December 31, 2021 were a share price of $18.31, a term structure of risk-free rates of 0.26% for one year, 0.64% for two years and 0.92% for three years, no dividend yield, and a volatility of 35%. For the year ended March 31, 2023 and December 31, 2021, the volatility assumptions used in the Monte Carlo simulations were based on the average unadjusted three-year historic volatility across a group of peer companies.

The grant date fair value of performance-conditioned stock units issued during the year ended March 31, 2023 was $10.62, determined using the stock price at the grant date, and is recognized as stock-based compensation expense based upon the probability of achievement of performance targets at each reporting period over the vesting period.

The total fair value of RSUs, market-conditioned stock units and performance-conditioned stock units that vested during the year ended March 31, 2023, the three months ended March 31, 2022 and the years ended December 31, 2021 and 2020 was $127 million, $15 million, $45 million and $36 million, respectively.

The weighted-average grant date fair value of stock options granted during the year ended December 31, 2021 was $6.54 per share. No stock options were granted in any other period presented. The weighted-average remaining contractual term for stock options outstanding at March 31, 2023 and March 31, 2022 was 8.7 and 9.7, respectively, with immaterial aggregate intrinsic value. The weighted-average remaining contractual term for stock options exercisable at March 31, 2023 and 2022 was 2.1 and 3.1 years, respectively. During the year ended March 31, 2023, the total fair value of shares vested was $6 million. There was no vesting during the three months ended March 31, 2022 or during the years ended December 31, 2021 or 2020. No stock options were exercised during any period presented. At March 31, 2023, there were 1.1 million stock options that were vested and exercisable with an immaterial aggregate intrinsic value.

The method used to determine the fair value of the stock options granted during the year ended December 31, 2021 was a Black-Scholes model on the grant date. The assumptions used to produce the fair value of stock options issued during the year ended December 31, 2021 were the share price on the date of issuance, weighted-average expected option term of 6.25 years, no dividend yield, volatility of 35% and a risk-free interest rate of 1.4%. The volatility assumption used was based on the average unadjusted historic volatility of common shares across a group of peer companies. The Company utilized the simplified method to estimate the weighted-average option term due to a lack of relevant historical data.