Share-Based Compensation

12 Months Ended

Jan. 01, 2022

Share-based Payment Arrangement [Abstract]

Under our 2015 Long-Term Incentive Plan (Plan), which replaced our 2007 Long-Term Incentive Plan in April 2015, we have authorization to provide awards to selected employees and non-employee directors in the form of stock options, restricted stock, restricted stock units, stock appreciation rights, performance stock, performance share units and other awards. A maximum of 17 million shares is authorized for issuance for all purposes under the Plan plus any shares that become available upon cancellation, forfeiture or expiration of awards granted under the 2007 Long-Term Incentive Plan. No more than 17 million shares may be awarded pursuant to incentive stock options, and no more than 4.25 million shares may be issued pursuant to awards of restricted stock, restricted stock units, performance stock or other awards that are payable in shares. For 2021, 2020 and 2019, the awards granted under this Plan primarily included stock options, restricted stock units and performance share units.

Share-based compensation costs are reflected primarily in selling and administrative expense. Compensation expense included in net income for our share-based compensation plans is as follows:


(In millions)	2021		2020		2019
Compensation expense	$	138	$	57	$	52
Income tax benefit	(33)		(14)		(12)
Total compensation expense included in net income	$	105	$	43	$	40

Compensation cost for awards subject only to service conditions that vest ratably is recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award utilizing an estimated forfeiture rate. Our awards include continued vesting provisions for retirement eligible employees. Upon reaching retirement eligibility, the service requirement for these individuals is considered to have been satisfied and compensation expense for future awards is recognized on the date of the grant.

As of January 1, 2022, we had not recognized $37 million of total compensation costs associated with unvested awards subject only to service conditions. We expect to recognize compensation expense for these awards over a weighted-average period of approximately two years. At January 1, 2022, outstanding stock appreciation rights totaled 606,000 with a weighted-average exercise price of $46.82 and a weighted-average remaining contractual life of 6.5 years; these units had an intrinsic value of $18 million, compared to $4 million at January 2, 2021.

Stock Options

Stock option compensation expense was $21 million, $20 million and $22 million in 2021, 2020 and 2019, respectively. Options to purchase our shares have a maximum term of ten years and generally vest ratably over a three-year period. Stock option compensation cost is calculated under the fair value approach using the Black-Scholes option-pricing model to determine the fair value of options granted on the date of grant. The expected volatility used in this model is based on historical volatilities and implied volatilities from traded options on our common stock. The expected term is based on historical option exercise data, which is adjusted to reflect any anticipated changes in expected behavior.

We grant options annually on the first day of March. The assumptions used in our option-pricing model for these grants and the weighted-average fair value for these options are as follows:


	2021		2020		2019
Fair value of options at grant date	$	15.05	$	10.66	$	14.62
Dividend yield	0.2%		0.2%		0.2%
Expected volatility	33.6%		29.3%		26.6%
Risk-free interest rate	0.7%		1.1%		2.5%
Expected term (in years)	4.7		4.7		4.7

The stock option activity during 2021 is provided below:


(Options in thousands)	Number of Options	Weighted- Average Exercise Price
Outstanding at beginning of year	9,810	$	44.03
Granted	1,489	51.64
Exercised	(2,833)	(41.57)
Forfeited or expired	(177)	(46.46)
Outstanding at end of year	8,289	$	46.18
Exercisable at end of year	5,143	$	45.54

At January 1, 2022, our outstanding options had an aggregate intrinsic value of $257 million and a weighted-average remaining contractual life of 6.0 years. Our exercisable options had an aggregate intrinsic value of $163 million and a weighted-average remaining contractual life of 4.6 years at January 1, 2022. The total intrinsic value of options exercised during 2021, 2020 and 2019 was $63 million, $10 million and $22 million, respectively.

Restricted Stock Units

We issue restricted stock units that include the right to receive dividend equivalents and are settled in both cash and stock. Beginning in 2020, new grants of restricted stock units vest in full on the third anniversary of the grant date. Restricted stock units granted prior to 2020 vest one-third each in the third, fourth and fifth year following the year of the grant. Compensation cost is determined using the fair value of these units based on the trading price of our common stock. For units payable in stock, we use the trading price on the grant date, while units payable in cash are remeasured using the price at each reporting period date.

The 2021 activity for restricted stock units is provided below:


	Units Payable in Stock			Units Payable in Cash
(Shares/Units in thousands)	Number of Shares	Weighted- Average Grant Date Fair Value		Number of Units	Weighted- Average Grant Date Fair Value
Outstanding at beginning of year, nonvested	583	$	47.60	1,145	$	48.53
Granted	145	53.05		337	51.76
Vested	(154)	(43.74)		(256)	(46.39)
Forfeited	(5)	(50.41)		(68)	(49.01)
Outstanding at end of year, nonvested	569	$	50.01	1,158	$	49.92

The fair value of the restricted stock unit awards that vested and/or amounts paid under these awards is as follows:


(In millions)	2021		2020		2019
Fair value of awards vested	$	20	$	17	$	23
Cash paid	13		11		16

Performance Share Units

The fair value of share-based compensation awards accounted for as liabilities includes performance share units, which are paid in cash in the first quarter of the year following vesting. Beginning with grants made in 2020, performance share units are subject to performance goals set at the beginning of the three-year performance period. Performance share units granted prior to 2020 are subject to performance goals set for each year of the three-year performance period. Performance share units vest at the end of the three-year performance period. The fair value of these units is based on the trading price of our common stock and is remeasured at each reporting period date.

The 2021 activity for our performance share units is as follows:


(Units in thousands)	Number of Units	Weighted- Average Grant Date Fair Value
Outstanding at beginning of year, nonvested	514	$	47.02
Granted	256	51.56
Vested	(237)	(54.43)
Forfeited	(7)	(48.30)
Outstanding at end of year, nonvested	526	$	45.87

The fair value of the performance share units that vested and/or amounts paid under these awards is as follows:


(In millions)	2021		2020		2019
Fair value of awards vested	$	18	$	8	$	9
Cash paid	6		7		10