Share-Based Compensation

3 Months Ended

Apr. 02, 2022

Share-based Payment Arrangement [Abstract]

Under our share-based compensation plan, 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. Compensation expense included in net income for our share-based compensation plan is as follows:


	Three Months Ended
(In millions)	April 2, 2022		April 3, 2021
Compensation expense	$	34	$	55
Income tax expense	(8)		(13)
Total compensation expense included in net income	$	26	$	42

Compensation expense included stock option expense of $12 million in both the first quarter of 2022 and 2021.

Stock Options

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:


	March 1, 2022		March 1, 2021
Fair value of options at grant date	$	19.95	$	15.05
Dividend yield	0.1%		0.2%
Expected volatility	29.2%		33.6%
Risk-free interest rate	1.9%		0.7%
Expected term (in years)	4.8		4.7

The stock option activity during the first quarter of 2022 is provided below:


(Options in thousands)	Number of Options	Weighted- Average Exercise Price
Outstanding at January 1, 2022	8,289	$	46.18
Granted	1,049	71.07
Exercised	(705)	(38.35)
Forfeited or expired	(28)	(45.34)
Outstanding at April 2, 2022	8,605	$	49.86
Exercisable at April 2, 2022	5,902	$	47.13

At April 2, 2022, our outstanding options had an aggregate intrinsic value of $199 million and a weighted-average remaining contractual life of 6.5 years. Our exercisable options had an aggregate intrinsic value of $153 million and a weighted-average remaining contractual life of 5.3 years at April 2, 2022. The total intrinsic value of options exercised during the first quarter of 2022 and 2021 was $23 million and $15 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 will 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. The fair value of these units is 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 activity for restricted stock units payable in both stock and cash during the first quarter of 2022 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 January 1, 2022, nonvested	569	$	50.01	1,158	$	49.92
Granted	84	71.07		223	71.07
Vested	(126)	(53.95)		(246)	(54.02)
Forfeited	—	—		(10)	(49.55)
Outstanding at April 2, 2022, nonvested	527	$	52.44	1,125	$	53.23

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


	Three Months Ended
(In millions)	April 2, 2022		April 3, 2021
Fair value of awards vested	$	24	$	19
Cash paid	17		13

Performance Share Units

The activity for our performance share units during the first quarter of 2022 is as follows:


(Units in thousands)	Number of Units	Weighted- Average Grant Date Fair Value
Outstanding at January 1, 2022, nonvested	526	$	45.87
Granted	174	71.07
Outstanding at April 2, 2022, nonvested	700	$	52.14

Cash paid under these awards totaled $15 million and $6 million in the first quarter of 2022 and 2021, respectively.