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 treasury shares for share-based compensation award issues or exercises during 2014.

Share-based compensation cost after tax was $13 million, $12 million and $11 million for the years ended

December 31, 2014, 2013 and 2012, respectively. The related income tax benefit recognized was $6 million,

$6 million and $5 million for the years ended December 31, 2014, 2013 and 2012, respectively. Options exercised during the years ended December 31, 2014, 2013 and 2012, had intrinsic value of $13 million,

$17 million, and $6 million, respectively. Intrinsic value is the market price less the exercise price. Options vested during the years ended December 31, 2014, 2013 and 2012, had total intrinsic value of $9 million, $15 million and $5 million, respectively.

As of December 31, 2014, we had $21 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 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 2014 and 2013:



	2014	2013	2012
Weighted-average expected term	8-9 years	9-10 years	8-10 years
Expected volatility	25.20-26.22%	25.25-26.31%	25.26-26.20%
Dividend yield	3.76%	3.65%	4.51-4.52%
Risk-free rates	2.42-2.62%	1.82-2.00%	1.58-2.00%
Weighted-average fair value of options granted during the period	$10.16	$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, 2014	6,332		$	38.39
Granted	401		46.81
Exercised	(1,086	)	37.59
Forfeited or expired	(689	)	39.49
Outstanding shares at December 31, 2014	4,958		39.10		$	66

Options exercisable at end of period	4,165		$	38.17	$	59

Cash received from the exercise of options was $22 million, $25 million and $10 million for the years ended December 31, 2014, 2013 and 2012, respectively. We acquired 378,276, 577,745 and 311,524 shares totaling

$19 million, $28 million and $12 million, respectively, from associates in consideration for option exercises during 2014, 2013 and 2012. The weighted-average remaining contractual life for options expected to vest as of December 31, 2014, was 8.4 years.

Options outstanding and exercisable consisted of the following at December 31, 2014:



(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	731	4.58 years	$	26.58	731	$	26.58
$30.00 to $34.99	675	6.01 years	33.96		675	33.96
$35.00 to $39.99	981	4.90 years	37.31		824	37.63
$40.00 to $44.99	1,258	3.09 years	43.58		1,015	43.32
$45.00 to $49.99	1,313	3.50 years	45.73		920	45.26
Total	4,958	4.17 years	39.10		4,165	38.17

The weighted-average remaining contractual life for exercisable awards as of December 31, 2014, was 3.4 years. Under all active shareholder approved plans, a total of 17.3 million shares were authorized to be granted. At December 31, 2014, 6.2 million shares remained available for future issuance under the plans. During 2014, we granted 20,760 shares of common stock to our directors for 2013 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 do 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 $14 million, $15 million and less than $1 million for the years ended December 31, 2014, 2013 and 2012, 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 with a peer group over a three-year performance period with payouts ranging from 0 - 200 percent for awards granted in 2013 and 2014. For awards granted in 2012, the payout range on these performance awards is 0 - 125 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 59,615 shares of performance-based restricted stock units during 2014 at the maximum-level performance hurdle for the three-year performance period ended December 31, 2013, as we achieved a three-year total shareholder return that exceeded all seven of the companies in our 2011 peer group. For the three-year performance period ended December 31, 2014, our total shareholder return exceeded six of 10 peers in our 2012 peer group. We expect payout of these shares at the target level to occur in March of 2015. Performance-based awards vested during the year had an intrinsic value of $3 million, $3 million and $2 million for the years ended December 31, 2014, 2013 and 2012, respectively.

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 pairwise 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 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 remainder of the performance period. We have used the historical volatilities of 2.88 percent for 2014 grants and 2.87 percent for 2013 grants.


•	Dividend yield has been modeled assuming dividends are reinvested in the issuing entity on a continuous basis and the holder of the award is not entitled to receive dividends paid during the performance period. Dividend yields of 3.74 percent for 2014 grants and 3.63 percent for 2013 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 0.66 percent for 2014 and 0.40 percent for 2013 grants.

This is a summary of service-based and performance-based share information, assuming a target payout for performance-based shares, for the year 2014:



(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, 2014	936		$	33.61	246		$	37.66
Granted	331		41.84		99		36.03
Vested	(271	)	29.79		(60	)	30.91
Forfeited or canceled	(28	)	36.28		(2	)	31.77
Nonvested at December 31, 2014	968		37.42		283		38.55