Share-Based Compensation

12 Months Ended

Jan. 04, 2020

Share-Based Compensation

Share-Based Compensation

Note 15. Share-Based Compensation

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 2019, 2018 and 2017, the awards granted under this Plan primarily included stock options, restricted stock units and performance share units.

Through our Deferred Income Plan for Textron Executives, we provide certain executives the opportunity to voluntarily defer up to 80% of their base salary, along with incentive compensation.  Elective deferrals may be put into either a stock unit account or an interest-bearing account.  Participants cannot move amounts between the two accounts while actively employed by us and cannot receive distributions until termination of employment. The intrinsic value of amounts paid under this deferred income plan was not significant in 2019, 2018 and 2017.

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)	2019		2018		2017
Compensation expense	$	52	$	35	$	77
Income tax benefit		(12)		(8)		(28)
Total compensation expense included in net income	$	40	$	27	$	49

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. 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 4, 2020, we had not recognized $27 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.

Stock Options

Stock option compensation expense was $22 million, $23 million and $20 million in 2019, 2018 and 2017, 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 implied volatilities from traded options on our common stock, historical volatilities and other factors.  The expected term is based on historical option exercise data, which is adjusted to reflect any anticipated changes in expected behavior.

The weighted-average fair value of options granted and the assumptions used in our option-pricing model for such grants are as follows:

	2019			2018			2017
Fair value of options at grant date	$	14.62		$	15.83		$	13.80
Dividend yield		0.2	%		0.1	%		0.2	%
Expected volatility		26.6	%		26.6	%		29.2	%
Risk-free interest rate		2.5	%		2.6	%		1.9	%
Expected term (in years)		4.7			4.7			4.7

The stock option activity during 2019 is provided below:

		Weighted-
	Number of	Average
(Options in thousands)	Options	Exercise Price
Outstanding at beginning of year	8,284	$	40.58
Granted	1,618		54.27
Exercised	(877)		(27.84)
Forfeited or expired	(281)		(52.76)
Outstanding at end of year	8,744	$	44.00
Exercisable at end of year	5,937	$	38.95

At January 4, 2020, our outstanding options had an aggregate intrinsic value of $45 million and a weighted-average remaining contractual life of 5.7 years.  Our exercisable options had an aggregate intrinsic value of $45 million and a weighted-average remaining contractual life of 4.5 years at January 4, 2020.  The total intrinsic value of options exercised during 2019, 2018 and 2017 was $22 million, $62 million and $29 million, respectively.

Restricted Stock Units

We issue restricted stock units settled in both cash and stock (vesting one-third each in the third, fourth and fifth year following the year of the grant), which include the right to receive dividend equivalents. 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 2019 activity for restricted stock units is provided below:

	Units Payable in Stock			Units Payable in Cash
		Weighted-			Weighted-
	Number of	Average Grant		Number of	Average Grant
(Shares/Units in thousands)	Shares	Date Fair Value		Units	Date Fair Value
Outstanding at beginning of year, nonvested	598	$	45.22	1,143	$	45.48
Granted	173		54.22	332		54.31
Vested	(166)		(39.34)	(299)		(39.27)
Forfeited	(62)		(49.16)	(72)		(48.72)
Outstanding at end of year, nonvested	543	$	49.44	1,104	$	49.61

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

(In millions)	2019		2018		2017
Fair value of awards vested	$	23	$	25	$	27
Cash paid		16		18		19

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.  Payouts under performance share units vary based on certain performance criteria generally set for each year of a three-year performance period.  The performance share units vest at the end of three years.  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 2019 activity for our performance share units is as follows:

		Weighted-
	Number of	Average Grant
(Units in thousands)	Units	Date Fair Value
Outstanding at beginning of year, nonvested	404	$	53.63
Granted	262		54.43
Vested	(196)		(49.58)
Forfeited	(59)		(53.94)
Outstanding at end of year, nonvested	411	$	56.03

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

(In millions)	2019		2018		2017
Fair value of awards vested	$	9	$	12	$	15
Cash paid		10		11		15