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 2017 and 2016.

Share-based compensation cost after tax was $17 million, $15 million and $14 million for the years ended

December 31, 2017, 2016 and 2015, respectively. The related income tax benefit recognized was $9 million,

$8 million, and $6 million for the years ended December 31, 2017, 2016 and 2015, respectively. Options exercised during the years ended December 31, 2017, 2016 and 2015, had intrinsic value of $19 million, $25 million and $15 million, respectively. Intrinsic value is the market price less the exercise price. Options vested during the years ended December 31, 2017, 2016 and 2015, had total intrinsic value of $8 million, $11 million and $7 million, respectively.

As of December 31, 2017, we had $28 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:



	2017	2016	2015
Weighted-average expected term	8 years	8 years	8-9 years
Expected volatility	16.95%	24.88-25.75%	25.04-26.15%
Dividend yield	2.83%	2.58-3.12%	3.52%
Risk-free rates	2.33%	1.44-1.60%	1.94-2.01%
Weighted-average fair value of options granted during the period	$10.79	$13.21	$11.15

Below is a summary of option information for the year 2017:



(Dollars in millions, except exercise price. Shares in thousands)	Shares		Weighted- average exercise price		Aggregate intrinsic value		Weighted-average remaining contractual life
Outstanding option shares at January 1, 2017	3,012		$	42.12
Granted	706		70.70
Exercised	(527	)	38.33
Forfeited or expired	(125	)	47.07
Outstanding option shares at December 31, 2017	3,066		49.14		$	79	5.61 years

Options exercisable at end of period	2,072		$	40.69	$	71	4.13 years

Cash received from the exercise of options was $13 million, $21 million and $24 million for the years ended December 31, 2017, 2016 and 2015, respectively. We acquired 96,030, 186,097 and 292,414 shares totaling

$7 million, $13 million and $16 million, respectively, from associates in consideration for option exercises during 2017, 2016 and 2015. The weighted-average remaining contractual life for options expected to vest as of December 31, 2017, was 8.69 years.

Under all active shareholder approved plans, a total of 17.3 million shares were authorized to be granted. At December 31, 2017, 11.3 million shares remained available for future issuance under the plans. During 2017, we granted 15,040 shares of common stock to our directors for 2016 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 generally cliff vest three years after the date of grant. We also grant restricted stock units which vest on a three year ratable vesting schedule. Service-based restricted stock units vested during the year had an intrinsic value of $23 million, $23 million and $26 million for the years ended December 31, 2017, 2016 and 2015, 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 to 200 percent for awards granted in 2015, 2016 and 2017. Three-year total shareholder return is calculated by using annualized total return of a stock to an investor due to capital gain appreciation plus reinvestment of all dividends.

For the three-year performance period ended December 31, 2017, our total shareholder return exceeded five of our nine peers. We expect payout of these shares at the target level to occur in March of 2018. During 2017, we issued 87,228 shares of performance-based restricted stock units at the target-level performance hurdle for the three-year performance period ended December 31, 2016, as our total shareholder return exceeded five of nine peers in our 2014 peer group. We issued 25,461 shares of performance-based restricted stock units during 2016 at the threshold-level performance hurdle for the three-year performance period ended December 31, 2015, as we achieved a three-year total shareholder return that exceeded four of 10 peers in our 2013 peer group. Performance-based awards vested during the year had an intrinsic value of $7 million for the year ended December 31, 2017 and $6 million for both years ended 2016 and 2015.

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 stock price data used to calculate the historical volatilities. The correlation coefficients are used to model the way the price of each entity's stock tends to move in relation to each other.


•	Expected volatility is based on each company's historical volatility using daily stock price observations with the period commensurate with the performance measurement period.


•	Dividend yield has been modeled assuming dividends are reinvested in additional shares of the issuing entity on the ex-dividend date during the performance period.


•	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.

The following assumptions were used in determining fair value for performance-based grants issued:



	2017	2016	2015
Expected term	2.89 years	2.44-2.88 years	2.88 years
Expected volatility	15.75-28.35%	15.42-33.64%	13.78-34.69%
Dividend yield	2.83%	2.58-3.12%	3.52%
Risk-free rates	1.44%	0.77-0.87%	0.99%

Below is a summary of service-based and performance-based share information, assuming a target payout for performance-based shares, for the year 2017:



(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, 2017	888		$	48.59	236		$	49.64
Granted	292		65.16		57		43.26
Vested	(311	)	43.05		(87	)	36.73
Forfeited or canceled	(26	)	55.59		—		—
Nonvested at December 31, 2017	843		56.16		206		53.35