Share-Based Associate Compensation Plans

Four equity compensation plans currently permit us to grant various types of equity awards. We currently grant incentive stock options, nonqualified stock options, service-based restricted stock units and performance-based restricted stock units to associates, including some with market-based performance objectives under our shareholder-approved plans. We also have a Holiday Stock Plan that permits annual awards of one share of common stock to each full-time associate for each full calendar year of service up to a maximum of 10 shares. One of our equity compensation plans permits us to grant stock to our outside directors as a component of their annual compensation. We used a combination of new shares and treasury shares for share-based compensation award issues or exercises during 2013.

Share-based compensation cost after tax was $12 million, $11 million and $9 million for the years ended

December 31, 2013, 2012 and 2011, respectively. The related income tax benefit recognized was $6 million,

$5 million and $4 million for the years ended December 31, 2013, 2012 and 2011, respectively. Options exercised during the year ended December 31, 2013, 2012 and 2011 had intrinsic value of $17 million, $6 million, and less than $1 million, respectively. Intrinsic value is the market price less the exercise price. Options vested during the year ended December 31, 2013, 2012 and 2011 had total intrinsic value of $15 million, $5 million, and $2 million, respectively.

As of December 31, 2013, we had $20 million of unrecognized total compensation cost related to nonvested stock options and restricted stock unit awards. That cost will be recognized over a weighted-average period of 1.7 years.

Stock Options

Stock options are granted to associates at an exercise price that is equal to the fair value as determined by the average high and low sales price reported on the Nasdaq Global Select Market for the grant date and are exercisable over 10-year periods. The stock options generally vest ratably over a three-year period. In determining the share-based compensation amounts, we estimate the fair value of each option granted on the date of grant using a binomial option-pricing model. We make the following assumptions to develop the binomial option-pricing model as follows:


•	Weighted-average expected term is based on historical experience of similar awards with consideration for current exercise trends.


•	Expected volatility is based on our stock price over a historical period that approximates the expected term.


•	Dividend yield is determined by dividing the annualized per share dividend by the stock price on the date of grant.


•	Risk-free rates are the implied yield currently available on zero-coupon U.S. Treasury issues with a remaining term approximating the expected term.

The following weighted average assumptions were used in determining fair value for option grants issued during 2013 and 2012:



	2013	2012
Weighted-average expected term	9-10 years	8-10 years
Expected volatility	25.25-26.31%	25.26-26.20%
Dividend yield	3.65%	4.51-4.52%
Risk-free rates	1.82-2.00%	1.58-2.00%
Weighted-average fair value of options granted during the period	$9.71	$6.78

This is a summary of options information:



(Dollars in millions, shares in thousands)	Shares		Weighted- average exercise price		Aggregate intrinsic value
Outstanding shares at January 1, 2013	7,937		$	37.34
Granted	394		44.70
Exercised	(1,440	)	35.98
Forfeited or expired	(559	)	34.07
Outstanding shares at December 31, 2013	6,332		38.39		$	88

Options exercisable at end of period	5,360		$	38.33	$	75

Cash received from the exercise of options was $25 million, $10 million and $1 million for the years ended December 31, 2013, 2012 and 2011. We acquired 577,745 and 311,524 shares totaling $28 million and $12 million, respectively, from associates in consideration for option exercises during 2013 and 2012.

Options outstanding and exercisable consisted of the following at December 31, 2013:



(Shares in thousands)	Options outstanding				Options exercisable
Range of exercise prices	Shares	Weighted-average remaining contractual life	Weighted- average exercise price		Shares	Weighted- average exercise price
$25.00 to $29.99	1,011	5.34 years	$	26.57	1,011	$	26.57
$30.00 to $34.99	764	7.04 years	33.97		500	33.97
$35.00 to $39.99	1,585	4.01 years	37.79		1,258	38.35
$40.00 to $44.99	1,885	3.16 years	43.07		1,504	42.66
$45.00 to $49.99	1,087	1.95 years	45.26		1,087	45.26
Total	6,332	3.98 years	38.39		5,360	38.33

The weighted-average remaining contractual life for exercisable awards as of December 31, 2013, was 3.2 years. Under all active shareholder approved plans, a total of 17.3 million shares were authorized to be granted. At December 31, 2013, 7.7 million shares remained available for future issuance under the plans. During 2013, we granted 21,363 shares of common stock to our directors for 2012 board service fees.

Restricted Stock Units

Service-based restricted stock units granted to associates are valued at fair value of the shares on the date of grant less the present value of the dividends that holders of restricted stock units will not receive on the shares underlying the restricted stock units during the vesting period. Service-based restricted stock units cliff vest three years after the date of grant. Service-based restricted stock units vested during the year had an intrinsic value of $15 million, less than $1 million and $13 million for the years ended December, 31, 2013, 2012 and 2011, respectively.

We have performance-based awards that vest on the first day of March after a three-calendar-year performance period. These awards vest according to the level of three-year total shareholder return achieved compared to a peer group over a three-year performance period with payouts ranging from 0 - 125 percent for awards granted prior to 2013. For awards granted in 2013, the payout range on these performance awards are 0 - 200 percent. Three-year total shareholder return is calculated by Bloomberg using annualized total return of a stock to an investor due to capital gain appreciation plus reinvestment of all dividends. We issued 61,146 shares of performance-based restricted stock units during 2013 at the maximum-level performance hurdle for the three-year performance period ending December 31, 2012, as we achieved a three-year total shareholder return which exceeded all of our seven peers. For the three-year performance period ended December 31, 2013, our total shareholder return exceeded all peers in our peer group. We expect payout of these shares at the maximum level to occur on March 1, 2014.

These performance-based awards are valued using a Monte-Carlo valuation on the date of grant, which uses a risk‑neutral framework to model future stock price movements based upon the risk-free rate of return, the volatility of each peer and the correlations of each peer being modeled. Compensation cost is recognized regardless of whether the market-based performance objective has been satisfied. We make assumptions to develop the Monte-Carlo model as follows:


•	Correlation coefficients are based upon the price data used to calculate the historical volatilities. The correlation coefficients are used to model the way in which each entity tends to move in relation to each other.


•	Expected volatility is based on our stock price over a historical period that approximates the expected term. We have used the historical volatilities of 2.87 percent for both the 2013 and 2012 grants.


•	Dividend yield has been modeled assuming that the holder of the award is not entitled to receive dividends that are paid during the performance period. Dividend yields of 3.63 percent for 2013 grants and 4.51 percent for 2012 grants were used.


•	Risk-free rates are equal to the yield, as of the measurement date, of the zero-coupon U.S. Treasury bill that is commensurate with the performance measurement period. Risk-free rates used were 0.40 percent for both 2013 and 2012 grants.

This is a summary of restricted stock unit and performance-based share information, assuming a target payout for performance-based shares, for the year 2013:



(Shares in thousands)	Service-based shares		Weighted- average grant date fair value		Performance-based shares		Weighted- average grant date fair value
Nonvested at January 1, 2013	930		$	28.18	209		$	31.26
Granted	317		40.09		101		42.17
Vested	(289	)	23.33		(61	)	23.98
Forfeited or canceled	(22	)	32.90		(3	)	23.80
Nonvested at December 31, 2013	936		33.61		246		37.66